Infineon Tech AG

Good morning everyone. Welcome to the conference call for the analyst and investor of Infineon's 2026 financial third quarter results. Today's call will be hosted by Alexander Foltin, Executive Vice President, Finance, Treasury and Investor Relations at Infineon Technology. As a reminder, this call has been recorded. This conference call contains forward-looking statements or assessments about the business financial condition, performance and strategy of Infineon Group. These statements or assessments are based on assumptions and management expectations restricting up to currently available information and present estimates. They are subject to multiple uncertainties of risk, many of which are particularly 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 the conference call. Beyond disclosure requirements stipulated by law, Infineon does not undertake any obligation to update forward-looking statement. At this time, I would like to turn the conference call over to Infineon. Please go ahead.

Many thanks, operator, and good morning, ladies and gentlemen. Thank you for joining our mid-summerly earnings call covering our fiscal third quarter 2026. On air today you have our CEO, Jochen Hanebeck, our CFO, Sven Schneider, and our CMO, Andreas Urschitz. Following our well-established procedure, Jochen and Sven will provide an overview on the market situation and divisional performance, key financials, and our outlook. After that, we will start our Q&A session. The accompanying slideshow for the call is available at infineon.com slash slides and we will provide a PDF with Jochen's and Sven's introductory remarks in the course of the call on our website, namely infineon.com investor. This is also your go-to spot for 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. At present, positive cyclical momentum and structural growth are converging into a bright picture, and Infineon is generating value from it. The recovery continues to gain traction. The upcycle is fully on track. What initially started in selected segments is now becoming broad, supported by improving demand patterns, normalized inventory levels and increasing order activity across many end markets. The strongest dynamic continues to come from AI related infrastructure. Investments in data centers continue to go up. Energy efficient power delivery solutions are required to support ever growing processing capabilities. Thank you very much. The prime example for the later is the recent opening of our new smart power fab interest. The cleanroom space available there enables us to ram the world's largest fab for cutting-edge power semiconductors and analog mix signal technologies at just the right point in time. Furthermore, we closed the acquisition of the sensor portfolio from AMS Osram as planned within a very short time frame. Let us now turn to our third quarter performance. The third quarter of our 2026 fiscal year was the first one with over 4 billion euros of revenue for two and a half years. With 4 billion 172 million euros we achieved an all-time high in quarterly revenues and came in a bit ahead of expectations even considering a minor positive currency effect. All our divisions contributed to 9.4% sequential growth on group level. Compared to the same quarter one year earlier, our reported revenue grew by close to 13%. Thank you very much. Our order backlog witnessed another material increase and stood close to 30 billion euros at the end of June, a clear indication of recovery momentum getting even stronger. Now to our divisional review, beginning with automotive. The third quarter of our 2026 fiscal year revenues increased by 6% quarter over quarter to 1 billion 932 million euros. Growth was driven mainly by microcontrollers and smart power components as well as our Ethernet products. All these are core building blocks of software-defined vehicles. The segment result increased by 8% sequentially to 356 million euros, corresponding to a segment result margin of 18.4%. As a reminder, the refocusing of our business with high voltage components for electric powertrains that we explained in our last earnings call is expected to burden segment result margin of ATV in this fiscal year by a low to mid single digit percentage reflected in our guidance. Thank you very much. The long-term trends driving automotive semiconductors demand remain firmly intact and continue to support content growth. Rising fuel costs are beginning to support XEV adoption in Europe, India, and Southeast Asia, while the shift towards software-defined vehicles continues to accelerate globally. Alongside these structural growth drivers, supply constraints in the Chinese automotive-grade semiconductor market create opportunities for us. Thank you very much. We are also seeing further design win momentum in China. For Xiaomi, we will support a cockpit and ADAS fusion unit incorporating three different Micron controller families. In another win with a leading Chinese car manufacturer, our silicon carbide bear dies will be used in the traction inverter. Finally, we further simplify the evaluation of our automotive microcontrollers for our customers. Together with Amazon Web Services, we have launched a cloud-based platform for virtual MCU evaluation. By removing the dependency on physical hardware, the platform can shorten evaluation cycles from several weeks to minutes, lower evaluation costs significantly and support hundreds of concurrent users globally. The platform already includes our next generation RISC-V architecture, enabling customers to gain hands-on experience with new microcontrollers much earlier in their development cycle and further accelerates innovation for software-defined vehicles. Let's now take a look at green industrial power. GIP's revenues grew by 11% quarter over quarter to €447 million, making the June quarter the second one in a row with double-digit growth. Reflecting the recovery on industrial markets, all application areas developed positively, in particular power infrastructure and HVAC. The higher revenue notwithstanding, the segment result of GIP contracted slightly to 44 million euros equivalent to a segment result margin of 9.8% after 11.7% in the quarter before. The decline was due to temporary operational and inventory related effects and hence not indicative of underlying profitability as