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Edited Transcript of IFX.DE earnings conference call or presentation 5-Feb-20 8:30am GMT

Q1 2020 Infineon Technologies AG Earnings Call

Munich Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Infineon Technologies AG earnings conference call or presentation Wednesday, February 5, 2020 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alexander Foltin

Infineon Technologies AG - Head of IR

* Helmut Gassel

Infineon Technologies AG - CMO & Member of Management Board

* Jochen Hanebeck

Infineon Technologies AG - COO & Member of Management Board

* Reinhard Ploss

Infineon Technologies AG - Chairman of Management Board, CEO, Head of Research & Development and Labor Director

* Sven Schneider

Infineon Technologies AG - CFO & Member of Management Board

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Conference Call Participants

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* Achal Sultania

Crédit Suisse AG, Research Division - Director

* Adithya Satyanarayana Metuku

BofA Merrill Lynch, Research Division - Associate

* Aleksander Peterc

Societe Generale Cross Asset Research - Equity Analyst

* Alexander Duval

Goldman Sachs Group Inc., Research Division - Equity Analyst

* David Terence Mulholland

UBS Investment Bank, Research Division - Director and Equity Research Analyst - Technology Hardware

* Janardan Nedyam Menon

Liberum Capital Limited, Research Division - Technology Analyst

* Jerome Andre Charles Ramel

Exane BNP Paribas, Research Division - Analyst of IT hardware and Semiconductor

* Johannes Schaller

Deutsche Bank AG, Research Division - Research Analyst

* Sandeep Sudhir Deshpande

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, everyone. Welcome to the Conference Call for Analysts and Investors for Infineon's 2020 Fiscal First Quarter Results. Today's call will be hosted by Alexander Foltin, Corporate Vice President, Finance, Treasury and 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, 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 and 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.

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Alexander Foltin, Infineon Technologies AG - Head of IR [2]

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Yes, thanks. Good morning, and welcome, ladies and gentlemen, to our first quarterly earnings call of the 2020s, which is also the 80th quarterly call in Infineon's history. Here present is the entire management board of the company, Reinhard Ploss, CEO; Helmut Gassel, CMO; Jochen Hanebeck, COO; and Sven Schneider, CFO.

Following our usual procedure, Reinhard will start with some remarks on group and division results, market developments and business highlights. Sven will then comment on key financials, followed by Reinhard again updating you on our guidance. As well as on where we stand in terms of our planned acquisition of Cypress. The customary slides to illustrate our introductory remarks are available at infineon.com/slides.

After the introduction, we will be happy to take your questions. (Operator Instructions) A recording of this conference call, including the aforementioned slides and a copy of our 2020 first fiscal quarter earnings press release as well as our investor presentation are also available on our website at infineon.com. Reinhard, over to you.

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Reinhard Ploss, Infineon Technologies AG - Chairman of Management Board, CEO, Head of Research & Development and Labor Director [3]

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Thank you, Alexander, and good morning, everyone. The starting to our 2020 fiscal year has been characterized by ongoing stabilization with some areas showing signs of improvement. Many of our end markets are bottoming, especially late-cycle industrial and automotive verticals.

In these areas, inventories continue to be worked down. In some other fields, like server, the situation is already better with stocks there having returned to normal levels. Order intake is rising again. All told, our first fiscal quarter came in much as we had expected on the revenue side.

We recorded a sales of EUR 1,916 million of pronounced seasonal decline of 7% quarter-over-quarter. Compared to the September quarter, the U.S. dollar remained practically unchanged. Year-over-year, our revenues declined by 3%. At a constant U.S. dollar exchange rate, the decline would have been 4%.

Regarding the earnings side, the quarter ended somewhat better than anticipated. Segment results stood at EUR 297 million equivalent to a segment result margin of 15.5% compared to our initial guidance of around 16 -- 13%, sorry. The figure was positively influenced by several factors, some of which are nonrecurring.

Originally, we had planned to temporarily close our factories in Dresden and Kulim for a 2-week period towards year-end. We decided against it, however, as we saw pockets of resilient demand and some early signs of recovery, especially for PMM business areas.

Consequently, underutilization charges were a bit less than envisaged. The swift adoption of our production schedule around Christmas time is a clear proof of the agility of our organization. Furthermore, the segment result margin benefited from the quick implementation of cost containment measures as well as from a more favorable product mix.

What we had already announced in our last earnings call in November, and hence, considered in our original guidance were the adoption of a refined inventory valuation methodology. This helps to explain the actual quarter-over-quarter margin development, and Sven will comment further on this in his section.

Our book-to-bill ratio was very close to 1 for the December quarter after 0.8 for 1 quarter earlier. Cyclical pressures appear to be easing, the worst is probably behind us. The market environment remains challenging in the near term.

The signing of the phase 1 trade agreement between the U.S. and China certainly is a step into the right direction, but not sufficient to bend macro uncertainties. Near term, the coronavirus outbreak in China is adding to these uncertainties. Therefore, we continue to expect that a broad-based recovery will not set in prior to the second half of our 2020 fiscal year.

I will comment more on this at the end of my introduction, when I will also give you an update on where we stand with regard to our planned acquisition of Cypress.

Now to our divisional business overview, starting, as usual, with automotive. Automotive revenues in the first quarter of our fiscal year amounted to EUR 829 million, a sequential decline of 7%. Practically, all our lines of business were affected, including electric drivetrain components. Compared to Q1 of last fiscal year, the decline was 2% and respectively, 3%, assuming a constant U.S. dollar exchange rate.

The segment result of ATV came in at EUR 67 million, resulting in a segment result margin of 8.1% compared to EUR 78 million and 8.7% in the quarter before. The impact of lower revenue was compensated to some extent by the aforementioned one-off effects related to inventory revaluation as well as by cost containment measures. Underutilization charges from comparatively low production volumes continue to be a burden.

The book-to-bill ratio for the December quarter was 0.9, the same value as 1 quarter earlier. General inventories have been trending down. Stock levels are almost back to long-term average levels, so that any future rebound will be felt positively throughout the supply chain.

In the 2019 calendar year, the global car market contracted by almost 6% in terms of unit produced according to figures from IHS Markit. China were the largest contributor to this decline, ending 2019, down 8.5% year-over-year as a result of lower consumer confidence, the transition to China VI emission standards and the cutting of subsidies for new energy vehicles.

