Infineon Technologies AG ($IFX)

Good morning, everyone. Welcome to the conference call for analysts and investors for Infineon's 2026 Fiscal Second Quarter Results. Today's call will be hosted by Alexander Foltin, Executive Vice President, Finance, Treasury and Investor Relations at Infineon Technologies. As a reminder, this call is being recorded. This conference call contains forward-looking statements and/or assessments about the business, financial condition, performance and strategy of the Infineon Group. These statements and/or assessments are based on assumptions and management's expectations resting upon currently available information and present estimates. They are subject to a multitude of uncertainties and risks, many of which are partially or entirely beyond Infineon's control. Infineon's actual business development, financial condition, performance and strategy may, therefore, differ materially from what is discussed in this conference call. Beyond disclosure requirements stipulated by law, Infineon does not undertake any obligation to update forward-looking statements. At this time, I'd like to turn the call over to Infineon. Please go ahead.

Thank you, operator. Good morning, ladies and gentlemen. Thanks for joining our springtime earnings call on which you have, as usual, our CEO, Jochen Hanebeck; our CFO, Sven Schneider; and our CMO, Andreas Rurchitz. Following our proven pattern, Jochen and Sven will provide an overview on the market situation and divisional performance, key financials and of course, our outlook with spotlights on automotive and on our AI business. After that, we will start our Q&A session. The accompanying slide show for the call is available at infineon.com/slides, and we will provide a PDF with Jochen and Sven's introductory remarks in the course of the call on our website, namely infineon.com/investor. This is also your go-to place for a recording of this conference call, including the slides, a copy of our earnings press release as well as our investor presentation. At this point in time, Jochen, over to you.

