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Executives

Ulrich Pelzer – Head, IR

Reinhard Ploss – CEO

Dominik Asam – CFO

Arun Mittal – Head, Regions, Sales, Marketing, Strategy Development and M&A

Analysts

Adithya Metuku – Bank of America Merrill Lynch

Amit Harchandani – Citigroup

Kai Korschelt – Deutsche Bank

François Meunier – Morgan Stanley

Youssef Essaegh – Barclays Capital

Janardan Menon – Liberum Capital

Sandeep Deshpande – JPMorgan

Sumant Wahi – Redburn Partners

Gareth Jenkins – UBS

Stéphane Houri – Natixis Securities

Günther Hollfelder – Baader Bank

David O’Connor – Exane BNP Paribas

Infineon Technologies AG (OTCPK:IFNNF) F2Q2014 Earnings Conference Call April 29, 2014 4:00 AM ET

Ulrich Pelzer

Thank you very much. Welcome everybody, and good morning on behalf of Infineon Technologies with our second fiscal quarter 2014 results conference call. Present on this call is, as ever, our entire management board. That’s Reinhard Ploss, our CEO; Dominik Asam, our CFO; and Arun Mittal, member of the board responsible for sales and marketing, strategy, M&A and our regional businesses. We have prepared a couple of introductory remarks by Reinhard Ploss and Dominik Asam, and will after that open up the call to Q&A. With that, over to you.

Reinhard Ploss

Thank you, Ulrich. Ladies and gentlemen, good morning, and welcome to our fiscal 2014 second quarter result conference call. I will start today’s call with introductory remarks and our Group and divisional results, market developments and our achievements during the quarter. Dominik will then comment on Group financials before I conclude with the outlook for the third quarter and the remainder of the 2014 fiscal year. We will then open up the call to questions.

Infineon recorded revenues of EUR 1,051 million in the second quarter, up 7% quarter-on-quarter from EUR 984 million. This increase was on the upper end of our expectations. Segment result also increased sequentially by EUR 30 million to EUR 146 million, equal to a segment result margin increase from 11.8% to 13.9%. Segment result for the second quarter includes multiple non-recurring effects, most notably from a refined inventory valuation methodology.

Excluding these effects, segment result margin would have been approximately 13%, which was also the upper end of our expectation. The book-to-bill ratio also improved of the reported period rising from 1.1 in the December quarter to 1.25 in the March quarter, with order momentum strengthening in all divisions as we move into our seasonality stronger quarters.

Now for the divisional revenue starting with Automotive. Automotive revenues came in at EUR 484 million, an increase of 7% over the prior quarter, driven by strong car production volumes at German premium OEMs where our products have a notable presence.

In addition, we are seeing robust demand on MOSFETs for speed control in fans and in the electric pumps. By adopting speed to actual situation, power consumption can be optimized enabling a reduction of CO2 per kilometer. Demand is also solid for body power products, used in application such as power distribution, power doors and trunk lifts.

Segment result was EUR 66 million in the second quarter versus $55 million in the first quarter. A positive effect from higher manufacturing volumes and productivity, more than compensated for the seasonal price decline. Book-to-bill in the March quarter remained constant versus the prior quarter coming in at 1.2. Except for the high demand products such as MOSFETs and body power, inventories in the channel remained at normal levels, while customers are placing longer term orders due to their confidence in the sustainability of demand.

Now for important Automotive highlight. I am pleased to announce that Strategy Analytics has once again ranked Infineon second in their survey of the automotive semiconductor market for the 2013 calendar year. Compared to 2012, we have been able to gain 0.5 percentage points of market share, narrowing the gap between us and the market leader Renesas, and increasing our lead over number three ranked STMicroelectronics.

The improvement was based on share gains in major markets including Europe, North America, Japan and China. These successes demonstrate both the competitiveness of our automotive offering and our diversified customer base.

Moving onto Industrial Power Control. IPC revenues in the March quarter totaled EUR 185 million, up slightly from EUR 179 million in the December quarter. Moderate growth in industrial drives and firm demand in traction was counterbalanced by a seasonal decline in home appliances and lower sales to wind power.

Segment result also experienced a quarter-on-quarter increase of EUR 6 million to EUR 33 million, in line with revenue growth. IPC also had a high book-to-bill ratio in the quarter of 1.3, as some major customers placed large long-term orders as delivery days stretching over multiple quarters. As far as we can see, inventory levels at our customers are at expected levels.

Now, turning to Power Management and Multimarket. PMM revenues for the fiscal second quarter came to EUR 252 million, up EUR 14 million from the first quarter, primarily due to increased demand for RF power amplifiers used in cellular infrastructure.

Segment result also improved sequentially by EUR 8 million, totaling EUR 37 million in the March quarter. Likewise, the book-to-bill ratio increased from 1.0 in the first quarter to 1.3 in the second quarter, as customers began placing orders for the seasonally strong second half of the fiscal year. Inventories in the channel are at normal levels.

We have one notable highlight for PMM in the quarter. The market research firm, IHS, has ranked Infineon again the second biggest supplier of silicon MEMS Microphone with a market share of 29.8% in calendar year 2013, 3 percentage points higher than our market share in 2012.

