Infineon Tech AG

Good morning everyone, welcome to the conference call for analysts and investors for Infineon's 2024 fiscal fourth quarter and full year results. Today's call will be hosted by Alexander Feultin, 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 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, and good morning, ladies and gentlemen. Thank you for joining our earnings call for the fourth quarter and the full fiscal year 2024. On this call, you have our CEO, Jochen Hanebeck, our CFO, Sven Schneider, and our CMO, Andreas Rorschitz. Jochen and Sven will provide an overview on the market situation and divisional performance, key financials and, of course, our long-awaited outlook for fiscal 25. Our prepared remarks will also cover step-up, sustainability achievements and the dividend proposal. After that, we will start our Q&A session. As usual, the illustrating slideshow, which is synchronized with the telephone audio signal, is available at infineon.com slash slides. We will again provide a PDF with Jochen's and Sven's introductory remarks in the course of the call on our website, namely infineon.com slash investor. There you will also find a recording of this conference call, including the aforementioned slides, a copy of our earnings press release, as well as our investor presentation. And now, Jochen, over to you.

Thank you Alexander and good morning everyone. Our fiscal year 2024 lies behind us and we concluded it as predicted and fully in line with our target operating model. What lies ahead is a continuation of a rolling correction to various degrees and timing in many of our target markets. More on this later. We currently focus on three priorities. First, we manage the cycle by focusing what we can control. At the same time, we drive structural margin improvements with our step-up initiative. Furthermore, we are accelerating our innovation to customer value with breakthrough innovations like GAN 300 or super thin silicon MOSFETs for AI to lead in our undiminished structural growth areas. Together, this will ensure that Infineon comes out of this down cycle stronger. Now, let's look first at the September quarter's results. As predicted, the fourth and final quarter saw the highest sales within our fiscal year 2024. Group revenues were 3,919,000,000 euros, 6% up from the previous quarter. All four divisions saw their revenues increase sequentially. The segment result came in a bit stronger than anticipated and amounted to 832 million euros, corresponding to a robust segment result margin level of 21.2%. Quarter over quarter, the US dollar weakened somewhat against the euro from 1.08 to 1.10, having a negative impact on revenue and earnings. For the full fiscal year 2024, we recorded revenues of 14,955,000,000 euros, an annual decline of 8%. Automotive was the only one of our segments that saw its revenues rise year over year, albeit slightly. The full year segment result margin came in at 20.8%. Sven will provide more color in the financial section. Indicative of the short-term order behavior of our customers in a down cycle, our order backlog has been declining further to stand at around 19 billion euros at the end of September. Now let's take a closer look at our divisions. In the final quarter of the last fiscal year, the automotive segment achieved revenues of 2 billion 149 million euros, a further uptick in comparison to the previous quarter. We saw higher volumes, in particular in XCV-related solutions in our microcontrollers. Both the segment result of 551 million euros and the segment result margin of 25.6% showed further slight sequential increases, with positive volume effects being the key driver. Looking at the entire fiscal year 2024, Infini was able to grow its automotive business by 2%. Our clear focus on structural growth areas, our broad portfolio and leading market positions across applications and regions once again allowed us to outperform peers. As you know, the overall sentiment in the automotive space has recently clearly deteriorated in many regions. We see many customers actively managing inventories downwards and anticipate they will even accelerate this towards calendar year end. The lessons learned from the last allocation period seems to be by and large forgotten. At the same time, production numbers continue to trend incrementally down. After a sequence of downward revisions in recent months, the number of light vehicles to be produced in calendar year 2024 is now estimated at 88.5 million by S&P Global, down 2% versus the previous year. In addition, the share of XCV is stagnating in many regions, which is unlikely to reverse in the early course of 2025. China is the notable exception to this trend, with every second car and rising being an electric one. In the longer term, we see our structural growth drivers around e-mobility, including hybrids and ADAS, or more broadly, software-defined vehicles, fully intact. The later one covers our top-notch microcontroller franchise sensors and smart power components for advanced power distribution, enabling software-defined architectures and functionalities such as automated driving. Among automotive semi-providers, Infineas has unrivaled portfolio breadth and a worldwide geographic exposure geared towards winning areas to reap the benefits of these developments. This is underpinned by our market share gains in MCUs and our number one position in China. Our success in China is undiminished, having achieved again significant growth in our fiscal year 2024 and gaining new design wins at an unabated momentum. In line with the strong trajectory, some of our latest design wins. A few days ago, we announced to broaden our collaboration with Stellantis. Infineon will be the key semiconductor supplier for the next-generation platforms. This supply agreement will significantly advance Stellantis' mission to make electromobility for the volume market a reality. In addition to the well-known silicon carbide design win, it will cover AUREX microcontrollers and smart power components, as testimony to our solution-oriented product-to-system approach. On the silicon carbide side, we continue our strong momentum, having achieved a significant first-time silicon carbide design win at a major American OEM through a directed buy. Our 750V CoolSig MOSFETs will be used in the primary traction inverter for an upcoming volume platform. In China, we are happy to announce that we are directly supplying another local key player with our state-of-the-art hybrid pack drive CoolSig 1200V power modules for several new models, some of which are launching as early as this year. These examples illustrate once again our global success also with silicon carbide. Now let's move to green industrial power, which saw revenues increase by 6% quarter over quarter to 503 million euros. The main application fields contributing to this positive seasonal development were renewable energy generation and transportation. The segment result of GIP climbed to 111 million euros in the September quarter, corresponding to a segment result margin of 22.1%. The overall business environment for industrial applications remains weak. Global manufacturing PMIs for the US, the EU and China are all below 50. Inventories remain elevated throughout industrial