IFX.DE FY2025 Q2 Earnings Call Transcript
Date: 2025-05-08
Source: Financial Modeling Prep

Operator: Good morning, everyone, and welcome to the conference call for analysts and investors for Infineon's 2025 Fiscal Second Results. Today's call will be hosted by Alexander Foltin, Executive Vice President, Finance, Treasury and Investor Relations at Infineon Technologies. As a reminder, this call is being recorded. This conference call contains forward-looking statements and/or assessments about the business, financial condition, performance and strategy of the Infineon Group. These statements and/or assessments are based on assumptions and management expectation resting upon currently available information and present estimates. They are subject to a multitude of uncertainties and risks, many of which are partially or entirely beyond Infineon's control. Infineon's actual business developments, financial conditions, performance and strategy may therefore differ materially from what is discussed in this conference call today. Beyond disclosure requirements as stipulated by law, Infineon does not take any obligation to update these forward-looking statements. At this time, it's my pleasure to turn over to Infineon. Please go ahead.
Alexander Foltin: Good morning, ladies and gentlemen. This is Radio Infineon with the 100th broadcast of quarterly earnings in our corporate history. On the mics today, you have our CEO, Jochen Hanebeck; our CFO, Sven Schneider; and our CMO, Andreas Urschitz. Jochen and Sven will provide a comprehensive overview on the market situation and divisional performance, key financials and our revised outlook. After that, we will start our Q&A session. As usual, the illustrating slide show, which is synchronized with a telephone audio signal, is available at infineon.com/slides. We will again provide a PDF with Jochen's and Sven's introductory remarks in the course of the call on our website, infineon.com investor. There, you will also find a recording of this conference call, including the slides, a copy of our earnings press release as well as our investor presentation. And now, Jochen, over to you.
Jochen Hanebeck: Thank you, Alexander, and good morning, everyone. What a difference a quarter can make in terms of macro and geopolitical events shaping the environment in which we operate. Looking through these external factors for a moment, the underlying business dynamics are largely unfolding for us as predicted. We are past the cyclical trough with customers and distributors in most of our target markets in the process of ending their inventory corrections. Besides normalizing inventory levels, the other key ingredient needed for a cyclical recovery is end demand picking up. And it is here where the headwinds from tariffs are expected to come in and impact on demand over the remaining course of our running fiscal year is likely, but nothing is yet visible in our order book. For Infineon, we therefore focus on managing what we can control, staying agile in the face of short-term market changes and simultaneously work on innovation and structural improvements to optimally set up our company for continued future success. Let's now look back at our March quarter, which has been an in-line one. We recorded revenues of EUR 3.591 billion, 5% up compared to the previous quarter. Positive volume effects were partially offset by annual price declines as expected. Currency played a minor role. The average actual U.S. dollar euro exchange rate was $1.05 in comparison to $1.07 in the quarter before. The segment result amounted to EUR 601 million. The corresponding segment result margin of 16.7% is the same as in the prior quarter, which was supported by a compensation payment from a customer of a mid-double-digit million amount. We were thus able to compensate for the kicking in of annual price adjustments in a fairly robust way. Our order backlog at the end of March was standing at around EUR 20 billion, constant quarter-over-quarter in spite of annual price adjustments and a significantly weaker U.S. dollar at the end of Q2 compared to the end of Q1. Now to our divisional review beginning with automotive. In the second quarter of 2025 fiscal year, automotive achieved revenues of EUR 1.858 billion. This reflects healthy sequential growth of 6% and confirms the underlying improvement of the inventory digestion by customers throughout the quarter. Please note that all reporting figures reflect the transfer of the Sense & Control business line from ATV to PSS as of January 1, 2025. All comparisons provided are adjusted accordingly on a like-for-like basis. The segment result of ATV amounted to EUR 385 million, corresponding to a segment result margin of 20.7%. This represents a sequential improvement driven by higher volumes and a favorable currency effect, which more than offset annual price adjustments and slightly increasing idle cost. We are very pleased to share the latest study from TechInsights, which confirms once more the exceptionally strong traction of our automotive semiconductor business in the market. Based on numbers for 2024, we continue to be the #1 global automotive semiconductor provider with a market share of 13.5%. We have improved our regional positions further and climbed to #1 in Europe and #2 in U.S. We also continue to hold a pole position in China as well as in Korea and the #2 spot in Japan. Our market share in automotive MCUs has risen to 32%, bringing us even to the global #1 position across the entire MCU market for all applications. Now to the present situation. While our recent business performance was slightly better than our initial expectation, the geopolitical environment has become significantly more volatile in recent weeks. Recently implemented U.S. import tariffs are likely to create