Driven by requirements for high quality audio for HD video recording and command recognition, the latest smartphone designs employ up to four microphones per handset, up from just one per handset only a couple of years ago. With our expanding market share, Infineon is in a good position to continue capitalizing on opportunities in these fast growing markets.

Next onto Chip Card and Security. Chip Card and Security revenues amounted to EUR 121 million, a quarter-on-quarter increase of EUR 13 million, lifted by high demand in payment, which increased year-over-year by more than 60%. Government IT application also experienced growth.

Segment result increased sequentially by EUR 2 million to EUR 8 million. The book-to-bill ratio for the second quarter came to 1.3, boosted by a strong demand for our IC Payment Cards, NFC-enabled SIM cards for the Chinese market and NFC-embedded Secure Elements and flagship devices at various smartphone manufacturers.

Lastly Distribution. Distribution point-of-sales, revenue declined sequentially by 3%, in line with normal seasonality. While our distributors have started building up some inventory to support seasonal growth, reach in the channel remains within our target range of eight to 10 weeks.

This concludes the business review. Let me now hand over to Dominik, who will comment in more detail on second quarter financials.

Dominik Asam

Thank you, Reinhard, and good morning, everyone. Fiscal second quarter revenues were EUR 1,051 million, a sequential increase of EUR 67 million or 7%. Gross profit increased sequentially by EUR 37 million, resulting in a gross margin of 37.9%. As Reinhard mentioned, our second quarter results include multiple non-recurring effects, the largest of which was a positive EUR 25 million effect, stemming from a refined inventory valuation methodology.

In essence, what we have done is allocate indirect costs related to our manufacturing across earlier stages in the manufacturing process also to unfinished goods rather than to finished goods only. This non-cash effect is included entirely in our gross profit.

Depreciation and amortization for the second quarter amounted to EUR 126 million, up EUR 6 million from the previous quarter. Research and development expenses came to EUR 136 million, a slight quarter-on-quarter increase of EUR 3 million. While selling, general and administrative expenses totaled EUR 121 million, up EUR 7 million sequentially on increased sales volumes.

Segment result for the second quarter was EUR 146 million, and segment result margin was 13.9% compared to the first quarter segment result of EUR 160 million and segment result margin of 11.8%. Along with the aforementioned positive effect related to inventory valuation, the second quarter included negative special effects which were also predominantly non-cash. Excluding all these items, segment result margin would have been approximately 13%.

The financial results together with income from equity method investments came to negative EUR 2 million versus negative EUR 6 million in the prior quarter. The improvement is primarily due to the phase-out of interest charges on our convertible bond, the absence of losses from convertible bond repurchases and a combination of higher invested cash and slightly higher interest rates.

Continuing with tax; we recorded an income tax expense of EUR 90 million, equivalent to a tax rate of 14%. Income from continuing operations was EUR 140 million compared to EUR 85 million in the prior quarter, while income from discontinued operations came in at EUR 10 million, as we recognized subsequent income related to our former wireline business.

In total, net income for the quarter was EUR 124 million, up from EUR 87 million in the prior quarter. Basic and diluted earnings per share were EUR 0.11 for the quarter, up from EUR 0.8 in the first quarter.

Free cash flow from continuing operations in the March quarter came to EUR 51 million, up from EUR 30 million in the December quarter. Net cash provided by operating activities from continuing operations was EUR 203 million in the quarter, while investments totaled EUR 154 million.

Coming now to financing cash flow. Infineon distributed EUR 129 million of dividends in the quarter, equivalent to EUR 0.12 per share. As part of our ongoing capital returns program, we’ve wrote put options on 4.5 million shares, thereby collecting premium totaling EUR 1 million.

In total, 10.5 million options with expirations ranging from June 2014 to February 2015 at an average strike price of EUR 5.98 per share are currently outstanding. As a result of the dividend payout, partially offset by a positive free cash flow, the company’s gross cash position declined from EUR 2,279 million at the end of the December quarter to EUR 2,198 million at the end of the March quarter.

Our net cash position decreased only slightly from EUR 2, 048 million at the end of the first quarter, down to EUR 2,010 million at the end of the second quarter. The decrease in net cash was less than the decrease in gross cash, because debt related to our convertible bond was extinguished due to the conversion of bonds to shares at the end of January.

Last but not least, let me address our after-tax return on capital employed or ROCE. It came in at 21% for the second quarter, up from 17% for the first quarter. Increase in ROCE can be attributed to higher profitability. Capital employed stood at EUR 2,232 million as of the March 31, 2013, up from EUR 2,194 million at the end of the December quarter.

Please note that again our capital employed contains provisions related to the Qimonda insolvency proceedings and put options on all our shares totaling EUR 427 million. These reduced our capital employed, but should be regarded as non-recurring and unrelated to our operating business.

Now back to Reinhard.

Reinhard Ploss

Thanks, Dominik. Let me now discuss our outlook for the third quarter. Infineon anticipates that third quarter revenues will increase by 4% to 8% over the second quarter. All divisions are expected to contribute to this growth. Segment result margin is expected to be between 14% and 16% of sales.

