Infineon Technologies AG (MRVL) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to the conference call for analysts and investors regarding Infineon's planned acquisition on the automotive Ethernet business from Marvell. Today's call will be hosted by Daniel Györy, Team Leader, Investor Relation 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 target business as well as the part of the Infineon Group. These statements and/or assessments are based on assumptions and management 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 developments, 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 take any obligation to update forward-looking statements. At this time, it's my pleasure to hand over to Infineon. Please go ahead.

Good morning, ladies and gentlemen. Thank you for joining us today on such short notice. On this call, you have our CEO, Jochen Hanebeck, our CFO, Sven Schneider; and Peter Schiefer, our Division President, Automotive; who is dialing in from the U.S. where he has been traveling to welcome our future colleagues. Jochen, Sven and Peter will explain the strong strategic rationale driving the acquisition, the compelling financial aspects and the planned financing of the deal. After that, we will start our Q&A session. We will use an illustrating slide show. On our Investor Relations website, we will provide a replay of this conference call, including the slides as well as a press release. And now Jochen, over to you.

Thank you, Daniel, and good morning, everyone. Ladies and gentlemen, the announced transaction presents a unique opportunity for Infineon. It will further strengthen our #1 position in automotive microcontrollers while significantly boosting our system capabilities. Infineon, as the #1 automotive semiconductor company and the global leader in automotive MCUs, is acquiring the automotive Ethernet business currently owned by Marvell. This business holds a #1 position in automotive Ethernet and offers a complete portfolio that is fully complementary to our own offering. This deal will enable us to accelerate the transition to software-defined vehicles by advancing zonal architectures based on Ethernet networks. We are very excited about this transaction as it provides an important boost to our already highly successful automotive MCU business. By enhancing our system capabilities, in line with our product to system strategy, we will be able to offer our customers the most comprehensive and value-adding solutions. The planned investment will also strengthen Infineon's already strong footprint in the U.S., including extensive R&D activities. Now let me hand over to Peter, who will walk you through more details about the transaction and its significance for our automotive business. Peter, over to you.

Thank you, Jochen. And first, let me give you a very brief recap of the Infineon's position in the automotive semiconductor. And as you may have seen yesterday, the researchers from TechInsights published their latest data on the global automotive semiconductor market. And I'm very pleased to share with you that we have further improved our position in several categories while we continue to be #1 position in the overall automotive semiconductor market. We remain the undisputed leader in the automotive power semiconductors. And with respect to the crucial category of automotive microcontrollers, we have not only maintained our #1 position but expanded it significantly to 32% and therefore, widened the gap to the closest competitor. From a regional perspective, we have also seen significant improvements. We continue to hold the #1 position in China. And I'm pleased to report that we have improved our position in Europe, now also ranking #1. Furthermore, we have seen gains in the Americas where we are now ranked #2. In Korea and Japan, we retain our strong position as #1 in 2, respectively. And this strong foundation provides us with the broadest customer access and positions us perfectly to leverage the acquisition we are announcing today. Now let me introduce the business we are set to acquire. Marvell is a well-known leader in the Ethernet technology and their great line, Brightlane Automotive Ethernet portfolio is the industry benchmark. Their offerings include 5 transceivers, bridges and switches that are ideally suited for all automotive application from advanced driver systems, to in-vehicle infotainment with a focus on the advanced electronic architectures for the software-defined vehicles. They already serve more than 50 automotive customers, including 8 of the top 10 global OEMs. Their strong customer relationships are backed by a lifetime design win pipeline currently standing at roughly USD 4 billion. The product offering of analog ICs with differentiated software stake is asset-light. The business is expected to grow at a compound annual growth rate of 25% in the coming years, making it highly accretive to our automotive growth ambitions. Their highly skilled and committed employees located on the U.S. West Coast, in Europe and in Asia fit perfectly with Infineon's global setting. Let me now elaborate on the key merits of this transaction. Future vehicle architectures will increasingly rely on efficient networking, and traditional field buses are reaching their limits and are being replaced by Ethernet-based solutions. Modern vehicles require the processing of vast amounts of data from sensors such as cameras, radar and LIDAR systems while ensuring seamless communication between high-performance computing units and solar components. In addition, vehicles require realtime diagnostic, secure over-the-air software updates and support for functional safety. This evolution will drive the demand to 3 up to 7 Ethernet switches, bridges per car along with a correspondingly higher number of files. The unique value of this acquisition lies in the fact that it strengthens our market-leading MCU business by enhancing our offerings for solar architectures in the software-defined vehicle. And this highly complementary addition to our portfolio will allow us to deliver even greater value to our customers through compelling system solutions aligned with our product to system approach. By combining Marvell's expertise with Infineon's global reach, we will establish the strongest position in the zonal compute segment. Moving to my last slide. I would like to talk briefly about our target markets. On the left-hand side, you see that the automotive Ethernet market is projected to grow from approximately USD 500 million in 2024 to 5x that size by 2030. This growth is driven by the increasing adoption of software-defined vehicles. While only about 5% of vehicles today are based on zonal architectures, this is expected to rise to roughly 50% by 2030. Ethernet is the backbone of this transformation, making it an essential component of the automotive future. Beyond automotive, Ethernet also plays a critical role in enabling new categories of devices and technologies in other applications with high-growth potential. And I will pass it back to Jochen to elaborate on one particular exciting adjacent opportunity in more detail.

