Infineon Technologies' (IFNNF) CEO Reinhard Ploss on Q1 2016 Results - Earnings Call Transcript

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Infineon Technologies AG (OTCQX:IFNNF) Q1 2016 Earnings Conference Call February 2, 2016 5:00 AM ET


Juergen Rebel - Corporate VP, IR

Reinhard Ploss - CEO

Dominik Asam - CFO

Arun Mittal - Member, Management Board


Gareth Jenkins - UBS

Sandeep Deshpande - JPMorgan

Pierre Ferragu - Bernstein

Janardan Menon - Liberum Capital

Francois Meunier - Morgan Stanley

Jerome Ramel - Exane BNP Paribas

Adithya Metuku - Bank of America Merrill Lynch

Johannes Schaller - Deutsche Bank

Andrew Gardiner - Barclays

Achal Sultania - Credit Suisse

Amit Harchandani - Citigroup

Guenther Hollfelder - Baader Helvea Equity Research


Welcome to the conference call for analysts and investors for Infineon Technologies' 2016 fiscal first quarter results. Today's call will be hosted by Juergen Rebel, Corporate Vice President Investor Relations of Infineon Technologies. As a reminder, today's call is being recorded.

This conference call may contain forward-looking statements, based on current expectations or beliefs, as well as a number of assumptions about future events. We caution you that statements that are not historical facts are subject to factors and uncertainties, many of which are outside Infineon's control, that could cause actual results to differ materially from those described or implied in such statements. Listeners are cautioned that Infineon's actual results could differ materially from the results anticipated or projected in any of these statements and they should not put undue reliance on them.

For a detailed discussion of important factors that could cause actual results to differ materially from the statements made on this conference call, please refer to our quarterly and annual reports available on our website.

At this time, I would like to turn the call over to Infineon. Please go ahead.

Juergen Rebel

Good morning, ladies and gentlemen. Welcome to the conference call for analysts and investors for Infineon Technologies' 2016 fiscal first quarter results. With us today we have Reinhard Ploss, CEO; Dominik Asam, CFO; and Arunjai Mittal, Member of the Management Board, representing regions, sales, marketing, strategy development and M&A. We'll start with an introduction by Reinhard and then the entire Management Board will be happy to answer your questions.

A recording of this conference call and a copy of our 2016 fiscal first quarter results and earnings press release will also be available on our website at Reinhard, please go ahead.

Reinhard Ploss

Thank you, Juergen. Good morning, everyone. Welcome to the telephone conference for our first quarter fiscal year 2016 results. I will begin today's call with some remarks on Group and division results, on market developments and on our achievements during the quarter; Dominik will then comment on financials, before I conclude with the outlook. After that, we're happy to take your questions.

Let me begin with Group performance in December quarter. Revenue came in better than expected; they declined sequentially by only 3% to €1.556 billion. This represents a more moderate than normal seasonality for the December quarter. It was driven primarily by strength in automotive. But also, the segment's power management and multi-market and chip card and security performed better than normal seasonality for a December quarter.

Segment result came in with €220 million, representing a segment result margin of 14.1%. The book-to-bill ratio for the first quarter came in at 1.1. The absolute booking figure stood at a solid €1.7 billion. Let us now take a look at the divisions. Before I start the divisional review with automotive, let me draw your attention to an organizational change we have implemented.

The responsibility for our 32-bit ARM-based industrial microcontroller XMC family shifted from the division automotive and chip card and security to a joint responsibility of the division's power management and multi-market and industrial power control on October 1. Accordingly, functional costs and revenue were reassigned.

As a consequence, the numbers for the September quarter were backward adjusted to make them comparable and differ slightly from the numbers we had published in November. Going forward, the XMC family will play an integral part of our strategy approach product to system in PMM and IPC. The responsibility in go-to-market lies now with these two divisions.

Now, automotive. Automotive revenue came in flat at €614 million for the quarter. Booking was strong during the quarter with a book-to-bill ratio coming in at 1.2. A solid order entry confirms the strong traction we saw in the automotive business during the quarter and will support the seasonal upswing in the current quarter. The segment result decreased to €81 million from €102 million in the previous quarter; this translates in to a segment result margin of 13.2%, compared to 16.6% in the September quarter.

Primary reasons for the decline in segment result were negative currency effects on both production costs and inventory, as well as some ramp-up costs for our new 200 millimeter Kulim 2 production facility. A strong driver of the solid revenues in December quarter was electric mobility. After many years of investment, we're very happy to see that electric drive trains for hybrid or battery driven vehicles are reaching meaningful numbers in the Chinese market.

The Chinese Association of Auto Manufacturers expects that in 2016 the number of so-called new energy vehicles sold in China could more than double, compared to 2015, to about 700,000 units. The majority of these vehicles are passenger cars, where local Chinese brands play a dominant role. We benefit in many ways from this trend.

