Siemens Ag Spons Adr

Please stand by. We're about to begin. Good morning, ladies and gentlemen, and welcome to the Siemens 2025 third quarter conference call. As a reminder, this call has been recorded. Before we begin, I would like to draw your attention to the safe harbor statement on page two of the Siemens presentation. This conference call may include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. At this time, I would like to turn the call over to your host today, Mr. Tobias Atzler, Head of Investor Relations. Please go ahead, sir.

Good morning, ladies and gentlemen, and welcome to our Q3 conference call. All Q3 documents were released this morning and can be found also on our IR website. I'm here today with our CEO, Roland Busch, and our CFO, Ralph Thomas, who will review the Q3 results. After the presentation, we will have time for Q&A. With that, over to you, Roland.

Thank you, Tobias, and good morning, everyone, and thank you for joining us to discuss our third quarter performance and outlook for the remainder of fiscal 2025. We delivered a robust performance in the third quarter despite ongoing macroeconomic challenges. Geopolitical tensions, high volatility in the tariff environment, as well as sudden changes in trade restrictions seem to have become the new normal. We welcome the progress made and the approach to restore predictability in EU and United States relations through a trade and investment agreement. Since some details of the agreement are still in flux, we will continue to monitor developments very closely. Meanwhile, we are focusing on what we can control by shaping our future as one tech company. We are driving opportunities to strengthen our businesses by fully embracing technological progress driven by data and AI. Through our leadership in industrial AI, we enable our customers to combine the real and the digital worlds to improve competitiveness, resilience and sustainability, and to achieve real impact. And we are engaged in close dialogue with governments across the globe. Our goal is to drive innovation and leverage public and private investment plans in industry infrastructure and transportation to contribute towards high quality and sustainable growth. I'm excited and confident that the recently launched Made for Germany initiative stands for a fresh and dynamic start in our home base. designed to change the country's operating system by focusing on growth, technology and competitiveness. And now let me outline the key highlights of our robust performance. Our strong topline results underscore our customers' confidence in our offerings. Book-to-bill reached 1.28, primarily driven by our mobility business. Our high-quality order backlog continues, To stand at a healthy 117 billion euros, which also reflects the recent euro strengths. This backlog will support further value generating growth. Group orders reached 24.7 billion euros, up substantially by 28% over the prior year. The key driver was mobility. We recorded two major orders in Egypt and the United States, along with a series of further large contract wins. Smart infrastructure kept delivering orders on a high level, with healthy growth in the base business. As expected, orders at digital industries were up sequentially, but below the prior year due to very tough comms in DI software business from exceptionally large license deals. DI's automation orders rose significantly by 19% from a low base driven by China and the United States. The recovery of orders was less dynamic than anticipated due to a high continuing uncertainty about the future tariff environment and ongoing trade disputes. This climate of volatility is weighing on business confidence in several of our core industries, such as automotive and machine building, where sales cycles are extended and investment decisions are taking longer. Overall revenue growth reached 5% with strong contributions from mobility, smart infrastructure, and Siemens Healthineers. A standout was again smart infrastructure's electrification business, which grew 16% on stringent backlog execution driven by the data center vertical. The automation business of digital industries returns to a year-over-year revenue growth for the first time since the end of fiscal year 2023. As expected, revenue in software was lower at DI, mirroring very tough comps from large license deals last year. From a regional perspective, group revenue was driven by EMEA up 10% and by the Americas up 9%, again fueled by strong momentum in the United States. Asia-Australia was down 10% on tough comps in China, particularly offset by strength in India up 16%. Robust revenue growth converted into solid results for profitability and to excellent free cash flow. Industrial business profit of 2.8 billion euros, equaling 14.9%, was in line with market expectations, with smart infrastructures, mobility, and health in years, delivering margin expansion. Earnings per share pre-PA reached 2 euros and 93 cents, excluding alter and dogmatics effects, totaling a negative of 15 euro cents. Strong cash conversion led to an impressive 3 billion euros of free cash flow in the industrial business. Although macroeconomic and geopolitical uncertainties persist, we confirm our outlook for fiscal 2025, and Ralph will give further details. Our teams are working diligently towards our long-term direction for Siemens as one tech company to achieve stronger customer focus, fast innovations, and higher profitable growth. We made major progress in stringently executing the program's investment track to shape our portfolio. Key examples were closing the Dogmatics acquisition to expand our AI-powered software offerings for life sciences at the beginning of Q4, which was much earlier than expected. And we are strengthening our portfolio of intelligent hardware by integrating the industrial drive technology business acquired from ABM Pabst. This move enables us to tap into growth markets like free-moving, battery-powered, driverless transport systems. With the successful listing of the energy business in India, we paved the way for streamlining our company structure as promised, and this will empower our business to succeed independently and grow faster. And in Munich, we opened the expansion of one of Europe's most modern train factories and service centers. This site is a testament to how competitive and successful manufacturing in Germany can be. Highly skilled employees are using cutting-edge technologies, maximum automation and digitalization to deliver superior products and digital services. As part of the program's productivity initiative, We are continuously working on optimizing our footprint. To mitigate risk from tariffs and strength resilience, we are expanding our supplier network and continuing to localize value chains. We are making good progress in strengthening competitiveness in DI's automation business. We signed a holistic transformation agreement in Germany with the labor representatives. The aim is to adjust capacities, foster the qualification of employees and strengthen our customer centric sales approach. You can see some examples for long term partnerships where we bring Siemens accelerator and domain know how to gather for lasting customer success. For decades, Siemens has been supporting Northrop Grumman in creating an industry leading digital energy engineering ecosystem to deliver cutting edge aerospace and defense systems. This year, Siemens received their supplier excellence award, and we prolonged our partnership agreement for another three years. Northrop Grumman will expand to use the use of our Siemens accelerated portfolio for real-time collaboration, rapid development, and a digital-first approach. For many years now, Siemens has been partnering with the German federal government to modernize historic cultural buildings, among them the landmark Berlin State Library. By implementing the latest hardware and digital technologies such as Building X, they are transformed into smarter and more energy efficient assets. Investments are fully covered by guaranteed savings of energy costs. Siemens is also a trusted partner for startups like German clean energy company Turn2X. Our global agreement covers technologies such as automation, energy management, digital twins and cybersecurity for remote plant operations to rapidly scale up climate neutral methane gas production capacity. Finally, a great example from our mobility business. After intense hard work, we achieved major milestones and were able to book the turnkey order of around 3.5 billion euros to build the blue and red lines in Egypt as a core part of a modern rail system. This project has a huge sustainability impact and will cut carbon emissions by 70% compared to car or bus transport. Talking about sustainability impact. In June, we committed ourselves to new sustainability ambitions in the areas of decarbonization and energy efficiency, resource efficiency and circularity, as well as people, centricity, and society. And all are based on a solid foundation of ethics and governance. Our industry-leading impact target is to achieve 1,000 megatons of custom avoided emissions by 2030. Besides the EG projects, a major contribution will come from, for example, our 1,200 electric freight locomotives made in India, where we have now entered full production mode. A great example for resource efficiency is our technology partnership with Cadolto and Legrand, for the growing market of prefabricated modular edge data centers. We take resource efficiency seriously with our robust EcoDesign target of 100% for products, services, and software by 2030. This is also reflected in our Siemens EcoTech label, which we introduced last year. And until today, more than 50,000 Siemens products have earned this independent certification which is an impressive ramp up. Now let's take a brief look at the main KPIs of our SaaS transition. Nominal ARR numbers now include Altair, whose software revenue is almost entirely recurring. This lifted the ARR to 4.9 billion euros. On a comparable basis, ARR growth again reached a very healthy level of 12% over the previous year, The cloud portion stands at 2.1 billion euros, which is equal to 47% of ARR, excluding the Altair effects. We are confident to achieve the target of 50% cloud ARR by the end of fiscal year 2025, and all customer-centric performance indicators continue to show a favorable trajectory. With these perspectives, I will leave you, Ralf, for further details on our business and outlook.