headwinds for global vehicle production. In response market researcher, S&P Global, has recently lowered its forecast for this year to around 88 million units. Turning now to our recent achievements. We are pleased to share several notable milestones for the ATV business. For example, we won several slots with our AURIX and Traveo microcontroller franchise in one of the lead platforms of a European premium OEM. The lifetime of this platform lasts well into the 2030s. More than half of all microcontroller sockets in the respective vehicles will be supplied by Infineon, resulting in an average content value of several hundred euros per car solely from our microcontroller solutions. Another success includes the usage of our latest AURIX TC4 microcontroller as a safety companionship for the next generation of a leading autonomous driving platform. This high-performance processing unit requires an extraordinarily capable safety host. Together, they enable high-speed ADAS calculation and central compute operations in a secure and dependable way. Moreover, this design win also incorporates Infineon's automotive grade OPTIREG PMIC, providing a complete power management solution. Lastly, we are proud to highlight a significant milestone in battery management system. A leading Chinese EV manufacturer has selected our new 18 channel battery management system, marking the first design win for this next-generation solution. The step-up from the previous 12 channel design enables more compact battery management systems, which is especially important for the upcoming 800-volt battery systems. This innovation sets a new industry benchmark for high-precision sensing and intelligent fast charging capabilities. Finally, on April 8, we announced the signing of an agreement to acquire the automotive Ethernet business of Marvell for a purchase price of USD 2.5 billion. The strategic acquisition marks an important step in strengthening our market-leading microcontroller franchise, particularly in the context of zonal controllers laying the foundation for software-defined vehicles. Besides this, Ethernet will play a key role in other highly promising future application fields such as humanoid robots. The business to be acquired is experiencing strong growth, is highly profitable and will thus be accretive to ATV growth and gross margin upon integration. The transaction is subject to customer regulatory approvals, and we expect closing to occur within the calendar year. Let's now move to Green Industrial Power. From the very low revenue level of the December quarter, GIP recorded the expected sequential growth. Revenues increased by 17% quarter-over-quarter to EUR 397 million. All applications areas contributed to this growth hinting at the anticipated gradual recovery of industrial markets setting in. That being said, the fact that GIP's revenue level is 15% below last year's is showing that such recovery has still a long way to go. The segment result of GIP came in at EUR 38 million in the second quarter of our 2025 fiscal year, leaving the segment result margin at a depressed level of 10%. Essentially, annual price declines offset sequential volume increases, while underutilization charges remain a burden. From a cyclical perspective, industrial markets are at the early stage of a gradual recovery. Customer inventories are trending downwards, but have not yet normalized. Orders in the value chain are picking up slowly, but have yet to translate into broader demand for power semiconductors. Rising tariffs, whether threatened or enacted, are adding a layer of uncertainty. In this environment, pricing pressures are persisting in particular for standard power components in China. Therein, silicon carbide is seeing a dynamic evolution of prices, not least driven by declining substrate prices in a more and more commoditizing market where we benefit from our well-diversified supplier base. In addition, market participants apply forward pricing on the anticipated transition to 200 millimeters. As a consequence, pricing pressures will dampen market expansion in the near term. Therefore, we adjust our projection and now estimate a low annual growth rate for our fiscal 2025 silicon carbide revenues on group level before any tariff impact. Meanwhile, structural growth drivers are unabated. Globally rising power and efficiency requirements support demand for energy generation from renewables as these are oftentimes the most economical sources. Related to this, continuous power infrastructure investments are driven, for example, by capacity extensions of key players in China and government initiatives in Europe. This affects area like transmission and distribution, energy storage systems or uninterruptible power supplies, not least to support AI data center build-outs and also EV charging infrastructure. With our unrivaled offering of power solutions, we are applying a key role in these areas. Now to our Power & Sensor Systems segment. PSS recorded revenues of EUR 979 million in the March quarter, essentially flat compared to the previous quarter. These numbers include the mentioned automotive sensor business line transfer from ATV to PSS. While we noted continued strong growth momentum for our power solutions for AI servers, most consumer-related application saw the expected price downs. Revenue for smartphone components as well as for our sensor portfolio were flat quarter-over-quarter. The segment result of PSS decreased to EUR 138 million, corresponding to a segment result margin of 14.1%. Please keep in mind that the previous quarter's numbers contained a compensation payment of a mid-double-digit million euro amount received from a customer. In other words, like-for-like, the underlying margin has slightly expanded sequentially. Looking at PSS target