Firstly, we're very strong in modules for passenger vehicles with Chinese customers. Secondly, we have also made modules for the commercial sector, mainly electric buses in China from APC, also featured in our last quarterly presentation. During the quarter, we could further strengthen our leading position in applications contributing to CO2 reduction.

Infineon's next generation camshaft sensor was chosen by a leading European tier 1 for its new generation of engine speed sensor platform. Besides, I'm very proud that we could achieve a major breakthrough in the Japanese market. A leader Japanese tier 1 selected our next generation 32-bit AURIX [ph] microcontroller for their new engine management and transmission platform.

Let us now take a look at industrial power controls. IPC generated revenues of €249 million, compared to €271 million in the previous quarter.

The quarter was affected by typical seasonality and product segment drives traction and renewables. In major home appliances, we experienced temporary weakness due to still very high inventories at OEMs. However, we're convinced that we have won further market share in December quarter as the Japanese market, where we have limited exposure, was very weak.

The book-to-bill ratio came in at 1.1 in the December quarter, pointing towards a typical seasonal upswing for the March quarter. The segment result declined to €23 million, compared to €39 million in the September quarter. This translates into a segment result margin of 9.2%. On top of the normal operating leverage, with lower revenue came a less favorable product mix and ramp-up costs for the 200-millimeter Kulim 2 facility.

A great highlight were the Paris climate agreement. This accord substantiates our excellent prospect for renewable energies further. As an immediate consequence, the subsidies for photovoltaic installations in the U.S. were prolonged for five years to 2022. Besides, key customers using our PrimePACK modules for photovoltaic inverters received large orders for utility scale plants in the U.S. Given our leading position in both solar and wind energy inverters, we remain very bullish for this sector.

Now, let me comment on power managements and multi-market. Revenues of PMM decreased by only 5% and came in at €510 million. The less-pronounced seasonal decline than typical was driven by a strong power management business which counterbalanced a weak business with components for smartphones. The strength in power was driven by a strong DC-DC business.

We saw excellent demand from server customers and a very strong medium voltage business. A key application in the medium-voltage class are low voltage drives; you find those in power tools, drones and robotics. We observed general trend in this area that such drives migrate to brushless DC motors that require multiple power [indiscernible] for motor control.

Besides, we also had a strong distribution business, where we saw general replenishment and a strong sell-through business. Also, we enjoyed a nice net back in shipments of power amplifier for wireless-based stations. The book-to-bill ratio stayed at 1.1. The PMM segment result declined seasonally to €79 million, translating in to a segment result margin of 15.5%. Besides a less favorable product mix, inventory effects and ramp-up costs for Kulim 2 had a negative impact on the segment result also for PMM.

During the quarter, we could strengthen our leadership in power components for server application with further design wins for the VR 13 next generation platform. We could also broaden our customer base with components for smartphones. We're very happy that we were awarded with multiple design wins for our RF components in flagship models of major Chinese brands.

Let us now move on to chip card and security. Revenues decreased by only minus 4% to €173 million. Our business experienced a much better quarter than typical seasonal mid-teens to percentage decline in December quarter. On a year-on-year basis, this amounts to a high revenue growth of 31%. This revenue development was due to an increasing demand for Infineon solution for payment applications in China and excellent business with embedded security elements and trusted platform modules.

The book-to-bill ratio came in at 0.9. But you should bear in mind that we still have a high order book from previous quarters, when customer placed a higher share of long term orders. Segment result declined slightly to €35 million, resulting in a segment result margin of 20.2%. During the quarter, we solidified our leading position in trusted platform modules. We secured 100% share in our recent projects at two leading notebook makers. Likewise, our strength in embedded secure elements was further underlined by business wins at Samsung and Lenovo.

We supply embedded secure elements to the latest Samsung Gear S2 smartwatch and Lenovo's Vibe P1 and Vibe X3 smartphones. We could also broaden our customer base for our e-ticketing solution based on CIPURSE, the only open security standard for secure fair collection solutions.

In addition to the recent business win at Barcelona's public transport project, we were awarded with a design win for our CIPURSE-based products at a major Latin American city's transportation project. With respect to Internet of Things, our IoT security solution, OPTIGA Trust, was awarded with two SESAMES awards. SESAMES awards are the security industry's most prestigious awards.

Ladies and gentlemen, this concludes the business review. Let me now hand over to Dominik, who will comment in more detail on first quarter financials.

Dominik Asam

Thank you, Reinhard. And good morning, everyone. First quarter revenues were €1,556 million; a sequential decline of €42 million or minus 3%. The average U.S. dollar/euro exchange rate for the quarter was about $1.09 to €1 and, as such, broadly in line with our assumption. Gross profit, research and development and selling, general and administrative expenses continue to be influenced by the effects of the consolidation of International Rectifier.