For 2020, volumes are predicted to stay essentially flat. This view contained the assumption of a return to growth in the second half of the calendar year. With our fiscal year running until September will only partially benefit from this development.

Specifically, with regard to electric vehicles. China market continued to be weak, but at least the slowdown appears to gradually taper off. In October, sales numbers of electric and plug-in hybrid light vehicles declined by 48% year-over-year. In November, the decline was 40%, and December around 25%.

News about no further subsidy cuts in 2020 are welcome, but a return to growth will take time as inventories in this market segment are coming down only slowly.

In Europe, meanwhile, OEMs clearly have to increase the share of electric vehicles within their fleets, be it 48-volt hybrid or full battery, to meet emission targets, which are in effect from this year on.

When looking at the introduction of new car models and their planned volume ramps, however, it appears that a noticeable demand momentum is likely to occur only towards the second half of the 2020 calendar year. Over the mid and long term, the secular trend towards electromobility is offering us very attractive growth potential.

With our broad portfolio of power semiconductors, driver ICs, microcontroller and sensors, we are ideally positioned to shape this trend. We are encouraged by the fact that we have won more than 35 plug-in hybrid and full battery electric car models, which will ramp until 2021. Furthermore, we could secure a very significant automotive MOSFET design win.

A major European Tier 1 awarded Infineon with a triple-digit million business for its 48-volt mild hybrid platform. A key success factor for this project were the newly developed package, which allows topside cooling instead of heat dissipation via the printed circuit board.

Now to Industrial Power Control. IPC recorded revenues of EUR 334 million, a decline of 8% compared to the previous quarter and of 5% year-over-year. Industrial drives continue to see sluggish demand. Wind power and home appliance were affected by seasonal weakness. Traction in power transmission, on the other hand, developed more positively. Also our solar business once again proved quite resilient.

The segment result for the first fiscal quarter came in at EUR 62 million, resulting in a segment result margin of 18.6% after 16.3% in the previous quarter. This rise in profitability despite lower revenues can be attributed to the nonrecurring inventory valuation effects as well as to slightly higher fab loadings and cost saving measures. The book-to-bill ratio was 1.1 for the December quarter. Order entry is slowly improving. Lead times are not getting shorter.

Core industrial applications like factory automation are typically late-cycle in nature. Market sentiment in these areas is currently stabilizing as can be seen from PMI indices, which are hovering around the 50-mark. The inventory correction is ongoing. Further progress in the current quarter needs to be made to clear the way for a cyclical recovery.

Structural demand drivers for our IPC business remain unchanged. The inverterization of household appliances helped by more stringent energy efficiency regulation in China, the increasing use of brushless DC motors and especially, the secular trend towards renewable energy, all provide attractive growth potential. Solar and wind continue to see positive momentum and are among those areas suited for an early and rapid uptake of silicon carbide solutions.

Together with SMA, the European leader in photovoltaic inverter system, we developed a customized silicon carbide hybrid module, including an IGBT transistor and a CoolSiC MOSFET. The efficient and robust design of the power conversion allows the inverter to shrink in size and weight. This helps the transition from central inverters towards string inverters at large scale photovoltaic power plants. Consequently, reducing CapEx and OpEx for operators and helping to bring solar energy to grid parity.

Now to power management and multimarket. In the December quarter, PMM recorded revenues of EUR 593 million, a sequential decrease of 7%. Stock depletion by distributors across many product areas was the principal driver for the decline. AC-DC components were more strongly affected. The typical seasonal decline in the area of mobile handset, however, was cushioned by the very strong trajectory of our silicon microphones.

In comparison to the first quarter of last year, PMM revenues were down by 4% and by 6% at a constant U.S. dollar exchange rate. PMM segment result came in at EUR 146 million, resulting in a segment result margin of 24.6%. This slight margin improvement despite lower revenues is, again, due to a mix of inventory-related effects and cost saving measures.

Overall, the demand picture is somewhat brightening, evidenced by a book-to-bill ratio for PMM of 1.0. There are early signs of improvement. The multi-source business, which went into the downturn first, is bottoming. Inventories there in other areas have reached normal levels again. The stock cleanup is basically done. Going forward, any end demand pull should lead to some restocking and feed through to suppliers.

One such end market beginning to recover is service, driven by data center for cloud computing, artificial intelligence and telecommunication infrastructure. The increasing complexity of server architectures and processors is boosting demand for specialized power solutions.

Infineon supports the open accelerator module form factor specified by the Open Compute Project association. Some of these accelerator modules are designed specifically for machine learning boards, hosting a number of high-performance special processors. These boards consume up to 750 watt per processor. Considering up to 8 processes per board, this leads to a total power consumption of 8-kilowatts, about 5 to 7x that of a standard server.

For such high-end applications, energy efficiency is a key factor influencing operating cost. Our reference power stage currently about to launch provides a digital power conversion solution addressing these requirements.

Regarding handset-related products, we are very pleased to see the strong market uptake for our silicon microphones. With the innovative sealed dual-membrane MEMS, our own package and industry-leading signal-to-noise ratio, they enable superior active noise cancellation for phones and accessories.

Based on current design wins, we estimate to generate about 50% growth in revenue with our microphone family in the current fiscal year compared to the last fiscal year. All in all, compared to our previous expectations, we expect a somewhat stronger acceleration of PMM's business going forward.

Let's conclude on the divisional overview with the Digital Security Solutions. The segment posted revenues of EUR 158 million in the first quarter of the 2020 fiscal year, a mild sequential decline of 2% and a year-over-year increase of 6%. Authentication solutions and embedded SIM for the automotive industrial application saw increasing sales, whereas the payment, bare die and module business declined.

This shift in product mix, together with cost-saving measures, led to a slight margin uptick. The segment result came in at EUR 22 million corresponding to a segment result margin of 13.9% compared to the 13.6% a quarter earlier. The book-to-bill ratio stood at 1.1 at the end of December, pointing to further stabilization.

In the past quarter, we have seen increasing project win momentum in IoT and other embedded security applications. We won projects in applications like smart metering, cloud authentication as well as battery authentication. In the smartcard segment, we launched a secure ID solution as a turnkey solution combining security hardware and software. It is ideally suited for the accelerated deployment of a government project for electronic identification.