supply chains. Their digestion is progressing only slowly, such that the timing and extent of semiconductor demand improvements remain uncertain. For core industrial applications like automation and drives, as well as for major home appliances, we continue to foresee a prolonged phase of muted development. In the era of renewables, inventory depletion may take longer than anticipated. That said, underlying structural demand remains strong, further driven up by power requirements for EV charging in AI data centers. We are preparing for the upswing in renewables by finishing the development of cutting-edge modules, which are highly appreciated and anticipated also by our Chinese customers. In the same light, I would like to spend a moment on Infineon's unique competitive setup across all relevant power technologies – silicon, silicon carbide and gallium nitride. Over the past few months, we have been very successfully pushing the boundaries in all three. In silicon, we achieved a technological milestone, becoming the first company mastering the handling and processing of ultra-thin silicon power semiconductor wafers of only 20 micrometers. By reducing wafer thickness from the industry standards of 40 to 60 micrometers, we cut substrate resistance in half, leading to power loss reduction of more than 15%. This makes power conversion more efficient, for example in AI power stages. The technology is already qualified by customers and another proof point that major innovations are still possible in the silicon space. In silicon carbide, we are ramping the world's most competitive device web in Malaysia, in a modular fashion, in line with our customer demands. In terms of silicon carbide substrates, our strategy of not being vertically integrated paid off fully, and we can rely on a diversified and competitive external wafer supply, which is leading in terms of cost and quality also for 200 mm. In terms of silicon carbide market success, we are happy to report that we achieved 650 million euros of revenue in our fiscal year 2024, equivalent to more than 30% year-over-year growth, clearly outgrowing the market and therefore gaining market share. For our fiscal year 2025, we predict our silicon carbide business to grow further in a low double-digit percentage range. In gallium nitride, we recently achieved a breakthrough innovation, developing the world's first 300 mm power GaN wafer technology. This groundbreaking technology will be an industry game-changer and enable us to unlock the full potential of gallium nitride about one year after the acquisition of GaN systems. A significant advantage of 300 mm GAN technology is that it can utilize to a large extent existing silicon manufacturing equipment, allowing accelerated implementation and efficient use of capital. Fully scaled 300 mm GAN production will contribute to gallium nitride cost parity with silicon on RES-on level, which means gallium nitride performance at the cost of silicon. As innovation leader in power systems, we are determined to defend our number one position in silicon and to shape the fast-growing wide bandgap markets. Making predictions which technology will be adopted in which application at what moment in time will not leverage the full potential, we rather team up with our customers to make the best choice in each case. Real-life examples like power supply units for AI data center, RECs, so-called fusion modules for EV inverters are showing that it is the combination of silicon, silicon carbide and gallium nitride products that achieves the cost performance optimum. Now let me continue the divisional review with power and sensor systems. PSS saw another quarter of positive momentum and printed revenues of 861 million euros, a sequential increase of 15 percent. While all business lines contributed to this development, the ramp of our power solution for AI servers clearly stood out, growing by almost 50 percent quarter over quarter. Also of note, with our industry-leading silicon microphones, we could benefit from the launch of new AI-enabled smartphone platforms. Driven by higher revenues, the segment result of PSS increased to 105 million euros after 70 million euros in the previous quarter, corresponding to a segment result margin of 12.2%. Underutilization charges continue to be a burden to margin expansion. Consumer compute communication applications have bottomed out, but the cyclical market recovery is progressing slower than anticipated. Especially in consumer applications, inventory burn remains a headwind. In stark contrast, power solutions for AI servers are booming, and Infineon is at the forefront of this highly attractive structural growth trend. Addressing the entire power flow from grid to core, we are uniquely positioned to power artificial intelligence. The AI revolution is still in its early stages and our business is scaling up very dynamically. We will accelerate our growth based on new sockets and achieve north of 500 million euros of revenue in fiscal year 25, depending on GPU RAMs and shares. Business with all leading AI processor makers as well as hyperscalers using their own custom XPU will drive this. Within the next two years, we will cross the €1 billion revenue line for powering AI solutions. Structural growth is underpinned by several drivers. The fast-growing number of new AI server installations, the rising performance and related power consumption of new processor generations, an increasing bill of material as the industry moves from lateral to more power-dense vertical power supplies, and for Infineon gaining market share on the back of unrivaled capabilities. What we bring to the table is sophisticated digital power control, in-house produced discrete MOSFETs with industry best figure of merits, packaging technologies like chip embedding, a full-fledged wide band gap offering, and very substantial application know-how. Another key success factor valued by our customers is our proven highest quality track record. We look forward to enabling higher and higher compute performance with the most efficient power flow solutions in the market. As a fourth in our row of segments, connected secure systems recorded quarterly revenues of €406 million, up 11% from the previous three-month period. The increase was driven by solutions for trusted mobile connectivity and authentication, as well as general-purpose microcontrollers. In line with higher revenue, the segment result of CSS improved to €62 million, corresponding to a segment result margin of 15.3%, in comparison to 11% in the previous quarter. Demand in most IoT and security markets has bottomed out but is only showing a sluggish recovery as continuing macro uncertainties affect consumer sentiment and corporate spending. Inventories have to come down further to enable a wider recovery. In the meantime, we continue to develop exciting new Edge AI solutions, like our DeepCraft Edge AI software. This new software solution includes the introduction of easily deployable off-the-shelf AI models for sound, gesture, surface and fall detection. This software is tailored to our hardware offering and will provide customers with a wide range of new Edge AI and machine learning models and solutions. Now over to Sven, who will present our key financial figures.