will be evidenced by the positive margin evolution in the running quarter. Power infrastructure is seeing strong structural momentum. Investments in grid expansion and modernization continue to grow, driving demand for energy storage systems, transmission and distribution gear, and high-voltage solid-state devices. AI data center growth is fueling demand for uninterruptible power systems, general power supply, as well as cooling. Semiconductors are poised to replace electromechanical parts in various use cases. For example, a semiconductor-based solid-state circuit breaker can protect electrical circuits from damage caused by short circuits or overloads by up to 1000 times faster than conventional systems. This capability is essential for direct current grids and offers a significant increase in system availability in industrial manufacturing and AI data centers. As part of our partnership with Siemens, we will supply 1.2 kV silicon carbide power modules for use in circuit breakers to enhance the efficiency, power density and reliability of Siemens' protection solution. Now to power and sensor systems. On the back of unabated AI power strength, PSS recorded revenues of 1 billion 442 million euros in the June quarter, 14% up sequentially and a staggering 34% more compared to the same quarter one year ago. The margin evolution of PSS shows a bright picture as well. The second result increased to 359 million euros, corresponding to a second result margin of 24.9%. The further increase of 4.5 percentage points compared to the previous quarter is evidence of profitable growth and value creation, strongly driven by our leadership position in AI power solutions. This leadership position is being recognized by industry researchers. In a recent report covering AI data center power semiconductors, Gartner identified Infineon as the company to beat. Portfolio breadth and system level expertise in conjunction with manufacturing capacity are the defining capabilities for data center operators seeking to scale AI. Infineon offers a unique portfolio spanning the entire power delivery chain and manufactures relevant technologies in-house. By seamlessly integrating wide bandgap materials, specifically silicon carbide, For high efficiency, high voltage grid to rack conversions and gallium nitride for ultra dense high frequency intermediate power stages alongside silicon at the processor level, energy losses are minimized at every single conversion step. Demand for our AI power solution continues to outstrip available supply. We are in allocation. Successful execution of capacity ramps and conversions from other areas will help us to achieve more than 1.6 billion euros of dedicated AI power revenues in the current fiscal year, ahead of the so far planned 1.5 billion. In addition, our business with non-AI data center Power Solutions is amounting to around 500 million euros annually, making Infineon clearly the leading force in the overall space. We are represented in almost all platforms across all relevant players in the industry. Enabling further steep growth in the coming years will be a function of ramping and deploying additional manufacturing capacities. Our new smart power fab in Dresden together with available clean room space at our other large front-end sites in Austria and Malaysia puts us in a unique position. to strategically secure access to critical power delivery solutions. Several leading customers across the AI data center ecosystems have signed or are in negotiation on multi-year capacity reservation agreements with us. These agreements encompasses a total cumulative sales volume of a high single digit billion euro amount over multiple years. These agreements also feature certain prepayments, thus further strengthening our customer relationships and sharing investment risks. We will revise our projection of 2.5 billion euros plus AI data center revenues for our 2027 fiscal year upwards as part of the annual guidance to begin to be given in our November earnings call. We expect such update to be material. The next waves of AI growth are already taking shape. Higher density power architectures for running the last frontier models as well as the emergence of agentic and physical AI. The growing inference and task coordination requirements of agentic AI provide a massive tailwind for us. Our undisputed leadership in power solutions for CPUs combined with a highly differentiated best fit product portfolio will represent another significant growth driver as early as next fiscal year. Accordingly, the aforementioned update of our revenue projection for 2027 will also include our power solutions for all different forms of data center configurations. Beyond the data center, our solutions bring physical AI to life. Enabling humanoid robots, collaborative machines, and autonomous systems to perceive, think, and act safely and securely. With expertise from all our divisions spanning microcontrollers, power systems, sensing, connectivity, functional safety, and security, Infineon is the trusted partner across the full spectrum of physical AI platforms. This provides a good transition to complete the divisional review with connected secure systems. CSS recorded revenues of €350 million in our fiscal third quarter, a sequential growth of 10%. All product areas contributed to this positive development, in particular authentication and identification solutions. Thank you very much. To optimally address the expanding opportunity set, we are establishing the Edge Systems or ES division as part of the new organizational setup presented in our last earnings call. The ES segment is formed from today's CSS and the Sensor and RF as well as the USB connectivity portfolio from PSS. The focus of ES will be on the interplay of sensors, microcontrollers, including software, connectivity and security to enable integrated system level solutions at the edge. In this context, I'm happy to report that we have closed the acquisition of the non-optical analog mixed signal sensor portfolio from AMS Osram at the beginning of July, just about five months after announcing it. The transaction is strengthening our position as a leader in sensors for automotive and industrial markets through a complementary portfolio and extending our product range in medical applications. Thank you, Jochen, and good morning, everyone.