Thank you, Alexander, and good morning, everyone. About 3 weeks ago, the [indiscernible] mission successfully returned to earth after 10 days in space. Radiation hardened semiconductor solutions from Infineon supported the electronic backbone at the heart of the Orion capsule, an anecdotal proof of the breadth and performance of our offering. Back here on our planet, the market recovery is clearly gathering strength. We are seeing rising demand across several key verticals. At the same time, our planet is burdened by multiple geopolitical conflicts affecting our markets in various ways. These effects, notwithstanding near-term business indicators like order intake, lead times, cancellation rates and stock levels are showing a clearly improving picture. Such picture differs by application. AI momentum is further strengthening with positive spillover effects in adjacent areas. Industrial markets are supported by rising power infrastructure-related demand. In automotive, low customer inventories are triggering the start of a broader replenishment, leading to a rising order intake. E-mobility is still in difficult territory, whereas software-defined vehicles are seeing a globally positive development. All in all, our end markets are clearly improving, preparing for a broad up cycle in an agile way and simultaneously setting the right strategic course remains paramount. For successfully implementing our strategy, the best fit organizational setup is key. Going forward, we will streamline our organization going from 4 to 3 divisions to accelerate innovation to customer value further. More on this at the end of our divisional review, but let's now look at our group performance in Q2. The second quarter of our fiscal year 2026 was fully in line with guided numbers. Revenues amounted to EUR 3.812 billion, 4% up from the previous quarter. Compared to the same quarter 1 year earlier, reported revenue grew by 6%. On a currency-adjusted basis, the annual growth rate would have been above 14%, given that the U.S. dollar was considerably stronger 12 months ago. The segment result for the March quarter came in at EUR 653 million, corresponding to a segment result margin of 17.1% compared to 17.9% in the quarter before. This development reflects the positive volume fall-through as well as usual kicking in of price adjustments at the beginning of the calendar year. In addition, the decreasing automotive high-voltage business and related costs for its refocusing led to a significant profitability headwind. More on this in the Automotive and later in the financial section. As a clear indication of the recovery momentum, our order backlog increased materially quarter-over-quarter by EUR 4 billion to around EUR 25 billion at the end of March. Currency effects have only a minor impact here. Compared to the end of March last year, our backlog is now around 25% higher, and it has kept growing in the currently running quarter. Where capacity allows, we are confirming customer orders now well into the next fiscal year. Now to our divisional review, starting with Automotive. Before looking at the March quarter, we proudly note Infineon's pole position among automotive semiconductor providers for the sixth consecutive year based on data from Tech Insights for 2025. With top 1 and top 2 positions in all major regions, our standing as the preferred partner of the automotive industry is reconfirmed. We managed to further extend our lead over key competitors, notably in the crucial category of microcontrollers, where we expanded our market share year-over-year from 32% to 36%. Now to the March quarter. Automotive revenues ticked up to EUR 1.830 billion. Low single-digit price declines were offset by volume increases. The segment result of ATV came in at EUR 331 million with a segment result margin of 18.1%. The sequential decline of 400 basis points was due to 2 main factors: impacts from our business with high-voltage components for electric powertrains as well as the mentioned price adjustments. Generally speaking, the near-term outlook for the automotive market remains relatively muted. In its April update, market researchers, S&P Global revised down its light vehicle production numbers for 2026. They are now more or less in line with our view. As you know, what matters more than car units is structural content growth. Here, we see the adoption of software-defined vehicles accelerating. Also, the trend towards e-mobility is intact. However, xEV penetration is progressing more slowly than predicted. In high-voltage power parts for electric drivetrains, market pressures are particularly acute. High competitive intensity and capacity build-outs have caused prices to erode quicker than expected. The volume development and the pricing lead to unacceptable profitability in our automotive high-voltage drivetrain business. Against this backdrop, we are resetting the business. In addition to restructuring of our frame-based module back-end operations in Wachstein, Germany announced last November, we are putting in dedicated measures to lower our operational cost base, and we are streamlining our portfolio. We use the opportunity to redeploy front-end manufacturing capacity towards our rapidly growing AI data center business where demand continues to strongly exceed supply. In revenue terms, the effective high-voltage drivetrain business will decrease by a low to mid-triple-digit million euro figure this fiscal year already considered in our full year revenue guidance for ATV. Overall, the business corresponds then or now to around 7% of ATV. Regarding profitability, we expect the segment result margin of ATV in this fiscal year to be burdened by a low to mid-single-digit percentage reflected in our guidance driven by the combined effect of substantially reduced volumes and costs related to refocusing the high-voltage business. Let me be very clear, Infineon remains fully committed to driving electromobility further. However, we will not be chasing market shares, but instead, our focus remains on profitable growth. This situation is isolated to high-voltage power components for e-mobility. It is not at all affecting product categories like microcontrollers, analog parts, not even MOSFETs or sensors. Leveraging our unrivaled technology and manufacturing base for power as well as system understanding will enable us to reposition our high-voltage e-mobility business for future success. In the meantime, Infineon keeps shaping the proliferation of software-defined vehicles. The foundation of such cars is the combination of powerful and dependable computing, high-speed secure data connectivity and smart and efficient power management. Infineon is at the forefront in all these disciplines as, for example, evidenced by the iX3, the first of BMW use Neue Klasse generation. It features ORIX travel microcontrollers, bright line, Ethernet connectivity solutions as well as power management ICs, smart power switches and E-fuses from us. And of course, it has an electric drive train demonstrating how the structural automotive trends are interlinked. We are also very proud to report additional design wins with the leading Chinese OEM Geely, covering a high number of microcontrollers and log products, including PMIC and [indiscernible]. These solutions will be deployed across several applications ranging from battery management systems to sonar control units in various vehicles, models across the range of the Geely brands. This further underlines the strong value proposition Infineon delivers to its Chinese customers. Now to Green Industrial Power. Revenues of EUR 403 million in the March quarter corresponds to a significant sequential increase of 15% following a seasonally very weak first fiscal quarter. Growth came mainly from power infrastructure, HVAC and home appliances. The segment result of GIP improved to EUR 47 million, equivalent to a segment result margin of 11.7% after 8.9% in the previous quarter. fall-through from higher revenues and lower idle costs more than compensated for negative price effects. With manufacturing PMIs in major world regions, north of 50 and inventories now normalized, the sentiment in industrial markets is improving. A broader cyclical recovery is in sight. For instance, customer order entry is picking up strongly while channel stocks approach low levels. In addition, certain areas provide structural growth opportunities. Grid modernization requirements drive investments in related infrastructure and support growth in energy storage systems and transmission and distribution equipment. Continuously rising AI data center build out fuel demand for uninterruptible power systems general power supply as well as commercial HVAC for cooling. In some cases, semiconductors are poised to replace electromechanical parts, a trend for which Infineon is ideally positioned. For example, we are gaining strong traction in our business for solid-state transformers. We are generating first revenues in the running fiscal year and have built a robust design and opportunity funnel. Same applies to our solid-state circuit breaker business, which is developing well and provides a solid foundation for future growth. Let's now move to Power & Sensor Systems. In the second quarter of our 2026 fiscal year, PSS recorded revenues of EUR 1.260 billion, representing 8% sequential growth. This was mainly driven by our AI power as well as the radar sensor business. The segment result increased to EUR 257 million driven mainly by higher volumes corresponding to a segment result margin of 20.4%. The increase of again, 300 basis points compared to the prior quarter is a further step on the profitable growth path of PSS, strongly driven by our leadership position in AI power solutions. Demand on the back of ongoing significant investments in data centers and related infrastructure continues to be very strong. Currently, our AI business is an allocation, and we are converting capacities from other areas as well as ramping new ones as quickly as possible. Given the unabated momentum, we are reconfirming our guidance of dedicated AI power revenues of EUR 1.5 billion for '26 as well as our indication of EUR 2.5 billion for '27, irrespective of a weaker U.S. dollar. The right to win in this market comes from the ability to optimize the entire power flow from grid to core. Infineon's unmatched portfolio breadth combined with deep system understanding, quality and delivery capabilities help customers scale AI clusters and deploy increasingly sophisticated power architectures. A very important milestone in this context is the ramp of gallium nitride for AI data centers. Already today, we are shipping more and more into selected power supply sockets. And we see a rapid expansion of the design-in pipeline across multiple power conversion stages, including intermediate bus converters where gallium nitride-based products make a clear difference in performance. Also for silicon carbide, the demand from AI-related applications is very strong, driving low double-digit growth for our overall silicon carbide business in this fiscal year. These developments confirm our excellent position with leading customers across the AI ecosystem and we see our content opportunity developing favorably. Such content, meaning the dollar value of semiconductors for a given power envelope is a function of the reconfiguration, which can vary considerably. We are represented in almost all platforms across all relevant players in the industry. For this, we see a content range of USD 100 to USD 250 per kilowatt with today's average now increased to about $175. Over time, this number will see a certain efficiency effect. But on the other hand, it will be driven upwards by a higher vertical power module share and the emergence of solid-state transformers. This assessment replaces our EUR 8 billion to EUR 12 billion SAM market sizing for the end of the decade as the gigawatt installation plans are quickly outdated and only revised upwards, resulting in a significantly higher market potential for us. Now to Connected Secure Systems, which recorded revenues of EUR 319 million, essentially constant quarter-over-quarter, increasing volumes of IoT-related microcontroller and connectivity products were offset by negative effects in Identification Solutions. The segment result of CSS decreased to EUR 80 million, corresponding to a segment result margin of 5.6%. The continued evolution from IOT into edge AI is expanding the opportunity set across multiple end markets. In this context, we are encouraged to see design win momentum building for our next generation of connectivity solutions as well as secure, low-power AI-enabled miocontrollers. Recent wins span various different application fields from servers to security cameras, from wearables to in-cabin monitoring systems. In parallel, the broader adoption of AI is supporting increasing demand for our secure element solutions to safeguard data integrity in servers. Ladies and gentlemen, this concludes today's divisional overview, the penultimate on in the current structure. Before handing over to Sven for our financial figures, let me introduce Infineon's future organizational set up to you. Starting from 1st of July, in other words, effects as of our fourth fiscal quarter, we will operate with 3 instead of 4 divisions; automotive, power systems and edge systems. This is the next logical step in our evolution from product thinking to the driving solutions out of our deep system understanding. Customers are demanding innovative system-level solutions at an even faster speed to optimally address their needs and create more customer value, we need to reduce complexity and accelerate further. The key guiding principle for our new setup is a clear application ownership. The 3 divisions will be fully accountable for developing value propositions for their assigned focus appreciations. ATV will remain responsible for the secular automotive trends of software-defined vehicles and e-mobility as well as all other automotive applications, including onboard chargers, which had previously been also addressed by other segments. Power Systems, or PS will be in charge of all power applications outside automotive. This includes powering AI from grid to core as well as renewable power generation and grid infrastructure. and power parts for consumer communication and industrial applications. In essence, PS will be the combination of today's GIP and the power part of PSS, bringing together silicon, silicon carbide and gallium nitride development under one roof, sharing related innovation of course with ATV. The focus of Edge Systems or ES will be on applications at the edge between the physical and digital world. The interplay of sensors, microcontrollers, connectivity and security is a key area for future innovation in [indiscernible] Examples include AI, robotics, medical wearables, industrial automation and home appliances. The ES segment will be formed from today's CSS and the Sensor and RF as well as the USB connectivity portfolio from PSS. After closing of the pending transaction, also the sensor portfolio from AMS, OSRAM will become part of ES. The revenue split based on pro forma numbers for our 2025 fiscal year would be roughly 50% automotive, 30% PS and 20% ES, thus giving each division's sufficient economies of scale. The new setup will reduce complexity and streamline decision-making. With 3 divisions and clearer ownership of our focus applications, we need fewer alignments and can better leverage our deep system understanding. This will help us create more innovative products, win more opportunities and deliver added value to customers faster, thus better supporting profitable growth. And now over to Sven for our key financial figures.