markets, we see that from a cyclical perspective consumer computing and communication applications have left the trough behind. This is confirmed by business indicators such as rising short-term orders, backlog building, low cancellation rates and normalized channel inventories. AI is poised to remain an engine of growth. The buildout of AI data centers and related infrastructure is continuing at a fast clip, and we see our business scaling up dynamically along the lines we had predicted. A key factor driving Infineon's success in this market is the unrivaled breadth and depth of our product offering. Instead of just focusing on individual power conversion steps, we are closely working together with the development teams of all top customers to holistically design and optimize the entire power flow from grid to core. By bringing together the best silicon, silicon carbide and gallium nitride dies with leading-edge packaging technologies like chip embedding, we achieved superior power density, energy efficiency and thermal performance. As an example, beyond power stages, we are now designed into the intermediate bus converters or IBCs, of one of the platforms of a leading AI processor company. With our OptiMOS 6 in a 5x6-millimeter dual-site cooling package, we are setting a new industry benchmark, fitting optimally into the constrained space of AI servers for accelerated compute. To complete the divisional review, let's take a look at the Connected Secure Systems. CSS recorded quarterly revenues of EUR 356 million, representing a 3% increase compared to the December quarter. Driven by higher revenues and some structural effects, the segment result of CSS rose to EUR 40 million, corresponding to a segment result margin of 11.2%. IoT and security markets remain close to the bottom as macroeconomic uncertainties continue to weigh on consumer sentiment and corporate spending. Against this backdrop, we continue to innovate and deliver cutting-edge products that lay the foundation for future growth. Executing on our development road map, we have further expanded our PSOC microcontroller portfolio. Following the successful launch of PSOC Control, we introduced PSOC Multi-Sense family. This new lineup enhances Infineon leading CAPSENSE capacitive sensing technology by integrating proprietary inductive sensing as well as noninvasive liquid sensing solutions. These advancements provide developers with unparalleled flexibility to create advanced HMI and sensing applications, ranging from sleek metallic product designs with touch on metal buttons to waterproof touch interfaces and innovative liquid sensing technologies. In addition, we are driving the adoption of AI-enabled application with a PSOC Edge family. By integrating NVIDIA's TAO models into a comprehensive development ecosystem, including tools, libraries and documentations, we enable developers to accelerate innovation and shorten time to market for Edge devices. This positions Infineon as a key player in the very dynamic Edge AI space. Sustainability continues to be a core focus for Infineon, and we are proud of the strides we are making in this area. With SECORA Pay Green, we are leading the way in sustainable payment technologies. This solution enables the production of fully recyclable dual interfaces, contactless payment card bodies that eliminate the need for an additional card antenna. Our innovation has been recognized by both customers and industry leaders, including Mastercard, which has added Infineon to its Greener Payments Partnership. Now over to Sven, who will comment on our key financial figures.
Sven Schneider: Thank you, Jochen, and good morning, everyone. Starting as usual with the gross margin. As most of you are following Infineon already for a long time, you're aware that the bulk of our contracted annual price changes is kicking in, in the March quarter, typically constituting a burden. Considering this and the revenue level still impacted by inventory digestion by our customers, we are pleased to see that we could keep the adjusted gross margin above the 40% mark. With 40.9%, it remained flat to the previous quarter's 41.1%. Several factors were at play here. Volume and productivity gains contributed positively as well as a slightly favorable currency development. On the other hand, idle costs went up to some extent quarter-over-quarter. The reported gross margin decreased slightly quarter-over-quarter from 39.2% to 38.7%. On the OpEx side, research and development expenses went up slightly to EUR 559 million in the March quarter after EUR 544 million in the December quarter. We are consistently building an innovation road map to nurture future opportunities for profitable growth. Prime current examples are a 12-nanometer FinFET tape-out for future generation for our AURIX automotive microcontroller family or the introduction of a trench-based superjunction concept for silicon carbide devices. Our selling, general and administrative expenses declined sequentially from EUR 395 million to EUR 376 million, evidence of strict cost discipline and showing the first fruits of the SG&A part of our step-up initiative. Net other operating expenses amounted to EUR 138 million, mainly related to impairment charges on manufacturing equipment at our 200-millimeter Austin site, which we plan to sell to the U.S. foundry, SkyWater. These charges are part of the non-segment results, which amounted to minus EUR 283 million for the March quarter. The financial result for the second quarter of our 2025 fiscal year amounted to minus EUR 28 million after minus EUR 17 million in the quarter before. Income tax expense for the March quarter amounted to EUR 63 million, equivalent to an effective tax rate of 22%. Cash taxes for our second fiscal quarter were EUR 80 million, down from