In line with the revenue increase, our June quarter saw a corresponding margin expansion. The reported gross margin went up by 210 basis points from 38.7 to 40.8%. The adjusted gross margin stepped up from 41 to 42.8%, mainly driven by higher volumes and positive mix effects. also pricing measures put in place from April onwards had a first positive effect annual merit increases kicking in from the beginning of April as well as rising input costs for precious metals and logistics were dampening margin progression to some extent idle costs were roughly on the same level as one quarter before likewise similar to the previous quarter refocusing our high voltage automotive drivetrain business had a negative impact of about one percentage point on group level Research and development expenses increased quarter over quarter from 612 to 674 million euros. Selling, general and administrative expenses went from 379 to 433 million euros. Non-segment result charges for fiscal third quarter amounted to 203 million euros after 195 million euros before. The financial result amounted to minus 63 million euros after minus 68 million euros in the prior quarter. Income tax expense for the June quarter was 112 million euros, equivalent to an effective tax rate of 21%. Cash taxes amounted to 220 million euros, adjusting for PPA effects the quarterly cash tax rate stood at 19%. Our investments in property, plant and equipment, other intangible assets and capitalized development costs amounted to 514 million euros in the quarter under report after 541 million euros in the quarter before. Depreciation and amortization expenses including acquisition related non-segment result effects amounted to 466 million euros. Free cash flow in the third quarter of our 2026 fiscal year improved significantly from minus 63 million to plus 599 million euros, to a large extent driven by the higher operating result. On the working capital side, inventory reach went down by 10 days from 175 to 165 days quarter over quarter, bringing us closer to our target for the end of the fiscal year of around 150 days. As stated before, slightly elevated inventory levels are helping us capture growth in the current upcycle and being prepared in case of geopolitically induced turmoil. Now to our liquidity and leverage situation. During the June quarter, we made two scheduled debt repayments, redeeming a 700 million euro bond and a 350 million US private placement at maturity. The related cash outs were partially offset. Thank you very much. The acquisition of the sensor portfolio from RMS Osram, which closed on July 1st, has no impact on this figure as it had already been pre-funded. The net debt position of around 5.2 billion euros at the end of June corresponded to a net leverage of 1.4 times. Our after-tax reported return on capital employed was trending up to 7.9% for the third quarter of our 2026 fiscal year. Jochen Hanebeck In our November earnings call we will give our outlook for 2027 in the new setup and at the same time provide adjusted historical data to you to enable relevant comparisons. Now back to Jochen who will elaborate on our outlook.

Thank you, Sven. The market environment for our outlook is turning increasingly favorable. The upcycle is gaining momentum. The recovery is broadening. Inventories are largely destocked across markets and market is becoming a relevant factor for growth. Thank you very much. Needless to say, the dynamic differs across applications. At this point, AI, power, and industrial infrastructure are appearing the strongest, followed by automotive, whereas consumer is lagging. Generally speaking, though, our outlook is framed by high confidence, bearing further escalation of geopolitical conflicts. For the currently running September quarter, last of our 2026 fiscal year, we are in line with recent currency developments, adjusting the US dollar euro exchange rate back to 1.15. We expect revenues of around 4.7 billion euros, corresponding to well above seasonal growth of almost 13% quarter over quarter and 19% year over year. By segment, for ATV, a moderate revenue growth is predicted. Whereas for each of GIP, PSS and CSS revenue should grow significantly. Thank you very much. Notably AI and related product categories to have a positive impact, offset partly by further rising input costs, which we will address in customer negotiations. For the full 2026 fiscal year, we now expect revenues to come in at around 16.3 billion euros, equivalent to an annual growth of around 11%. From a segment perspective, PSS is poised to grow materially faster than this group average, driven by buoyant demand for AI power solutions. As the outlook for some industrial markets linked to AI continue to improve, GIP is now expected to grow just below group average. ATV should see slight revenue growth driven by its broad product portfolio and the broader adoption of software-defined vehicles, despite material headwinds from the high-voltage drivetrain business. Lastly, for CSS, we expect revenues to remain stable year over year. Regarding profitability, we confirm our expectation for the full year adjusted gross margin to reach a low to mid 40s level and for the second result margin to land at a level around 20%. Therein, idle costs are projected to amount to an annual level of around 650 million euros. In our forecast, we have not included potential indirect effects from further escalating Middle East conflict or any other lingering geopolitical tension. Our investments in the fiscal year continue to be expected to come to around 2.7 billion euros and for depreciation and amortization we anticipate an unchanged level of 2 billion euro including amortization of around 400 million euros resulting from purchase price allocations which will be recognized in our non-segment result. Based on our favorable business outlook we are upgrading our projection for the adjusted free cash flow The figure which net of investments into major front-end buildings and M&A transactions is now expected to come at around 1.85 billion euros after 1.65 billion euros before, corresponding to around 11% of group revenues. for the reported free cash flow. We are changing our guidance now from around 1.25 billion euros to around 900 million euros. This is an implicit upgrade as well, given we are now for the first time considering the purchase price for the sensor portfolio acquired from AMS Ostrom of about 570 million euros, the impact of which is partly offset by the improved underlying cash flow. Ladies and gentlemen, before going into Q&A, let me summarize. The upcycle is clearly gathering steam and end market strength is broadening. Structural growth drivers are proving to be very strong. AI momentum is unabated and Infineon is at the forefront of powering AI from grid to core. Our AI-related revenue will more than double this fiscal year and exceed 1.6 billion euros in addition to the 500 million of classic data center power. Our unrivaled portfolio coupled with significant additional cleanroom space will propel growth. Expect a material upgrade of our prediction for 27 in our November call. A significant portion of our future data center revenue is going to be covered by customers signing CRAs with us. Automotive is further improving, driven by structural content growth, share gains and inventory replenishment. Our third fiscal quarter came in fully in line with our guidance. Based on a bright business outlook, we expect a much better than seasonal Q4. 13% sequential growth to €4.7 billion. The segment result margin expanding 400 basis points quarter over quarter. A strong finish of our 2026 fiscal year and a good point of departure for 2027. The opening of Dresden 4 and the closing of the acquisition of AMS Osram sensor portfolio are proof points of how we are actively positioning Infineon to capture profitable growth and create value.