With this, I would now like to hand over to Sven, who will provide additional color around our key financial figures.

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Sven Schneider, Infineon Technologies AG - CFO & Member of Management Board [4]

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Thank you, Reinhard, and good morning, everyone. Let me first provide some more details on our margin development. In the first quarter of our 2020 fiscal year, the gross profit was EUR 709 million. The gross margin increased to 37% from 35.5% in the previous quarter. Excluding nonsegment result effects, the adjusted gross margin stood at 37.9%.

As Reinhard has mentioned at the beginning already, we have refined the method with which we allocate certain overhead costs to inventories throughout the various manufacturing stages. Some of you might recall that this was done related to the back end back in 2014, now we have completed the exercise, including the front end. Overall, this resulted in a onetime effect of EUR 36 million, benefiting our gross margin by about 1.9 percentage points.

On the flip side, the book value of our own inventories increased correspondingly. Besides this positive accounting-driven effect, our gross margin continues to be burdened by significant underutilization charges. In the December quarter, we incurred idle costs of around EUR 130 million, somewhat less than originally anticipated, as we did not implement the planned temporary shutdown of our production facilities in Dresden and Kulim.

For the entire 2020 fiscal year, we still assume underutilization costs to weigh meaningfully on our margins with an overall amount estimated at just under EUR 400 million.

Research and development expenses and selling, general and administrative expenses came in at EUR 243 million and EUR 204 million, respectively, the net other operating income amounted to EUR 4 million. The nonsegment result for the quarter stood at minus EUR 30 million, a pretty regular run-rate. EUR 18 million hit our cost of goods sold, EUR 1 million R&D and EUR 13 million SG&A. Additionally, we recorded a positive EUR 1 million in net other operating income.

Our investments into property, plant and equipment, intangible assets and capitalized development costs in the first quarter of the 2020 fiscal year were EUR 255 million, EUR 95 million less than in the previous quarter. Depreciation and amortization, including nonsegment result effects, went up slightly from EUR 244 million to EUR 250 million.

Included in these figures are, respectively, EUR 21 million and EUR 20 million related to the amortization and depreciation of fair value step-ups, almost entirely from the purchase price allocation from International Rectifier. The portion of depreciation and amortization included in our segment result, therefore, moved from EUR 223 million to EUR 230 million.

As of the beginning of this fiscal year, Infineon is adopting the IFRS 16 standard to account for leases. As a result, we have recorded so-called right-of-use assets of EUR 255 million pertaining to obligations that were formerly classified as operating leases outside the balance sheet. These right-of-use assets led to EUR 13 million of depreciation in the first quarter included in the figures above.

The financial result for the December quarter came in at minus EUR 13 million after minus EUR 18 million in the preceding 3-month period.

Now to taxes. Income tax expense in the first quarter decreased to EUR 43 million compared to EUR 64 million in the quarter before, which had contained certain nonrecurring effects. The effective tax rate was 17%, the cash tax rate was 15%, corresponding to our assumption for the entire 2020 fiscal year.

Free cash flow. Our free cash flow from continuing operations was a negative EUR 86 million for the December quarter. The first quarter typically marks the low point of our annual cash flow profile among other reasons because of the payout of annual success bonuses. We continue to expect significant improvements of our free cash flow over the course of the 2020 fiscal year to get us to the forecasted EUR 500 million to EUR 700 million. The Cypress acquisition and its financing had a negative impact of approximately EUR 10 million in the past quarter.

Our gross cash position as of December 31, 2019, amounted to EUR 4.9 billion, included in this figure are the proceeds of EUR 1.2 billion from the issuance of our hybrid bond. Just to clarify, as this question comes up occasionally, the hybrid bond is accounted for as equity under IFRS. It is, however, not an instrument that can or will be converted into shares. In other words, it will not lead to dilution.

Considering financial debt of EUR 1.5 billion, our net cash position stood at EUR 3.3 billion. The financial obligations corresponding to the leases that are now capitalized pursuant to IFRS 16 are not part of the figure for financial debt mentioned above.

Let me briefly comment on our earnings per share. For the December quarter, EPS from continuing operations increased to EUR 0.16, both basic and diluted from EUR 0.13 in the previous quarter. The hybrid bond is considered in the numerator where interest due to the bondholders is substracted from our net income, but not in the denominator as there are no underlying additional shares.

Our adjusted EPS amounted to EUR 0.17 after EUR 0.19 1 quarter earlier. You can find the exact derivation of the adjusted EPS in a table in our press release.

Our reported after-tax return on capital employed, or RoCE, came in at 11.1% in the December quarter. Excluding bookings related to the acquisition of International Rectifier, in particular goodwill, fair value step-ups and amortization, effects from the pending Cypress transaction as well as deferred tax effects, the adjusted RoCE stood at around 16%.

I will now pass back to Reinhard again, who will comment on our outlook.

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Reinhard Ploss, Infineon Technologies AG - Chairman of Management Board, CEO, Head of Research & Development and Labor Director [5]

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Thank you, Sven. The semiconductor market environment appears to be normalizing. The inventory correction has mostly run its course with some further adjustment needed in certain automotive region and core industrial product areas. Demand from end market segment is either stabilizing or upticking. We have yet to see tangible signs of a broad-based recovery, but things are directionally getting better, much as we had predicted last November. However, trade-related uncertainties continue to persist and there is no meaningful macro improvement.

On the contrary, the recent outbreak of the coronavirus in China has potential, apart from the human tragedy, to significantly dampen economic activity and weigh on GDP growth. We will monitor the situation carefully. First and foremost, in order to protect the health and safety of our employees.

Regarding our business, we have not yet seen major impact on either supply or the sales side. However, there clearly is a disruption to at least Chinese economy and it is too early to fully assess potential impacts.

Given this picture and assuming no major impact of the coronavirus situation on us, we confirm our guidance for the 2020 fiscal year. Excluding Cypress, year-over-year revenue growth should be 5%, plus or minus 2 percentage points. This continues to assume an exchange rate of $1.13 for the U.S. dollar against the euro.