Thank you, Roland, and good morning, everyone. Let me share more about our robust fiscal Q3 performance and expectations looking ahead. Orders for digital industries at 4.4 billion euros were up sequentially and moderately below prior year, with a book-to-bill very close to one. As expected, the iSoftware business was well below the extraordinarily strong prior year, which had included seven large software license deals as discussed back then. All of DI's top and bottom line KPIs reflect this tough basis of comparison. Software orders reached nearly 1.6 billion euros for a book to build modestly above one. It was good to see that the automation businesses showed 19% growth over easy comps in the prior year, driven by discrete, up by 21%, while process was up 13%. However, automation orders were fledged sequentially, so far not yet delivering the previously anticipated demand acceleration into the second half of our fiscal year. Instead, the underlying market dynamics and the manufacturing output developed rather sideways. Ongoing tariff uncertainties and trade tensions have dampened further acceleration of recovery because of rather cautious investment sentiment in important customer industries such as automotive, machine building, and machine tools. Our backlog for digital industries decreased moderately to 9 billion euros. Therein, the software backlog stood at 5.5 billion euros, adversely impacted by a weaker US dollar. The automation backlog was slightly lower at a base level of 3.5 billion euros. Revenue for DI declined 10%, a notch below our expectations. Therein, automation revenue was up 4% to 2.9 billion euros, showing year-over-year growth for the first time in almost two years. Discrete automation was up 5%, mostly driven by a factory automation business. Process automation was flattish. The software business was down 30% on very tough comps. Besides the well-flagged effect due to lower volume from large orders for software licenses, temporary trade restrictions on EDA with regard to China impacted revenue and profit in this business. Altair-related effects and initial dogmatics-related transaction costs weighed on the reported margin with 120 basis points. Excluding Altea and Dogmatics, DI's profitability reached 15.7%, mirroring software revenue performance in software. Our team is implementing the integration concept as scheduled to ensure substantial cost synergies. Exchange rate headwind on margin was 40 basis points. DI's robust profit margin in automation was supported by stringent cost management and some first benefits from capacity adjustments initiated earlier. Severance charges accounted for 160 basis points, of which around 100 basis points were related to the automation business. As Roland mentioned, we finalized the consultations with the employee representatives on executing capacity adjustments in Germany to strengthen competitiveness. Therefore, we expect to recognize material severance charges north of 200 million euros in the fourth quarter in line with our assumptions for digital industries. Adequate pricing measures and a ramp-up in productivity gains supported a net positive economic equation in the third quarter. A clear highlight was digital industry's strong cash conversion in both automation and software, which led to an excellent free cash flow of more than 1.1 billion euros. Now, let me give you the regional perspective on our top-line automation performance. As mentioned, automation orders continued to recover from the low prior year level. In China, orders increased substantially by 31% over the prior year on very easy comps. Mutual economic conditions still weighed on order growth momentum in Germany, which was up 2% over the prior year. However, we recorded some sequential improvements. The US sent positive signals with order growth of 28%. Revenue growth was turned positive in and it's back to reflecting actual market demand. Growth was again driven by China up 19% year over year on strength in discrete automation. Flow order momentum in Germany also translated in flat revenue development, while Italy saw further sequential recovery from trough level. Looking ahead, we confirmed the ICE Fiscal 24-25 guidance for organic revenue growth of minus 6% to plus 1%. As already reflected in market expectations, we foresee, however, to reach the lower half of this range. In the fourth quarter, we anticipate a seasonal upswing. Orders at DI will be up substantially year-over-year, driven by EasyComps in its automation business and by a strong pipeline of mostly mid-sized orders in the software business, supported by the successful SaaS transition in PLM. Therefore, we expect comparable revenue growth in the fourth quarter in the mid-to-high single-digit range. In nominal terms, we expect the Altair and Dogmatics businesses, which we acquired well ahead of schedule, to add around €200 million in revenue in the fourth quarter after the effects from deferred revenue haircut. Excluding Altair and Dogmatics, we confirm that the profit margin for fiscal 2025 will be in the range of 15% to 19% outbid in the lower half. Altair and dogmatics-related effects will be around minus 120 basis points for the full fiscal year. In the fourth quarter, we expect the ICE operational margin to improve materially despite higher severance charges due to recovering automation revenue, unfolding productivity measures, and a strong performance in software. All in all, we see the ICE profit margin for the fourth quarter excluding Altair and dogmatics coming in around midpoint of the annual guidance range. Now let's turn to smart infrastructure, which executed flawlessly again and delivered an excellent third quarter performance. Under the supportive market conditions, the team achieved strong revenue growth and kept the operational margin expansion trend going for the 19th quarter in a row. In total, orders were down 1% at 5.7 billion euros due to some project shifts in the buildings business into the fourth quarter and due to a temporarily lower level of large orders. On the other hand, the base business of small ticket and mid-sized orders showed very healthy, high single-digit growth. The sales funnel for the fourth quarter looks promising, and we expect a return to order growth. By business, orders were up 2% in the electrification business, which benefited from many mid-sized orders. On the other hand, orders at buildings decreased by 3%. At electrical products, They were 2% lower due to fewer major orders for data centers in the U.S. compared to the prior year. Overall, activity in the data center vertical remained sound with a book-to-bill clearly above 1. The book-to-bill on SI level reached 1.0. Including the impact from negative currency effect, SI's order backlog now stands at healthy 18.7 billion euros. Revenue growth was broad-based and reached 9% slightly topping expectations. The largest contribution, again, came from the electrification business, which was up 16% on stringent backlog conversion, particularly