Thank you Jochen and good morning everyone. In the final quarter of our fiscal year 2024, the adjusted gross margin came in at 42.2%, flat compared to the previous quarter. Increasing idle charges and a slightly negative currency development compensated the impact of higher sales. Also, the reported gross margin remained flat at 40.2%. For the full fiscal year 2024, the adjusted gross margin was 42.6%, a resilient level for a downturn year. Yet, compared to the record year 2023, it was a noticeable decline of 470 basis points. The main headwinds were lower volumes, a negative price development and steeply rising idle costs, which ended up at around 830 million euros, about 400 million more than the year before. The bulk of these underutilization charges is of cyclical nature, given the current lack of a visible market rebound. Looking back at the September quarter again, now focusing on operational expenses, research and development went down to 477 million euros from 509 million in the quarter before, reflecting fluctuations in the capitalization of development expenses and the recognition of funding. Selling, general and administrative expenses stayed essentially flat at 393 million euros compared to 390 million in the previous quarter, showing our determination and focus to efficiently manage the cycle. The net other operating expense of minus 233 million euros was at an unusually high level as we recorded restructuring expenses of 218 million euros for provisions for personal related measures under our step-up initiative. Together with the asset impairment in the previous quarter, we have so far recorded one-time expenses for step-up of 291 million euros. These charges are part of the non-segment result, which amounted to minus 359 million euros for the September quarter, bringing the total for fiscal year 24 to minus 915 million euros. Jochen will provide a further update on StepUp later on. The financial result for the September quarter was minus 26 million euros after minus 30 million euros in the quarter before. Income tax expense for the fourth quarter amounted to 64 million euros, equivalent to an effective tax rate of 14%. Cash taxes for the reporting quarter were 68 million euros, resulting in a cash tax rate of 15%. Going forward, we continue to expect a tax rate between 20 and 25%. Now to our investments in the property, plant and equipment, other intangible assets and capitalized development costs. In the September quarter, they amounted to 722 million euros. Total investments for the entire fiscal year 24 were 2.7 billion euros, coming in a bit below our revised annual guidance of 2.8 billion euros. Depreciation and amortization, including acquisition-related non-segment result effects for the fourth fiscal quarter amounted to 473 million euros after 470 million euros in the preceding quarter. Our reported free cash flow from continuing operations improved substantially in the September quarter and reached 1 billion 145 million euros. Factors driving this strong figure were, besides a better operating result, cash-ins from fundings, the scheduled receipt of customer prepayments and positive working capital effects, in particular from the reduction of inventories. Considering the acquisition of GAN systems for around €800 million and expenditures of around €900 million for large front-end buildings, our adjusted free cash flow came in at €1,690,000,000 for the entire fiscal year 2024, corresponding to 11.3% of sales, fully in line with our target operating model. The reported free cash flow amounted to 23 million euros for this same period. Our inventories have declined by over 400 million euros quarter over quarter. Their reach has therefore come down to 153 days at the end of September, almost 30 days less compared to the end of June. Keeping stock levels under control will remain a focus area of our cycle management. However, the sluggish recovery will stand in the way of further near-term reductions. In addition, we will continue to keep a relevant portion of inventories linked to strategic purposes due to manufacturing footprint optimizations in conjunction with step-up and also as a mitigation of potential geopolitical risks. Before coming to our liquidity and leverage figures, let me spend a minute on the settlement we have reached in the last quarter with the Insolvency Administrator of Quimonda. With this mutual agreement, we have brought the legal dispute to an end, which was pending since the end of 2010. The Insolvency Administrator had claimed an amount of around 3.4 billion euros plus interest. While not admitting any wrongdoing, we have decided to settle all legal disputes and claims and hence eliminate any tail risk against the payment of 753.5 million euros before the deduction of taxes in the magnitude of around 100 million euros. Provisions of 221 million euros that have been set aside for the Kimonda case have been fully utilized. As a result, earnings and cash flow from discontinued operations have been negatively impacted. Now to our liquidity and leverage. First the figures, then some remarks regarding our updated finance policy. Our gross cash at the end of our fiscal year 2024 stood at 2.2 billion euros. The slight decline compared to the previous quarter's level relates to the positive free cash flow being offset by the Kimonda settlement and the complete repayment of short-term bank facilities. As a consequence of the latter, our gross debt amounted to 4.8 billion euros, equivalent to a gross leverage of 1.2 times. Net debt amounted to 2.6 billion euros, corresponding to a net leverage of 0.6 times. Our financial policy has been and will continue to be driven by conservatism and a strict commitment to an investment-grade rating. It is our clear aim to retain financial flexibility throughout the cycle on the basis of a strong liquidity position. Within this framework, we have reviewed our financial policy targets, considering lowered net pension and contingent liabilities over time. Going forward, our objective for gross cash will be at least 10% of revenues on average throughout a year. We are thus dropping the additional cushion of 1 billion euros, planning instead to establish committed standby credit facilities. Our gross debt target of a maximum of two times EBITDA stays in place unchanged. Finally, our after-tax reported return on capital employed remains at a depressed level. For the complete fiscal year 2024, our return on capital employed came in at 8.5%, clearly below our aspirations. As we closed our fiscal year 2024, we will propose to our next annual shareholders meeting in February a dividend of 35 cents per share, unchanged versus the prior year. Keeping the dividend constant, despite a meaningful decrease in earnings, shows our strong commitment to shareholder remuneration. We are striking a fair balance between shareholder remuneration and sufficient financial flexibility for the company. including the stock repurchases we have conducted during the course of fiscal year 2024. This equals a return of around 90% of our annual free cash flow adjusted for major M&A to shareholders. Now back to Jochen, who will comment on our outlook.