Gross profit declined to €558 million from €624 million in the previous quarter. This represents a sequential decrease by €66 million, resulting in a gross margin of 35.9%. R&D expenses stayed essentially flat at €198 million. SG&A expenses decreased by €15 million to €200 million. Included in these numbers are €54 million of non-segment result charges. Of that amount, about €45 million are International Rectifier acquisition-related amortization and other charges. This amount includes a credit of €30 million which is related to a reversal of provisions and impairments in conjunction with the closure of the Singapore Techview facility. €27 million of the International Rectifier acquisition-related cost hit our cost of goods sold.

In R&D and SG&A, we booked acquisition-related charges of €4 million and €24 million, respectively. These predominantly include amortization of acquisition-related intangibles; special retention plans during the integration phase; and other integration expenses. Excluding acquisition-related and other non-segment result effects related to International Rectifier, the gross margin stood at 37.6%.

We recorded a segment result of €220 million for the December quarter; a decline of 23% quarter on quarter. The segment result margin came in at 14.1%. The reasons for this reduction are primarily seasonally lower revenues and negative currency effects on both inventories and production cost. The product mix and ramp-up cost for our 200-millimeter Kulim 2 factory also played a role. The operating income decreased to €166 million from €203 million in the September quarter.

The non-segment result improved significantly, from a negative €83 million to a negative €54 million. The still meaningful negative non-segment result was again predominantly a result of the already-mentioned acquisition-related expenses.

Now let me comment on depreciation and amortization. It remained flat at €211 million. Included in this figure are €37 million related to the amortization and depreciation of fair value step-ups from the purchase price allocation.

The financial result continued to be driven by financing expenses for the acquisition of International Rectifier and showed a negative figure of €12 million. Continuing with tax, we recorded an income tax expense of €2 million in the December quarter, this represents an effective tax rate of 1.5%, due to taking effects from purchase price allocation and deferred tax assets in to account. Nevertheless, the cash tax rate is expected to be about 15%, going forward.

Net income from continue operations declined to €152 million; down by €170 million from €322 million in the September quarter. As you might recall, the net income in the September quarter contained a €209 million reversal of previously written-off deferred tax assets. The net income from discontinued operations was again negligible. Basic and diluted earnings per share came in at €0.14 for the fiscal first quarter; down from €0.29 in the fourth quarter of the fiscal year 2015.

The adjusted earnings per share improved by 6% to €0.17 for the fiscal first quarter, compared to €0.16 in the previous quarter. Free cash flow from continue operations was zero, compared to €177 million in the September quarter. The net cash provided by operating activities came in at €175 million, compared to €429 million in the September quarter. At the end of the December quarter, the gross cash position stood at €1.994 billion, slightly decreasing from €2.013 billion at the end of the September quarter. Our net cash position decreased slightly to €204 million at the end of the December quarter, after net cash position of €220 million at the end of the September quarter.

Let me also address our after-tax return on capital employed or ROCE. It stood at 12% in the fiscal first quarter, after 26% in the fourth quarter of the last fiscal year. The decline is essential driven by the reduction of net operating profit after taxes by about one-half. Please note that besides the lower segment result, the reversal of write-offs of deferred tax assets had a significant positive impact on that number in the September quarter.

ROCE was again strongly affected by bookings related to the acquisition of International Rectifier, in particular, goodwill; fair value step-ups in the context of the purchase price allocation; and the related amortization.

Let me now hand back to Reinhard, who will comment on our outlook.

Reinhard Ploss

Thank you, Dominik. Let me now come to the outlook for the fiscal second quarter. We expect a typical seasonal upswing which leads to revenues improving 3% sequentially, plus or minus 2 percentage points. This is based on a rate of $1.1 against €1. We expect revenues in ATV, IPC and CCS to increase, while power management should slightly decline compared to the December quarter.

As a midpoint of the revenue guidance, the segment result margin should come in at 13% as every year the pressure on Q2 margin is predominantly a result of the annual contract prices coming in to effect, effective January 1, on a large portion of our revenue base. For the full 2016 fiscal year, we confirm our guidance and expect a growth rate of about 13%, plus or minus 2 percentage points year over year; the segment result margin of 16% of sales, at the midpoint of that range.

On a comparative basis, we still want to grow close to our trend line growth rate in this fiscal year. With regards to investments, we defined as some of outlays for property, plant and equipment and intangible, as well as capitalization of R&D spending, our budget remains unchanged at €850 million. We also continue to expect depreciation and amortization of approximately €850 million for the fiscal year 2016. Therein included are approximately €135 million related to the purchase price allocation.

Ladies and gentlemen, the first quarter of the 2016 fiscal year has shown, once more, the strength of our well-diversified business across end markets, customers and regions. There were many concerns in the market regarding the economic development in China, certain end customers or a general weakness in the smartphone market that may have an adverse effect on our business. However, our numbers show that our business model proves resilient.

Whilst we experienced the impact of a slowdown in a certain end markets, like smartphones and major home appliances, we saw an acceleration in other end markets, such as electric drive train; DC-DC application, like server and low-voltage drivers; power amplifier for wireless base stations or embedded secure elements; and trusted platform modules.