benefiting from large data center contracts. Up 6% electrical products continued its consistent growth path from a high level. Buildings showed 5% growth, which was broad-based across business types. In the first nine months of fiscal 25, revenue in the data center business grew sharply to more than 2 billion euros. We now expect revenue growth for the full fiscal year to be around 30%. Seamless backlog execution again led to further margin expansion of 180 basis points year over year to a record operational level of 18.8%. As ICE business continued to benefit from economies of scale due to higher revenue and high capacity utilizations. SI's economic equation was once again clearly positive, supported by adequate pricing and sustainable productivity gains, which more than offset cost headwinds. A consistently strong cash focus drove another €1 billion of free cash flow for SI this quarter, with a cash conversion rate of 0.94, fully matching our ambitions. Looking at the regional top-line development, we saw robust demand with order momentum closely linked to large order awards while the base business was strong across the board. Germany was up 6% with several large electrification orders in power utilities. While the US was on the prior year level, it had tough comps from very strong data center orders in the third quarter of last fiscal year, as mentioned back then. China showed further improvement in the top-line development in electrification and electrical product businesses. Revenue growth in all regions was fueled by excellent backlog execution. The U.S. again achieved outstanding 12% growth on a high level. The key growth engine was the electrification business driven by successful execution of data center projects. The service business delivered 8% growth with clear gains across all key regions led by the Americas. We continue to expect very consistent and resilient end-market demand trends with data centers and power utilities as growth engines. Therefore, we confirm our fiscal 25 guidance of 6% to 9% comparable revenue growth and an operational profit margin at the upper end of the range of 17% to 18%, excluding the gain from the wiring accessories divestment. For the fourth quarter, we see the comparable revenue growth rate being in the lower half of the full fiscal year guidance range of 6% to 9% growth strongly supported by the order backlog. We anticipate the profit margin to be in the range of 17% to 18% geared for another quarter of year-over-year margin expansion. Mobility delivered a strong third quarter performance. Orders jumped to 7.9 billion euros with an impressive book-to-bill of 2.58. Besides the two major bookings in Egypt and the US already mentioned, we saw strong order momentum across businesses. Our sales funnel continues to look very promising for the fourth quarter and thereafter. Order backlog stands at 52 billion euros with further improvements in the gross margin. This backlog includes more than 15 billion euros of highly attractive service business. Revenue was up 19% in Q3, fueled by extraordinary growth in rolling stock on very easy comps driven by strong backlog execution. Again, customer services contributed strongly to top-line growth. Higher revenue translated into an improved profit margin of 9.3%, up 60 basis points with strength in the customer services business and with stringent project execution. Precash flow improved over the prior year but was softer than expected due to deferrals of some larger payments into the fourth quarter. We are very confident that mobility will collect these and other anticipated payments and we expect a material catch-up in free cash flow in the fourth quarter. Our assumption is that mobility's revenue growth for Q4 will be rather flat on very tough comps. Fourth quarter margin is seen again within the full year margin guidance of 8% to 10%. Now, let me turn to our performance below our industrial businesses where we recorded positive effects from the successful resolution of portfolio-related and legacy topics. Among them, we recorded a substantial gain of 154 million euros from closing the sale of the airport logistics business in Europe, Asia and the Middle East. The closing for this business in the US is subject to regulatory approvals and is expected in calendar year 26. And we recorded a positive effect of 121 million euros from revised provisions for a legacy project following final customer acceptance. I'm very pleased with our strong Q3 free cash flow performance, which puts us well ahead of last year's level after nine months. Strong contributions from the businesses added up to 3 billion euros with a cash conversion rate well above one. Outside industrial business, we recorded substantially lower tax payments in the third quarter compared to prior year. With that, we are very well positioned to deliver excellent levels of double-digit cash return for the sixth year in a row. And we continued our path of shareholder-friendly capital allocation. Our share-buy-back program is progressing very well and is ahead of schedule. After 18 months, we are already approaching the 3 billion euro mark, halfway through the intended volume of 6 billion euros for our five-year program. Our ability to consistently generate high amounts of cash enables us to act from a position of financial strength with a capital structure of 1.0 for industrial net debt over EBITDA. And the capital structure will continue to be well within the target corridor at the end of fiscal 25, even after closing the dotmatics acquisition for an enterprise value of $5.1 billion early in July. Our industry-leading AA ratings by both Standard & Poor's and Moody's enabled us to successfully refinance debt through a large dual bond issuance at attractive interest rates for various durations. We will continue to stick to our commitments for stringent capital allocation in the future and will balance investments and attractive shareholder returns. Let me conclude with our guidance for the group which we confirm. For the Siemens Group, we expect comparable revenue growth in the range between 3% and 7% and a book-to-bill ratio above 1%. We expect EPS pre-PPA for fiscal 2025 in a range of 1040 to 11%. Effects related to altering dogmatics, which we successfully acquired ahead of schedule, as well as the gain from the sale of enomotics are not included in this outlook. During the first nine months of fiscal 25, these effects contributed in total a positive 2 euros and 44 euro cents per share to basic EPS pre-PPA. For modeling purposes, you can assume for Altair and .matics all in a negative impact on EPS pre-PPA in the range of 40 to 45 euro cents for fiscal 25. In addition, this outlook excludes burdens from legal and regulatory matters, as always. Ladies and gentlemen, our direction is going to be unchanged and very clear. We are firmly committed to creating value through profitable growth, resilient cash flow, and disciplined capital allocation. With that, back to Toby for the Q&A.