EUR 152 million in the previous quarter, which had contained payments made for prior years. Adjusting for PPA effects, the quarterly cash tax rate stood at 20%. Our investments into property, plant and equipment, other intangible assets and capitalized development costs went down noticeably as planned and in line with our annual CapEx budget from EUR 731 million to EUR 470 million. Depreciation and amortization expenses, including acquisition-related nonsegment result effects, remained essentially flat with EUR 483 million. Our free cash flow improved quarter-over-quarter from minus EUR 237 million to plus EUR 174 million. Main drivers for the improvement were lower investments, less paid taxes and the nonrecurrence of annual bonus payouts in the December quarter. Also, changes in inventories contributed positively. Here, our cycle management efforts are showing positive effects. In a challenging market environment, characterized by customers and distributors destocking, our inventories went slightly down over the course of the March quarter, the reach declining from 190 to 177 days. Towards the end of our running fiscal year, we continue to target a reach level in line with end of last year. This implies that we will need to keep fab utilization levels at low levels, also in the light of potential tariff-related demand risks. Going forward, quarterly idle charges will, therefore, be higher than previously anticipated and be a margin drag in our fiscal H2. Jochen will comment on it in the outlook session. Now to our liquidity and leverage. Our corporate finance team had an eventful and successful quarter. After signing a EUR 2 billion committed standby revolving credit facility, about which we reported already last time, a EUR 700 million bond was issued in February with a 5-year tenure and a coupon below 3%. Also in this quarter, we repaid a EUR 500 million bond at maturity, called and redeemed a EUR 600 million hybrid bond and paid out our annual dividend of EUR 455 million. At the end of March, our gross cash position equated around EUR 1.7 billion. Our gross debt amounted to EUR 5.5 billion. These figures contain EUR 400 million in drawn short-term credit facilities. Our gross leverage is 1.5x, net leverage is amounting to 1.1x. The financing of the planned acquisition of the automotive Ethernet business from Marvell is another example of how we apply our conservative financial policy. We have put in place a committed acquisition facility from our banks consisting of a EUR 1 billion and USD 1 billion tranche. This facility will be drawn at closing. For the majority of the remaining related currency risk of the planned acquisition, we have concluded so-called deal contingent foreign currency hedges. S&P Global has confirmed that the fully debt financed acquisition is commensurate with our investment-grade rating of BBB+ stable. Finally, our after-tax reported return on capital employed for the second fiscal quarter of 2025 came in at around 5%. Now back to Jochen, who will comment on our outlook.
Jochen Hanebeck: Thank you, Sven. When looking at the cyclical dynamics in our target markets, our initial predictions are providing to be fully correct. Inventory corrections by automotive customers have largely ended. In industrial, they are getting less intense. Stock levels in consumer markets have normalized. With this, the foundation for a cyclical upturn would be late in principle. Observing short-term customer order behavior and a high share of turns business we had so far been cautiously optimistic, calling for a modest recovery in the second half of our 2025 fiscal year. We continue to think this is what best describes the underlying dynamics. And if there weren't any changes to tariff policies, we would essentially reiterate and confirm our guidance from last quarter, even taking a substantial negative currency effect from moving our U.S. dollar-euro exchange rate assumption from $1.05 to $1.125 into consideration. But the world has changed and the macroeconomic and geopolitical factors are fast-moving goalpost at presence. Trade conflicts have intensified, sparked by announced, enacted and partly paused tariffs and counter tariffs. There are not yet semiconductor-specific tariffs in place. However, in the flux situation around tariffs is impacting customer demand and likely leading to end market weakening. After the announcement of a 90-day pause on the so-called reciprocal tariffs, there is currently no clarity around the extent of U.S. and potential retaliatory tariffs. But it seems logical that whatever the outcome, economic growth is already impacted as uncertainty is weighing on consumer sentiment and corporate investment in the short term. Chip demand is also likely due be affected by supply chain disruptions as OEMs assess the impact on their product demand, their manufacturing strategy and which locations they would want chips to be delivered to. Some are likely to cut inventory levels further in the light of potentially weaker demand. Others might restock to manage geopolitical volatility. To be clear, we do not see any of these described impacts in our order books yet, but we expect them to come to a certain degree in the remainder of our current fiscal year. The magnitude and duration of these indirect effects is highly difficult to predict, but being mindful of them and fully transparent to you, we decided to prudently adjust our outlook downward. Let me start with our outlook for the full 2025 fiscal year, which under German disclosure rules in contrast to our main international peers we have to provide. As you are aware, we had so far predicted our annual revenues to be flat to slightly up compared to fiscal '24 based on a U.S. dollar-euro exchange rate of $1.05. We are now changing our currency assumption