Beside this, we continue to believe that growth ultimately creates the highest value for our shareholders. This often requires patience when investing into long term trends. Electric drive train for low-emission vehicles is an excellent example. It has taken many years of investment, but now we see volumes becoming meaningful, driven by China; poised to become the largest market for electric or hybrid vehicles in the world.

Our three pillars, system leader in automotive, number one and technology leader in power semiconductor and leader in security solutions, are the foundation for our future success. During the quarter, all three pillars were further strengthened with some major breakthroughs for long term success. We're, therefore, really excited about the future of our business.

Ladies and gentlemen, this concludes our introductory remarks and we want to open the call for your questions. And with this, back to Juergen.

Question-and-Answer Session


[Operator Instructions]. We will take our first question from Mr. Gareth Jenkins from UBS. Please go ahead. Your line is now open.

Gareth Jenkins

A question for Dominik. It's around the forward quarter margin guidance and really full year. Can you give us a sense of the moving parts on the forward quarter? How much is product mix versus OpEx increase, based on FX, versus the annual price-downs? And what gives you the confidence in the reiteration for the full year? Looks like your second-half margins will have to be high 'teens to get to 16%. How do you feel - where's the confidence coming from that gets you there? And then, I have a follow up. Thank you.

Dominik Asam

I'm not quite sure whether I understood the first half on the Q4 question. You talk about calendar Q4 now; is that the reason why I'm lost?

Gareth Jenkins

Sorry. I'm talking about your forward quarter guidance for Q2.

Dominik Asam

The Q2 guidance versus the Q1 guidance, yes. This is pretty much related to the unusual price decline we see in the March quarter. And by the way, if you compare prior year you have to be careful that in the Q1 there was a significant one-off charge of €40 million in the Q1. So that step-down was not as significant as it normally looks there, so it's actually a pretty typical price-down for Q2.

And then, for the full year you asked the question how can you get to the full year numbers. You are right, that we need to see a significant margin expansion in the second half compared to the first half. But again, this is pretty typical for our seasonal pattern.

Again, if you look at last year you will see that the first half was significantly below second half; and that was despite the dilutive effect of International Rectifier which hit the second half more than the first half. So, from that perspective, it's ambitious, certainly, but it is in line with prior years. And we also see a very solid booking situation which should support that recovery.

Gareth Jenkins

And just a follow up on one of the other factors affecting profitability in the quarter. Could you talk to the costs of the Kulim 2 ramp and how you see those phasing out as the products from ramps?

Dominik Asam

Yes, I think they are pretty minor still in the December quarter; and they will slightly increase over the quarter in Q2 and then stay at that level. There will be no major changes on that or improvement, I'd say, over the course of the current fiscal year, because the loading will still take some time to really fill the factory. So it's a minor issue actually if you compare sequentially the development from Q2 through Q3 and Q4.


We will take our next question from Sandeep Deshpande from JPMorgan. Please go ahead. Your line is now open.

Sandeep Deshpande

I have two short questions. Firstly, my question is on the chip card business. You've had a very strong performance for the last couple of quarters in chip card; how do you see the development of chip card through this year? The margin you are showing in chip card is well beyond what you used to historically show and so there seems to have been a step change in this business. That's my first question.

And my second question is regarding the industry and how the industry is reacting in a weak China environment. Do you see incremental price pressure because of that or is it that it's as it was before? Do you see a changed pricing or demand environment because of what's happening on the macro picture? Thank you.

Reinhard Ploss

The chip card business we're very happy to comment on, because you know we have had a much weaker chip card business. But here, many effects were coming in. Our rolled over portfolio accelerated the shrink and expanded also the outsourcing share; and last, not least, also changed the way we go to market. All these effects are coming together and we're very sure that we will be able to maintain at that revenue stream chip card comes in the earnings level for the next quarters. The industry will be commented by Arun.

Arun Mittal

Sandeep, on the pricing, we don't see any extraordinary behavior. It is just like every year, in the first quarter of the calendar. And, in fact, two weeks ago I was coming back from China, having celebrated our €1 billion revenue per year target which they met one year before time. So the mood is good and business is normal.


We will now take our next question from Pierre Ferragu from Bernstein. Please go ahead. Your line is now open.

Pierre Ferragu

You noted that currency effects on the cost side impacted your first quarter segment result. Could you give us a bit more detail around this and remind us of your main currency sensitivities? Thank you.

Dominik Asam

Yes, the main impact actually came from the extremely high volatility in the Malaysian ringgit. In our inventory valuation there is a little bit of a trailing averaging in there. And, basically, as the Malaysian ringgit had strongly depreciated in the two prior quarters that basically led to a reduction in inventory and that is P&L relevant. So that's about it.

And that affected - there was actually a positive effect in the prior quarter and so the September quarter and a negative effect in December quarter and that had a certain sequential reduction - that triggered a certain sequential reduction.