Thank you, Sven. Looking at our broad-based CME markets, it becomes clear that cyclical headwinds are persisting and the recovery in the majority of those markets is sluggish. Especially in automotive, customers are reducing inventory levels. Visibility beyond 1-2 quarters is clouded by short-term ordering and a higher than normal share of turns business. Predicting the exact timing and momentum of the cycle is challenging. Our current focus is on managing what we can control and ensuring Infineon is in optimal shape for a market recovery. The secular drivers underlying our structural growth beyond the current transition phase remain firmly intact. With this in mind, we expect revenues of around 3.2 billion euros for the currently running first quarter of our fiscal year 2025 on an assumed US dollar exchange rate of 1.10. As already mentioned, we expect significant further inventory reduction by our customers to their year-end reporting. All in all, this will lead to a projected sequential revenue decline of around 18%, but three times our usual seasonality. On a year-over-year basis, this will correspond to a low teens decline. On a divisional level, ATV and CSS are expected to trend along the same lines as the group. PSS should see a less pronounced revenue reduction, whereas GIP should post a steeper decline. For the segment result margin, we expect a mid-teens percentage level for the December quarter, driven primarily by the meaningful revenue contraction. Now to our outlook for the full 2025 fiscal year. As already mentioned, current market visibility is very low. In such an environment, we have to formulate assumptions for key business drivers, allowing for a broad range of scenarios and acting accordingly. As a base case, we assume our full-year revenues to be slightly down compared to the previous fiscal year. In other words, we expect the transition phase in the majority of our markets to drag on. As our guidance for Q1 shows, our fiscal year 2025 will be off to a slow start, mainly due to inventory corrections. We expect overall only a modest rebound to set in during the later quarters. This view is predicated on the following key assumptions. Global economies will hardly accelerate compared to 2024. Consumer spending on electronics will only slowly increase. Automotive production will be flat and the value chain impacted by a prolonged wave of auto-semi-inventory adjustments, presumably reaching into the second or third quarter of our fiscal year. Outside China, electric vehicle penetration will increase only slowly. Within China, the car market will stay robust, with most of the growth accruing to domestic auto OEMs, where we have an excellent standing. Industrial customers will continue to work down inventories and restrain TAPEX budgets. Spending on AI data centers will remain buoyant, driving our business. Qualitatively speaking, the ongoing inventory correction, expected price compression in the range of low to mid single digits and a slightly adverse currency assumption will weigh on our top line, only partly offset by secular content growth and share gains. On the basis of these presumptions, we anticipate revenues of our ATV business to decline slightly year-over-year, as continued MCU share gains and EV-related content growth, in particular in silicon carbide, will not fully compensate inventory and price reductions, especially in the first half of the year. For GIP, we foresee a more pronounced decline as the segment addresses late cycle areas and is burdened by inventories in the renewable chain. Conversely, PSS should see a moderately growing revenues on an annual basis, in particular as our broad AI-related product offering is gaining tremendous traction in the marketplace. CSS is expected to stay more or less flat. Given the anticipated lackluster revenue development, we will put in significant efforts to support our profitability throughout the second year of cyclical correction. Our business model is resilient, but pricing, negative currency effects and consciously underutilized manufacturing capacities constitute notable margin headwinds. Looking at idle charges, we predict them to rise to close to a billion euros for the whole of fiscal year 25. To mitigate the impacts, we will relentlessly work on our productivity and exert very strict cost discipline. Reaping some early benefits from our step-up initiative as well as somewhat lower raw material and energy prices will help too. In total, we expect our full year adjusted gross margin to come in at around 40% and our segment result margin to land at a mid to high teens percent level. Cyclical idle charges burden these margins to the tune of 500 basis points without accounting for the positive margin fall-through effect from higher revenues that we can generate from currently underutilized capacities once the market is back. Investments are key variables that we can control. Consequently, we are reducing them by around 10% compared to the previous year and expect them to amount to around 2.5 billion euros for the fiscal year 2025, including capitalized development expenses. We focus our invest first on the construction of the fourth module in Dresden for smart power technologies for applications such as powering AI. Furthermore, we expand silicon carbide and gallium nitride capacities, ensuring leadership in wide bandgap. We have decided to postpone the further extension of our COOLIM-3 FAB for the time being. Based on further efficiency gains, our area-efficient silicon carbide trench technology, and the faster transition to 200 mm for silicon carbide, we will be able to address the foreseeable market demand over the coming years and effectively scale our silicon carbide business. The potential to scale capacities by adding equipment and further clean room space later in line with end demand is also a proven strategy and a great optionality. It is evidence of how CAPEX decisions can be taken in a modular fashion. For depreciation and amortization, we anticipate a value of around 2 billion euros in fiscal 25. This includes amortization of around 400 million euros resulting from purchase price allocations mainly in connection with acquisition of Cyprus, which will end up in our non-segment result. Our adjusted free cash flow net of investments into major front-end buildings is expected to come at around 1.7 billion euros within the corridor of between 10 and 15 percent of sales embedded in our target operating model. For the reported free cash flow, we expect a level of around 900 million euros for the fiscal year 2025. Let me now come to an update on StepUp, which we started at the right point in time. As a reminder, with the program, we aim at structural improvements to strengthen our competitiveness. And so far, it is complementary to our near-term cycle management. We are fully on track to deliver a high triple-digit million segment result improvement. The necessary measures have been worked out and will be implemented across four main action fields, manufacturing productivity, efficiency and central and support functions, portfolio management and tactical pricing excellence. We expect the full impact to be effective by the first half of our fiscal year 2027. In fiscal 26, already about half of the effect should come through, while 2025 will already benefit from some first contributions. One-time costs are close to 300 million euros in our P&L for the concluded fiscal year 2024, and we estimate another 100 to 200 million euros to be also charged as non-segment result. Step-up will require focus and persistence in order to achieve the ambitious target. We have the clear buy-in of the management team to enhance Infineon's competitiveness. Our company sets ambitious targets also for non-financial metrics. As a role model in sustainability, we are very well on track towards CO2 neutrality by 2030, relating to direct and indirect energy-related emissions . As part of our continuous efforts, we have switched additional sites to renewable energy during the past fiscal year, achieving a global rate of green energy of almost 90%. This puts us in a very good position to achieve our stated milestones of reducing CO2 emissions by 70% by 2025 and 100% by 2030, compared to the base year 2019. End of fiscal year 2024, we reduction amounted already to 66%. Furthermore, we are on track to set a science-based target addressing Scope 3 emissions in close collaboration with our supply chain partners to further support climate protection. Now ladies and gentlemen, it is time to summarize. Most of our markets have bottomed, but show only a sluggish recovery. Inventory corrections throughout the value chain are affecting our business at present. Visibility is currently very low. In our base case, revenue development will be slightly down year over year. Cycle management is a key to navigate the near-term, with full focus on the things we can control, especially OPEX and CAPEX discipline, as well as loading of fabs. Our structural drivers remain intact. Some of them are currently subdued, like renewables or I2E, while others are gaining steam. AI, software-defined vehicle. With technological breakthroughs, we are solidifying our position as the industry innovation leader. Ultra-thin silicon wafers, leading silicon carbide offering, gallium nitride on 300 mm. Combining innovation power with our step-up program, we make sure that Infineon will be in optimal shape for the future.