Thank you, Peter. As Peter alluded to, the strategic relevance of this acquisition extends beyond the automotive sector. Ethernet technology is increasingly relevant in the rapidly evolving field of humanoid robots or in more general terms, the world of physical AI. Humanoid robots with advanced sensing and control systems are poised for explosive growth in the coming years. Today, we see rapid step-change innovation around various concepts. Market observers are revising up volumes and predict a steep upward trend. We firmly believe that physical AI represents another compelling growth opportunity in the years ahead. Infineon's comprehensive portfolio, ranging from sensors and power semiconductors, especially in this context, gallium nitride to microcontrollers, connectivity and security solutions position us perfectly to shape this market. With low latency transmission capabilities, Ethernet is the perfect complement to our existing strength. Overall, this acquisition enhances our ability to address exciting new growth factors while reinforcing our leadership in automotive. With that, let me now pass it over to Sven to discuss the financial aspects of the transaction. Sven, over to you.

Thank you, Jochen, and good morning also from my side. Let me now walk you through the financial aspects of this transaction, which nicely add to its compelling business rationale. The automotive Ethernet business we are acquiring from Marvell is expected to generate between USD 225 million and USD 250 million in revenue in 2025. As explained, it has a high growth momentum with an expected CAGR of 25% over the coming years. This and the attractive gross margin level of around 60% make the business highly accretive to our automotive growth and margin ambitions. We anticipate scale-driven cost synergies from combining production volumes and R&D forces. Revenue synergies will result from leveraging Infineon's unmatched customer reach. These synergies will further support the financial accretion coming from this transaction. The total purchase price for this all-cash transaction is USD 2.5 billion. The deal will be financed through a combination of existing liquidity and additional debt. Committed acquisition financing from banks is already in place, reflecting our conservative financing policy and our clear commitment to retaining an investment-grade rating. Subject to regulatory approvals, we expect the transaction to close within the calendar year 2025. The integration will follow the proven script of previous acquisitions. And once integrated, the business will become part of our Automotive division. With that, let me hand it back to Jochen for closing remarks.

Thank you, Sven. Let me briefly summarize, this acquisition strengthens our leadership in MCUs and expands our offering with market-leading Ethernet solutions. It is highly complementary to our portfolio and supports our strategic focus on software-defined vehicles by enhancing offers for zonal architectures. Beyond automotive, it opens up exciting opportunities in adjacent applications such as humanoid robots as a prime example for physical AI. Financially, it is accretive to our growth and margin ambitions. Ladies and gentlemen, this concludes our presentation, and we are now open up the call for your questions. We kindly ask you to limit yourself to one question and one follow-up. Operator, please start the Q&A session now.

[Operator Instructions] Our first question comes from Didier Scemama, Bank of America.

My first question is, the level of operating margin you expect from this transaction, I would say, at closing and then, obviously, post acquisition as you generate synergies on the revenue and cost side? And I've got a quick follow-up.

Didier, Sven here, thank you for the question. The line was a bit bad on our end, so I hope I understood it well, otherwise, please rephrase. So we are going in with the numbers, of course, we have seen in our due diligence phase. So we have said it's a $225 million to $250 million revenue for '25 at a gross margin of around 60%. That's the margin we are guiding for. The operating margin, of course, depends very much on the synergies, which, as I explained briefly in the intro will kick in over the next years, both on the cost side and also on the revenue side. And over the next years, we definitely, as I said, expect this transaction to be accretive also to operating margins for automotive.

Got it. And on my follow-up is on the regulatory process. Presumably, you need CFIUS approval, and I guess, MOFCOM and some other regions, so if you could just give us the list of countries you need approval for.

Didier, this is Jochen. So we have the typical antitrust topics, namely here, U.S. and Germany, maybe other restrictions on the CFIUS side, we expect process where you know we have a lot of experience with. We do not expect a filing in China, given the level of revenue the target is making in that country.

The next question comes from Janardan Menon, Jefferies.