to $1.125 for the remainder of the fiscal year. Even with this adverse currency effect, we would still be within the range of our former guidance, including a mid- to high-teens segment result margin level. However, we need to be mindful of likely tariff-related indirect demand effects. Take, for example, the recent announcement of several automotive OEMs who either pulled or meaningfully reduced their forecast for 2025. Also other markets will probably be affected by tariff-related headwinds. As said, we are not able to calculate these effects or derive any number from our order intake or change in order behavior of our customers at this moment in time. Therefore, we guesstimate them at a magnitude of around 10% of our planned Q4 revenue. Including both these factors, tariff and adverse currency impacts, we now predict our revenues for the 2025 fiscal year to be slightly down on an annual basis. Our reduced revenue outlook consequently affects our margin assumptions for the 2025 fiscal year. We expect our full year adjusted gross margin to come in around 40%, whereas our segment result margin should land at a mid-teens percentage level. Idle charges in the second half of our fiscal year will be higher than previously assumed. For the full year, they are expected to amount to around EUR 1 billion. The vast majority of them is of a cyclical nature to keep our inventories at healthy levels, considering a margin headwind of now around 600 basis points for the 2025 fiscal year. We will continue to manage what we can control and put in significant efforts to safeguard and improve our current margin levels, benefiting from the first positive effects of our step-up initiative. Overall, we are progressing with step-up as planned. In the current context, we plan to reduce our investments, including capitalized development expenses to around EUR 2.3 billion from around EUR 2.5 billion before. For depreciation and amortization, we now anticipate around EUR 1.9 billion, including around EUR 400 million resulting from purchase price allocations, which are recognized in our nonsegment result. For the reported free cash flow, we continue to expect a level of around EUR 900 billion. Our adjusted free cash flow net of investments into major front-end buildings is now expected to come at around EUR 1.6 billion compared to EUR 1.7 billion as predicted before, given that some of the invest push outs affect large front-end buildings. For the sake of abundant clarity, our forecasts do not include the automotive Ethernet business of Marvell, which we intend to acquire. For the currently running third quarter of our 2025 fiscal year, we expect revenues to come in around EUR 3.7 billion, equivalent to around 3% sequential growth. This also assumes a U.S. dollar euro exchange rate of $1.125. And hence, the like-for-like growth at constant currencies would be around 8%. On a divisional level, we expect a higher quarter-over-quarter growth rate for GIP and PSS, whereas ATV is assumed to grow below group average. For CSS, we forecast revenues to be sequentially down. For the June quarter segment result margin, we expect a mid-teens percentage level. In comparison to the March quarter, we expect less favorable currency relations as well as an impact from annual merit increases, which became effective on April 1. Before coming to the summary, I would like to share 2 additional good news with you. The first is another milestone in our sustainability road map. The Science Based Targets initiative has officially approved our science-based target. This target includes Scope 3 emissions in covering purchased goods and services, capital goods and upstream transportation and distribution. Having a validated science-based target, including Scope 3 emissions, is an important milestone for us and will further strengthen Infineon's position as role model in sustainability. The second piece of good news is about our Smart Power Fab we are currently building in Dresden. The German government has issued the final funding approval supporting fifth of the overall investment. Meanwhile, the construction of our new fab for analog, mixed signal and power products is proceeding as planned. The building shell almost is complete, bringing highly efficient, scalable and resilient supply for fields like renewable energies, data centers and e-mobility. Before going into Q&A, ladies and gentlemen, let me summarize. The second quarter of our 2025 fiscal year came in fully in line with our expectations with revenues of EUR 3.6 billion and a segment result margin of 16.7%. As market data is showing, Infineon has fortified and expanded its global leadership in automotive semiconductors. The planned acquisition of Marvell's automotive Ethernet business will position us optimally to shape the future of software-defined vehicles but also in areas like humanoid robots. Outside of automotive, several high-growth applications areas prove our innovative strength and system competence, first and foremost, powering AI data centers but also energy storage systems or Edge AI solutions are gaining traction. Our markets have bottomed and inventory levels mostly normalized. Normally, the runway would be clear for the envisioned modest recovery to set in. Alas, tariff-induced market uncertainties are considering indirect demand headwinds. To account for this, we can only guess the potential impact at this point. Including this as well as a weaker U.S. dollar, we revised our revenue guidance for fiscal '25 to slightly down. Cycle management and focusing on things we can control remain key to navigate the near term. Beyond that, our growth potential remains highly attractive, and we are strengthening our innovation power and leverage structural improvements to optimally benefit from secular trends.