Ladies and gentlemen, this concludes our introductory remarks and we are now opening 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.

Thank you. Our question and answer session will be conducted electronically. If you would like to ask a question, simply press star key followed by the number one on your telephone. If you are joining us today using the speakerphone, please ensure that your mute function is turned off. And we take our first question from Johannes Schaller from Deutsche Bank. Please go ahead.

Yes, good morning. Thanks for taking my question. I mean, clearly the current revenue run rate into Q1 is quite depressed by these stocking effects. I mean, maybe you could give us a little bit more detail on how we should think about quantifying those and I'm pretty sure you're not shipping in line with an 80 or 88 million star in Q1, maybe kind of what's the equivalent you're seeing in Q1. And then just as a quick follow up on gallium nitride, great progress on 300 millimeter. How should we think about this conceptually? Is this for you more something to grow and expand your margins or is it more something that will allow you to defend your market share and defend your profitability? Thank you.

Yes, Sven here. Hello, Johannes. I take your first question. Jochen will take the second one. So on the development of the revenues on the inventory, destocking, as you said, some guidance, and we have received also from others a couple of questions on that one. First quarter we have said that this is a very atypical quarter with much more seasonality than usual. Usually we have a seasonality of give or take minus 6%, now it's minus 18%. So, the difference between the two is something we attribute mostly to the inventory destocking. So, if you want a number, you can, of course, calculate it by yourself, but give or take its 400 million plus of revenues, which we are losing, so to say, in Q1 due to inventory destocking. There will be some part also in Q2, and we cannot exclude than in some areas even in Q3. And if you adjust now the revenue of the first quarter and also imply the typical seasonality of some price effects in our second fiscal quarter, I think it's at least from today's perspective, from our opinion, fair to assume that the inventory adjusted run rate of revenues would be slightly above $7 billion. And if you then look at the second half in order to come to a revenue number which is slightly below previous year, then that's an increase adjusted for the inventory effects of whatever, 7%, 8%, half year two versus half year one. And this is more in line with our usual seasonality. So there's no crazy hockey stick recovery baked in in H3, H4. It's mostly related to the inventory destocking.

Yeah, and I take then the question on the GAN. The GAN on 300 is paving the way for delivering GAN functionality at silicon costs. So for us it's shaping the market. GaN will replace in various voltage classes silicon, and that's really a breakthrough, offering all the advantages, again, of gallium nitride, like higher switching frequency, higher power density, and so on and so forth to the market. And our advantage is the Consistency with our manufacturing footprint as gallium nitride differs mainly on the epitaxy layer. You know that it starts with silicon then it comes the epitaxy and the rest of the processing is very much also silicon like. So we feel that we have an excellent position not only technologically but also from our manufacturing or call it capital stock to shape this market?

Maybe asking very slightly differently. I mean, I guess you're planning to charge more for 300 millimeter gallium nitride wafer than for a silicon wafer, because there is a bit of a debate in the market about this point specifically.

We will do value-based pricing and we will sit down with the customer, because we know the savings come from the system optimisation, but Andreas, maybe you can add more colour on that.

Look, the point is that with us announcing 300mm, we achieved this magic missing link, as I call it, towards our customers in terms of then also providing credibility that we can supply GaN performance at silicon cost. Coming back to your question, does this mean now that the GaN wafer is sold as a whole if we would ever sell a wafer, which rarely happens, for the same price like silicon the answer is no but in terms of cost to performance and our go-to-market charging then a price per performance on a die level for a gun device together then with the driver and the controller goes to what's parity with silicon solution while providing gun performance and and this is a breakthrough and the game change in the market which all our customers are jumping on and saying hey we want to go with you it's it's a convincing and compelling story That's very clear. Thank you very much.

The next question comes from the line of Andrew Gardner from Citi. Please go ahead.

Thanks very much for taking the question. First, just a follow-up from the first question on your inventory levels and the customer inventory levels, and then one on silicon carbide, please. What is your assumption in terms of what customers are doing? How clear are they being, particularly in the automotive space, about their reduction of inventory? Or are you just, you know, you're feeling the pressure in terms of your orders, and so you're making an assumption? I'm just trying to understand the level of communication you're getting from those customers.

No, it's very consistent. We see it in the order picture. Of course, Christmas is also in that regard a long period this time, but we get it also through communication. And I mean, if you think about the situation of certain tier ones, I think it also is logically very much in line with their current priorities. So numerous indication. that this will happen, especially to the calendar year's end. In Japan, maybe also towards March, but the main effect is in calendar year end.

Understood, thank you. And then on silicon carbide, you mentioned 650 million euros in the fiscal year just finished and low double-digit growth for the coming year. As you suggested, it seems like you're clearly gaining share. Can you give us an update on the split that you have between industrial and automotive as we look to fiscal 25? You have been over-indexing towards industrial relative to some of the peers, but I'm just wondering whether that's changing.

Yeah, overall you can assume it will be 50-50 and fluctuate a little bit up and down around that number from now onwards.

Okay. And then just finally, very quickly, the win you mentioned with the US OEM, or is that a new EV manufacturer?

That's a traditional car, volume car manufacturer.

Thank you.

And, André, if I may just add on the silicon carbide growth, if you look into 25, the growth rate in silicon carbide for automotive will be higher than for GIP. Understood. Thank you, sir.

The next question comes from the line of Didier Schemama from Bank of America. Please go ahead.

Yes, good morning. Thank you for taking my questions. Maybe two questions. So first, Sven or Johan, whichever wants to take the question. On the March quarter, I appreciate you don't want to guide at this stage, but normal seasonality for ATVs is up 5% Q&Q. So I'm just trying to understand or triangulate your comments. So on the one hand, you've got a big inventory correction well above normal seasonality in the December quarter, and you've got the price declines coming through in the March quarter. Would you say that the December quarter is the low point for ATV for the year and then March is up and the quantum of that is TBD? Or would you say that ATV is probably going to stay at that level in the March quarter even declined given the lingering inventory correction effect.

Yeah, Didier, without giving you a guidance now for second quarter, because please bear with us, we are the only ones guiding today for a full fiscal year. I always need to repeat that for German corporate governance reasons. But now to answer your question. That is expected to be the low point for automotive. The revenue number for automotive in Q2 should be higher than in Q1. And, yeah, the other effects will come into play, as you rightly mentioned, with price effects, especially on the automotive end. But, I mean, I've given you now already a quasi guidance by saying that inventory corrected both quarters together will be slightly above 7 billion. I think then you can calculate backwards what a potential number for Q2 could be.