I just wanted to understand the synergies from the customers' perspective a little bit better. So would you be able to sell the product to a Tier 1 or OEM as a combined microcontroller plus Ethernet solution? Or are these decisions made independently by and large, and they will continue to be made independently?

Peter, do you want to take that question?

Yes, sure. Janardan, I think, for sure, the broad portfolio Infineon had already combining now the Ethernet solution is an even more compelling for an OEM to decide to take a complete solution, especially also the interoperability will be key. You're well aware about the design cycles. Bringing up new car models in less than 20 months needs partners where you can have a chipset which works well and supports the R&D community, not only with the hardware but also with the software. And here, I'm very confident that we can further enhance the system offering to our customers and make their decisions towards Infineon a sound decision.

So just going into the answer that you gave the previous question that the target doesn't have much revenue in China. Would that be a market where you would see significant upside given that you already have a very strong microcontroller presence there?

Absolutely. And we have a great relationship with the key OEMs in China, and we will really use that to make sure that we have also the Ethernet business linked to the applications they are working on.

And just a brief follow-up for me. On the gross margin, I'm assuming that this product is currently being manufactured at the foundries. Are you able to bring it in-house, as a statement on your press release seem to suggest? And if so, would you be able to increase gross margin?

No, these products are manufactured in nodes all the way down to 16 nanometers. So it's clearly in our manufacturing strategy following the foundry approach, which also inherently provides, of course, an advantage to shift it according to potential geopolitical needs, but also fits very nicely to our joint venture in Dresden with TSMC called ESMC.

The next question comes from Adithya Metuku, HSBC.

Just a couple. Firstly, I wondered if you could give us some color on the main competitors in this business and the automotive Ethernet landscape. I'm not acquainted with this landscape. And also, if you could comment on what share Marvell has in this landscape, that would be helpful. And then I've got a follow-up on the financing.

Peter, do you want to take?

Yes, sure. So Marvell is the leader in the automotive market. As the competitors, which are stronger is, for example, Broadcom and Realtek from Asia.

Got it. And would you say Marvell has a significant market share, majority market share? Or any color you can give?

Yes. I would say that they are very close to Broadcom on the #1 position.

Got it. Just as a follow-up on financing. Sven, is the rate of interest on this debt similar to what you have on your current debt? Or would it be -- or should we assume something higher, given all the stuff that's going on in the macro at the moment?

Adi, Thank you. I fully understand. So maybe I explained that really well given that we are in unchartered territories in the last day. So you know us, we have a very conservative finance policy. We have a very clear commitment to investment-grade rating. And in all our major transactions so far, we've always followed a very careful and conservative approach. If you think about Cypress where we have done at that time. And this time, we don't need equity to be very clear. We even did equity prior to regulatory approvals. This time, again, before launching the transaction, we agreed with very reputable banks out of our core banking group for full underwriting of this amount, so this is done. We have it on hand. And the spreads or conditions are basically in line with bank financing. We have just done a couple of months earlier, the $2 billion undrawn revolving credit facility with 14 banks, so that's all in line. And of course, now after this transaction closes, we will think about refinancing it in the markets you are all aware, the dollar markets, the eurobond markets, that's then a little bit later out, but that's the plan to take it out, of course, also with free cash flow and existing cash.

[Operator Instructions] The next question comes from Didier Scemama.

My follow-up, I just wondered maybe a question for Jochen. Strategically, are you trying to -- you're clearly going up the stack with that Ethernet acquisition. Is that an idea because you're trying to dilute the weight of power semis in your mix to move away from competition from China. Is that the idea here? Or is it just broadening the scope of engagement with your customers on the automotive side?

I would say it strengthened our, let's call it, digital control connectivity part of the company. And yes, we are strong in power, but we feel that the combination is often what makes the difference. If you think about the example I just gave about humanoid robots with the small joins there, you exactly need all 3. You need gallium nitride to drive high frequency small motor, you need the control part with a microcontroller and you need the Ethernet connection then to the main GPU. So I would say, this transaction clearly strengthens our call it, microcontroller connectivity leg the company, and that, of course, is from a technology nature, it's very much analog mixed-signal technologies, which are in itself very differentiating and sticky.

Yes, obviously, very sticky. And the other question, I think you had those restrictions when you acquired the Bluetooth WiFi business of Broadcom. Are there any end markets that are not allowed to sell these Ethernet chips? So for instance, data center and so on? Or are you allowed to sell it into industrial, for instance?

We are allowed to sell it into automotive, industrial and robotics.

Got it. Congratulations.

Thank you.

Ladies and gentlemen, that was our last question.

Thank you. Time to wrap up. Thanks for all your questions. With that, we are concluding this conference call. For further questions, please feel free to contact the IR team here in Munich. Take care, and have a good day.

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