Alexander Foltin: Thank you, Jochen and Sven. Ladies and gentlemen, this concludes the introductory part of our broadcast today. We're now opening the call for the interactive part, i.e., your questions. We kindly ask you to limit yourself to one question and one follow-up. Operator, please start the Q&A session.
Operator: [Operator Instructions] We'll take our first question from Didier Scemama, Bank of America.
Didier Scemama: My first question, maybe for Sven, on the margin guidance for the full year, the revision from mid to high teens to mid-teens. I just wanted to understand the mechanics a little bit because, obviously, you were not quite there when you were guiding at $1.10 before. So I just wanted to understand gross margin, you said adjusted about 40%. Are there any specific elements in OpEx that we should be mindful of? Or are you seeing more pricing pressure perhaps that would warrant the lower segment results margin? And I've got a follow-up.
Sven Schneider: Yes, Didier, thank you for asking. So first of all, starting with the gross margin. So indeed, it's around 40%, which stays at that level and is now in around 40%. There are different levels at play, taking our haircut for the Q4 into consideration. There is, of course, a certain volume reduction included, which then is also translated to be consistent in higher underutilization charges. And that's, of course, a negative for gross margin and segment result margin. That's one change to the last call. To what extent that will materialize, we, of course, do not know. As Jochen has said, it's a guesstimate. The second point is currency. There is a currency effect, which is pretty relevant. And maybe I also take the liberty to answer that because I get a lot of questions in the meantime here from you guys. These $0.075 from $1.05 to $1.125 and please don't ask me where the dollar will be. Honestly, I don't know. I've given up on forecasting the dollar. We just took the midpoint between $1.10 and $1.15, that's why it sounds a little bit mathematical. The $0.075 translates into close to EUR 400 million of revenue headwind for the second half and translate into give or take EUR 150 million, EUR 170 million of segment result headwind for second half. So that's another impact. And then lastly, I'd also said in the intro. There are, in certain components, standard power components, some price reductions on the industrial side. Also, that is reflected in the margin guidance.
Didier Scemama: Okay. Very clear. For my follow-up, I just wanted to also understand a little bit to guesstimate on the tariff-induced reduction. So what are you assuming for the September quarter for the various divisions? Are you expecting, for instance, automotive to decline sequentially? Or if you could help us understand a little bit where the haircut is coming from?
Sven Schneider: Yes. So Didier, again, it's a guesstimate. I mean we are all looking at the tariff uncertainty. As we said, some tariffs, and I'm talking indirect tariffs. Some indirect tariffs have been announced in our life already. Others have been announced and taken away. Reciprocal tariffs, the retaliation, all these things are uncertain. Therefore, we do not have any mathematical calculation behind this haircut. And to be also transparent, 10% of Q4 translates into, give or take, EUR 400 million of revenue haircut. So no mathematics behind it. It's not visible in our order book. We do not see it in our numbers. We do not get clear messages from our customers that they are postponing or canceling orders. It is a guesstimate. It could also have been 5%, to be honest. We decided to give you 10%. You have now full transparency, both on currency and on our haircut with regard to revenues, and you will have lots of intelligence to deal with it and put it accordingly into your models. Nothing else than that is included. We think it's a derisking of this year's guidance.
Didier Scemama: No, I think that's very kind and very clear. And I think brilliant, what you've done. Maybe my final question on AI. I just wanted to know if you -- because you haven't really talked about your guide for this year or for next year. So are we still on track for EUR 600 million for this year? And is the EUR 1 billion sort of achievable next year in spite of FX? So should we assume a haircut also because of FX?
Andreas Urschitz: Yes. Andreas speaking, Didier. To cut long story short, we absolutely confirm the EUR 600 million prediction for the running year. As you know, Infineon is powering AI. So we do that from what we call the grid to the core. We, in the meantime, occupy all the meaningful steps in between. So talking about this power flow. So from the AC to DC converter, the switch mode power supply over the intermediate bus converter, Jochen commented on this, towards then powering the core processors. And within that, we have a sustainable differentiation potential going forward, optimizing with GPU makers, but also server rack makers and data center operators, the power efficiency and also power density in given AI data centers, which Infineon simply is excelling. Having said that, full confirmation.