Thank you, Ralph. We are now ready for Q&A. Please limit yourself to one question per person. We want to give as many of you as possible the opportunity to raise your question. Operator, please open the Q&A now.

Thank you, ladies and gentlemen. Anyone who wishes to ask a question may press star followed by one on their touchscreen telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. Our first question comes from the line of Max Yates from Morgan Stanley. Please go ahead.

Thank you and good morning, Roland and Ralph. I guess I wanted to start on smart infrastructure because I think there'll probably be a lot of folks on BI. So maybe just as a housekeeping question, could you give us a feel of what the data center order intake has done kind of year over year and in the third quarter and year to date Actually, the main question I'd like to ask is just around the SI margins. So you're obviously going to be towards 18%. When we think about kind of the path from here and we think about kind of what you still can improve fundamentally in this business, what are the levers that you can still pull internally or is it really now everything is kind of firing on all cylinders and it's just about growth and operational leverage from here? And if there are any cost savings still to come out or cost benefits, any quantification of that to sort of help us understand the trajectory in the next couple of years would be helpful. Thank you.

Yeah, so thanks for the bunch of relevant questions, and as you rightfully anticipate, I believe that we will discuss a lot about DA, so thanks for starting with an SI question. I mean, first and foremost, I said that we see a very robust and also substantially confirmed market development for data centers. We have been indicating at the beginning of this fiscal year already that the extremely high new order level of prior year will not repeat itself in particular, not throughout each and every quarter. So it wasn't a surprise to us that for this quarter, we had new orders that were below 800 million. as the large orders of prior year didn't repeat themselves. But as I said and pointed out, and I won't repeat all that, we have a very, very strong backlog, and we have also a very clear view and visibility on the month and quarters to come. Our team is delivering consistently on highest level and flawlessly, so therefore we have no doubts that executing along these lines and continuing on the high levels of growth that we have been accomplishing on the revenue side throughout the first three quarters of the fiscal year give or take 40% will continue and also demand and discussions with the hyperscalers and also other parties from the energy environment are going to continue. So we see ourselves well positioned from an offering perspective with our portfolio and also on the execution side, extremely reliable, being a global partner for our customers. This is of the essence also on the way forward. So a single quarter doesn't impress us too much in prior years comparison when it comes to new orders. So rock solid from our perspective and a great execution team. So when it comes to margin on SI level, I think Matthias and Axel said everything at their capital market event back in December in Switzerland. There's nothing new that really happened. I mean, they are just consistently executing. And I do know it's extremely impressive, 19 quarters in a row consistently executing. But this is because these two gentlemen and their team have a hell of a lot of experience. and they also have been pulling all levers into place and are now just doing what they said before. I'm not worried about the further potential as they indicated. They have been opening their margin range in that event back in December, and they will continue moving there. It was a very strong quarter that we are just reporting about, and As I indicated, margin guidance will be at the upper end of the corridor with potential for more to come. Is there one single source of incremental profitability? No. They will continue to execute on economies of scale, of course. They do have productivity measures on their agenda, and they will execute accordingly. And what they also do very consistently for many years, meanwhile, is they do look into their portfolio, and they groom that consistently into the area of profitable growth and high capital efficiencies.