Operator, please start the Q&A session.

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

Hi, thanks for letting me on. I have two questions, if I may. Firstly, regarding your guidance on the margin in the fourth quarter, When you had guided in the prior quarter, the implicit margin was guided already for the fourth quarter. Has something changed from when you guided in the third quarter in terms of your cost structure or any other costs? And then secondly, can you quantify how this is playing through on the price increases are playing through on the margin into the fourth quarter? and I have a quick follow-up on the AI-related LTAs that you've signed. In terms of the AI-related LTAs, I mean, is there a particular target that the company has in terms of how much of the capacity that you are going to outlay over the next three years that you've talked about in the past will be signed up in terms of these LTAs? Thank you.

Good morning Sandeep, thank you for your question. I take the first one and then I give it to Jochen on AI. So on your question regarding the margin Q4 implicit guidance, any change from Q3, the answer very easily is no, there is no material change. we had baked in a couple of positive effects from the price increases but they are mainly contributing to next year and we have also baked into our forecast already the cost increases which we have seen with regard to the geopolitical situation around the Middle East so no major change on that end.

Thank you. Johannes Schaller from Deutsche Bank.

Thank you very much. The prices under the CRA are not fixed. It's a volume commitment, but not a price commitment. So prices will develop along market price.

Thank you.

We take now the question from Johannes Schaller from Deutsche Bank. Please go ahead.

Yeah, good morning. Thanks for taking my question. Just on the situation now with these CRAs and also specifically on AI, could you comment a little bit on what you see in stage two with your processor customers? I mean, there is a bit of a concern in the market that new players are coming in here. The space will become a bit more competitive. Maybe help us understand how confident you are on your market share outlook with the processor players and the revenue opportunity in euros also. And does new competition even matter given that the industry is so capacity constrained? And then as a second question, Jochen, you mentioned some supply constraints in the China auto semi space that could create some opportunities for you. I think that's quite interesting. Different to, let's say, the market view out there, which is more that this space is extremely competitive and there's a lot of supply. So maybe help us zoom in a little bit on that and give us some more color here. Thank you.

Yeah, thank you, Johannes. If I may, I would like to ask which new processor companies do you have in mind?

Do you talk about the ASICs ones or which ones are you talking about? No, sorry, new processors. So, competition from a competition point, competitors of ours. Yeah, yeah, exactly.

Got it. Yeah, competitor for ours. I mean, obviously, many companies are seeing this big opportunity and are trying to enter, but the hurdles are very high, right? Yeah. Thank you very much. Thank you very much. On the China outer side, yeah, I agree. It sounds at first counterintuitive. But what we do see right now, particularly in MOSFETs and analog parts, is that Chinese competitors cannot deliver because they are, to a good extent, linked up to foundries. And these foundries in China... are shifting their supply also partially to AI. And there are also again and again quality missteps. So here we are seeing a good opportunity to pick up more business. And of course, we will not do it only for a short run, but we want to have then a midterm commitment from customers.