For the remainder of the 2014 fiscal year, assuming a Euro-Dollar exchange rate of 1.35, Infineon expects that revenue growth will reach at least the upper end of our previously guided range of a 7% to 11% increase over fiscal 2013. Therein, IPC is expected to grow faster than the Group average. ATV is expected to grow at the Group average, while PMM and CCS are expected to grow slower than the Group average. Other operating segment is expected to remain at or slightly below the level achieved in fiscal 2013.

Given the sales outlook, segment result margin is also expected to reach at least the upper end of our previously guided range of 11% to 14% of sales. Our investment budget of EUR 650 million and expectation for depreciation and amortization of EUR 500 million or slightly above remain unchanged.

Ladies and gentlemen, as expected, Infineon was able to record solid revenue growth and improve profitability in the second quarter, demand for our products remain strong and our order books are filling up nicely. These trends give us confidence that our sales and profit growth momentum will carry into the second half of the fiscal year.

Looking into the longer term, Infineon remains solidly positioned for further sustained profitable growth. On the one hand, we have been able to increase our market share in important established markets such as automotive. On the other hand, we are also able to expand our presence in emerging applications such as silicon microphones and security for NFC-based applications. And thanks to our investment in prior periods, we are well prepared to capture and profit from these market opportunities.

Thus the management board remains confident, that Infineon is on track to deliver on our objectives of high single-digit revenue growth and through cycle segment result margin of 15%.

This concludes our introductory remarks. And my colleagues and I will now be happy to answer your questions. And with this back to Ulrich.

Ulrich Pelzer

Thank you. Paula, if you could please poll for questions, and then kick off us from the Q&A. Thank you.

Question-and-Answer Session

Operator

Thank you. Our question-and-answer session will be conducted electronically today. (Operator Instructions) We will now take our first question from Adithya Metuku of Bank of America Merrill Lynch.

Adithya Metuku – Bank of America Merrill Lynch

Good morning guys. It’s Adi Metuku from the tech team at Merrill Lynch. I just had a couple of questions. First one is on the IGBT market. One of your customers, China Southern Railway is talking about using their own IGBT chips and modules in their locomotives, and they intend to start production in the middle of 2014. It looks like this is being driven by the Chinese government trying to indigenize production of semiconductors. I just wondered if you could give your views on the competition in the IGBT and the IGBT module space. And my second question is more of a clarification. Considering you’re raising your guidance, so I just wanted your views on where you see the peak segment result margins at the peak of the cycle? Thanks very much.

Reinhard Ploss

So thank you, Metuku. The IGBT answer will be given by Arun, while the segment result will be given by Dominik.

Arun Mittal

Okay. Yes, so for the IGBT, yes, it is correct that IGBTs are starting to be made in China. However in the field of traction what Reinhard mentioned in his opening comments, we have very good backlog for business going into the next three to four quarters. So what happens after that, we have to wait and see. However, we know that couple of things are very crucial in this business.

Point one, is reliability, and point two is quality. These need long learning curves to go through before one can achieve equivalent results as what we have mastered over the last decade.

Dominik Asam

So I am not 100% sure I understood your question, but if I am correct, you wanted to understand how we can understand the current segment result margin and how that translates into our longer term objectives, and how the market cycle can affect us. So I want to start with a starting point, we jump off, basically right now as we’ve said in the last quarter, we have been running at round 13% if you adjust for effects which are kind of non-recurring. And going into Q4, you know that there is a slight uptick in normal seasonality. And we also expect that to happen in this year. So that’s the reason why we have clearly said that we will reach at least the upper end of our target ranges, be it on the revenue side and on the margin side.

And on the margin side, if we have a slight increase uptick in Q4, there is a slight – there is of course an opportunity to increase margin slightly in line with this kind of rule of thumb of an incremental EUR 0.50 fall through to the bottom line unless there are some increases in OpEx, which we will have to some degree. So that’s the point we just jump off.

You should know that in the current numbers, there is about 1.5 percentage points of headwind from 300-millimeter, which is still one-off cost because we have, I’d called it embryonic volumes in 300-millimeter. We do ship in 300-millimeter. We have double-digit millions of revenues, but it’s still not a meaningful contribution, while there is a big factor in Dresden to that incremental cost is visible in the numbers, also the research and development effort to bring all the products we can onto 300-millimeter.

As this is going away over the next years, I’d say as we reach a certain loading in Dresden, this headwind will go away and then turn into tailwind.

Now, if you really enjoy a strong boom, and I think currency except for certain niches where you might call it a boom already, we don’t see a boom and we see a kind of normalization after two years where we have been on a relatively sluggish market environment. If you see a real boom and statistically a real boom at Infineon means that in addition to the high single-digit target revenue growth, we see 16% standard deviation to the upside, so then we talk about 20% plus increase.

You can simply take that incremental revenue and ask yourself a question, do we have enough capacity for that, then assume that a certain percentage of that mainly about half will fall through the bottom line. And then of course if you assume a severe boom, it can happen that we see very high peak margins again. How high? That’s simply dependent on how quickly this boom happens and how much capacity we have for that.

Adithya Metuku – Bank of America Merrill Lynch

Okay. That’s clear. Thanks very much.

Operator

Our next question comes from Amit Harchandani of Citigroup.