Bringing it down by divisions, we now expect PMM to exceed the group's average growth rate, driven by power components for enterprise computing and communications as well as handset-related products. ATV is expected to grow in line with group average, offsetting, once again, a lackluster car market as content gains and exposure to structural xEV and ADAS demand.

IPC's growth rate should come in slightly below group average. As for some industrial applications, recovery takes longer. DSS revenues should stay flat or grow just slightly. At the midpoint of the guided revenue range, we continue to expect a segment result margin of around 16% of sales, but we are gradually stepping up the loadings of our fabs again, underutilization charges will not diminish massively overnight. We will, therefore, stay disciplined with regard to cost containment measures in order to provide some counterbalance.

For the running second quarter of our fiscal year-end, as mentioned already in our yearly guidance, assuming no major impact of the coronavirus situation on us, revenues are anticipated to increase by 5% quarter-over-quarter, plus or minus 2 percentage points. ATV and IPC should grow a bit above PMM, a bit below group average. DSS revenue is projected to stay flat. The segment result margin should come in at about 14% at the midpoint of the guided revenue range.

As you are familiar with our earnings seasonality, you know that the March quarter is always seeing the impact of price adjustment on long-term contracts. Furthermore, we assume underutilization cost of about EUR 100 million to hit us this quarter and to continue to benefit from cost containment.

Just as a reminder, we expect investments of around EUR 1.3 billion for the 2020 fiscal year, including capitalized development costs. Depreciation and amortization are expected to amount to around EUR 1 billion. For our free cash flow, we expect a level of between EUR 500 million and EUR 700 million in this fiscal year.

Now let me provide a brief update on the status of our planned acquisition of Cypress. We have made further progress in obtaining antitrust clearances. About 3 years -- 3 weeks ago, the Taiwanese authorities greenlighted the deal. Regarding the outstanding regulatory approvals by CFIUS and SMR, we are in a constructive dialogue with the decision-making bodies. And from today's perspective, consider closing of the transaction to occur around the end of the current quarter or the beginning of the next quarter.

Ladies and gentlemen, let me summarize the key points. The first quarter of our 2020 fiscal year saw the anticipated revenue decline, which was slightly higher than normal seasonality. Our margin came in better than expected driven by one-off effects as well as cost savings and our marked cyclical pressures are easing somewhat.

Demand is normalizing. Channel inventories are largely back to normal levels, making room for some restocking. A broad recovery, however, is not in the cards yet. With our differentiated product portfolio, manufacturing capabilities and unique exposure to structural growth drivers, we remain well positioned to benefit from any resurgence of demand. Our full year guidance with 5% revenue growth and 16% segment result margin is confirmed.

Ladies and gentlemen, this concludes our introductory remarks and we are happy to take your questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Alexander Duval from Goldman Sachs.

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Alexander Duval, Goldman Sachs Group Inc., Research Division - Equity Analyst [2]

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Yes. Firstly, you obviously benefited to some extent from cost control in the quarter, which benefited your margin. I wondered if you could talk to the extent to which that's sustainable into future quarters and what the key measures are that are helping you on that front?

And then just secondly on linearity, through the quarter, some of your peers have recently talked about orders and/or inventories improving on a monthly basis through the quarter. So I wondered if you could give some more color on what you've seen in the last few months.

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Reinhard Ploss, Infineon Technologies AG - Chairman of Management Board, CEO, Head of Research & Development and Labor Director [3]

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Thank you, Alexander, for the questions. So the cost control situation, long-term considerations about this will be answered by Sven, followed by Helmut about the detailed inventory insights.

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Sven Schneider, Infineon Technologies AG - CFO & Member of Management Board [4]

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Yes, Alexander, thank you for the question. I think to your cost related question, you can see that the reduction on the one hand, in the costs of goods, but also on the SG&A side, is nicely coming through in the previous quarter. We expect that to continue, as mentioned in the transcript, and to counterbalance the continuous pressure from the underutilization charges.

And I would say, gradually it could be reduced over time, again, once the economy picks up and the growth comes back more towards the second half of our fiscal year. So please do not extrapolate simply the cost-saving measures from 1 quarter to the full year.

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Helmut Gassel, Infineon Technologies AG - CMO & Member of Management Board [5]

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Yes, good morning -- Helmut Gassel here -- to everyone as well. On the order side, yes, our orders have actually increased in absolute terms, also reflected in our better book-to-bill ratio, which, on the other hand, you've seen is just shy of being 1. So it's 0.97, not exactly at 1 yet, basically confirming that we see an increase in book-to-bill, and therefore, order activity, but of course, not to an extent of immediate strong growth.

As far as inventories in the channel are concerned, Reinhard already mentioned that it has come down nicely. There still is some pockets, in particular, in the area of industrial and in some regional areas in automotive, where we still have to work off some inventory. But on the other hand, there is areas, for instance here in PMM, where we already have seen a strong depletion of inventory in the channel as well.

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Sven Schneider, Infineon Technologies AG - CFO & Member of Management Board [6]

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And maybe if I can just add to the first question, Alexander, there are different measures, of course, with regard to cost containment. There is the hiring freeze as we have just -- as we have announced already. There are some salary reductions in terms of no increases for the foreseeable future. So this stays in place as we have said that we want to be disciplined.

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Operator [7]

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We will now take our next question from Sandeep Deshpande from JPMorgan.

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Sandeep Sudhir Deshpande, JP Morgan Chase & Co, Research Division - Research Analyst [8]

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My question is regarding the auto market. I mean it was pretty soft in the December quarter, and you're saying that it's mostly second half loaded. There was some margin impact also in the December quarter. Maybe can you flesh out how you see potential recovery in the automotive market? Is it going to come from electrification and then potential impacts to the margin as that top line grows from the levels seen in the December quarter?

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Reinhard Ploss, Infineon Technologies AG - Chairman of Management Board, CEO, Head of Research & Development and Labor Director [9]

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Sandeep, thank you for this question. I will share it with Helmut. So in general, it is very difficult to give an estimate on how the electrical car market will develop. We have seen this overly drastic drop in China due to the cut of the incentives or the subsidies and we have seen a slight uptick in Europe, especially in Germany on the number of electrified cars here.

But it is pretty unclear how the end customer, the consumer will make its decisions. This is quite interesting by the -- overlaid by people buying more and more of these type of SUVs, which on return, again, are more prone to be hybrid or, I would say, not so much electric. So it is very difficult to read.