So in terms of products, this is, you know, maybe let's call it also including some legacy applications, if you want to call it that.

It's MOSFET, so not the IGBT side. The IGBT side is still difficult, as I explained last time. It's MOSFET and analog parts. And these analog power parts, they go also into power distribution for software-defined vehicle. I wouldn't call it legacy. I would call it broad-based products that find multiple applications in the car, new ones and established applications.

Very broad. That's very clear. Thank you, Jochen. Very helpful.

The next question comes from Lee Simpson from Morgan Stanley. Please go ahead.

Great. Thanks for fitting me in and well done on the sales guide. Maybe if I just go back to the question on margins, if I could. I'm just trying to understand the 23% guide that you've given us for Q3, where the moving parts are here, because we do have a sense that there's some drazed in startup costs to be absorbed. There's probably underutilization. And really, I guess we're trying to work out what the utilization rates could be. And how does this affect the run rates for that margin structure? Really importantly, as we go into next year as well. And maybe my follow up, if I could, just want to understand the nature of the follow on discussions around your LTAs. The new customers beyond those who have committed, maybe the size and scale there, and equally the size of prepayments that you're getting. Is this one or two billion, or is this a bigger number for the prepayments? Thanks.

Okay. Hi, Lee. I take your question. It's not totally surprising. You asked a question about the margin in Q4. So let me help you here a bit. First of all, one thing you mentioned, Drayston Module 4, ramp-up cost, no material inclusion in this year. That's next year. So the situation is as follows. If you look at the Thank you very much. Thank you very much. Thank you very much. and it could be 23 plus. But let's look at the quarter. How is it really coming in? There is a better fall through than 50 percent included in the Q4. So let's see how much we will then really ship at the end of the quarter. Also, revenue wise and take it from there. And one last sentence. You are asking the question not because you are so interested. about Q4. You are asking the question, as you said, because you are very interested in hearing the first news on 27. And maybe this is also part why we guide as we guide.

Good. And then I will take the opportunity on the CRA to make some broader statements, because I guess others also have questions on that one. So first of all, for the CRAs, the target customers are hyperscalers, AI processor makers, as well as hardware providers for data centers, covering therefore stage one and stage two products. We are currently in discussion or have finalized agreements with more than 10 customers. The essence of these agreements is that customers commit to taking certain volumes over a period of several years. Penalty clauses ensure that customers have skin in the game. Key benefits for Infineon, obviously, customer commitments underpin and de-risk of AI capacities. The agreements are based on existing and already planned capacities. As such, they are firming up Infineon's projection of AI power growth. The CRAs are obviously not in the backlog. and again, prices are not fixed. On the prepayments, I cannot comment at this moment in time as we are still in negotiations with our customers. I hope that clarifies a couple of questions around the series.

That's very clear. Thank you very much.

The next question comes from Didier Chemama from Bank of America. Please go ahead.

Yes, thank you for taking my questions. Good morning, gentlemen. I've got an additional question maybe on the CRAs. First of all, I think it's really interesting that these developments are taking place a bit like we've seen in memory. So I just wanted to understand a couple of things from you, Jochen, if possible. What's the embedded assumption on pricing? I know that the pricing is sort of determined by the supply and demand in the future, but obviously in your high single-digit billion, You've got an assumption of pricing. Should we assume flattish from here or down or up? I mean, that would be an interesting one for us to understand. And then related to that, do you expect that high single-digit billion number to be revised higher in the coming quarters as you finalize your negotiation with other customers? Thank you.

Okay, so the first part Andreas will take and then I will answer the second part.

First and foremost related to pricing and infinite pricing overall. Already in our last earnings call, I talked about supply constraints, in particular in our AI power business and visible impacts on adjacent areas leading to more favorable pricing environment. I then also said we will adjust pricing to reflect market realities. Meanwhile, demand was outstripping and still continues to outstrip supply in several areas, no longer related to the entire AI power delivery chain only. Thus, and walking the talk, we have informed our customers in these areas about price increases two times, and the last time happened in July. We are seeing good traction for these measures overall, as customers' value delivery capabilities in today's situation and the value we create with our products in the market plays a very, very decisive role. Full visibility of this in our P&L and in our margin, as Sven was alluding to, however, will be there only from Q1, Q quarter one, next fiscal year onwards. And I give it back to Jochen.

Yeah, thanks. Thanks, Andreas. Didier, on that question, let's say the momentum is on our side with respect to your question on the high single digit billion number. The momentum is on our side. I would not be surprised if that number is increasing, but we work now with those customers that have raised their hands and are interested. and then we will update you in the next quarter again.