Sven Schneider: And Didier -- go ahead, because I just wanted to add something to your previous question, but do you have a follow-up to Andreas. Please go ahead.
Didier Scemama: No, just on the EUR 1 billion for next year. I think last quarter, you said that that's very much, I wouldn't say in the bag, but that's a realistic ambition. Is that still the case?
Andreas Urschitz: Didier, yes, we reconfirm the EUR 1 billion.
Sven Schneider: And now my small addition because I forgot to mention that. On the segment result in gross margin effect, Didier, also one last comment on guestimates and potential effects. I think we should also be realistic. I mean, this is a guesstimate, as I said. The later it comes or the smaller it gets, the more upside we have on our mid-teens segment result margin, to be also very clear and transparent on that level.
Didier Scemama: That’s incredibly clear and I really appreciate all the work you’ve done there to make our life a bit easier.
Operator: The next question comes from Menon Janardan, Jefferies.
Janardan Menon: I just want to go back to the fiscal Q4 outlook. Let's assume that you don't get any kind of a tariff impact, which may be unrealistic. But just looking at where your order book is currently, how would you expect the different businesses to perform into Q4? Would the -- I'm not asking for specific quarter-on-quarter guidance by business. But would the maximum strongest momentum be in the automotive division into Q4 based on your current visibility or would it be a continuing rebound in industrial, both GIP and the PSS as well as in AI? I mean, just qualitatively, can you tell me based on your current visibility, what Q4 is looking like?
Sven Schneider: Yes, Janardan, thank you for the question. So again, it's difficult to predict. But if we just go back to a normal seasonality for an unaffected quarter or second half, you would usually see a stronger growth momentum for automotive and for PSS. Industrial, the inventory digestion is abating, but still going on and CSS has different dynamics, as you know. So I would probably answer with a normal quarter unaffected auto and PSS.
Janardan Menon: Understood. And on the GIP price pressure, it appears to me that this is not going to go away because Chinese competitors are predominantly competing with you in the power discrete side, especially IGBTs and going forward, possibly silicon carbide. And some of your non-Chinese competitors are also likely to be trying to get some share there. How do you see -- how do you -- and we are dealing with that in the longer term, not so much what's the FY '25 outlook, but '26, '27. This is something you'll have to deal with on an ongoing basis. Is there any action or strategic approach that you can take to sort of mitigate this effect on overall Infineon's numbers going forward?
Jochen Hanebeck: Yes. Thanks for the question. I'll try to answer. I think we have to segment that market more. There are clearly products, which we call standard power semiconductors taken IGBT or also our silicon carbide device in a TO-247 where differentiation becomes more challenging. If it comes to high-reliability modules, the game looks very different. And this is what you need, for example, for ESS, but also for transmission. So here we can clearly differentiate ourselves in the market by the package side. On the front-end, the technology side, we are, in terms of silicon carbide MOSFETs, one or two generations ahead of competition when it comes to our area efficiency and figure of merits for silicon carbide MOSFETs. And by the way, the same is true for silicon MOSFETs. We are ahead one or two generation. So we have to segment that market and some market segments like, for example, a solar residential inverter built up by discrete is probably not an area for us to play. But when it comes to higher reliability and the high-performance application, we clearly have a right to play. And just a case in point, as you asked also for the overall effect on Infineon, which, of course, is highly good part is automotive. Our revenue in China for automotive year-over-year grew double digit. Automotive revenue, China year-over-year grew double digit. And that includes also the whole portfolio.
Janardan Menon: Okay. Yes. I'm assuming that this effect will be much more on your industrial business than on your automotive business in general.
Jochen Hanebeck: Because in automotive, higher reliability performance plays out, but don’t underestimate the requirements in power infrastructure. The more renewables come into the net – into the grid, the more demanding the application becomes, effects like grid shaping plays a role. And so we expect there is a good part of the market where we can play our offshore wind, right? Same thing in China, maintenance of offshore wind is difficult.
Operator: The next question comes from Stephane Houri, ODDO BHF.
Stephane Houri: Yes. Actually, I have a question on the -- your comments about the end of the inventory collection notably in the automotive space. Can you maybe remind us what is the current level of inventories in terms of number of weeks at your automotive customers? And do you see the automotive market, let's say, stabilizing everywhere in terms of geography, but also in terms of mix, EV versus hybrid, IC, et cetera? Can you maybe give us some overview about what's happening there?