Thank you, Jochen, and good morning, everyone. Those of you following us for a long time are aware that margins in our March quarter typically step down sequentially due to annual price adjustments becoming effective. For the quarter under report, the reported gross margin went from 39.9% to 38.7%. The adjusted gross margin decreased by 200 basis points to 41%, therein, our high-voltage automotive drivetrain business had a negative impact of about 1 percentage point combining the fall-through from lower revenues, idle cost increases as well as charges related to the refocusing of the business explained by Jochen. From this, you can deduce that overall price declines were of a quite modest nature. . On the OpEx side, research and development expenses downticked quarter-over-quarter from EUR 626 million to EUR 612 million. Also, our selling, general and administrative expenses declined that went from EUR 409 million to EUR 379 million. Non-segment result charges for the March quarter amounted to EUR 195 million after EUR 267 million before. The financial results for the second quarter of our running fiscal year amounted to minus EUR 68 million after minus EUR 56 million in the prior quarter. Income tax expense for the March quarter was EUR 91 million, equivalent to an effective tax rate of 23%. Cash taxes amounted to EUR 109 million, adjusting for PPA effects, the quarterly cash tax rate stood at 22%, right within our expected corridor of 20% to 25%. Our investments in property, plant and equipment, other intangible assets and capitalized development costs amounted to EUR 541 million in the March quarter after EUR 582 million in the December quarter. Depreciation and amortization expenses, including acquisition-related nonsegment result effects, amounted to EUR 452 million. Our free cash flow in the second quarter of our 2026 fiscal year came to minus EUR 63 million, a slight improvement from the previous quarter's minus EUR 199 million. Looking at our inventories, the reach went slightly down from 183 to 175 days quarter-over-quarter including some safety stocks, inventories related to our manufacturing footprint optimization over the last year's and prebuilds. We are fully on track to meet our target for the end of the fiscal of around 150 days. The inventory reduction envisaged will have a positive impact on our free cash flow in the coming 2 quarters. That said, slightly elevated inventory levels are an advantage to capture growth in the coming up cycle and to be prepared in case of geopolitically induced turmoil. Now to our liquidity and leverage situation, which is affected by various successful financing transactions in connection with our recent M&A activities. First, we tapped the eurobond market in early February with a EUR 2 billion issuance across 3 tranches. On the back of our rating of BBB+ stable confirmed by S&P Global and in a time window -- prior to the outbreak of the Middle East conflict, we were able to achieve favorable conditions. EUR 1 billion of the proceeds were used to repay a part of the initial bank financing of the Marvell Ethernet acquisition. EUR 500 million are earmarked for the pending acquisition of the sensor portfolio from ARS OSRAM, which we expect to close still in this quarter. In addition, we also procure new U.S. dollar funding, namely EUR 700 million of term loans from banks as well as EUR 300 million from the U.S. private placement market. The total proceeds of USD 1 billion have been used to repay the other remaining part of the initial Marvell Ethernet financing. In other words, we have successfully refinanced the entire Marvell Ethernet acquisition and prefunded the AMS OSRAM transaction. Furthermore, we paid out the annual dividend of EUR 456 million and bought back shares for employee participation programs for a total of EUR 178 million in the last quarter, busy and eventful time for our corporate finance team. Taking all the financial activities mentioned and our free cash flow together, we arrived at the following cash and debt levels at the end of March. Our gross cash position stood at around EUR 2.2 billion, whereas gross debt came in at around EUR 7.9 billion. The resulting net debt amounted to around EUR 5.7 billion as of the balance sheet date. This translates into a gross leverage at the end of March of 2.2x to above our target, but overstated as we repaid an older U.S. private placement of USD 350 million at maturity at the beginning of April. So after the end of the last quarter, and we'll redeem a Eurobond of EUR 750 million on its due date in June. Net leverage corresponded to 1.6x. Going forward, we expect these numbers to improve based on sequentially increasing EBITDA levels and land within the leverage target range. Our after-tax reported return on capital employed came in at 6% for the second quarter of our 2026 fiscal year. Before handing back to Jochen, a brief comment. As you have heard, we will operate and report in a new organizational structure starting from Q4 of our running fiscal year with 3 instead of 4 divisions. That said, we will provide you with key financials for the current setup also for the September quarter, allowing you to model the full 2026 fiscal year in a consistent way. At the same time, we will provide adjusted historical data for the new setup on a pro forma basis in due course to you to enable relevant comparisons. Now back to Jochen, who will comment on our improved outlook.