Got it. Makes perfect sense. My second question is more like medium term and related to the step-up program. I guess the main questions we get on Infineon from global investors is why should I invest in power semiconductor companies? When I look at your US-listed peers in power semis, their gross margins are higher than yours, at least at this stage. They might fall in the coming quarters. Who knows? And obviously, your Japanese and US-listed microcontroller peers in automotive have got tremendously higher gross margins. Just remind us, what's the investment case, really, for Infineon for investors relative to what they could get in investing in some of your overseas competitors?

Yeah, I think it's even in a downturn, I understand that margin is valued proportionally higher. But I think in the medium and long term, you need to look at the combination of growth and margin. and we feel that we have a lot to win on the growth side, but we also have potential on the margin side and that's why we are going for the step-up program. It would be rather easy to bring up the company only on margin level at the expense of growth, but I don't think that's in the long-term interest of shareholders. So the combination profitable growth is for me and for us the equation for generating shareholder returns. But I think the growth element is a little bit forgotten, but we have not forgotten, and for growth, innovation is key in order to differentiate from, let's say, average market players or bottom fishers.

Very well. Thank you so much. The next question comes from the line of Sandeep Deshpande from JP Morgan. Please go ahead.

Yeah. Hi. Thanks for letting me on this morning. I have a question on what you are hearing from your customers in the automotive space on pricing in the automotive semiconductor space. And will you see that impact fully reflected in the first quarter results or will that also be reflected in the second quarter results? I have a quick follow-up after the response.

Andreas here. Look, Sandeep, after 2024, where we have seen very low single-digit price decrease and no return to mean relative to, so to say, the pricing as it used to be pre-COVID, we now do foresee on a corporate level low to mid single digits price decrease in 25. In that regards, auto, we quantify to be around the low single digits. This is mostly due to, if you will, two elements. Element one is our portfolio breadth that we have placed at the auto customers, talking about very sticky MCUs and its software environment, our smart power solutions. That puts, so to say, fuel into the equation of relative price stability, plus then also CRAs. So with the CRAs that we've been doing throughout the last two, two and a half years, that is definitely also bringing in additional input towards more stability in that regards. In other segments such as our multi-source MOSFETs, which are pretty much commoditized or consumer heavy product lines as such, we however foresee mid to high single digits in price decrease. So allow me to say we are not blindsided, it's the opposite. So us being market leader in particular in the area of power semiconductors, we know what we are talking about. At the very end, this ends in a blended mix of low to mid single digits decrease on corporate level for fiscal 25.

Thank you. And then a follow-up on your chips which go into the AI market. I guess you will see some improvement in your sales into that market into 2025. And could you comment on whether this is this lateral technology or the vertical technology that you are selling into this market, and how you see developments into 26 as well? Thank you.

Yeah, Sandeep, I take that one. I wouldn't call it improving because what we are basically telling you that compared to last year, the revenue will quadruple in the next two years, right? Towards one billion. I wouldn't call that improvement. We have been very successful with the two most important GPU makers in designing in our products. And the hyperscalers, anyway, the hyperscalers are working with vertical. On the GPU side, it's split. One GPU maker is pushing power density which is the critical element because of the higher and higher power consumption you need to increase power density around the processor in slightly different means but we feel comfortable that over the midterm they all will move towards vertical power supplies so it's a real We are very happy with the progress we have made in this regard.

Thank you.

The next question comes from the line of Francois Bouvinier from UBS. Please go ahead.

Thank you very much. My first question is on China. It's one of the key highlights for this quarter. Many of your peers flagged the China robustness, and I think you mentioned it in your opening remarks. Can you tell us maybe what you have in terms of China revenues? I mean, this quarter or for the full year, that would be very helpful to monitor that. And then my follow-up question is, again, on the fiscal Q1, minus 18 percent quarter on quarter. I understand there is a correction happening, but still minus 18 percent is well below, above, I mean, in terms of decline than your peers, around minus 5 percent quarter on quarter. So, my question is, do you take some proactive steps, I mean, to decline? You know, inventories, I mean, it seems that you are, you know, very different than Pierce. So I'm wondering if you have some proactive decisions to cut inventories on top of what your customers are doing.

Yeah, thanks for the question. So first of all, China share, I think last fiscal year, or not the one before, was 25%, grew now slightly to 27%. I would call it stable in China. And with respect to your second question, I think the difference is that we are not stuffing the customer. We sense that in the market some players keep on pushing volume into the customers. This is also partially at rebates, and this is what we refrain from doing.

Okay, thank you. And just from China. Sorry, I didn't catch it. Your growth, China growth, what is it, this quarter and this year?

No, fiscal year 23 was 25% and fiscal year 24 it was 27% of the total.

Share of the year.

Share of total, sorry, share of total.

Share of total. And in terms of growth rate, I can calculate, I guess, but if you can help me save time. Higher than company average.

Higher than company average, but do you have the numbers?

Probably in terms of growth, it was flat. So given the fact that on a company level, we went down in revenues, while share was increasing to 27 percentage points in the revenue portfolio. So you can make the mathematics on your own.

Okay. Thank you.

The next question comes from the line of Shanarda Minow from Sheffield. Please go ahead.

Hi, good morning. Thanks for taking the question. I just want to go back to the Q2 quarter and what you are suggesting for that. So when you are saying that you'll be slightly below the $7 billion range after doing $3.2 billion in Q1, that's still quite a punchy quarter-on-quarter growth that you're going for, which is sort of in a low double-digit number. So is that growth mainly being driven by automotive? What I'm trying to say is would on a sequential basis based on your current visibility, would automotive be the fastest growing or rebounding segment into fiscal Q2? And if that is so, is that based on already the orders that you have from your customers where they're saying, you know, we are depressing our orders for the December quarter, but we want you to shift much more into the March quarter if you have that visibility already.

Jonathan Senn here. So maybe I take the two and my colleagues may add. So first of all, let me very clear that the calculation I've given you for half year one and half year two was a calculation with inventory adjusted revenues. These are not the reported numbers. So the 3.2 billion is the number we are guiding for Q1, yes, there will be some increase in Q2, but I'm not guiding that quarter now. But I said if you take the inventory correction effects out, then in both years you would be on an adjusted, in both quarters, you would be on an adjusted base slightly above 7 billion. please do not now calculate with a double-digit growth reported quarter or quarter that was not what i said and your second question was who is growing the most uh the biggest contributor also in line with what johan said in the in the intro is coming from PSS this year, mostly around AI, which will kick in more in the second fiscal quarter or from second fiscal quarter onwards. So that's the key driver. Of course, automotive will grow compared to Q1, but we also said on a yearly basis there will be a slight decline in automotive.