And regarding the margin, definitely, ATV due to being prepared to grow 10% year-on-year, basically for the last fiscal year, sees the biggest impact in idle cost, which will, of course, over the time, be worked down but as well affect ATVs throughout the fiscal year. Helmut, please add some more details on the automotive.

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Helmut Gassel, Infineon Technologies AG - CMO & Member of Management Board [10]

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Yes, Sandeep. The overall light vehicle market is expected to be flat in 2020. That is based on a stronger recovery in the second half of 2020, meaning a very slow beginning of 2020.

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Reinhard Ploss, Infineon Technologies AG - Chairman of Management Board, CEO, Head of Research & Development and Labor Director [11]

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So a question, Sandeep, can you hear us? We are a little bit uncertain about the line. (technical difficulty) Okay. Sandeep, now back again. We restart the answering of your question. I think we have heard it completely. So in the automotive market, let's just comment on the margin.

Automotive was prepared to grow in 2019, around 10% due to many of the factors driving it. I think everybody can remember well. And the consequence due to the drop is now that the idle cost situation in ATV is pretty significant and will continue throughout the fiscal year. But we will work up over the time again. On the other side, the car market as such Helmut will comment on this.

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Helmut Gassel, Infineon Technologies AG - CMO & Member of Management Board [12]

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Yes. Let's start with the overall car production, which is expected to be flat in 2020 as compared to 2019, with a recovery in the second half of 2020. No significant structural effects, I would say, that's a broader view.

When it comes to the most relevant to us part of the electrification of vehicles, we look at the Chinese market as basically being stable. So we do not expect a major push in 2020. There is, as you know, a drop, again, anticipated in the last, I would say, subsidies in China by the end of 2020, which one can speculate might have a little bit of an uptick also in battery electric one and electric vehicles in China towards the end of 2020, but we do currently not anticipate that in our figures.

There is going to be growth in the electric vehicle market in our view, and that is predominantly coming from Europe, but also there. As the regulation kicks in later, and many of the models will kick in later also in Europe, we do see that growth also coming back-loaded in the year. So therefore, we will only have an impact of -- or a major impact of that in our last quarter, our fiscal year, which ends in September, as you know.

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Operator [13]

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We will now take our next question from David Mulholland from UBC (sic - UBS).

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David Terence Mulholland, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Technology Hardware [14]

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It is David from UBS. Can I just clarify, I think you made a comment, or I may have misheard you in the introduction, where you said that the inventory revaluation impact had already been considered in your guidance. Can you clarify if I heard that correctly? And if that was the case, given then the beat that you've seen in the quarter was, but not following through to the -- to kind of implications on your full year guidance?

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Reinhard Ploss, Infineon Technologies AG - Chairman of Management Board, CEO, Head of Research & Development and Labor Director [15]

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David, thank you for your question. So Sven will give more detail. But yes, the inventory revaluation was completely planned in and there had been, I would say, slightly effect there, but I leave it to Sven to go through the details.

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Sven Schneider, Infineon Technologies AG - CFO & Member of Management Board [16]

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Yes, absolutely. There's little to add Reinhard now, so I try to quantify it a bit more for you, David. So if you compare our guidance for the quarter, which was around 13% and now the actual 15.5%, as Reinhard just said, the gap is not driven by the inventory revaluation because it was already in the guidance. The gap comes from basically 4 effects.

The biggest one is that we did not close our factories in Dresden and Kulim, Malaysia as planned. This, of course, is a positive effect so lower idle costs. The second one is, there is some kind of positive FX headwind because the full quarter ended at around 1.11. The third one is our cost containment, as we already mentioned, this cost containment came in a bit quicker than anticipated.

And lastly, there were some structural effects. So between divisions, so more P&M, for example, compared to other divisions and within the divisions and segments, some higher-margin products have been requested by our customers more than we anticipated. That explains the gap or the beat, as you said.

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David Terence Mulholland, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Technology Hardware [17]

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And then just one follow-up question on Cypress. I know there's probably not too much you can really add. But is there any sign at this stage, particularly, I guess, with CFIUS as to whether there might be issues that need resolved? And obviously, you said you've been making progress, but how clear are those signals? What do you think the risk is today of something coming up that could put that closing in doubt or clearance --?

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Reinhard Ploss, Infineon Technologies AG - Chairman of Management Board, CEO, Head of Research & Development and Labor Director [18]

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Yes, David, you already mentioned that we cannot go into detail there. But we have a very good understanding about the requirements of U.S. government, what they expect. And we are working together with them in order to resolve that. Our expectation that we find a setup, which is supporting our revenue synergies and -- but please allow us not to go into details because we want to treat this in a very cooperative environment with the governments, which we really appreciate the way of interaction.

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Operator [19]

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We will now take our next question from Adithya Metuku from Bank of America.

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Adithya Satyanarayana Metuku, BofA Merrill Lynch, Research Division - Associate [20]

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I had 2 questions. Firstly, just as a follow-up to David's question. So it feels like -- I think the -- when I read the press release, my understanding was that the beat came from a one-off effect, and that was largely to do with the inventory revaluation.

But now it sounds like most of that beat in margins was organic. And so it seems to me like you're pricing in some conservatism for the rest of the year. Am I -- potentially for the coronavirus, given the fact that you haven't raised your margins for the full year, am I right in thinking so?

And secondly, my question is on silicon carbide. Obviously, you gave a number last year on 1 -- last quarter on EUR 1.8 billion backlog. I just wondered if you could give us an update on that. And potentially any color on how we should think about any wins at Tesla and Toyota, the 2 companies where you don't seem to have a lot of exposure in the automotive landscape from an EV perspective. Any color would be much appreciated.

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Reinhard Ploss, Infineon Technologies AG - Chairman of Management Board, CEO, Head of Research & Development and Labor Director [21]

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Thank you, Adi, for your questions. So before I give it for the details to Sven regarding the financial, definitely, we have not been very, I would say, conservative on our outlook. When you look at the total year, we already have put in November time frame, I think, a very, let's say, progressive target for the year. And this is the base is building up, and we are working through.