Thank you, Sven. In general terms, the up cycle is gathering intensity, breadth and speed as the recovery is broadening across more and more of our target markets. While geopolitical risk and macroeconomic uncertainties persist, fundamentals are improving. On the demand side, we see stronger bookings, leading to a growing backlog. Visibility is getting better, even beyond our fiscal year as customers' orders are stacking up nicely for the coming quarters. Channel inventories are at the lower end of target ranges. Customer inventories have largely destocked to healthier levels as well. In some cases, even below that. In automotive, we are pleased to see industry players bringing inventories back up to reasonable levels. On the supply side, more and more pockets of tightness are emerging, particularly in areas adjacent to booming AI product categories. Of course, the dynamics vary across applications. But overall, we believe a broader recovery is in sight, and we are therefore raising our annual outlook even against an unfavorable currency development. For the currently running June quarter as well as for the remainder of our fiscal year, we are changing the assumed U.S. dollar euro exchange rate from formerly EUR 1.15 to now EUR 1.70. with this in mind, we expect revenues of around EUR 4.1 billion for our fiscal third quarter, corresponding to 8% growth quarter-over-quarter. By segment for ATV, a slight revenue growth is predicted, whereas for each GIP, PSS and CSS, revenue should grow significantly. For the third fiscal quarter's segment result margin, we expect a high teens percentage level. Besides the fall-through from higher volumes, we expect the evolution of prices in certain areas, notably AI and related product categories to have a positive impact. In contrast, rising costs for energy and precious metals will somewhat dampen marketing expansion. For the full year 2026 fiscal year, we now expect revenues to be significantly up compared to the previous fiscal year, translating into a level of EUR 16-plus billion. As mentioned, this is absorbing an unfavorable U.S. dollar-euro exchange rate assumption of EUR 1.17 for the remainder of the fiscal year. From a segment perspective, PSS should grow materially faster than group average, driven by volume demand for AI power solutions. As the outlook for some industrial markets is also benefiting from, GIP is now expected to grow at a moderate pace. ATV should see slight revenue growth, driven by its broad product portfolio and the early adoption of software-defined vehicles, burdened by the decrease of the high-voltage drivetrain business. To give you an idea of the strength of the underlying automotive business, excluding the high-voltage business as well as the Ethernet business, which is for the first time, consolidated for full year and at constant -- and at constant currencies, ATV would see almost 9% annual growth this fiscal year 2026. Lastly, for CSS, we expect revenues to remain stable year-over-year. Regarding profitability, the improved revenue prediction causes our expectation for the full year adjusted gross margin to go up to a low to mid-40s level after having guided to a low 40s level before. Our segment result margin will correspondingly benefit and land at a level of around 20% after having guided to high teens margin level previously. Positive contributors, and particularly for the quarterly trajectory will be rising volumes and better than initiated assumed pricing. Idle costs are expected to go down to an annual level of around EUR 650 million. Their cyclical part constituting a margin headwind of around 300 basis points. That said, we will manage idle costs and inventories in a balanced way downwards as when explained. Offsetting these benefits to some extent, will be an adverse currency development and rising input costs for precious metals, energy and freight resulting from the war in the Middle East. While we have baked in these direct impacts, our forecast does not include potential indirect effects from a protracted or escalating Middle East conflict or any other lingering geopolitical tension. Our investments in this fiscal year are expected to come to around EUR 2.7 billion. As we mentioned in our last call, this amount contains around EUR 500 million of pulled-in investments relating to powering AI to part steep revenue growth in the coming fiscal year. In this context, I'm happy to announce that we will officially open our smart power fab in [indiscernible] on the 2nd of July. The 300-millimeter fab will focus on state-of-the-art analog mixed signal and power technologies. Its completion comes just at the right time to boost Infineon's growth opportunities in highly attractive markets like AI, power, automotive and robotics. Returning to our outlook. We continue to anticipate a value of around EUR 2 billion for our depreciation and amortization this fiscal year. This includes amortization of around EUR 400 million resulting from purchase price allocations, mainly in connection with the acquisition of Cypress and Marvell's Ethernet business, which were recognized in our nonsegment results. For the free cash flow, we are upgrading our guidance to around EUR 1.25 billion compared to the previously estimated EUR 1 million on the back of an improved business outlook and planned inventory reduction. Our adjusted free cash flow, net of investments into major front-end buildings and M&A transaction is likewise expected to come at a higher level and amount to around EUR 1.65 billion after EUR 1.4 billion before corresponding to around 10% of group revenues. For the sake of completeness, our guided numbers do not include effects from the pending acquisition of the sensor portfolio from AMS OSRAM, which we expect to close towards the end of this quarter. Ladies and gentlemen, let me summarize. The second quarter of our 2026 fiscal year came in fully in line with our guidance. The recovery is gathering steam. We faced an up cycle in several of our target markets. Momentum differs across applications, AI exceptionalism persists, benefiting also our industrial business. Automotive is directionally improving, driven by structural trends. The dynamic for software-defined vehicles is accelerating. E-mobility trend is intact, yet unfolding slower than anticipated. High-voltage drivetrain parts are exposed to significant market pressures. We refocused our business focus accordingly. Based on a brighter business outlook, we raised our guidance to significant -- revenue rose to EUR 16-plus billion, low to mid-40s gross margin, a segment result margin of around 20% and adjusted free cash flow of around 10% of rent. Thus, our 2026 fiscal year, we'll see a much stronger second half and comparing the first half of calendar year '26 to the second half. According to our current order book as the picture would be even brighter. Going forward, we will move from 4 to 3 divisions with a streamlined setup and clear application ownership, we will deliver added value to customers faster, leading to more profitable growth. Ladies and gentlemen, this concludes our introductory remarks, and we are now opening the call for your questions.

Seeing the long queue, we kindly ask you to limit yourself to 1 question and 1 follow-up. Operator, please start the Q&A session now.

[Operator Instructions] We'll take our first question from Sandeep Deshpande from JPMorgan. .

Great results today. I just have a couple of questions. Firstly, on the AI business, Jochen, you said on your prepared remarks that your content is going to between $100 million to $250 million -- $200 per kilowatt. So with this increase in your content compared to what you had previously guided the market to, why are we not seeing an increase in your AI revenue guidance for the year? Or are you still capacity limited? . And my second question is on the margin. You are guiding to 20% margin now for the year -- for the full year '26, that implies a very big step-up in your margin in the fourth quarter, maybe 25% some kind of big step up is going to occur. Can we understand is this a function -- what are the drivers of this big step up in the fourth quarter? Is this a function of pricing or utilization because you've previously told us about your underutilized capacity, your idle charges. And so how does that go through in that number? As well as whether we should be forecasting this sort of margin for Infineon into the future given this big step-up?