That's great. Thank you very much, Ralf.

The next question comes from the line of Ben Uglow from Autoscaped Analytics. Please go ahead.

Morning, Roland, Ralph, and Toby. Thank you for taking the question. I wanted to explore the kind of customer hesitancy or the uncertainty in the environment. Your U.S. peer made an interesting observation yesterday, and I think what they were suggesting was that they were seeing strength on the product side in let's call it the flow business but the uncertainty was much more related to I guess the capex, the project related businesses being quote unquote pushed to the right. First of all I sort of wanted to know is Siemens experiencing exactly the same thing? And I guess the million dollar question is is that flow business, is that product demand that we're seeing Is that underlying or is this simply a kind of base effect from the restock? If you could give us just your impressions on that, that would be helpful. Thank you.

Thank you, Ben. Very elaborate question, of course, and as you, I also listened to Piers talking to the market yesterday. There is kind of communality, I believe, and this is not a surprise to me, nor is it a surprise to you, I guess. I mean, the investment sentiment as such, suffering from all those uncertainties, is rather tied to large-scale projects, isn't it? I mean, the flow business, as you call it, that's easy or easier to decide upon because it's incremental. While if you put all eggs into one basket, as some of our customers have to do with large-scale projects, you're rather hesitant and want to see whether a new agreement or whatever it is, is really sustainable and stable in nature. So therefore, I'm not surprised from a, if you will, psychological perspective, this is suggesting itself at the end of the day. The second part of your question, I think that's a rather tricky one. Is that flow business a base effect type of thing coming back after the destocking exercise or not? And I can just refer ourselves and we do that internally when we analyze. the fact i mean we saw a stabilization yeah that would be used to call normalization that has been pretty much completed um so china also in automation business has been coming back and is showing impressive growth figures year over year however from a sequential perspective the huge pickup that we had been expecting for quite some time after the stocking is probably overlaid by that uncertainty in decision-making. On top of that comes geopolitics, and I won't spell out all of that what we know anyhow. So the big momentum type of V-shaped recovery isn't taking place at the moment. Still, structural demand, and I know I'm sounding like a broken record, in this very industry is extremely sound and solid. And on the way forward, we are going to talk rather timing differences than substance, I believe. So we feel we are perfectly positioned to be there and available whenever a pickup is taking place. If it's more gradual, we'll be there. If there is a V-shaped type of momentum after geopolitical settlements or alike, we will be there as much So, therefore, unfortunately, my crystal ball isn't any better than yours in that regard, but we stand ready for execution if need be. And, again, allow me to take another aspect into consideration, the capability to generate strong, consistent free cash flow, even in difficult environments like this. This is making me believe this company stands on firm feet in a highly attractive market.

That's understood. Thank you very much.

Next question, please.

The next question comes from James Moore from Rothschild in Redburn. Please go ahead.

Yes, good morning, everyone, and thanks for the time. I wondered if we could look ahead three, four months to the Capital Markets Day and whether you'd like to lay out any free Capital Markets Day expectations on health and ears or targets. Feel free, but my question surrounds the One Tech Company plan. and scope to lift digital revenue and software-defined revenue in the company. You're doing a radical rewiring of the IT stack of the company with a billion, half of which is ERP, CRM, half of which is the data fabric and the world's first ISM. And I think if we were to strip out health and ears, you are getting close to 20% of sales with Dofts and Altair and with a bit of growth from digital revenue. But I'm thinking of the remaining 80% of revenue, which is a more classical hardware side of the company. Do you see a material potential to convert that towards software-defined automation, digital-style revenue over the next five to ten years? And is there any way you could scale that opportunity? Obviously, you don't want to push customers, and adoption of new technologies needs to be handled carefully. But do you think that is the major direction of travel for the next – medium term phase of the company's future.