Regarding the coronavirus, definitely, we have not put any numbers in. There is clearly no clear enough view how the consequence will be. I'll just say -- give you some aspects why because we have to differentiate how much of the production is remaining in China because the global market does not seem to be effective, the China may be and then in which buckets. At which speed? Will manufacturing in China catch up? That is completely unclear, and we have a quarter and yearly effect to consider and this is something where we do not make a guesswork.

Regarding the silicon carbide, we last time said there is an 8 -- no, EUR 1.8 billion design in funnel, 1/3 of it is automotive. A significant portion is all across here, definitely, I want to underline that Infineon has progressed significantly in providing a very broad portfolio of products for all these markets. But there is no news about wins besides the one we have communicated for IPC in the solar market, which is, in general, moving nicely. With this, to Sven.

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Sven Schneider, Infineon Technologies AG - CFO & Member of Management Board [22]

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Yes, Adi, just to again state it, so the revaluation was already included in our guidance. So it does not explain the beat, as you rightly said. The beat comes from the 4 factors I mentioned. So no shutdown. The foreign exchange positive effect, the product and portfolio mix effect and the cost savings. If you now exclude the EUR 36 million in this previous quarter, then our underlying profitability was 13.6%. So if we now are guiding for 14% you see there is some positive trend, but there is still some way to go to the 16% for the full year.

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Operator [23]

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We will now take our next question from Achal Sultania from Crédit Suisse.

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Achal Sultania, Crédit Suisse AG, Research Division - Director [24]

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Just one question on the seasonality as we go into the next 2 quarters beyond March. Obviously, get to 5% growth for the full year, it seems you have to do almost 8% sequential growth in the June and September quarters, which is obviously well above the normal seasonality of anywhere between 3% to 4%.

So I'm just trying to understand, clearly, there is a market recovery going on. But to basically grow at twice the rate of normal seasonality in June and September, how much of that is market-driven and how much of that is actually driven by the confidence of some of these new product ramps that you're talking in the second half of the year?

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Reinhard Ploss, Infineon Technologies AG - Chairman of Management Board, CEO, Head of Research & Development and Labor Director [25]

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Thank you, Achal, for the question. There are, I would say, various buckets on a higher level, and Helmut will give some more details on that. But there are, first of all, the normal seasonality plus the recovery of the inventory cleanup, where we will then go back to normal, I would say, revenue streams to market, which we currently don't have. We still have end market related. That means a point of final sales, a higher level than we have towards the channel. And finally, of course, yes, there are some effects where we see good growth to come, but maybe Helmut, you can go into details.

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Helmut Gassel, Infineon Technologies AG - CMO & Member of Management Board [26]

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Yes, I'm happy to add a little bit more color. I'd say, the growth drivers -- structural growth drivers that we have always been cited are kicking in again, xEV, not as strongly as in the previous years for the multiple reasons discussed.

There is one more consideration for you why xEV appears not to be as strong, and that is that we, in Europe, have a higher share of chip business as compared to module business and thus, the growth, let's say, in market share, doesn't fully -- is not fully reflected in -- or in -- and market penetration is not fully reflected in revenue growth.

ADAS comes in nicely, a strong contribution still also with the microcontrollers in this area. Silicon carbide has its portion to it. And definitely, silicon microphone is a very nice driver. And I'd say the rest of the incremental revenue growth is really broad spread and more market-driven than individual product area driven.

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Achal Sultania, Crédit Suisse AG, Research Division - Director [27]

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Okay. And maybe one follow-up, Sven. I guess, just wanted to clarify the comments on fab underloading charges. It was, I think, EUR 130 million you said for last quarter, it's going to be around EUR 100 million for this quarter. And did you mention EUR 400 million for the full year? And if that's the case, then just trying to understand what was the number last year for fiscal '19 as well? Just to trying to understand what's the pace of decline in those charges.

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Sven Schneider, Infineon Technologies AG - CFO & Member of Management Board [28]

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Yes. So I can confirm. So last -- full year last year, number was EUR 300 million approximately. We expect that to be slightly below EUR 400 million for this full year, EUR 130 million was the previous quarter, around EUR 100 million is quarter 2.

If you now run the math because we have done it in the last time, I think, for you to be very transparent. There is this what we call structural idle, which you always have for product ramp-ups or technical reasons, and there is the cyclical idle. So this is due to what Reinhard already mentioned the fact that the loading is not at the normal level, given the macroeconomic environment.

And if you now look at the cyclical idle, the cyclical idle impact, the negative impact on the segment result margin for the full year as mentioned in the last call, is around 3%. If you run the number for the previous quarters, it was even 5%, given the fact that it's very front-loaded.

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Reinhard Ploss, Infineon Technologies AG - Chairman of Management Board, CEO, Head of Research & Development and Labor Director [29]

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Yes. But just to make clear, it doesn't go to 0, as Sven already mentioned. So please do not assume that we will have a benefit for the fall going down. But just to confirm, Sven already said it, but it's important to consider.

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Operator [30]

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We will now take our next question from Janardan Menon from Liberum.

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Janardan Nedyam Menon, Liberum Capital Limited, Research Division - Technology Analyst [31]

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My first question is on your silicon microphone business. Traditionally, you've had -- you've sold into the smartphone market, including some of the flagship phones on a bare die sort of foundry basis. And now it appears that especially into some of these extremely strong selling wearables launched last year, you were selling directly your sealed membrane Infineon's own products.

I just want to know, are you success -- is it -- is the growth coming from such new launched products? Or are you seeing design wins where you are taking share from your sort of previous customers who are some of the big MEMS, microphone suppliers into the market through your own product?

And if so, can you tell us -- you've talked about how the second half will see an incremental further contribution from the silicon microphone business, can you tell us -- give us a little bit more color on how those design wins are coming through? And to what extent you think you can penetrate the underlying smartphone market itself?

My second question is on the EV side, obviously, the European OEMs are looking to meet the 95-gram CO2 target next year. And to that extent, they will have to launch quite a few models into the market towards the end of this year, which should be a big driver for your own growth into fiscal '21 on the EV side.

At this stage, what is your running assumption? Are you assuming that they will meet those targets? Because there are talks in the market that they may not meet it, they may pay the penalty, et cetera, et cetera. So how do you see that ramp? Is it going to be quite a steep ramp from European OEMs that you will see, say, from the September quarter or the December quarter into next year? Or are you adopting a slightly more cautious approach to that, given that there are uncertainties on how successful those models might be in the market?