Understood. And thanks for the clarification. And just on the margin, you know, your level of improvement in margin, segment margin through the year seems to be somewhat more muted than your expectations for revenue. Is that because you are targeting a lower level of inventory through the year and therefore will keep your utilization levels low? What I'm trying to get at is the one billion or so of underutilization charges. How does that sort of track through the roughly through the four quarters of the year based on current visibility?

Yeah, that's a good question, Jonathan. So first of all, it's really not so easy this time with a limited visibility. But I mean, from today's perspective, the billion of underutilization charges should be more than 50 percent in the first half and less than 50 percent in the second half. That gives you a part of the answer. So the underutilization charges will not disappear or be reduced very steeply. And that then has, of course, some kind of breaking effect also on the margin improvement. But there are many other things which play a role this year. If you determine the full year margin, there is a fall through from higher volumes. There is a positive first contribution from step up, also probably developing over time. You have heard that 50% will be in 26, but first contributions are due this year. There is the price reduction Andreas was talking about kicking in. There are some structural impacts and there's also some negative FX. component. And this, of course, relates to 110. If the dollar would continue to trade at 106, that would be an upside. But we are guiding for 110. Yeah. So I hope that gives you some additional guidance to your margin question.

Understood. And just a clarification on the AI numbers. I just want to confirm that previously you were saying 200 million FY24 going to 400 million in FY25, and now you're saying 250 million in FY24, which will go to 500 million or around 500 million in FY25.

Is that correct? North of 500 this year, yes. Depending on the GPU RAMs, the exact RAMs and the shares, yes. North of 500. Understood. Thank you.

The next question comes from Joshua Buchalter from TD Cowen. Please go ahead.

Hey, guys, thank you for taking my question. Good morning. Maybe I'll follow up on the last one first. Could you maybe provide any details on what's incrementally driving the increase since last quarter from 400 to greater than 500 million euros in the data center business? And in particular, you know, you mentioned you're exposed from core to grid. Any details you can give us on the drivers of the upside by socket Is it more on the core, is it more on the grid? Thank you.

Okay, the core side of things are, determined and the design wins are collected from the GPU makers. And here we have collected further design wins. On the high voltage side, so grid 248, this is a different set of customers. I think it's also known like Delta, LightOn, Shikoni. I'm just looking at Andreas, but these are the set of customers. And here we are also making good inroads with our high power density PSUs, power supply units. So we are shipping next quarter five kilowatts. We have eight kilowatts and 12 kilowatts in the pipeline. But Andreas, do you want to add more on that?

Yeah, precisely. That also then pays into the equation. So our revenue base and growth rate next to powering the GPU, powering then also the switched mode power supplies and making them full with silicon and silicon carbide solutions, plus then also drivers and controllers as they come from Infineon. Let me give you just one number which recently was told to me by a customer who said, look, Infineon, you're actually the only guys out there in the field who provide us with all the material systems in power semiconductors needed to make the utmost power density, power supply become reality. Johan said that state of the art today are five kilowatt power supplies in a given server rack, if you will. That is why we speak moving into eight kilowatt and going forward into 25, 26. We move in the same form factor up to 12 kilowatt. And as I said before, these densities which are north of 100 watt per cubic inch is something which is pretty unique that Infineon can do since, I said it before, we have the material systems and digital power technology, then also interconnect technology, packaging technology, all what it takes for a customer to buy from Infineon and fuel our growth next to powering the GPU. powering the entire power flow from grid to core. And that is where the 500 million plus plus stems from, as Jochen and Sven have indicated before.

So you sense our excitement about it. And of course, the trend for more power is our friend. So just as a reference, the latest Grace Blackwell REC consumes 120 kilowatts and tendency is rising. And by the way, we are winning on innovation as Andreas highlighted, but also on portfolio and very important on quality because these applications do not allow for quality misses. The number of power components on those parts is so high that any PPM rate already causes issues for the entire value chain.

Thank you for all the detail there. From my follow-up, I want to ask about the China auto market in particular. Many of your peers that have reported acknowledge the digestion in the West, but also had a pretty high growth rate in China that offset a lot of that. Your numbers appear a bit weaker. Maybe you could give us any metrics on what's China doing in your December quarter guidance versus digestion in the rest of the world, or any metrics you can give that can help square away those two buckets. Thank you.

We do not see the inventory digestion in China. The China market is running well. We rather even see some pull-ins of orders from fiscal Q2 into fiscal Q1. So inventory correction is outside China. Okay.

Got it. Thank you.

Next one.

The next question comes from the line of Lee from MS. Please go ahead.

Great. Good morning, everyone. Thanks for fitting me in. I just wanted to maybe just try and understand a little bit better the destocking and what you're seeing as underlying growth in the second half of the year, particularly as it relates to ATV, obviously. And as I've understood what you've said so far, I think you're saying the run rate implied in the first half is just south of 7 billion. that there will be a 7 to 8 per cent increase half on half in the second half and that the inventory destock effect that you would net off that sub £7 billion is around about £700 million, if I got that right. What I am trying to appreciate here is, is this the right way to look at the underlying dynamics for the first half and for us to better understand that phasing between Q2 and Q1?

Yeah, I think it's the correct picture. The reported numbers in the first half are loaded by an inventory digestion effect from our customers of around 600, 700 million. So end market sell through would be therefore reported numbers plus 600, 700 million more. And therefore, assuming that this inventory digestion period is broadly over, we cannot exclude a bit into Q3, then the growth rate from the 7 billion into what is required to meet the overall numbers for the whole fiscal year is slightly above normal seasonality. So no hockey stick, but all explainable by this inventory correction period.