Yeah, thanks, James. Very good question. On the first part, no news here. We say all the same. We will give you by the end of the year, we give you an idea where we want to move regarding seamless health and health. But on the other one, I mean, obviously, you calculate very well. If you just reduce the denominator, then you will end up in a similar number as you said. And number one, I mean, obviously, it's quite obvious that we want to strengthen our business exposure in the software and digital space because that market grows by 10 or more percent and we can grow faster. There's a reason why we added also capital with Altair with Dogmatics exactly in that space. And this is something where we want to continue our strategy, driving growth there, increasing our competitiveness, but also leveraging AI and our AI capabilities, which we have already and we're adding. And we have learned recently that we hired Marzi Filum in one of the top, top LLM guys in the world in order to really build up an AI competence center in the West Coast. We want to add, of course, OT competence there because the combination makes us. We want to add data. We have a massive amount of data. So that's really a growth driver. And yet it leaves us with a substantial hardware business, and we are happy with our hardware business too. There's one megatrend though, which if we take our five megatrends and I would like to – if I would add one, That one would be software-defined hardware. The world is going into the direction of software-defined hardware. An autonomous car is a software-defined hardware. If you talk about robots, these are software-defined hardware. Of course they need hardware, but the functionality is driven by the capabilities of software, and the innovation speed is also driven by software, which is very good news for the real world because we can improve it faster. This is exactly where Siemens has its strengths. Out of all our engineers, more than 50% increasing number is already software people. So we are super strong on that one. And yes, we are driving for software-defined automation, so decoupling hardware and software and make it more agile, the development, along with not only the technology but also the business model relating to it, which is also helping us, which gives us more recurring revenue. So the question is now, would that happen in five to ten years? And thanks for not asking whether we can make it in two, because this is an industry which is a little bit conservative. But you see that customers like Audi, they are picking it up now, and they see the benefits. of really having an opportunity to put a control center central in a plant up to eight kilometers apart, still having real-time capabilities, and then driving with software the manufacturing. You can control it faster, and very important, you can leverage the capabilities of IT, and most of the engineers are IT-educated, and use these capabilities in a labor market, which is short and short on any capabilities, and use it then also in industrial space. That's exactly our strategy. It will take time. There are markets which might adapt faster. I don't know how China is developing. So far, we don't see that the adaption rate is that fast. They are relying more on the traditional one. But this can change very quickly, as you know. In the United States, definitely, we see a huge potential there. And that's exactly our strategy. But the last point is don't underestimate the potential also business-wise of hardware. You see it in our smart infrastructure business. We are extremely happy and drive it super very fast forward. We have the right products at the right time and drive it with an excellent team and really a good quality, good delivery. We can ramp it up fast. And the same holds true also for our hardware business in other areas like DI, for example. Super relevant, but what you're asking is exactly the direction where our theme and strategy goes and where we believe it's definitely a competitive edge compared to any other competitor.

Thanks, Raiden. Next question, please.

The next question comes from the line of Daniela Costa from Goldman Sachs. Please go ahead.

Hi, good morning. I hope you can hear me well. I just wanted to follow up on DI and on software specifically. Obviously, your guidance implies quite a large pickup. Can you maybe help us understand how much of this is maybe what you couldn't book in China EDA versus underlying trend you're seeing? And if it's more about underlying, what are the industries and the visibility that you have that these stronger software growth in mid-sized orders will carry on for longer than just Q4. Thank you.

Thank you, Daniela. And, I mean, just reminding ourselves quickly, prior years, third quarter had that tremendous license impact of some large-scale orders, and we by then already said we haven't seen that before accumulating in one single quarter, and this won't repeat itself, and it didn't. But we do see a strong funnel for the fourth quarter. You are right, referring back to the third quarter and that interim period when EDA business in China was not possible. That, of course, has been kind of paralyzing the market for a couple of weeks. And it's hard to quantify that. But, I mean, give or take, I would not expect that to have been more than low double-digit million, maybe mid-double-digit, but not well beyond. We'll see how much of that is going to be catch-up then in the fourth quarter. On top of that, we said from the very beginning that we see a back-loaded fiscal year in terms of the funnel in particular on the mentor, on the ADA side for the fourth quarter, but also the momentum created that Roland talked about in the PLM SaaS transition is also picking up and we are quite confidently looking into that. I talked to our software guys last night to make sure that I'm really having the latest and greatest status and all that looks like we are going to execute on a very strong quarter in the fourth quarter. It's not done yet. But after all what we see one month in the fourth quarter, we can confirm that what we are indicating, what we have been indicating before. And if you look back into the last fiscal year, that very third quarter was both new orders and revenues in the software space around 2 billion. And we aspire to reach out to that level again now in the fourth quarter. Again, it's done after it's done, but there is no reason for me to have any doubts. Where does it come from? Of course, I mean, the market segmentation at the moment suggests that electronics and semis are going strong compared to other market verticals as we call them, but we do not see any surprising outstanding part of the market sector. All the sentiment in decision-making that I touched on before and the answer to a prior question is still valid also for the software market. And we do see a lot of momentum, but we do not capitalize on one industry only. Maybe to highlight the opportunities coming up in the defense industries, which are strengthened at the moment. We talked about that in the past. There is definitely an industry that deserves being looked at. There's a great need for automation and digitalization, and there's no way around software backbones in that field if they want to come up with higher output anytime soon. But anytime soon is not measured in weeks and months in that industry, but rather in quarters and years. So we do not expect a huge material impact on our numbers from that market segment. But in the years ahead, there will definitely be huge opportunities because it's kind of greenfield when it comes to automation. And we are there to help. And I think the trust we earned ourselves in other high-quality industries will also be a striking argument in this field.

Thank you very much.

Thank you for the question, Daniela. Next question, please.

The next question comes from the line of Jonathan Monsi from BNP Paribas. Please go ahead.

Thank you. Good morning, everyone. Yeah, just maybe a question on Altair and some first thoughts now that it's been onboarded for a few months. Are there any things that surprise you about it? Maybe any change in view on the potential of the business, both in terms of cost and sales synergies, maybe also that occur on the contribution to revenue and orders? in the third quarter and expectations for Q4. I think maybe the business is somewhat seasonal. And then just in terms of the charges arising from onboarding of the business, I see that the cloud AAR for Altair is obviously quite a bit lower. It's all AAR but not on the cloud. I remember as you're transitioning to the cloud, your initial investments were quite elevated on cloud. Will we have to see extra costs go into the business to sort of accelerate Altair's move to the cloud, or is that not the plan? Thank you.