We will now take our next question from Janardan Menon. Please go ahead. Your line is now open.

Janardan Menon

Just want to go back to the margin progression a little bit. I'm just wondering, if most of the margin hit in fiscal Q2 is coming from the price negotiations and the pricing pressure, how does that swing back so fast in the next quarter? How are you able to neutralize that effect and then rise to - you need to almost get to about 18% margin in the latter half of the fiscal year.

So what exactly is the dynamics of that, taking care of that price pressure so fast? And in your margin guidance in the second half, especially in fiscal Q4, would you be counting on an increase in utilization in the 300-milimeter fab at all as a positive tailwind to help you in your margin progression?

Dominik Asam

It's a multitude of factors which will drive the recovery in the second half. First and foremost, of course, the absence of the headwind from the annual price reduction and the productivity improvements we have to achieve every single quarter. So, basically, you'll see productivity kicking in against less price reduction because most of the customers are then already phased over, so to speak, to the New Year.

Secondly, very significantly of course, the volume ramp will drive margin expansion, that's certainly the biggest impact there. And last, but not least, there are also some operational improvement measures which we're still implementing at International Rectifier and other parts of the Company.

And then, the multitude of smaller factors. It's really not one single big thing, but it's various factors which will support that recovery.

Janardan Menon

And in the previous quarter you'd said that by the end of the year you should be at about 25% or so, of utilization in the Dresden fab, up from 10% or so. Is that still the way we should be looking at it?

Dominik Asam

I think that was not for 2016. We said that in 2017 we want to reach - within FY17 we want to reach the cost breakeven and that should be about 25%, 30% loading. So that's what we have to achieve in next fiscal year.


We will now take our next question from Francois Meunier from Morgan Stanley. Please go ahead. Your line is now open.

Francois Meunier

Actually, I was wondering about this margin guidance, as well, for Q2, for the March quarter. Basically, it implies gross margins of 34%, 35% which actually is not that much higher than STMicroelectronics. So I was wondering if there anything going on with the inventories as well. Because I think I asked the question actually last quarter again, inventories have crept up another 5% this quarter. I was wondering if it's normal or if you think that you are going to normalize this number by the end of this year.

Dominik Asam

Inventories, first of all, we're actually very happy that we have a solid inventory position to sustain the volume ramp which we anticipate for the second half of the fiscal year. We don't see any major charges or something looming because of excess of inventory; that's not the case. So, from that perspective, we're happy with the inventory situation.

There are some buckets where we might be a little bit high, there are others where we're still a little bit constrained, but average temperature of the hospital is okay. We see that as quite normal in terms of the seasonal demand. And again, as you mentioned, we need a significant recovery in the second half and that will require certain volume ramp; and we need that inventory to sustain that.

Francois Meunier

Okay. Maybe just a quick follow-up question about the microphones, MEMS microphones. You had a strong ramp last quarter; if you could give us a bit of an update on what's going on with this new big product for you.

Arun Mittal

Okay. Francois, yes, our microphone business is in line with the smartphone business Reinhard talked about in his introduction speech, that we see also the slowdown there in smartphones overall. So it's absolutely in line with that.

Having said that, the pipeline for design-in for the new models, particularly with our Asian customers, is looking very healthy and, therefore, we remain upbeat on a year-to-year comparison that we will see decent growth.


We will now take our next question from Jerome Ramel from Exane. Please go ahead. Your line is now open.

Jerome Ramel

A question on IPC, if you could give us a little bit color on the different sub-segments. You say that you will see some inventories direction in home appliances, but for the other segment, drive, renewable energy, if you could give the speed between solar and wind turbine and also the trend, that would be helpful.

Arun Mittal

Okay, Jerome, no change in the principle. We're excited about renewables, as Reinhard mentioned. The discussions which took place in Paris are just giving us the tailwind which we need. But as you can imagine, this is more for the midterm.

In the short term, we see that the benefit from the change - or the extension of the tax benefits in the U.S. for renewables is also coming our way. So here, on the renewables overall, be it solar or wind, we see very nice tailwind in both these areas, in U.S., as well as from China.

In the industrial sector, classical drives, other than the home appliances, we also see stable business. There, particularly, the expansion towards the West Coast or inland in China, takes place by the companies. We ride the wave with our customers, who have also been giving some guidance in the last weeks. So, these two form a major portion of the IPC business.

Last, but not least, you asked about traction. With an increase in rail activity, we're - our backlog is very, very healthy. But we're also seeing that some more orders should come in the next six to 12 months, if China will fulfill its ambitions of a high-speed network which so far they have been pretty much on track. All three, I think, leads to the fact that in IPC we will see a year-to-year growth, as predicted earlier.

Jerome Ramel

And maybe just one follow up. If I look at the margins of the sub-segments, the most profitable division is chip card right now. Also, within PMM it's probably the non-power business which is more profitable.