Okay. So Sandeep, so AI, yes, you're right. So we are indicating now instead of this EUR 8 billion to EUR 12 billion SAM at the end of the decade to make things also easier for you, we are giving the guidance on our content per kilowatt. And that is in the range of $100 to $250 per kilowatt and the rest is then the assumption of the installed gigawatt. The average is EUR 175 million. The range is created mainly by the adoption of vertical power deliveries. So solutions with vertical power deliveries, obviously at the upper end of that range. Important is also for me that you understand this EUR 175 million is today's number. Over time, that number will change. somewhat by efficiency, but then mainly by the adoption of more vertical power deliveries and the inclusion of the part. So that number includes now also SST. but as of today, that number for SST is obviously 0. Then your question was about the EUR 1.5 billion this year. So first of all, please note that we have absorbed the the FX. And this number is -- the content behind that number structurally is very dynamic because these customers are very dynamic. Of course, there's also the pricing element in there, but I would like to see first a better or more detailed view that we can deliver supply chain wise as we are in allocation, this number before I think about a higher number to communicate. So it's supply chain and structure and of course, pricing, which is the dynamic -- which constitutes the dynamic behind this EUR 1.5 billion. And now over to Sven on the 20%.

Sandeep. On the profitability, maybe I take that one because I understand many of you have that question and expand a bit. If you look at the quarterly development of the revenue, we started with 3.66. Now excluding currency, is all reported then 3.8. Now you see 4.1, which is a significant increase of 8% quarter-over-quarter. And in order to achieve our significant growth rate on the full year, which we have given you now a little bit more information on EUR 16 billion plus. We indeed need another stronger Q4, which is also in line with seasonality. But just looking at the numbers, I mean you can easily calculate that EUR 4.5 million, EUR 4.6 billion would be a number to come above the EUR 16 billion threshold. And this is the current view of our up cycle, which was explained. And on the back of that one, yes, indeed, the margins in Q4 would not be in the high teens range, but they would definitely be in the low to mid-20s in order to come to the around 20% for the full fiscal year. So that's our current assumption. Now you asked where is it coming from? I mean, first of all, there is a positive volume effect. The fall through is clear. There is -- and Jochen said it already, the dynamic development of AI. I mean, the -- you can assume that the Q4 number on the power AI business is higher than the Q3 is higher than the Q2 number. So there is a profitability component. You have seen PSS developing 300 basis points quarter-over-quarter now for 2 quarters. If you just continue with that, you would be around the 25% level for PSS in Q4. And there's also some, as we said carefully in our prepared script, the longer the allocation lasts on AI and adjacent markets, the more positive dynamic for pricing could be also visible still in the remaining quarters. So I don't want to guide now for '27, but yes, our current view is we are going out of that fiscal year with a very strong Q4.

The next question comes from the line of Andrew Gardiner from Citi.

Sven, I know you just said you don't want to guide on fiscal '27. But if I come back to Jochen, your final statement in the prepared comments, -- you were talking about the calendar second half being having a much brighter outlook than the calendar first half. As you just walked through some of the moving pieces into the September quarter, but also sort of leaning therefore into the December quarter. Can we take it that the September quarter based on the backlog today is looking meaningfully stronger than normal seasonality. And then I'm just going to follow up on the AI comments. .

Yes. Andrew, I mean, you are trying it always in a very smart way. I know, to get something out of us, which we don't want to say. But I mean from today's perspective, looking at the order book strength, looking also at the orders going well into next fiscal year, as we have said, I would say there is a better than seasonal Q1, and from today's perspective, Q1 looks even better than Q4, but it's very early to really give you more accurate numbers. Stay tuned for the August and the November call. But so far, as we said, more and more of the end markets are going into the up cycle, and that's not only AI.

Okay. Understood. And if I could just come back to some of the AI comments. Jochen, you were talking about sort of the dynamic customer environment and sort of the things that they're asking for and you talked about GaN and SiC in listening to some of your competitors' conference calls over the last couple of weeks, it feels like -- some of them are having to make more specific architectural or technology choices in terms of what they're offering customers. . I think a point that Infineon has long been making certainly to us in the financial markets, but obviously to the customers as well is that you've got the range of technology SiC can silicon modules, et cetera, you can be flexible with them. Is there increasing evidence of sort of the success of your approach? And what are you hearing from customers? How do you feel like you're facing up to the competition given your breadth relative to what some of them may have?

Yes. I think it's absolutely the value proposition Infineon brings to the table. Our broad technology spectrum, you hinted at silicon, silicon carbide, Gallium nitride, I would add the analog parts I would add the assembly technologies on the module side and further on, of course, also system understanding how to -- which topology to use, then also the 800-volt DC versus 3 phase all the way up to SST. So I think Infineon is a one-stop shop. That doesn't mean that others will gain some business, but we feel very comfortable that this is our application, and we will be the driver in the market. It's demanding. The customers are very demanding. Technically, it's very demanding, but we will be able also to supply in-house manufacturing raise and module 4. Also, what comes more and more that, particularly U.S. customers ask for non-China and non-Taiwan supply chains, which we can offer, so plenty of aspects which we in favor of Infineon.

We now have a question from the line of Didier Scemama from Bank of America. .

My first question is on the data center business. So I think in the past, you had mentioned that you had about a EUR 500 million of sort of traditional server CPU power management business. Just wondered if you could give us an update on that business. I think recently, last night, in fact, doubled to serve the CPU TAM for 2030 from EUR 60 million to EUR 120 billion on the back of [indiscernible] accelerating pay. So I just wondered if that EUR 500 million has been upsided -- and how do we think about that for '27?

Yes. Very good question. And honestly, that business is likely to go through the roof next because, indeed, CPUs inference is obviously a slightly different segment of the market other than GPU. We are well established historically, and we hear the respective customers asking also on that end for significantly more.