Amit Harchandani – Citigroup

Good morning gentlemen. Amit Harchandani from Citigroup, and thanks for taking my question. Couple if I could. My first question centers around your drives business. You talked about – I think you said a moderate growth in drives, which seems to be a better outlook compared to what was said in the previous quarter. So could you maybe kindly give us some additional color in terms of how the drives demand has shaped up in the quarter that has gone by, and the upcoming quarters? And my second question is a bit more broad-based, and you’ve said that the order books are filling up nicely. Could you maybe help us understand to what extent this is just being driven by inventory replenishment and demand, and the various puts and takes across the different divisions when it comes to the order book? Thank you.

Reinhard Ploss

So Amit, the first point I will answer. It is very clear that we see that the overall economy is strengthening, the outlooks are reasonably strong. And typically with this strong and positive sentiment, we see that the demand for IPC modules for automation and general business is getting stronger. A significant part also as said comes from the trains, and what we also see a significant demand from the renewable energies in China.

So what you see, there are several elements coming together which are developing more positively than it looked before. The order book, Arun will comment on it.

Arun Mittal

Okay. Yes, Amit, regarding the distributors or inventory in the channel, we think it’s pretty healthy. It’s in the range of eight to 10 weeks. And within that, of course different distributors and different regions and for the different businesses have different level of stock.

So on one hand, some of them are preparing for the Q3, Q4. On the others, they are really well stocked or healthily stocked at the moment.

Amit Harchandani – Citigroup

And would you say this is uniform across the different segments, or are there any variances in particular that you would like to highlight? Thank you.

Arun Mittal

Yes. There are some variances like for example power management. I think they are preparing ahead of time with inventory, whereas some others like automotive they are running hand to mouth.

Amit Harchandani – Citigroup

Okay. Thanks Dr. Ploss, and thanks Arunjai.

Arun Mittal

Welcome.

Operator

Our next question today comes from Kai Korschelt of Deutsche Bank.

Kai Korschelt – Deutsche Bank

Hi. Good morning gents. Thanks for taking my question. I have two. The first one was just as a follow-on to an earlier question. I think to be a bit clearer on your previous peak margin, I think of 20%. So I’m just wondering, given the 300-millimeter investments current headwinds, but also a different capital base. Overall, I’m just wondering, if you could give us broadly speaking, a revenue range at which you would need to get to 20% operating margins? That was my first one. The second one was I know its early days, but based on the current order book and revenue visibility, should we expect the September and potentially December quarters to be broadly seasonal, or is there scope for that better than seasonal demand to continue into those quarters? Thank you.

Reinhard Ploss

So let me start with the outlook. Then Dominik will answer on the peak margins. We see that quarter four has upside potential, while quarter one fiscal means quarter four calendar year is pretty far out, and we are very careful on guiding already this quarter. So we cannot comment on the December quarter yet.

And now Dominik the revenue for peak margin.

Dominik Asam

Yes, I tried to answer that with my long response I gave before. It’s really equation of also how quickly that revenue materializes. If it’s materializing from today to tomorrow, we don’t have the capacity to do it. So we have some capacity, but not all the capacity. If it stretches over a five year increase, you have price decline to take into account, but very roughly if you want to have a very course idea, if you assume that peak margin will occur in a couple of years time or so, maybe you need – the fall through is maybe 30% to 40% in that order of magnitude, because of some increase in OpEx, some price decline.

And you need all the incremental revenue and then you take out the 30% to 40% fall through to segment results, and then you can calculate how much more revenues it will take. And also to say that very clearly, we don’t see any signs of a heated boom that would bring us as far as that. So we don’t see that margin within our kind of planning horizons so to speak.

Kai Korschelt – Deutsche Bank

Okay, thank you.

Operator

Our next question comes from François Meunier of Morgan Stanley.

François Meunier – Morgan Stanley

Yes. Thank you for taking my question. Actually, I’ve got a few. Yes, the guidance for EBIT margins for the year is at least 14%, and that’s very good indeed at this point of the cycle. But I was wondering in fiscal Q1, you kind of under-spend on R&D, in this quarter, there has been a few one-offs as well. So I was wondering if this 14% guidance was ex one-off or including the one-offs for the year.

Reinhard Ploss

I think Dominik.

Dominik Asam

Well, this is the segment results margin guidance, and it includes the effects we had currently discussed for Q2. But it’s on segment result basis, so excluding these things which by definition we take out of segment result of course.

François Meunier – Morgan Stanley

Okay. Okay, it’s very clear. Now my second question, if I may is on Automotive. I think in a normal year normally it’s growing like around 7%, 8%. I think you’re running at like 14% run rate at the moment. So it’s pretty good. And you’ve been quite bullish about this during the quarter. So is there a boom, just to reuse the word you were using before in autos and where is it driven? Is it like – is there any special push from electric vehicle, BMW i3 or this type of things, or where is it coming from exactly? Why is it so strong? And also where is the momentum going? Is it sustainable into the next two, three quarters?

Reinhard Ploss

Yes. So I think on a year-to-year comparison, we have to consider that the first half of last fiscal year was a pretty weak situation even for Automotive. There is some special effects on I would say stocking and so on. So here we cannot definitely compare one-to-one year-on-year growth. On the other side, definitely we see that the year’s projection which we always see on a longer term that you have a content growth of 1% to 2% and a car growth between 5% to 6%, we see that due to our exposure to higher end cars, the content growth might be higher.