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

Joshua Buchhalter Hey guys, thank you for taking my question and congrats on the results. I'll also use German efficiency and ask two questions at once. So I guess to start, can you speak to sort of how we should think about the linearity and maybe magnitude of the Dresden capacity coming online over the next few years? And was that 50% fall-through number specifically related to Dresden, or should we think about all incremental revenue falling through at 50% moving forward? And then my second question, there's certainly been a lot of noise in both directions about 800-volt architectures in data center. Could you maybe speak to how either a slower or faster 800-volt adoption would change your AI content opportunities? Thank you.

Yeah. Hi, Josh. I take the first and the third and fall through. I leave it to Sven. So Dresden, as we said at the beginning, when we embarked on that project, filling the FAB would take three to seven years. We are clearly now at the lower end of that range. So likely if the market demand is there, we can ramp up. Thank you very much. Thank you very much. is incremental on the 800-volt DC side, but not tremendously. So for us, it's not the biggest factor in our growth trajectory as we are very well positioned on the PSU side. I think the question was whether the fall through only applies to the Dresden facility revenue altogether and I think you always commented on overall numbers not related to individual FAPs.

Correct. Yeah, thank you.

The next question comes from Jacob Bluestone from BNP Paribas. Please go ahead.

Hi, good morning. Thanks for taking the question. I've got two questions as well. Firstly, just on the AI revenue guide, you've obviously put through a small hike for this year. And I just want to understand, is that from the early impacts of the price hikes starting to feed through and therefore driving your guidance? Or are you actually already starting to see supply coming through more quickly than expected? And then just secondly, on your order book, you offset a very strong backlog, 30 billion at the end of the quarter. It was up 5 billion queue on queue. Can you maybe just give us a little bit of color on how much of that relates to some of the inventory builds you mentioned? And how much would you sort of put more in the, I guess, more structural long term camp? Thanks.

Second question, I'm not quite sure whether I got it, but the first one, the 1.6, and again we said above 1.6, so it's now an operational task to squeeze out as much as possible in the quarter to serve the demand of our customers. So it's a mix of... Thank you very much.

Hi, Jacob. As far as I understand it, your question on the order backlog, you're asking how much of the order backlog increase is inventory built or more structural at customers. That's how I understood. Thank you for confirming. So the backlog increase is driven mainly by, now again, I'm in the old divisional structure, but GIP, PSS and automotive structure. Thank you very much. and Automotive. We said it in the intro, it's a combination of some market developments in China, some nice order momentum around the software-defined vehicles and some order replenishment, so it's a combination.

Thank you.

The next question comes from Francois Bouvigny from UBS. Please, go ahead.

Thank you very much. Two quick questions. The first one is on the seasonality in fiscal Q1. I think Sven, last quarter, you said that you would expect Thank you very much.

Yeah, maybe I take that question, Francois. So we clearly see a very much different seasonal pattern for Q1. Let's see how it really comes out, but forget the seasonality we have seen in the past. Today, it looks rather as a very strong second half of the calendar year. and therefore also please understand that our projections coming out of two three quarters around high teens now coming into different territory have of course also some uncertainties which we have to make certain calls on and i think we will see over the next two quarters where this new level of profitability will exactly land

Thank you. And maybe my second question is on actually microcontrollers. I mean, Infineon did a very good job in terms of market share in the last three years. Now, if I look at the current dynamic, I mean, Renesas and NXP are growing their auto revenues by a mid to high teens percentage year on year, which, you know, that's your main competitor in macrocontrollers, which seems to be, I mean, higher than what you are doing right now. So I was wondering in terms of macrocontroller dynamic, is there any mechanism or reason maybe you would temporarily lose share because of some inventories or anything we should be aware on your market share on the microcontroller side that maybe you know would explain a lower growth from the automotive versus your MCU piece?

Yeah, so particularly on the MCUs, I always said it now for the last two years that for likely for the next two years, there will be still market share gains. What you observe is a different effect, but I can explain it in the easiest way. If you take the automotive division and you take and to be fair also the Ethernet, the newly acquired Ethernet business. So the business and that business without high voltage, without Marvell would grow at constant currency exchange rate 10%. So I think we are rock solid in our core automotive business and having additional growth momentum now with Ethernet due to software-defined vehicles. But we have a construction site called High Voltage, which we are resetting, refocusing on the profitable topics, on innovations, while at the same time reallocate these capacities towards powering AI. Great. Thank you, Francis.

The next question comes from Stéphane Oury from OdoBHF. Please go ahead.

Actually, I have also two questions. The first one is about the PowerAI revenue view for 2027. I think in another call you said you would be materially above the 2.5 billion. And my question is to know why you're not upgrading it today and to know what you will know better in November than now. Is it about the real level of demand or is it about the ability to run the production? And I've got a follow-up. Thank you.