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Reinhard Ploss, Infineon Technologies AG - Chairman of Management Board, CEO, Head of Research & Development and Labor Director [32]

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Yes. So Janardan, thank you for your questions. We would be happy if we could give you a precise answer on this because it is also for us important to know how we prepare for the ramp. But we see a very undecisive behavior of end customer, which finally will decide on what will be taken.

I think what we see currently is at least a certain sentiment, people considering the environmental conditions more and many people are going for a hybrid or something like this. Don't forget that even the enforcement of the 95 grams will only come throughout the year and not start right away. We also see some diesel pick up again.

So it's extremely difficult to read from the way we are designed in, I think there [will be] no ramp without Infineon. And there's a huge number of new cars. Many of them are sold out even, especially in the SUV range, some are still available, and I think this is the most difficult area.

We have a -- I think, here, we assume a clearly double-digit growth for EV moving forward in 2021, but the current year and how it will be taken on is extremely difficult. Maybe Helmut can add some more to this regarding the silicon microphone. I will comment on it briefly.

We see more and more the people taking our packaged solution in the silicon microphone because we have superior performance in this package. But for us, either is very good. So high end is supported by own packaging. The broader market is, I would say, based on also bare die business to those who do the packaging.

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Helmut Gassel, Infineon Technologies AG - CMO & Member of Management Board [33]

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Yes, I'm happy to comment. I'm just adding to the microphone real quick. There also is a sheer growth in number of microphones used in some of these noise cancellation accessories and that accessories also play a bigger and larger number in the total demand for silicon microphones.

Just another, let's say, just comment -- yes, well, we're looking -- just looking at the total number, discussing whether we shared or not. Yes, we're looking at roughly EUR 300 million of revenue for the total silicon microphone revenue within this year. So it is becoming a really substantial number and part of the additional growth has already happened, I think as said also by Reinhard in the intro in last quarter, so it really begun already in last quarter.

Now to the automotive side, yes, we do expect a strong growth of EVs in Europe to meet the 2021 95-gram requirements. Some of the analysts are predicting already a doubling of the current volume in the current year of 2020. There, we are -- we take a little -- slightly more conservative approach. Nevertheless, at least given the current political environment in Europe and the strong public discussion on environmental topics, we do expect a strong uptick in growth, and the car OEMs have all the desire to meet the 95 grams in 2021.

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Operator [34]

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We will now take our next question from Johannes Schaller from Deutsche Bank.

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Johannes Schaller, Deutsche Bank AG, Research Division - Research Analyst [35]

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On the coronavirus is the first question. I know you can't obviously make an assessment on the Chinese economy or local Chinese production. But if we just look at your own operations in Wuxi and what you have otherwise. Can you maybe run us through quickly kind of what plans you have there if things get worse?

And also, particularly if your China local production is being disrupted, can you compensate with other plans or basically kind of other operations somewhere else on the globe? So in a way, I'm trying to understand how big the risk is for your own operations here.

And then the second question, sorry, just coming back to the underutilization charges. I mean, you're saying less than EUR 400 million or a little less than EUR 400 million for the year, but you have now EUR 130 million in Q1 and EUR 100 million in Q2. So we shouldn't expect this to get higher again in the second half of the year, right? So I'm just wondering if maybe that shouldn't be closer to EUR 300 million than to EUR 400 million.

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Reinhard Ploss, Infineon Technologies AG - Chairman of Management Board, CEO, Head of Research & Development and Labor Director [36]

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Yes, Mr. Schaller, thank you for your questions. I briefly answer the idle cost situation. So I think we gave a certain indication that around EUR 300 million, something like this is the cyclical or the downturn topic. There is a residual as always. So it should not get higher. We expect that as we will ramp factories up in order to meet the demand, this number will get lower. But it -- the residual, I would say, there is always a structural one, which depends very much on technology and the rest. But it's definitely a 3-digit million number. Sven?

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Sven Schneider, Infineon Technologies AG - CFO & Member of Management Board [37]

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Maybe just quickly to add here because we are giving you a lot of different numbers. We have to appreciate that. So if -- you are right, EUR 130 million quarter 1, around EUR 100 million quarter 2, if we are for the full year close to EUR 400 million, then you are right, more than 60% of idle has or will have occurred at the end of the first quarter. The rest is then Q3 and Q4 gradually fading down with revenue growth.

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Reinhard Ploss, Infineon Technologies AG - Chairman of Management Board, CEO, Head of Research & Development and Labor Director [38]

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And now to Jochen regarding the manufacturing issue, I will...

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Jochen Hanebeck, Infineon Technologies AG - COO & Member of Management Board [39]

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Yes. Mr. Schaller, so you're right, our major operations is in Wuxi, so this facility is -- has extended its Chinese New Year shut down by 1 week. So it's planned to resume production next week. Other dependencies in China for us then are various subcons. Here we have subcon partners in -- let's say, in the areas which are more affected and areas which are less affected, so we can shift certain volumes. And last but not least, also an aspect to consider is freight. So getting parts in and out. This is a daily matter of finding routes which are open. But up to this point, we managed well.

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Johannes Schaller, Deutsche Bank AG, Research Division - Research Analyst [40]

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So you're not really concerned about your own operations, it sounds like?

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Jochen Hanebeck, Infineon Technologies AG - COO & Member of Management Board [41]

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It depends on the future development. I can only say up to now, we managed well.

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Operator [42]

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We will now take our next question from Jerome Ramel from Exane BNP Paribas.

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Jerome Andre Charles Ramel, Exane BNP Paribas, Research Division - Analyst of IT hardware and Semiconductor [43]

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Yes. First question, I'd like to reconcile the comment you made on the margin for Q1, which came to be better-than-expected because of -- you were underloading, so you didn't shut down the fab but the revenues were pretty much in line with expectation, even slightly below. So how do you reconcile the fact that you had to have less of underloading, but the revenue is basically in line? And the second question is, if we have better margin, why do you stick to the same full year EBIT margin and no improvement from a better starting point in Q1? And then I have a follow-up.