So what we see is I would say not a boom, but a very solid situation with more positive at least for our positioning than expected boundary conditions for semiconductor content. And we believe that the growth can, if the boundary addition continues to come to this from our guidance 8% annual growth to gross for constant environment. But I would not say there is a strong boom when you take out the special effects.

François Meunier – Morgan Stanley

Okay. So it’s more a question of easy comps on last year, right. And the third question, if I may, sorry to ask maybe too many questions, but in terms of power modules, if you remember in 2010 when things were really, really booming in China for power modules, where are we today compared to that peak? Are we like 10% below, 20% below? Where are we going basically for all those power modules, because it was a big driver for the margins at the time?

Reinhard Ploss

Yes, Arun will take that question.

Arun Mittal

Yes. So power modules, let’s see. Power modules, we are not at the peak. So we are about 15% below the peak. And I think if we are able to get that peak again and we will probably come close to delivering those results as well. Was that okay?

François Meunier – Morgan Stanley

Yes, but can you come to explain where we are versus the previous boom – previous peak of the cycle?

Arun Mittal

Yes, we are 15% below the peak.

François Meunier – Morgan Stanley

Okay. Very good. Thank you guys. Thanks very much.

Arun Mittal

Welcome.

Operator

Our next question is from Youssef Essaegh of Barclays.

Youssef Essaegh – Barclays Capital

Hi. Thanks for taking my question. I have two, but the first one, if I may, is on FX. So you maintained your guidance on the basis of a Euro-Dollar at 1.35, while for the first half of your fiscal year, it’s mostly been above that level. And unless you have some special reasons to believe that the outlook of the Euro-Dollar should be down, can you please tell us why you didn’t change the FX rate in your assumption? If you have some special hedging policy or sensitivity to EBIT margin that you can share with us on that front?

Reinhard Ploss

Yes, Dominik please.

Dominik Asam

Yes, I mean it’s frankly not such a big driver given that the delta between the 1.35 and the 1.38 something is minor. If you look at it from revenue and earnings perspective, for the remainder of the fiscal year not such a big thing. September 30 is the end of our fiscal year. You’re right that we have actually been able to cope with this headwind quite nicely in the first half.

And if you do the math with our famous kind of EUR 0.01 Euro-Dollar exchange rate means about EUR 1 million per quarter and you see it’s not such a material impact on the bottom line.

Youssef Essaegh – Barclays Capital

Okay. Yes, because the move is – year-to-date from your fiscal start of the year is a little bit above 2%. So, given your guidance is closer to 10% but still – yes, I mean it’s not a major drag on the bottom line anyway. The other thing is, if you can help us understand how you spent the CapEx this quarter between your spending on the 200-millimeter fabs and on the extension of the Dresden front? Thank you.

Reinhard Ploss

Yes. I think to put it very roughly, the majority of our investment is of course in our operations area, which means factory is basically – there is also a very significant amount outside that, which is our R&D capitalization you find some data on that in our annual report.

If you look at the OP invest then the rule of thumb is that, again they are the majorities on front-end but also an increasing part in back-end. So let’s say 60% or so front-end, very roughly. And then you take out off that 60% front-end, you can say that probably three quarters more or less in this fiscal year is capacity invest. And if you then split the capacity invest again, there is a kind of mix between 300-millimeter and 200-millimeter for power technologies which is the bulk of it and then a little bit of debottlenecking in the CMOS in Dresden and that’s it. So I think that gives you some feeling as to how our CapEx splits this year.

Youssef Essaegh – Barclays Capital

So if I do my rough math, it’s less than 20% of the CapEx that goes into 300?

Reinhard Ploss

Yes. Well, sorry, I forgot to answer to you on the micro. Yes, that order of magnitude is not a bad indication. Yes.

Youssef Essaegh – Barclays Capital

Okay. Thank you very much.

Operator

Our next question comes from Janardan Menon of Liberum.

Janardan Menon – Liberum Capital

Just wanting to narrow down a little bit on the margin trend, especially on gross margins. You’re guiding at about a 200 basis point increase in segment margins for fiscal Q3 if you take off the one-off effects. How much of that is likely to come from gross margin improvement? Are we likely to see that go up to the sort of 39% to 40% range? And what are the drivers of the gross margin at this point of time? Is it all capacity utilization increases, or is there – are you seeing any benefits from sort of higher ASPs move to sort of SOC kind of products etcetera, which you’ve talked about in your power discretes before? And as a follow-up to that, if you could also just give us, what do you expect your capacity utilizations to be? And what it was in Q2, and what you expect it to be in Q3?

Reinhard Ploss

Yes. So let me make some general remarks. Dominik will go into the details. We have started a significant productivity improvement program last year. So a substantial part of the improvements comes from there. Of course the overall utilization is significantly higher than last year, but it’s a compound effect. And as the divisions have different profit margins, also effects are coming from there, but Dominik will give more on that side.

Dominik Asam

Okay. So I mean the famous big chunk of inventory revaluation was in gross margin, but also a good chunk of the other non-cash effects were affecting gross margin. So very roughly, the bulk of the kind of adjustment we made down from 13.9% segment results as published, down to about 13% is actually in gross margin you can say, maybe even a little bit more.