Thank you, Jonathan, for that bundle of questions around our latest acquisitions. And let me start with what do we see? We have been acquiring a highly attractive asset with extremely interesting and capable personnel. And there is nothing in that field that could be more impressive than the quality of people. So, therefore, we do see exactly what we expected in that field. I mean, obviously, too early to finally conclude on timing and content, but there's nothing that makes me believe we need to change our plan of integration and also the commitments we gave only for a dime. It's all executing along these lines. We have the first quarter in. We do all the typical things you have to do, revenue haircut, you book all those fees that are related to the transaction itself, integration efforts all lined up. And as we said, surprisingly enough, from an outside-in perspective, but well-organized and well-planned from an inside perspective, we see the cost synergies ramping up. Of course, they didn't materialize yet, and steady state is going to be reached as indicated in the second year after the acquisition being closed, so too early to jump to final conclusions. But talking numbers, I mean, the underlying performance ignoring all the one-offs is exactly along the lines we expected it to happen from a revenue recognition perspective. We had 130 million of contribution top line revenue in the third quarter. We do expect a bit more from Altair in the fourth quarter. And also bear in mind that Dogmatics is going to contribute then also with a give or take 50 to 60 million top line momentum. So all that is spurred up. I indicated in my presentation that we expect an all-in impact of both of the acquisitions for the fiscal year of 40 to 45 cents. And we'll take it from there and we'll guide you for the next year when we have more clarity on the way forward but so far no surprises seen. The team has been very well prepared for that what is going to be executed and bear in mind we acquired more than 35 software companies before so it's not being a new kid on the block in that regard. Still we have respect for each and every measure that needs to be implemented. We are looking at people And we also do know that go-to-market and just tapping on the cross-selling opportunities is nothing that starts after four or five years. It needs to be started and initiated right away and the teams are spurring up together. Also a great spirit out there. When it comes to Altair's ARR portion, bear in mind they just had a different regime of revenue recognition in that field and we will look into that and we will make things comparable, but the stickiness of that business is definitely going beyond the ARR figures that would be presented under our definition. Give us a bit more time to be more elaborate and more in detail on that one. But a big, big picture is we acquired highly attractive assets, which we will integrate along the lines of our commitments.

And regarding the question on the cloudification, because, I mean, the business model is clear. It's AR heavy, or almost all AR. On cloudification, we have now experience on rewriting software to cloudify. You don't have to touch each and every line of code. We know that. And we are looking into that and see what we can do selectively to change that in order to take benefit, of course, out of the cloudified business and software. But it's also too early to say. I don't expect any huge impact on this one as we go along. As I said before, you can do that selectively and touch only those pieces of code which you need to cloudify. Thank you. Next question, please.

The next question comes from the line of Benjamin Helan from Bank of America. Please go ahead.

Yeah, morning. Thank you for taking my question. I just wanted to see if you had any comments around China in digital industries and automation. Can you just talk through a little bit of detail, kind of what are you seeing there and how should we think about the potential for recovery in the second half of the year sequentially in our business? Thank you.

Thanks for that question. I've been literally waiting for it. I mean, China is, of course, recovering, as we said, also, I think, quite impressive top-line numbers for the third quarter, but admittedly also on easy comps. We have been seeing the automation business stabilizing there. We talked a lot about inventories on shelves, so the reach there is also give or take on a stable level now. And therefore, we consider normalization being completed in that field. When it comes to a sequential development month over month, the July figures seem to be stable. But as I said before, we did not see a sequential recovery that is type of V shape. So therefore, we stay tuned on this one. On the other hand, we also do not have any indication that there would be a relapse or anything happening at the moment. We have a lot of respect for the competitive landscape as we pointed out before. We have been introducing new products which are slowly but steadily starting to gain ground from a customer qualitative feedback that seems to be all in place that it takes to get incremental growth business in place and to foster our positioning in particular in the global player scheme. innovants and alike are serious competitors and we are respectfully looking at them and deal accordingly with our own value chain and execution. When it comes to the revenue side, I mean, the development of the backlog has been commented a lot on nothing new there. We have this ability, I believe the time of big surprises coming from artifacts in the sales channel is crossing fingers gone for now. At least it looks like we have the visibility again that it takes to meaningfully steer the business in an important market. But again, I would also like to draw your attention, even though you didn't ask for that, to the global landscape in that regard, because as you saw from our chart that has been displaying the regional setup and development, that Germany is still having quite some space to catch up with. We need momentum there. There was quite some promise in momentum but again not a v-shaped type of development in july so far so coming into the quarter we are along that we we develop along the lines that we described in our guidance i said that lower half of the corridor as expected by most of you in the consensus already so not a surprise at all and we also of course as roland pointed out in his presentation we have have been achieving an agreement with the representatives of labor, but we didn't have the booking yet. So we do expect restructuring impact between 200 and highest case, maybe up to 250 million for the quarter that will then complete the exercise that we have been indicating. And I agree completely with Roland. Well done. Also time-wise, this is not that easy as it looks like. and has been completed in a very constructive manner for the way forward. Just a quick run through the different verticals that applies for China mainly, but not only on the automotive side. The outlook is, of course, impacted by decision-making processes, which are somewhat paralyzed every now and then on the trade conflicts and tariff discussions over capacities in China. are known too early to talk about how we are going to enter into 26, but the structural demand, I pointed that out before, is intact and we have no doubt that the development on the way forward is going to be along the lines that we gave from a mid-term perspective. Machinery overall dynamics seem to be rather stagnating at the moment. not offset by local stimulus programs and localization of value chain in the short term. So automation demand stabilized within that normalization of buying behavior after the destocking, but not more. On the chemical side, China and the U.S. seem to be robust. Europe rather flattish, and we do expect a further slightly positive steady development, likely at the reduced speed as cyclical support fades And pharma, I mean, we are all aware of the latest news. I mean, in general, it's solid and a steady market segment over the quarters. But generally, for solid expansion expected, we need to better understand what the tariff implications may mean in that field. Electronics and semis are good. I think I can leave it with that. And as pointed out before, defense is a huge opportunity for us, but not tomorrow, but rather the day after tomorrow. That's super helpful.