Yeah, thanks for the question. I know there's high interest in that number, but first of all, of course, we are closer to the market. You know, we have to give them a yearly guidance and I would not like to go into one and a half yearly guidance. We are closer to the market. We are closer to Customer development, we are closer to our operational insights, how much we can really deliver. And last but not least, we would like to give you a full set of financial numbers, capex, cash flow, all of that. So picking out one number, even though there's high interest, we would like to refrain from.

Okay, I understand. Now back on the quarter and the question is about the green industrial power issue that you had. You said it was a temporary operational and inventory related effect. Are you saying that the next quarter the margin will be back to normal already? Thank you.

Stefan, you can always say in this environment what is normal. I would say it will definitely go up materially compared to Q3. So it will show a very positive trend to answer your question.

Okay, very clear. Thank you. and the opportunity for GIP or soon part of PS is really great. If you think about this power infrastructure, right, and it's ESS and SST and SSCB combined, it's today a market of a low to mid triple digit million number. We expect that market already to be beginning of the next decade, a mid single digit billion market. So a great opportunity and really falling into our hands because high reliability requirements there. So playing to the strength of Infineon. So the GIP business, particularly the power infrastructure part of it, will be a strong pillar of the PS division in the future.

All right.

The next question comes from Aditya Mituku from HSBC. Please go ahead.

Good morning, guys. Thank you for squeezing me in. Two questions, please. Firstly, just Sven, on the backlog, you know, it's already at 30 billion euros. Would it be fair to assume that roughly two thirds of this is for delivery next year? any color you can give around the proportion of the backlog for delivery next year and then for Jochen on GAN there's been some recent talk about GAN adoption in stage two closer to the XPU you know potentially replacing silicon quicker than what people expected maybe three or six months ago I just wanted to hear your thoughts on what you're seeing here are you seeing a quicker transition to GAN than maybe six months ago thank you

Thanks for the question. I take the second one first. We have seen the first emergence of GAN in PSUs. We talked about that a couple of times already. It's actual, it's fact, it's everyday business. The next big opportunity is the IBC level 48 to 12, where there is a clear value proposition and various customers are evaluating this and we expect business to pick up in 27. Now you are talking about the third opportunity for... for GAN, and that's the low voltage GAN right in the power stage. Yes, that's technically clearly our goal, but the technical hurdles are also significant. I mean, we are very well prepared in the sense of manufacturing footprint for this, as it would be also part of our 300 millimeter production. Thank you very much. Thank you very much.

Yeah, Adi, I'll take your other question on the backlog. So the two-thirds assumption as of today seems to be reasonable to me.

Got it. Excellent. And just quickly, Jochen, so essentially, would you say that development on GAN has accelerated closer to the XPU in the last six months, or there's no big change there?

We are definitely accelerating, but again, it will take several years before you see it in the market, given the technical challenges here. Got it. Thank you.

The next question comes from Tammy Jew from Birnberg. Please go ahead.

Thank you for taking my question. So the first question is on your LTAs. Are you eventually targeting to have 100% of your AI revenue on the LTA? And also based on the terms, it wasn't that clear that if it's cancelable or uncancelable because pricing is not fixed. It's just basically about volume. And also, secondly, I have a question on your market, your market controller position in China, where we do hear that, for example, given the pricing pressure, there has been more consideration of taking local supply. Do you see that becoming a more discussed point among your customers or you are very confident in your market share? Thank you.

Okay, let me talk about first the CRAs again. These agreements are not rigid take or pay contracts or they are not NCNR. They encompass the different product groups and include some reasonable flexibilities. Again, future prices are not fixed in advance. We have not defined an exact target in terms of coverage of the capacity, but I would feel comfortable with a high coverage given the dynamics. And again, it's also at the advantage of the customers to get security of supply. With respect to automotive micros in China, we are still clearly the market leader. Of course, there are also local competitors very bluntly trying to copy our products. So far, not successful. Our major competitors are still the well-known manufacturers. Thank you very much. Non-Chinese competitors try to offer then individual microcontrollers, but customers need a portfolio. And I think portfolio density is, besides the individual technical lead, a very strong argument in this place. But, of course, we are staying paranoid and we are very carefully evaluating what competition is coming up in China as well as elsewhere.

The next question comes from Vasil Taze from Metzler. Please go ahead.

Yes, good morning. Thank you for taking my question. Related to your AI power business and specifically really on the part with server level or board level opportunity, On the technology side, are you fully betting on GAN or would you see other opportunities or other technologies as well? And then related to this as well, what is the difference or your positioning regarding GPU vendors and hyperscalers, internal XPU or ASIC programs. Is there a difference in your exposure to this both camps?