And then from that, you can simply apply this operating leverage formula we have given to you, where we see that the increased revenues we’ve guided for the June quarter and then the normal seasonality would hint to increase in Q4 too, slight increase in Q4 too would give you a little bit of an uptick on gross margin. So maybe we can end the year with a percentage point or so higher than we currently run.

Janardan Menon – Liberum Capital

Okay. So the majority of it is going to come from operating leverage rather than gross margin improvement in future quarters?

Dominik Asam

Yes. We will have some increases in OpEx also, and that means that the fall through will come predominantly from the incremental revenues.

Janardan Menon – Liberum Capital

And just a small follow-up on your power management division. You’ve talked about strengthening in the wireless infrastructure, which many of competitors have pointed out as well. But given we’ve seen some commentary on improvement in PC demand etcetera. Can you just give us a few comments on how you’re seeing other areas in that division, both, PC servers as well as the smartphone area, both panning out over the rest of the year?

Reinhard Ploss

Market insights will be given by Arun.

Arun Mittal

Yes. Hi, Janardan. Yes, you’re right, with RF power business we are doing very nice. Reinhard mentioned that it’s very healthy growth year-over-year of 40% in that quarter. And the power business nevertheless remains a major part of the Power Management Group. Here we are waiting for Q3, Q4. All signs indicate that it will be a nice year going forward, considering all the launches of the platforms from Intel and so on. And therefore we remain optimistic that Q3, Q4 for the fiscal will be a good year.

Janardan Menon – Liberum Capital

Thanks a lot.

Operator

Our next question comes from Sandeep Deshpande of JPMorgan.

Sandeep Deshpande – JPMorgan

Yes, hi. Thanks for letting me out of the question. I have a couple of questions. Firstly, Reinhard, maybe you could help us with understanding what capacity you can supply to your customers by the end of this year or early next year, because you’ve had – you raised CapEx last year, and you’ve had some capacity constraints? And a follow-on to that is that you’ve been talking about these very high book-to-bills, I mean if the book-to-bill is that high, will you be able to meet the capacity requirements of your clients by the end of the – later in the year when then should be more crunch time in terms of orders? And a corollary to that would be that, to you, would that mean that you would need to raise CapEx? And I have one quick follow-up.

Reinhard Ploss

Yes. So Sandeep, thanks for the questions. What we are seeing currently that a lot of our tightness comes in the back-end, very selectively in the front-end. We are increasing capacity and are growing 300-millimeter. And we are very confident that we are able to meet customer demand in this fiscal year. So allocation should be so far I would say not allocation, but delivery tightness should be gone in the summer timeframe.

The overall revenue for which we have installed a capacity for fiscal quarter four, Dominik will give you an answer on the equivalent revenue possible.

Dominik Asam

Yes, I mean you see that if you take our guidance for the coming June quarter. We already kind of at run rates which are around EUR 1.1 billion. And we will then still ramp capacity to some degree with the money we have guided to spend this year, and will then kind of reach significantly above that. So very roughly, you could say that the run rate coming out of the fiscal year provided and that’s a very important provided that’s the structure is right.

There might be around EUR 1.2 billion in the end. That would mean that if you kind of gross it up to a full year, 4.8 plus is feasible with the capacity we’ve installed. And then your second question, will we need to raise CapEx compared to the current fiscal year? The clear answer is no, unless we just grow in the kind of normal range. We have indicated high single-digit. If we grow at the high single-digit rate, we definitely don’t see CapEx going up next year.

If it’s of course a boom where you see huge increases, it might change, but this is not what we see at present.

Sandeep Deshpande – JPMorgan

A follow-on to that, Dominik, would be that you’re seeing growth in areas where historically – this was not where you’ve invested substantially in the past, such as the MEMS Microphone. Also you’re seeing growth in non-power semiconductor areas. I mean from what I understood, one of the reasons for building your own capacity was the vertical transistors that you need to build yourselves. I mean some of – so does this – I mean the current growth trends you’re seeing in these non-power areas, does this not mean that you can do some more outsourcing, and thus improve the capital allocation slightly?

Reinhard Ploss

Well, Sandeep, Reinhard here. We always communicated that for our deep submicron technologies, we go 65 nanometers and below, fully outsourced. And of course everything which is chip card and microcontroller-related is subdued to the further growth to there. And we are not requiring a CapEx in order to grow, but this is a strategy which has been communicated already for some time and kicks in now.

On the other side, we do not see a specific growth that one or the other segment has more dominant. I think we even highlighted that power is growing and smart power for automotive is also growing. We saw with a very rough we are growing across the board.

Arun Mittal

And MEMS Microphone is in-house production by the way.

Reinhard Ploss

Yes, and here definitely for power, sensors and MEMS, we have a clear in-house manufacturing strategy for front-end and the selective manufacturing strategy for the back-end. So no big changes from a basic approach here. Only now the deep submicron becomes more and more effective.

Sandeep Deshpande – JPMorgan

Thank you.

Operator

Our next question comes from Sumant Wahi of Redburn.