Okay. And if I do the math right, on your $175 million of content per gigawatt that implies in euro terms, you're shipping about 10 gigawatts of capacity this year for AI data center. And next year, if you say the same content about 16 gigawatts of capacity. So that would give you a very high market share. Is that the way you actually think about these things? Or are you thinking about it differently? . And related to that, I appreciate the content is very difficult to nail down because there are a lot of things -- different moving parts, different architectures, different materials, et cetera, especially as we look out into the future, but even at the EUR 10 billion, the midpoint of your guidance and EUR 250 million per gigawatt, that's 40 gigawatt capacity addition, which is I would say, well above any consensus that is out there. So what's the implied gigawatt capacity addition you've got in your EUR 8 billion to EUR 12 billion TAM assumption set.

Please here, I really would like to be very specific -- forget the EUR 8 billion to EUR 12 billion. There are so many numbers out there in terms of gigawatt. That's why we refrained from giving now a SAM market guidance. So the number, 8% to 12% is no longer valid because there are numbers out there for the end of the decade, which is much higher gigawatts, and that would result in a substantially higher SAM number. But as the range is so broad, we leave it to you and give you the number on the dollar per kilowatt. And in terms of market shares, I still I think that the best guidance I can give you is that the 30% to 40%, which we have traditionally in data center is for me, the minimum. And then let's see, again, highly dynamic environment from platform to platform. And therefore, honestly, I even feel proud that we give you the guidance for next year -- or indicative number for EUR 2.5 billion next year. very dynamic. And again, it's indicative for next year, not the maximum, but please understand that it's also, for us, difficult to predict that market. .

No, very clear. And sorry, just I'm not quite sure -- well, I think you don't want to give the answer, but I'm going to ask you again. The EUR 500 million for this year for server CPU power management, sort of -- what sort of level do you think would be right for next year? And do you think you should combine these 2 numbers to make it more comparable to what your peers are disclosing which typically combined DC and AI revenues together? .

We are right now in discussion with these customers on what they need, how much we can deliver. In addition, obviously, we are already in a tight situation on the one hand. On the other hand, the comes in the perfect moment in time. So I cannot give you a new number on this EUR 500 million, but any new number will likely be higher, driven by the one statement you quoted or even the Intel statement. So we are just in the process of working through that.

The next question comes from the line of Johannes Schaller from Deutsche Bank. .

Jochen, you mentioned in the auto business, there is a bit of restocking dynamic building up here. So just wondering if you could share with us your anticipation kind of how long that may support the momentum in the auto business? And also, if you could zoom in a little bit on China, your assumption for the full year, I mean you're still winning really good deals here, but then obviously against that, the underlying market is -- so how should we think about China auto overall for this year? And then just a very quick clarification because we get a lot of questions on your comment just on Q1. When you say higher than Q4, you mean potentially, you mean in absolute revenue terms or year-on-year growth, that would be helpful.

So on automotive, the restocking is what we see in our order book, right? We don't -- it's not yet in revenue or only the first innings are in the order book. We see the order book for automotive growing substantially, particularly -- also for this year, but particular for next year. And we see that predominantly coming from 2 regions, China and Europe. Of course, also U.S. and Japan, but the 2 biggest buckets for the order backlog growth in automotive is China and Europe. That gives me confidence that we are well positioned in China. And again, also in China, I talked about the high voltage business. This is certainly a challenge, but beyond the high-voltage business for inverters whether you take MOSFETs, whether you take analog parts, whether you take microcontrollers, whether you take sensors, we are doing very well in China. And a good example of that is the Geely design win, which I highlighted. And the second question, I'll pass on to Sven. .

Yes. So thank you for asking the question in a more precise way. So my comment was mainly about the seasonality as it was also us. So the average seasonality is minus 5%, minus 6% for Q1. And we expect, from today's perspective, a much less pronounced seasonality. I'm not yet in a position to give you absolute revenue numbers for Q1. That is a bit too early. .

We now have a question from the line of Lee Simpson from Morgan Stanley.

I just wanted to ask a 2-part first question really on new products. It was interesting, I thought that you opened the call, Jochen, on RadHard products for the ARTEMIS launch. -- we have heard from peers that they lean explicitly on by CMOS IP and of course, packaging technology. Just wondered what it was that you saw as a competitive advantage for yourselves in those products? And maybe related to new products, you did tease us with the idea that solid-state transformers would be introduced to data centers into server racks. And I was just curious as to the function of a solid state transformer, perhaps in first stage on a server rack.

Yes. So first of all, the [indiscernible] business is business that comes out of our high rail business unit, which business we have successfully entertained for quite some time now in satellites, also somewhat in defense. You're referring to more of these LEO satellites, and to be honest, that business, yes, it indicates a lot of growth. I'm not so sure about the margin to be very honest. So do not expect us now to go into that business big time, maybe the one or the other adjacent topic, but margin-wise, I'm not so sure. On the SST side, we are fully in. We believe in this trend. Our customers believe in these trends and we are shipping initial volumes. Of course, that is also as it's part of a power infrastructure. There is a regulatory aspect to it, which needs to be overcome or needs to be addressed. That will take some time. So I still expect the SST to take off when exactly and where maybe earlier, even in China than in the Western world as it is, again, a regulatory topic that needs to be addressed by the system guys. But we are ready. We have the products, and we are working on about 20 projects as we speak.

Great. That's very clear. I just wanted to maybe follow up, if I could. On the realignment of the high-voltage business for automotive? And what's really different from last quarter? Because you did explain a shift away from supplying, particularly IGBTs into inverters for regions such as China and saving that capacity for the data center. So has this been an acceleration of that shift, and maybe could you maybe just again outline some of the details, particularly as impact on margin for the next couple of quarters.