I hope that was no... In other words... Sorry, that's actually very clear. Thanks so much for cleaning that up. It's important. Yeah, no, no, very important this morning. And I think maybe just aligned to that, you're clearly enjoying a lot of market share wins in China. And this is across the board. This is power semis, microcontrollers, and other sockets. I just wonder, that seasonal pattern as you currently see it, is there risk here that that could be disturbed to the upside the second half of the year on the basis of China? Or do you see a sort of slowing effect from China into the second half of the year? Thanks.

I mean, we based our fiscal year guidance on assumptions and I think we set overall a global automotive market being flat for the year over year. And is the dynamic in the sense that China is stronger and the rest of the world is softer. Absolutely. Overall, we project the number or we assume a flat number. If that changes, then our assumptions need to be updated. But that's what we said, right? In such an environment, to give you a precise number, It's almost impossible. That's why we formulated assumptions. And the assumption is flat car production. If China is, for whatever reason, accelerating, maybe incentive programs more, then this would be a potential upside. In automotive, the share gains are basically for the running fiscal year in the books.

Great, that's very clear. Maybe if we could squeeze one last one in. Just on the cut to the investments this year at £2.5 billion, should we assume that all of that's coming from the slowdown in spend in Coolum 3 Phase 2, or are there other factors in that mix? Thanks.

I take that one. So if we try to give you more details now on the two and a half billion. So there is a kind of an investment into basic investments like maintenance, process optimization, quality IT and under IFRS there is quite a significant component of IFRS capitalization of development costs. If you take these two together, Now really on the back of an envelope, this is maybe close to a billion. The other one and a half to come to the 2.5 billion, they are for two things. There's the strategic investments, which is the shell construction. in our smart power analog mixed signal FAB and Dresden for module 4. That's give or take these strategic investments are in the ballpark of 800 million. You can also see that in the delta between the reported cash flow and the adjusted cash flow. And on top of that, we are doing the capacity investments in our key growth areas to support the structural drivers silicon carbide gallium nitride transition 200 to 300 millimeter and everything which is needed to fuel our growth in powering ai which is then also smart power and logic these are the investments we keep on the rest we cut down and cool him second module is part of it that's very clear span thanks very much

The next question comes from line of Aditya from HSBC. Please go ahead.

Yeah, good morning, Jen. Thank you for squeezing me in. Firstly, I just wondered if you could give us some sense of the lead times across your product ranges and how this compared to the previous downturns we've seen in late 2015, late 2018, just to get a sense for how the current downturn compares to previous downturns. That would be great. And then my second question is on the company-specific growth drivers. You've given us color on the silicon carbide and the AI data center businesses. I just wondered if you could also give us some color on what you're expecting in terms of growth contribution from automotive MCUs and your MEMS businesses so that I can get a sense for what your underlying assumptions are for the decline, excluding your company-specific growth drivers in 2025. Thank you.

Okay, I take the second one. And as you correctly highlighted, we gave you guidance on powering AI. We gave you guidance on silicon carbide. On microcontrollers, we expect to grow. But, of course, also microcontroller is subject to inventory reductions. But the net out of that should be still somewhat of a growth for this fiscal year.

And coming back to the other question on lead times, so how does or do current lead times compare to those in previous downturns, if you will, and here I would say grosso modo pretty much similarity, if you will. Today we are talking about lead times of two weeks, typically for multi-source products, two weeks or even less, because these are provided from stocks that we have built in order to serve that market with speed, with proper speed. And it goes up to more complex products such as, for instance, microcontrollers, where we have a blended mix in between some parts on stock and some parts in manufacturing to be manufactured on demand by customers. So here we typically talk about six to eight weeks of lead time. So it varies from And in line with what we've seen pre-COVID.

Got it. But would you say these are in line with what you've seen in previous downturns? The reason I ask is there is a lot of concern around pricing taking another leg lower. And I'm thinking if your lead times have already come down and pricing isn't going down, when is it going to go down? That's a question for the bears, I suppose. But I just wanted to hear your thoughts.

It's a bit speculative. Allow me to say pricing is always a function of supply and demand. As a matter of fact, while we are speaking, we see pricing trends, as I've mentioned before. So for the entire fiscal 25, low to mid single digit in the blended mix on corporate level, mid to high single digits for quite commoditized and consumer-like segments, which is again pretty much in line with downturns as we have seen it, as I've seen it in the past 10, 15 years.

And of course the stickiness and especially of the design in products matters a lot also in price negotiations.

Got it.

And just a quick clarification on the MCUs. When you said you expect growth, that's in automotive MCUs, I take it? Yes. Got it. Thank you.

And Eddie, very quickly also on your pricing question, you only asked about pricing, but I think the thing which matters most is the margin, so input cost and pricing. And for example, silicon carbide, yes, there are some price reductions, especially on the discrete side, but you also see the substrate prices going down significantly. As long as the delta is playing to our favor, it's not negative. We should always look at both

sides of the coin understood thank you swen the last question comes from line of tammy q from berenberg please go ahead hi thank you for speaking me in so um firstly on the ai related business so um you have definitely got a lot of traction within this ai new design can i ask what is your visibility from that design perspective i.e from my understanding things have changed quite quickly or market share can move quite quickly in this market. Do you have visibility that you have similar or increasing level of market share in the future generations compared to this trend?

We see the orders. I mean, we do have lead times, obviously, for those products. And therefore, we see the orders coming in for early 2025. I think with the position we have established now with the various players, we are also in a very good position to deal with them on the following generation. I do not expect this to be a one-hit wonder.

Okay, thank you. And also regarding China, everyone's comment about China, especially auto market has been very strong. Do you see any potential risk given that currently China's macro is still a bit uncertain that China may come as a negative surprise after Chinese New Year? How long is your visibility on that market and your discussion with your local customers, please?

Look, here we are now in a space where I can only refer to my assumptions again, because given the US elections, there could be also other developments playing out. So macro effects is for us very difficult. I can only repeat what I said before. Flat car production, a good growth dynamic in China is our assumption. If anything changes due to further stimulus or tariffs in the reverse side, we will need to update our model. We are not able to predict macro overall.

Thank you.

All right. Thanks, everyone. It's time to wrap up our already extended earnings call. Thanks for all your questions. We are concluding it now and would point you to the IR team here in Munich for any further follow-ups. Have a good day. Take care and talk to you next time around. Bye-bye.

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