Sumant Wahi – Redburn Partners

Hi, gentlemen. Thanks for taking my question. I had two. One, could you – just going back to the work in progress inventory revaluation, I was just wondering, is it possible for you to give us a little bit more detail about how this affected the different segment margins of Automotive, as well as IPC etcetera, so that I can understand where it is? I mean my read would have been that this is mostly Automotive, but please correct me. And then the second question I have is on the IPC side. I mean, if you hear some of your European customers specifically on the T&D side, they have been fairly moderate in their guidance and talking about the order book over there. And I’m just wondering if you could probably walk us through on the demand side of IPC, where you envisage the strength for the next four quarters coming from and where do you see relative weakness, and a bit of a geographic detail would be really helpful? Thanks.

Reinhard Ploss

Okay. So the special effects of inventory revaluation will be answered by Dominik. Arun will give an insight on the IPC.

Dominik Asam

So, on the inventory revaluation topic, as I mentioned there are other negative effects against that. It’s really not worthwhile assuming it’s materially different from division to division. You can really do it on a pro rata revenue basis if you want to kind of reduce it from 39% to 30%, you take that off pretty much the same way in all the divisions, you don’t go wrong.

Sumant Wahi – Redburn Partners

Okay. So the 18% margin jump on the IPC was primarily because of higher revenue?

Dominik Asam

Better mix in higher revenue, yes.

Sumant Wahi – Redburn Partners

Okay.

Arun Mittal

Yes, Sumant on the IPC question. We don’t see a major change. I think drives remains slow. It’s not picked up as compared to traction. Traction we see a nice big boom. However the ratio of drives and renewables will remain to 40% and 20% respectively as part of IPC’s business which Dr. Helmut Gassel had recently also I think talked to all of you.

Sumant Wahi – Redburn Partners

And in terms of geographical details, could you mind giving us a little bit on Europe versus China?

Arun Mittal

Yes, clearly we see here a pull from China much ahead of the rest. Europe seems to be coming on. And we have to be always careful when I make that comment, because trains are primarily ordered in by customers in Europe, but they are for China. So there is a bit of mixture there which one has to keep in consideration behind these statements.

Sumant Wahi – Redburn Partners

Thank you.

Operator

Our next question comes from Gareth Jenkins of UBS.

Gareth Jenkins – UBS

Thanks. Just one follow-up if I could on earlier one, and then a slightly different one, but I wondered if you could just give us a sense of when you expect an inflection in content growth within autos? It’s obviously been fairly stable historically, but the more we see hybrid and electric vehicles, I know it’s fairly small in the mix for now, but when do you expect to kind of an inflection in that content growth going forward? And then secondly, I just wondered if you could give us just a sense of what’s going within the renewables business? I think you called out Chinese wind being slightly weaker. I just wondered if you could give a sense of what’s happening in the European renewables market in particular. Thank you.

Reinhard Ploss

Yes, Gareth. The inflection to auto. It’s interesting question. I think we already passed an inflection point in history where we have seen a content growth between 6% to 8%, while the number of car growth was 1% to 2%. This has changed significantly, and the productivity gains and reduction in borne [ph] by this were eating into additional semis. And now what we see is that with the demand for electric cars or hybrid cars, there can be significant upside, but still the percentage of those cars is extremely low even so the number of, I would say, comments everywhere is higher.

What we definitely expect that the growth in security and power train will be the higher security of course includes the advanced driver assistance systems. So I don’t think there won’t be big growth except China will be coming up with electric vehicle, but here the impression even from the recent trip to China is that, I think the will is there, the concept is still missing how to execute on it.

And then the renewables, Arun will answer.

Arun Mittal

Okay. So Gareth on the wind power, we’re very well positioned in China particularly with our collaboration with Goldwind for example. So there is movement there in China happening for renewals overall, solar as well as wind. And there we are benefiting from that.

On the global scale, clearly wind will grow smaller percentages than solar. The last report which we know from IHS says that, solar is expected to grow around 13%, where wind is about CAGR of 2% for the next four to five years.

And having said that, we also see that governments in Europe for example are continuing to push their plans of increasing share of renewables. For example in the U.K., there is a clear plan to go up to 20 gigawatts of electric energy by 2020. And this is – if it all goes as planned, than sooner or later it has to – it will have an impact on our business too.

Gareth Jenkins – UBS

Thanks.

Operator

Our next question comes from Stéphane Houri of Natixis.

Stéphane Houri – Natixis Securities

Yes. Stéphane Houri from Natixis. I have two questions, if I may. The first one would be the traditional question about Qimonda. If you could make an update, especially in the light of, kind of negative judgment against Micron. If you could give us some color about that, that would be great. And I also wanted to talk about one of your comments in the Chip Card and Security business. You were talking about NFC in China. Could you be precise, if you were talking about SIM card or embedded Secure Element? And on that subject, I know it’s a kind of niche subject, but could you give us your view on the host-card emulation technology, and if it can have an impact on your Secure Element hardwire business? Thank you.

Reinhard Ploss

Okay. Stéphane, Qimonda will be answered by Dominik. And Arun will comment on the NFC.

Dominik Asam

I mean relating to the process Micron regarding Inotera and Qimonda. I think I can’t comment on that. The only point is that of course the stake Qimonda held in Inotera was sold for EUR 400 million. As you know, there is a debate, that the insolvency administrator is arguing that we have not contributed in kind to Qimonda business worth EUR 6.5 million but much less, the stake alone was sold for EUR 400 million. And now there is a debate whether that was too cheap. So that is not an indication that would in any way affect us negatively I’d say. So it’s actually neutral, if not positive, because somebody says this was too cheap, it must have been valued at a higher price, otherwise there was really no big moves.