Yes. The trend is visible already for several quarters, and that's why we took a reaction with the restructuring of the [indiscernible] operations and so on and so forth. What we wanted to achieve with this guidance is to give you a clearer picture of the scope. So first of all, it's not all power components, not at all. The MOSFET business in automotive is running very good margins. It's really the high voltage part for inverters. The IGBTs are now by now available in China, no surprise because we also shifted our R&D years ago already to silicon carbide. And so it's really more the combination of lower-than-expected volumes or decreasing volumes like in the U.S., a stagnation somewhat within China. Price pressure, because people are -- market participants are partially very aggressive picking up any sort of business. By the way, on silicon carbide, this is an effect not from Chinese competition, but from non-Chinese competition. So for us, this is an area which we really need to reset, but we wanted to give you a precise scope, meaning it came down from above 10% of automotive now to 7% of automotive, and it constitutes a drag on ATV margin from low -- between low to mid-single digits. I think we will need likely the biggest step will happen this year, but also next year, we will have an impact on automotive, but we wanted to give you also the background so you can model it. And it's not at all a weakness of the automotive business in general and also not in China. .

And then maybe, Lee, Sven here on the margin to be here even more precise. So we said that there is a 200 basis point the quarter-over-quarter margin headwind from the high-voltage business on automotive. So if you take the EUR 1.8 billion, 2%, you are at close to EUR 40 million. This is exactly what we have included on the segment results side. This is the fall-through from lower revenues. This is a change in inventory reserves. And we have also put some money into the non-segment results for restructuring. .

We now have a question from the line of Janardan Menon from Jefferies.

I just want to follow up on the AI power side, especially from a capacity point of view. Given that as you were answering to Didier's question, that demand is increasing quite sharply on the CPU, general service side and also saying that the number you're looking at potentially for 2030 is well above the $8 billion to $12 billion that you previously indicated. How are you thinking about your capacity planning beyond FY '26? You had pulled in $500 million for this year. I mean, obviously, you're not guiding for CapEx, but I'm just saying, are you accelerating the ramp of your Dresden fab further into '27, '28 to to address this. You are taking those measures even though you're not telling us that. And do I understand from your comments that the EUR 2.5 billion is not the max that there is a headway for you to exceed that number when you come to next year. SP1

So the second question is clearly, yes. It's an indicative number. the EUR 2.5 million, again, structure matters a lot. -- pricing matters a lot. So it's not the max number, but I will not give max number out at this moment in time. In terms of capacity, you are right. I mean [indiscernible] comes in at the perfect moment in time. The cash is spent on the building and infrastructure this year, and then we scale it with the equipment, and we get here, book the slots for next year in order to increase revenue capabilities further on. Beyond that one, in Fila, we have still the possibility to convert existing clean room from 6- and 8-inch to 300-millimeter by moving 8-inch to Kulim. And so that is an option. And -- of course, we also -- if it comes to silicon carbide, which is partially driven by AI I think another growth driver is going to be the resurgence of renewables in light of energy resilient supply. So if that comes together we could finish our Kulim 3.2 plant. Remember, the base plate is done, and that would be also in a capital-efficient manner -- ways to expand rather quickly our front-end capacities and the back-end capacity is then accordingly, where we are, to a good extent, outsourced in terms of AI.

Okay. And just a quick follow-up on pricing. You sort of alluded that if this kind of allocation continues then the industry becomes tighter and pricing could move up further. If you and pretty much all your peers put in a round of price increases in April from what we can understand from what has been generally reported. Are you suggesting that you could be seeing yourselves increase pricing once again before the end of the year and that's something that both you and you think your peers could be doing, which would have a positive effect on '27 as well?

Already in our last earnings call, we have been talking about supply constraints, in particular, in AI power business. that has started to impact also at adjacent areas to then also having an effect on more favorable pricing environment in those we have, as you rightfully said, informed our customers about increases to come, which now are effective from the running quarter onwards going forward. as this upcycle affects more and more affect broader parts of the market. We expect cyclical dynamics also to accelerate, including pricing to improve in the coming quarters. So having said that, the environment definitely is changing in that regard. And we will see where that brings us then also going forward in terms of broader pricing. Definitely, talking about the price range that we gave for the current fiscal in between medium to low single digits, that figure is trending more towards the lower part of the bar. .

The next question comes from the line of Francois Bouvignies from UBS. .

I have 1 question on the capacity again for '27. So this EUR 2.5 billion for '27, is it a capacity number that you see right now is more demand number? Or could you do still materially higher than this EUR .5 billion is the comment we're coming through?

Francois. So again, it's an indicative number. It depends a lot on the structure. Obviously, a vertical module contains the same silicon as a lateral one, but is asking for a much higher price. And also, of course, we are basically running a task force to beef up capacity. So please accept that I will not come up now with the MAX number, but we are working on clearly to beef up that number, the EUR 2.5 billion.From a clear point of view regardless of the pricing point or second to the -- regardless of pricing.

Okay. And maybe on the content per kilowatt that you flag, I mean in the range of EUR 100 million to EUR 250 million. I mean it's a big range given all the uncertainty around the market. And I was wondering if you are thinking about this range, is it fair to say that the inference ASIC, AI is more on the low end of this content per kilowatt when the training and GPU are on the high end. Is that the right way to look at it as well from a mix perspective? .

Correct. Our content is almost -- or corresponds pretty much to the the power of the processor. And then that's first order effect, right? But I also said that the latest, let's say, waves on CPUs and these sort of products are not we are still working through it with our customers to see what is really the demand, get the orders and then assess it. So that's -- I would call that whole wave now work in progress. .

Is, maybe just to add, think you and your colleagues have grilled us so many times that because we only said it's north of 10 -- so now please give us some applause that we are now giving you not only a range but also an average point that's a lot of precision in this very dynamic environment. .

That's true. And we appreciate that to be honest. .

The next question comes from the line of Joshua Buchalter from TD Cowen.

As we think about sort of this year being capacity constrained, can you maybe talk through some of the implications of that? Are there changes you're making internally from a mix standpoint to favor maybe more vertical power? And then any competitive implications like is this allowing others to sort of enter the market given you're not able to fully service all the demand that you're seeing?

Yes. I'm not quite sure whether I understood the question correctly, so please tell me. But what we are doing from a portfolio point of view in front-end capacities as I said, we see the weakness in the high-voltage e-mobility part, we redirect these capacities to AI. Also, there are some spots in GIP, which are strongly growing, others less so. Of course, we take that also as a opportunity for margin optimization. And then whether we are selling a vertical module or a lateral module, that, of course, depends on the architecture of the customer. And here, we are trying to serve both. Also, the supply chain beyond the front end. So back end is obviously considerably different, and we are trying to maximize here the output given the fact that we also have some limitations in back-end. Yes. But maybe -- is that what answer to your question? Or did I miss a point

No, I think that definitely got it. I guess for my follow-up, on the high-voltage silicon headwinds, should we think about those being mostly complete this year and then it's a smaller headwind next year? And maybe you could speak to your confidence that it's going to be -- remain relegated to just the high-voltage IGBTs and that why you're confident that we won't have similar pricing issues longer term on the silicon and silicon carbide MOSFET side.