My question is, going forward and with your guidance of EBIT margin through the cycle of 15%, how sustainable do you think it is? Because if I look at the picture right now, while your best performing division in term of margin are coming from more volatile division rather than the power, so just like to understand how confident you are with the sustainability of the margin from the non-power business?

Reinhard Ploss

The total power business is definitely overall profitable. We do not report on the power as a sum. And when you look in to the numbers, we have already addressed that IPC is suffering significantly from the integration of the IR business. Here, we expect over the time, as we can recover and you look back some time the margins of IPC were very solid. So we believe that we will, say, work through these challenges on IPC, bringing this, over the time, back.

Regarding PMM, I think here the total business is quite positive. The differences between power and non-power are there. The highly innovative silicon microphone shows stronger numbers. But here, we see that we still have a huge potential in order to grow the business, although the non - well, the Chinese and others. So we do not see it as volatile as the typical mobile business.

Just to say some numbers on IPC, we're pretty sure that IPC will come back over 15%, after having ramped the intelligent power modules for major home appliances and others. Here, what we expect, that the margin is - or the overall segment result will be significantly supported by the growth which is to be expected, as we have it typically over the year.


We will now take our next question from Adithya Metuku from Bank of America Merrill Lynch. Please go ahead. Your line is now open.

Adithya Metuku

I have a couple. Firstly, for the March quarter revenue guidance you said your book-to-bill ratio was 1.1. If I look at the historic book-to-bill ratios, in December 2012 you had book to bill of 0.95 and you did 8% sequential growth. In December 2013, when it was at 1.1, you did 7% sequential growth. In December 2014, it was 1.1 and you did 9% sequential growth.

Now, you have a similar book-to-bill ratio, but you're guiding for 3% sequential growth. It looks really conservative, so can you explain the - can you talk a bit about what's driving that?

Secondly, if you assume normal seasonality in 3Q and 4Q, on your sub-seasonal revenue guidance for 2Q your full-year revenues would growth by 15%, but you have kept your full-year revenue guidance unchanged at 13%. Again, it just looks a bit conservative. So, if you could explain how you're looking at demand trends, that would be really useful. Thank you.

Arun Mittal

Adithya, you are 100% right. There were quite a bit of numbers you threw out there, I'm sure I didn't catch all of them; but I have my own set of numbers which let's see if you can catch. Q4 to Q1, typical seasonal is minus 6% and we saw only minus 2%, as you saw in the reporting recently. Here, you see, very clearly, that we're ahead of the trend, very positively. Whereas, Q1 to Q2 typical is plus 5% and we're guiding at 3%, plus minus 2 percentage points, as Reinhard indicated in his speech.

Yes, it could become plus 5% or it could be higher, but with Chinese New Year round the corner and PMM's business being highly dependent on Asia which is nearly 70%, we think it is safe to look in to the details there and be a little bit more conservative in terms of guidance. But, yes, plus 3%, plus or minus 2 percentage points, is the guidance out there.

All in all, considering the areas in which we're active which is the growth in automotive which Reinhard talks about, whether it is electrification of the drive train or a reduction of CO2 footprint or in chip card tailwind, as well as a gain in share that we're experiencing, we think will be helping us to achieve the forecast which we have guided for, for the full fiscal year.

Adithya Metuku

I kind of get the conservatism for the March quarter. But on the sub-seasonal revenues for the March quarter, even if you assume normal seasonality in the remaining two quarters of the year, I struggle to see how you can only do 13% growth and not 15%. Are you expecting some kind of demand to drop down in the second half of the fiscal year? Or is there anything I'm missing?

Arun Mittal

No, not really. I certainly hope you will be right. It's just that we prefer to be guiding in the manner that we have always done which is stay conservative and achieve those numbers which we guide for. And so much uncertainty out there three quarters from now, so that is the reason why we're guiding.

Earlier half of the Q&A, Dominik was, I think, trying to explain why we're sure we will meet the bullish numbers in the second half. And your question indicates that on the revenue you think we're too conservative. So, yes, somewhere in the middle is the truth. And I feel, at the moment we're conservative on the revenue side, but we should be able to meet it if there are no other negative surprises from the macroeconomic scene.


We will now take our next question from Johannes Schaller from Deutsche Bank. Please go ahead. Your line is now open.

Johannes Schaller

Maybe to quickly start, unfortunately, again with the margin, but in the automotive business you have a great book-to-bill here; and there are certainly on the power side and on the radar side, a lot of things moving in to the right direction in terms of demand. How should we think about the margin in that business, really, over the course of the year?

I think what I'm asking as well, if we look at the 16% guidance for the year, are you assuming really more an improvement in the auto margin? Or are you assuming, maybe, mix shifting back towards your higher margin businesses? If you could help us with a bit more clarity around that.

And then also, you mentioned the server side, where you have pretty good momentum. I think some of the demand data points there have been mixed. If you can just remind us where you are in terms of market share progression, if you're still expanding your market share and if you expect that to continue over 2016. Thanks.