There were some – of course there is always kind of exchanges of information going on which needs to be evaluated, but as you might have seen, we’ve not done anything in the reserves to some meaningful degree. So there was nothing really new on the Qimonda front. And unfortunately nothing new to report with regards to any progress related to a settlement.

Stéphane Houri – Natixis Securities

Okay.

Arun Mittal

All right, on the chip card part, the NFC part. So here we are seeing definitely good traction and you hit the point when you talk about Chinese market. NFC-enabled SIM cards is where we are seeing most of the activity. And those of course coming with Secure Elements.

And the second part is on the global basis and specifically saying global, I do not want to go into the details of the names of the customers. NFC-embedded Secure Elements and flagship devices at various smartphones manufacturers. Also we’ve had some design wins recently. So both are driving the NFC-based business including Secure Elements.

To your second question on HCE, the host-card emulation. Essentially it’s a software-based enabler for use case for mobile payments, or I think it will trigger the use of mobile payment which is all good news. However in the long run, we do believe that for security, also in the hardware, will be a must. And here we hear from our customers the big ones who are in this active, they clearly are going with both solutions HCE plus NFC-based with Secure Element. So I think the jury is still out on that. And if you would ask my opinion, I would say, a combination of software plus hardware-based security will be the winner in the long run.

Stéphane Houri – Natixis Securities

Okay. Thank you very much.

Operator

Our next question comes from Günther Hollfelder of Baader Bank.

Günther Hollfelder – Baader Bank

Hi. Many thanks. I actually have two questions. The first one is on the margins in Automotive, which were a bit higher than I expected given the usual price decline you see at the beginning of the calendar year. And the second question would be on 300-millimeter. You highlighted the negative impact again on the margins. Could you provide us with an update on the ramp up? I understand that you’re focusing mainly on CoolMOS right now given here your competitive edge with the Superjunction. But at the same time, I think you’re also gaining some momentum on the OptiMOS side. An update here, what you see right now, what products are transitioned to the 300-millimeter would be great? Thanks.

Reinhard Ploss

Okay. Margin in Automotive, Dominik will answer. And 300-millimeter I can answer right away. I think we are making progress in 300-millimeter. Yes, you’re right. We are doing mainly CoolMOS, but we are also having a volume on discrete IGBTs already transferred and ramping and the next generations or the next technologies to follow, is as said the major junk of technologies to be ramped as IGBT in general. And the current revenue is in the range of double-digit cumulated, millions of course, yes.

Dominik Asam

And regarding the margin development at ATV. Yes, you’re absolutely right. Q1 is the one where – which is most strongly affected in ATV. And if you look at the increase sequentially of revenues versus segment result margin, you figure out that actually ATV was below Group average. Hence you have to take into account the special effect I have hinted too, which is about a percentage point or so. And if you do that, I hope that your model is not so much off any more.

So yes, ATV was kind of not having seen such – enjoying such a big fall through of the incremental revenues into bottom line because of stronger price decline, especially if you adjust for the special effect from that one percentage point or so we have discussed.

Günther Hollfelder – Baader Bank

Okay. Thank you.

Ulrich Pelzer

We have time for two additional questions please.

Operator

Our next question comes from David O’Connor from Exane.

David O’Connor – Exane BNP Paribas

Yes, good morning guys. Thanks for squeezing me in. Just one more of a clarification on my side. Dominik, I think previously you said your usual seasonality for the business is Q1 down 5%, up 5%, plus 4% and plus 4% for Q4. I was just trying to – maybe help me reconcile your implied guidance for Q4 at the moment is kind of flat to up. I’m just trying to understand, to you, how does that reconcile with the usual seasonality of plus 4% in Q4? And also then, when I look at peers, your closest U.S. peers. They seem to be at plus 3% in Q4. So you can just help me understand that? Thanks.

Reinhard Ploss

First of all, let’s not be artificially precise here. Some of our U.S. competitors indicate margin – sorry, revenue growth guidance of 9 percentage points wide here. So first point. The second point, the numbers you mentioned are simply the 10-year averages or so of the sequential development of Infineon and things can change. Thirdly, we had a very strong March quarter with 7% up sequentially, which is very good.

We have guided basically 4% to 8% for the June quarter, which means normal seasonality and better. And now please allow us to kind of wait for the guidance for the Q4. We will go up, yes, but how much exactly, we’ll tell you at the end of the next quarter.

David O’Connor – Exane BNP Paribas

Okay. And maybe just one follow-on on OpEx. So for the remainder of the calendar ‘14, how should we thinking of OpEx?

Reinhard Ploss

Very moderate increase. There is nothing dramatic happening.

David O’Connor – Exane BNP Paribas

Okay, great. Thank you.

Operator

As there are no further questions at this time, that will conclude today’s conference – or today’s question-and-answer session.

Ulrich Pelzer

Perfect. I think this is first in many, many years that we managed to actually answer all questions in the queue during the call. We’re very happy about that and we’ll try to do that again next quarter. For this round, thanks very much for dialing in for your interest and your questions. Talk to you again in about three months. Bye-bye.

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