I said high voltage. So the pricing pressure is in is on the silicon side and on the silicon carbide side. I also mentioned that silicon carbide side. Again, on the inverter in the car, the pricing pressure comes from Chinese competition on the silicon side on silicon carbide, it comes not from Chinese players because they are not yet there but from Western players. But it doesn't extend at all to other product families of automotive. So the closest you would think of is MOSFET set. But here, I can tell you that the MOSFET business of automotive is clearly above our target operating model. So we have here really a unique breadth and width of our portfolio and a very high economy of scale. So I think that is a very good position. Yes. And IGBTs, again, are good enough in certain solutions, and we did not invest into R&D as we have shifted the R&D on silicon carbide and the silicon carbide for the Infineon Group is growing as we are having lots of opportunities here also in AI, but also in power infrastructure.

We now have a question from the line of Stephane Houri from ODDO BHF.

Yes. I also have a question on the automotive business and notably on the evolution of the margin. So I understand that you had some exceptionals during the quarter. And then you also said that the backlog is improving and that you have a better visibility on automotive. So what is the visibility that you have on the improvement of the operating margin in the automotive business going forward? Is it going to be quick or not? And looking maybe longer term to your -- about your 25% EBIT margin model. At what point do you think that automotive can come back to it because it's still 50% of your business. So it really depends a lot on the automotive ability to improve the margins also. .

Yes. The high-voltage business will be a drag on the margin, as I said, for the next 2 years, mainly this year as we are redirecting the capacities and re-restructuring but somewhat also affected next year. But let me put it like that. If I take out the idle the cyclical idle costs and the high-voltage business, then automotive would be clearly at 25%. So it's really getting the restocking will lead to higher volume over time. Again, we indicated that the order book for the second half of the calendar year is particularly strong also for automotive. So I would expect that the idle costs come down over time. And then we have to work on this high-voltage area and then everything will be in shape for auto.

The next question comes from the line of Jakob Bluestone from BNP Paribas. .

I had a question on your order backlog. A year ago, your backlog was about EUR 18 billion. It looks like this year, you'll do about EUR 16 billion plus of revenues. The backlog is now at EUR 25 billion, so implying quite strong revenue growth to come. And I was just wondering, is there something in the composition of that backlog that has changed? So are there more longer-term orders in there? And maybe -- I mean, you've mentioned a number of times the auto backlog, but just sort of interested if you can give any kind of mix in terms of divisions or on that backlog. .

if I plot the order backlog over lead times, all categories are going up. It's, of course, AI related, but it's also automotive related, and it's also GIP, so power infrastructure related. And coming back to the auto side, as I said before, 50% of what we incurred over the last 2 months came in for next year already and 30% about for this year. So it feels like -- it definitely looks like a very healthy buildup of our order book backlog, especially across the 3 major themes, which I just mentioned, AI, automotive and Power infrastructure. Last question, please, operator.

We now take our last question from the line of Sébastien Sztabowicz from Kepler Cheuvreux.

First one would be on the fab loading. Today, where are you standing in terms of fab loading? And what do you expect for the next 2 quarters for fab loading and when do you expect to be back to full capacity? Is it possible to reach full capacity already in '27? Or is it a bit too early? .

Okay. So the fab loading is particularly high in the 300-millimeter fabs. They are basically fully loaded. Front-end is around 90%. Back end is around 75%. We still incur EUR 650 million idle this year. We think that this will decrease. On the other hand, please also remember, we want to reduce our inventories in order to beef up our cash flow. And of course, we will reduce either, I think, significantly next year, but too early to quantify. Okay. .

And in China, I know that you have a stronger competitive pressure from Chinese competitor on silicon IGBT and you have also pressure on frequent carbide. How do you see the competitive landscape in the rest of the business from the Chinese competitors, notably around microcontrollers, sensors, connectivity. Have you seen any kind of ecosystem building up there over the past few months or so on? And how do you see the deal activity on all these growing areas?

Yes. Really, local -- our local competition in China is really particularly on IGBT again, they caught up as we have focused on silicon carbide. But once it comes to higher reliability, and that's not only automotive but also power infrastructure, once it comes to higher power, I think we are -- we are still also the choice for high voltage. If you talk about other categories, I'm pretty sure we are winning, for example, as we speak, automotive MOSFET market share in China, as customers realize that quality matters in these sort of applications. And in terms of microcontroller, let's say, we do not really feel yet competition. But of course, we stay paranoid, and we look around every corner where things might happen. But right now, it's confined to IGBT, to the largest extent. And of course, we are acting on that. And maybe, Andreas, you want to add on what we are doing in China for China in order to position us well in the local market. .

First local innovation. So we are tightly working on one or the other customization element, be it on product level or application level. Second is then also local operations. So we are about to further strengthen then also our ability to service customers, logistics locally. The third point is then also local manufacturing. So for selected technology and product buckets, we have a strategy that has been shared with you a couple of times in the meantime, where we say we bring those products into local manufacturing sources, if you will. Typically, these are generation today, minus end kind of products in order to supply the China market in China for China. And fourth point I want to mention is that also our strengthening of local ecosystem, what we call. So we're working together with quite a comprehensive network of design houses, if you will, value-added resellers that then together with Infineon and Tier 1s, Tier 2s and OEMs form, so to say, ecosystems that drive innovation in key applications for Infineon together with Chinese market players then also going forward.

All right, everybody. We are reaching almost the length of a football match here. We are now concluding our fiscal second quarter conference call. Thanks for all your questions to twist and old saying for the IFX stock by in May and stay. Further questions, please contact the IR team. Take care. Enjoy spring time, and have a good day. .

That concludes today's conference call. Thank you, everyone, for joining us. You may now disconnect.