Reinhard Ploss

I think you indicated or more or less said it, the automotive business, here we see the growth of a profitable business which we have won years ago or one year ago, that should support all the automotive to improve their margin. But the margin expansion is we expect for most of our divisions, moving forward. Now we come to the question to the servers. Maybe, Arun, you can take that question on market share and development of the server business.

Arun Mittal

Sure. Yes, servers itself is predicted to grow at 6%. And with a significant position we have both in AC-DC part, as well as the DC-DC inside the servers, we think we're going to grow with that or about that, if we're successful in one or the other customers.

These tend to be large projects which you win and are determined by the Intel processor ramp-up schedules. We're doing quite well in the sever market, especially since the combination of the IR and Infineon portfolio of products, both for the controllers, as well as for the switches.

Reinhard Ploss

Another comment on auto, we already mentioned the rise of demand in renewable, that means electric, drive. Here, we see that the utilization of the module manufacturing is improving, so we also expect there a contribution to a margin improvement for auto.

Johannes Schaller

Just maybe a very short follow up on auto. There are some kind of rumors going around on VW demanding pretty big price cuts, have you seen any of that at all coming through to your level? Or is that something which is, maybe to a certain extent, also part of your guidance to be on the conservative side?

Reinhard Ploss

We have not seen any effects from VW. But here, we also want to comment that we're very broadly based on a global customer base and we do not see here specific effects. And we also believe that the certain shifts in demands may not significantly affect us.


We will now take our next question from Andrew Gardiner from Barclays. Please go ahead. Your line is now open.

Andrew Gardiner

I had another question on the automotive side, just thinking, perhaps, a bit more over the medium or long term. Reinhard, thinking about your statements on the growth in China, particularly in the electric vehicle space or some of the comments you've made about the advanced safety features coming in, are you feeling any signs that we might have an inflection here?

You mentioned that these are investments that had been made some years ago and it's finally bearing fruit. I'm just wondering whether you're, perhaps, starting to think about a change in the content growth that you're seeing over the medium term for auto. Also, more specifically, can you remind us the underlying figures for the market that you're currently using to forecast automotive revenue for 2016? Thank you.

Reinhard Ploss

Andrew, the effect on shift to higher content, we can say we see now for around one to two years, especially with the autonomous driving or assisted driving coming in much more strongly. And here we have to say, even much more strongly, we have anticipated the success story for [indiscernible] is very strong; and the demand for further application in this segment is also much stronger.

When we would look back some years, we would have expected the major growth for automotive would come from the number of cars produced. I think at that time we stated a 3% to 4% coming from the number of cars and 1% to 2% coming from the content. This, of course, - these numbers did not contain any xEV effect. Now this has swapped and we see more the content growth as the major drivers than the number of cars.

So the xEV growth is something where we're cautious on, but we believe that this can also contribute additionally for the content. It is, I would say, from a speed of auto, definitely a kind of inflection point we have seen. And we believe that this will continue for some time, because although the differentiation in this sector seems to be very attractive for the OEMs to add additional feature for the supported or assisted drive the numbers for cars, maybe Arun can help out on the underlying figures.

Arun Mittal

Okay. Well, you see different reports in the market for the cars; so some say 2%, some say 3%. We have also seen more aggressive figures for this year; it depends on how things develop globally. But independent of that, as Reinhard pointed out, the principal change is that the content is rising. And we feel very comfortable that we're in a good position to care for - to supply for this content drive.

Your earlier question on China and growth of China in the xEV segment is clearly something which we're benefiting from. And here, Reinhard mentioned it in his opening speech, that we hope to ride that wave also, even though it is small in terms of the total cars globally.

Reinhard Ploss

But give me one second here to add - I think many people always ask us how strong are we in the China market, as such. And as we're benefiting significantly from the growth of local company in the xEV area, although in the commercial vehicle we can say that we have found a very solid ground in the local markets which makes us believe that we can continue our growth story in China.


We will take our next question from Achal Sultania from Credit Suisse. Please go ahead. Your line is now open.

Achal Sultania

First one is more on the near term. I think, obviously, you're talking about continued strength in your automotive business. And we - the data points that we come across, we're seeing some signs that the volumes in the U.S., at least the SAR volumes, are indicating that they might have somewhat peaked; that's what a lot of people believe.

Are you already seeing some kind of deceleration in your U.S. business or, basically, it's being offset by continued growth in Europe and China? I just want to understand what's happening, region-wise, in your auto business.

Arun Mittal

Yes, Achal, no, we're not seeing any deceleration in our auto business and neither regionally nor globally. And the guidance indicates that we're confident about our growth in the short term, for sure. But the macro aspects I covered earlier and maybe Reinhard can add to that. Thank you, Reinhard. I know you mentioned that the auto levels, the backlog is also pretty high, so it gives us the confidence.