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Reinhard Ploss, Infineon Technologies AG - Chairman of Management Board, CEO, Head of Research & Development and Labor Director [44]

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So Jerome, thank you for your questions. We said that there are some structural effect in the portfolio mix, which helped it. I think for the second quarter, we never assumed, I would say, some special measures like shutting down fabs. So for the second quarter, we are pretty much in line on the expectations regarding loading the fab. Don't forget that the second quarter is also very much affected by the price-downs for the yearly contracts to come. So I think the effects of Q1 related to the overall year, we are not in a position to raise the overall year at this time yet. So we definitely have to see how the development of the market is. And don't forget, it already assumes a significant recovery of our revenue stream. I think, here, we have also to see how sticky the various changes in portfolio are, which is not clear as of today.

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Jerome Andre Charles Ramel, Exane BNP Paribas, Research Division - Analyst of IT hardware and Semiconductor [45]

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Okay. And second question is, if I look at your calendar Q1, so fiscal Q2 guidance, revenue slightly up. If I look at your peers, NXP or ST Micro, they're quite significantly higher on a year-on-year basis. Do you see, specifically in automotive, that you might be losing market share? If I take some data point, NXP became #1 in 77 gigahertz radar, where you used to be the #1. We see more easy traction, the technology with silicon carbide and so on. And we are hearing that the Japanese competitors are quite aggressive on the server side as well. So how should I think about your market share? Is the lag due to your product mix with more power? How should I explain this difference, I would say, between NXP, ST Micro and you guys for the year-on-year basis?

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Reinhard Ploss, Infineon Technologies AG - Chairman of Management Board, CEO, Head of Research & Development and Labor Director [46]

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So Jerome, here I think you cannot look at single quarters. You have to look at how the development along many quarters are, and we believe that here, we are doing better than the competition. At least we have no sign that we are losing market share in our relevant markets. So the assumption that NXP with 77 gigahertz is #1, this is not something which we can -- I would say, as to our knowledge, I think here, we are definitely on a very good path. And as we continue to grow significantly in this area and have -- I would say, are also very successful as many of the Tier 1s. We cannot give you -- I would say, there is no single sign for that. So even we can say that in the server market and -- the server markets, we are making our way into, I would say, even the higher power, and there is very much on the high-end side. Maybe Helmut has some additional aspects on the topics.

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Helmut Gassel, Infineon Technologies AG - CMO & Member of Management Board [47]

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Yes, I would just basically reiterate what Reinhard said. Market shares on a quarterly basis are very difficult to track. Overall, I'd say, in xEV, our growth, in particular, with the European car OEMs this year where we feel to have a very strong position will potentially only point towards us growing stronger. I think that some of the announcements that were made on the 77 gigahertz are for revenue later, definitely not in this year, and most likely not even in next year. So we'll see how that development is going to track. And so overall, I would say, we feel pretty confident about our market and market share development. If you look at, for instance, last year, we have grown in 5% in revenue, whereas overall market declined. I think this year, we anticipate the market also to be not higher growth and then our own revenue growth. So we have really no reason to believe that we're losing share.

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Reinhard Ploss, Infineon Technologies AG - Chairman of Management Board, CEO, Head of Research & Development and Labor Director [48]

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An additional 1 year, I think you have to think about what the related products are the people making their announcements. We are strong in the transceivers and make our way into the micros, while others are strong on the micros and the radar area. So I think here, maybe there is some confusion due to that.

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Operator [49]

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We will now take our last question from Aleksander Peterc from Societe Generale.

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Aleksander Peterc, Societe Generale Cross Asset Research - Equity Analyst [50]

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To clarify your comments on idle capacity charges. So you said it last year, the cyclical component depressed your margins by 200 basis points, so that's the -- over and above the normal idle capacity charges. So with EUR 400 million this year, am I right to assume that your pressure this year will be for the cyclical components, the 300 basis points on gross margins? That would be my first question. I have a short follow-up.

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Reinhard Ploss, Infineon Technologies AG - Chairman of Management Board, CEO, Head of Research & Development and Labor Director [51]

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Aleksander, Sven will answer it, I think at the end, you're right.

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Sven Schneider, Infineon Technologies AG - CFO & Member of Management Board [52]

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Confirmed. You're right.

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Aleksander Peterc, Societe Generale Cross Asset Research - Equity Analyst [53]

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Okay. That was easy. And then the second one, also probably quite easy. The Cypress acquisition, would you agree to say that this has taken a little longer than expected? And secondly, on financing, could you just tell us if it's all done and dusted now? Or if there's anything we should still expect to come through as you close this acquisition by the end of the quarter?

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Reinhard Ploss, Infineon Technologies AG - Chairman of Management Board, CEO, Head of Research & Development and Labor Director [54]

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So regarding Cypress, yes, of course. But I think, don't forget, we put ourselves into a position that if there would be a surprisingly fast relief by the government bodies, we have to be able to do it in December. We thought about the beginning of the year and now clarified it and we see some shift outs I think here. But it's, I would say, not indicating in many major issues, which have changed. We have been prepared for working it through and we put quality and -- before speed at that point.

And Sven, regarding the money?

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Sven Schneider, Infineon Technologies AG - CFO & Member of Management Board [55]

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Regarding the money and the financing, so I'm always differentiating into financing and refinancing. So the acquisition facility, as you know, has been fully underwritten at the time of the announcement. So the money would be available from the banks at any moment in time. In the meantime, we have done 2 equity-related steps in order to have a first prepayment or repayment already on hand. The first one was the accelerated book building, the second one was the hybrid bond. Once a transaction closes, we would then start to draw the bank facility, the remaining bank facilities and refinance that in the capital markets. And here is no change to my previous statements, you are aware that give or take, 70% should be debt finance, 30% equity finance. With the equity financing, we are 80% done, and we have a lot of time and flexibility to really assess what we want to do once the closing has happened.

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Alexander Foltin, Infineon Technologies AG - Head of IR [56]

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And with that, ladies and gentlemen, it's time to wrap up. Thank you all for your questions. Our first quarterly call of the decade went into overtime. I hope you appreciate this extended version. It's a sign from our point of view of the interest and of the many things worth talking about. We conclude the call here with further topics, if any, feel free to contact us in the IR team here in Munich. Thanks very much again, and have a good day.