Thank you. Next question, please.

The next question comes from the line of Gael Debray from Deutsche Bank. Please go ahead.

Oh, thanks very much. Good morning, everybody. Roland, you mentioned this partnership with Legrand in modular prefabricated kind of data centers for the edge. My question is, why do you need to partner with Legrand? I mean, from a strategic perspective, does it mean that you don't really intend to invest into the wide space of data centers, you know, in things like smart PDUs, RAC, buzzways, and maybe a few other specific product categories tailored to the wide space? So that's question number one. And then the second one, which is fairly quick, it appears that you've been selling more shares in both Siemens Energy and Siemens Elsevier this quarter. So just a quick, you know, just an update on what are your remaining stakes in both shares and perhaps also a quick word on your strategic intention for both names.

Let me start with the latter one quickly. No change, of course, on the way forward on the energy side. We just stick with that what we had. Exactly, 10.9%. On the health in years, you saw ourselves reporting as required by the regulatory body in Germany that we have been touching a threshold last week that implicitly means 2% being sold and you also heard us talking about the plan to finance Altair and maybe Dogmatics with a further sell-down on Siemens Healthineers shares, which we are still out for. This, however, and let me just underpin that again, is not prejudicing strategic decisions on the way forward. But I think we are very well on track with that, what we do, and we do that also as meaningfully, silently, and also looking at the share price development of a great company like Siemens Healthineers at the same time. So no news compared to the plans we have been sharing with you when we talked about the acquisition of Altair and Dotmatics.

So regarding your question on our partnership, so number one, We said it always in the context of Siemens Accelerator. This is a platform, this technology with a marketplace and an open ecosystem. So we want to partner with technology companies who are enriching our portfolio. And in some cases, it's an overlap. In most cases, it's obviously complementary. So Legrand has a complementary portfolio. There are some overlaps. But if you talk about the customer requirements, some customers, they want us, for example, to include some switching technology, which are maybe from others. We do that. But the conclusion is not that we are not ready to invest in any kind of meaningful technology, which we can enrich our portfolio, like bus bars and like. We do that. We have very, very good switching technologies, low voltage and medium voltage, which we use. And in any expansion of our portfolio, we are looking very much into it. And we would definitely also be happy to allocate more capital, is it in R&D, is it in any kind of ways of expanding our capacities there. So, therefore, it's fully in line with what we normally do. We partner with strong partners. fulfilling customer needs and requirements and strengthening our business in doing so.

Very clear. Thanks very much.

We take one last question.

Today's last question comes from the line of Phil Buller from JP Morgan. Please go ahead.

Hi, thank you for squeezing me in. In terms of the balance sheet, the 7 billion of cash in the industrial businesses here today is obviously very impressive. I know that We're committed to the buyback and dividend, but you're now well below the leverage target despite recent M&A. You've obviously got this significant optionality tied up in Healthineers and Siemens Energy. So should we be now considering larger scale M&A, more of these higher price alt-ons that we've done of late? And if so, in what areas are you most interested in? And just to squeeze in one final one, you don't normally talk about aerospace and defence, but you have called out Northrop in the prepared remarks, so perhaps you could share your defence exposure, perhaps in Europe and overall, please. Thanks.

So, Phil, first of all, thank you for appreciating our strong balance sheet, which we do exactly the same way, and we will keep it like that. We will make sure that capital allocation is meaningfully well-balanced, And we didn't wait for a huge position in liquidity and cash to think about M&A. We do that when it's meaningful. So there will no decision being taken in any different way compared to the past. Also bear in mind that the 5.1 billion of valuation Dotmatics is not included yet. It has been executed on July 1st, so not taken into consideration, but I agree with you. We are rock solid with regards to our balance sheets, and we will make the most valuable contributions to further grooming the value of the company with that, and we are not in a hurry. We will not get overexcited about matters. We will stick to that regime of capital allocation that we have been committing ourselves to, and we will definitely make sure that you are going to see us as a shareholder-friendly company in that what we do also on the way forward.

The vertical which we are serving is, we call it aerospace and defense. We combine that, and it's blur in some cases if you talk about customers. And our exposure is, let's differentiate between software, automation, and let's say smart infrastructure. Smart infrastructure, it's building business or any kind of manufacturing, so no differentiation there if it comes to any kind of manufacturing line for software. As you know, the aerospace defense sector in particular is the largest one in the United States. And our footprint in our software business is extremely strong there. So, therefore, if you add these two, then you can imagine that this is a very strong vertical of ours from that perspective, software defining PLM and the like, also simulation, which you need if you want to define these things. And for automation, it's similar. I mean, these are assembly lines. We have a good footprint there, I would say. same kind of exposure which we have in other automation verticals, which are assembling parts and the respective supply chains. And obviously, as you can imagine, we believe that this is a segment which is growing going forward.

Thank you very much.

Thanks a lot to everyone for participating today. As always, the team and I will be available for further questions. We wish you a relaxing summer break and look forward to meeting many of you in September on various occasions. Have a nice day and goodbye.

Ladies and gentlemen, that will conclude today's conference call and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.