Achal Sultania

And maybe one more, on the medium term. Obviously, when I look at your margins in ATV and IPC they are about low teens which is obviously below the Group average. I understand you've been investing heavily in this business for future product, but at some point is it fair to assume that these businesses should get to around Group level average at some point in time when those investments start to come down and revenues continue to grow at a meaningful level? Or is it like something structural in those businesses which mean that the margins in those businesses would never get to those 15%, 16% levels?

Dominik Asam

I think we will have a good chance of getting ATV, our biggest division, closer to that Group average. And you know that we have this famous 15% through-cycle target and this is also the target we have earmarked for ATV, to achieve within a reasonable timeframe.

It will take probably also some time for IPC. And as Reinhard has already mentioned, there are specific issues with International Rectifier where there are contractual obligations which prevent a quick recovery and it will take us a couple of years to clean that up. And from that perspective, it will take some time. In IPC, we don't see a 15% margin target realistic now for IPC in the current fiscal year.

Reinhard Ploss

But as it is so important, I also want to state, there is a clear target for all our divisions to achieve the 15% plus. We have the plans, but it may take some time, as Dominik said.


We will take our next question from Amit Harchandani from Citigroup. Please go ahead. Your line is now open.

Amit Harchandani

Maybe three quick questions, if I may. Firstly, starting with bookings, you've given the book-to-bill numbers for the December quarter. Could you kindly tell us how the evolution has continued maybe in the month of January? Any initial data points? And maybe going back to December, what was the linearity of bookings through the quarter? So that would be my first question.

The second question is with regards to the comment on investments. Could you maybe share your latest thoughts on inorganic investments and scope for strategic partnership? How are you thinking about that?

And finally, maybe broadly on China, you've talked about the market evolution. But could you give us a sense of how would you strategically look at competition from the Chinese vendors as the government encourages indigenous funds? Thank you.

Arun Mittal

Our guidance, as always, Amit, is based on the signs we see already in the bookings. Clearly, what supports our positive guidance of growth is indications that we see also in bookings in January. Second question was on linearity of that. I haven't really looked in to, on a daily basis, how linear that is, but I think on a quarter-to quarter basis we're in line with our indications. Dominik, do you want to add something there?

Dominik Asam

I think the behavior, if you cut out the months within the December quarter, is very typical with the stronger book-to-bills in the first couple of month and then the weaker book-to-bill because of the holiday season in the December quarter. So it's very normal.

Reinhard Ploss

That's why I didn't look at it, I was on holiday. Okay. And investment, your question on inorganic growth, yes, this is the same statement as always, sorry for that. But our belief is no different than what it was before the decision for buying International Rectifier. And there, please understand, we can't give any more than what you know already. And if there is something to know, I'm sure, Amit, we'll call for a conference call.

Dominik Asam

The question on China, well, this is, Amit, from my point of view, a very mixed picture. Currently, we see a lot of push from China to enter in to communications in mobile market, especially mobile. We do not see yet a strong competition in auto which I believe is also due to the fact that the zero-defect requirements are quite a challenge from effort to return.

In the total power segment, we have seen several attempts from China in order to enter those. But here, I think our excellent technology position is providing us a very good differentiation to the market which we definitely plan to continue. And here, we have the technology and development in order to stay ahead. But here, we also are very well aware that this might not be enough and, therefore, we believe that the strategy for complementing power with control and the investments there, will help us to fulfill the concept of P2S.

Other business, like the chip card, well, I think these are very special from an also governmental and regulation point of view. Maybe Arun can add some comments on this. And for IPC, we have seen continues effort in order to enter the IPC business, the IGBT business we have to say and quite some investment there. And we expect that we will continue to see efforts in order to penetrate that market which also may have an effect on the electric vehicle. But again, I believe our technology base here, at least for the next years, is pretty good.


Our last question comes from Guenther Hollfelder from Baader. Please go ahead. Your line is now open.

Guenther Hollfelder

Just a follow-up question on your smartphone business. I assume that margins in the first half are also negatively impacted by the decline or the weakness we're seeing currently. I was just wondering, your margin guidance of 16%, do you need a recovery in the global smartphone market in the second half, like a returning-to-growth mode for smartphones, to get to this 16%? Thanks.

Reinhard Ploss

Well, I think here we see still two effects, one is the potential growth of the smartphone market. On the other side, we see also the penetration of the MEMS-based microphone, as well as our strength in our F parts [ph]. For these two types of technology or products, we have, similar as in other areas, a kind of a compound effect and penetration, I would say, also bringing our strengths to market.

And for quite some time, we were from the ramp even not able to address the full markets which we can address potentially more strongly now. On the other side, of course, we expect that a certain recovery in the market will happen; and the current order books at least tells this assumption to be correct.

Juergen Rebel

Okay, thank you, all, for your questions. We would like to conclude this conference call. And for any further questions, please feel free to contact us here. From the investor relations team in Munich, we would like to thank you very much for your interest. And have a nice day. Bye.


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

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