This is Andreas. Thank you very much for the question regarding AI power stage 1 and 2. Are we fully betting on GaN or others? Well, as a matter of fact, over the course of the last years, we put ourselves in the position of having a very large portfolio of silicon-based solutions. Thank you very much. Thank you very much. Very great combinations in between controllers, drivers and also FETs, be it in gallium nitride, be it in silicon carbide. So the beauty of this positioning that we do have is that we let our customers choose. And this we believe very much. And that's also the feedback of the market that that together with our unprecedented capacity, so to say, offering, which also plays a decisive role. makes customers go for Infineon as the primary choice along the entire power flow from what we call the grid even towards the core, which is the second stage.

And then the second part of the question, is there a difference in your exposure to the GPU vendors or merchant processor makers versus the hyperscalers internal programs? Is there a difference in your positioning?

Again, so Andreas speaking, I take this question. Look, so the way how this industry is working is that us as primary suppliers of any kind of semiconductor solution for grid to core power for powering AI data centers is pretty much based on working with all the value chain players starting from the processor maker. So these are companies Thank you very much. Thirdly, we're working together with what we call hardware makers or ODMs who typically reside in the East and make subcomponents such as intermediate bus converters or PSUs on behalf of the so-called OEMs or data center operators as such. And by bringing all these elements together, so talking to the processor maker, the software Data Center Operator, i.e. the architect of this environment, plus then the subcomponent makers. This gives us an ideal position in order to provide tailored Power Flow solutions. So we call it Power Flow or from grid to core was the word I was saying before. which is unique in terms of so to say then at the very end cost per so to say compute power which AI and also hyperscale data center is all about.

Thank you Andreas.

Now we finally take Didier Shimama for a rounding of question. Please go ahead.

Thank you for taking my follow-up. I just had another question on the CRA perhaps. I wanted to understand a little bit the sort of TNCs on the CRAs. So first of all, is it the hyperscalers or the system builders or the processor, I mean your customers that are asking to sign those CRAs, or is it you trying to enforce it? And then related to that, I would assume that part of the sort of CRA commitments you're making, you've got certain capacity addition to make. So against that, are you seeing visibility through, say, I don't know, 28 from your customers against those capacity commitments? It would be great if we could get a bit of color on this.

Sure did you. Happy to take a second round from you. So honestly, customers are approaching us because they sense that there is a shortage looming and they want to secure supply. And as I said before, target customers are hyperscalers, are AI processor makers, as well as hardware providers for data centers. So the whole coverage stage one process and stage two. And in terms of what do we offer, of course, includes our planned capacity build out, which we alluded to you in Dresden, in the other sites, Kulim and Villach. And yes, these agreements reach out multiple years, which also covers the end of this decade. So the late 20s. But we have there a spectrum, right? Not all are covering that long. Some customers only want to engage in shorter agreements. Others are till the end of the decade. So a broad spectrum. And please understand that I cannot go into individual customer agreements.

No, no, of course. Actually, just had a quick follow-up maybe on the backlog and the commentary that Andreas made earlier on a positive reaction from the client base on the price hikes you've announced in July. How much do you think this is driving sort of a pull-in in orders ahead of the price hike that you may put through again either in Q4 or into next year? Just wanted to understand that a bit.

The pricing which Andreas alluded to is of course going into the AI direction also with distributors but you know that a big majority or not a big majority but a big chunk of our business is under VPA. So I think we will get a lot more clarity from the price increases, how they come in exactly, now negotiating with our customers over the next five, six months, and the vast majority of the VPAs kick in soon. in January. So that's the way I would position it. And that's why, of course, you would not expect now a pull in the backlog because the PPA negotiations just will start in early autumn.

Okay, so to be clear, the CRAs are only with AI customers, but could it be that given the looming shortages, tier 1s or even some industrial customers feel the need to either secure CRAs or are effectively forced to pay up for capacity? Not quite sure.

Say again, please, it was an interrupt.

No, what I meant is the CRA is only with hyperscaler customers. So I guess the concern if you're an automotive customer or industrial customer is that your capacity is going to go primarily towards those guys. So does that motivate your non-AI customers to sign either CRAs or to actually pay up to get capacity?

First of all, the CRAs are not only with hyperscalers, as I said, processor makers as well as other hardware providers are in the queue for signing CRAs. Of course, there is a certain recognition in the market that the power market is impacted by AI. I explained that already in the past, right? The Thank you very much. As I said, is strong in microcontrollers, which has no capacity linkage whatsoever with powering AI, is strong in analog. I alluded to the opportunities we see in China. And then, yes, in automotive MOSFETs, you could... Thank you very much. Okay, time to wrap up. I think we've been generous with our time. Thanks for all the questions to the callers and for the answers to our board members.

We are here with concluding our fiscal third quarter conference call for further questions, please reach out to the IR team. We wish you an enjoyable August break, of course, only after writing your reports on IFX. Take care and have a good day.