Jochen Hanebeck: So the inventories at the customers are difficult to state. We can share with you that our overall inventory in our distribution channel is very much on target. We have a target in 10 to 12 weeks. And we are at the upper end of 12 weeks, and automotive is not really an exception to that, but very much in line. On the inventories beyond that, meaning at the Tier 1s, we do not really have transparency. We call, of course, our major customers, get indications and from that we have derived our statements, which I made in the introduction that we see things coming to a normal level. In some areas -- that's, of course, an average statement. In some areas, it's already in a, let's say, risky territory because some Tier 1s, of course, under cash constraints, manage their inventory further down. In other areas, it might be a little bit higher, but the average is normal. And therefore, we also see that our automotive business now in the last quarter picked up, especially currency neutral or at same currency.
Stephane Houri: Okay. And regarding China, is there anything specific happening in the Chinese market, which has been driving the growth while the others were a bit, let's say, negative so far?
Jochen Hanebeck: On automotive, I think you have seen the latest number for April in China. The market is there. And we are participating in a nice way. I just mentioned in the previous question that our automotive revenue grew double-digit year-over-year in the quarter. So we are participating. We are exposed to the right OEMs. I think we made it public in the past. We have a broad coverage. So I'm very happy with the development I see there. Anything to add, Andreas?
Andreas Urschitz: Yes. Just to build on what Jochen has been saying. So as a matter of fact, talking about China, in the automotive sector, we continued to increase auto market share to 13.9 percentage points. So you can see it also in the market share this revenue growth as a result of many, many things, including portfolio breadth, our P2S approach, reliability commitment and a couple of other such factors that play into the equation, so.
Operator: The next question comes from Joshua Buchalter, TD Cowen.
Joshua Buchalter: For my first one, I wanted to ask about the auto MCU business. I mean you showed another year of very meaningful share growth. I think you hit 32%. I mean how much further can that go? Are you reaching the point where the market is getting pretty saturated and more concentrated than usual? And -- or do you think there's more room to run on the auto MCU share gain side, given your investments in SDV in your AURIX family?
Jochen Hanebeck: Yes, you know, probably that this story dates back many, many years. So the design wins we harvest today date back 3, 5 years in case of platforms. I do expect some further gains. But of course, always keep in mind that FX and inventory effects can alter the numbers. But we are just in the transition from the 65-nanometer generation to the 40-nanometer generation and the big design win step function took place in the 40-nanometer generation. So I think we have still a good runway where exactly reach is very difficult to predict.
Joshua Buchalter: Okay. And I apologize, it's early here, but I'm a little confused on the gross margin half-over-half direction. I mean it looks like revenue is going to be up sort of high single digits. You mentioned how you basically maintained the guidance despite the 10% haircut. So I can imagine there's a huge change in volumes there. Can you help -- is there a currency impact on the COGS line? I know you gave the rule of thumb on revenue and operating income. But yes, I just remain a little bit confused as to why gross margin is going to be down sort of 100, 150 basis points half over half.
Sven Schneider: Yes, Josh, it’s Sven. I take the question. So of course, you are an expert. It’s in a round number. So you can look at a round from the north or from the south. And here, to be fair, I would say the second half is probably more looking from a northern perspective to the 40%. Whereas the first half is more from a northern perspective, the second half, if our haircut comes and materializes, is then maybe looking a little bit more from the south to the 40%. For the full year, it still remains around 40%. That’s our current view. But you are right. There are a couple of our sites, which are also benefiting, of course, from lower costs in U.S. dollar, but that is factored in our rule of thumb [$0.10] for the profitability and [$0.25] per quarter on revenue.
Operator: The next question comes from Sandeep Deshpande, JPMorgan.
Sandeep Deshpande: I have a question actually following up to Janardan's earlier question on pricing, but actually related to automotive. I mean one of your big U.S. competitors has talked about using pricing as a lever to keep their share or grow their share. I mean, are we going back to the bad old days in semiconductors and particularly in automotive semiconductors where they seem to be wanting to keep their share in terms of pricing? And how does that -- how is Infineon seeing this game being played out?
Jochen Hanebeck: Yes. Sandeep, in automotive, we -- you know most of it is under annual price agreements and they came in as exactly as we predicted. I mentioned in the intro, there is the specific area of silicon carbide, where prices are coming down, but please keep in mind, that's to a very good extent is forward pricing, the substrates becoming a commodity, which is beneficial for us. And the 8-inch transition is in rollout for all market participants, which typically is a situation where forward pricing is applied. But remember, we also have other means in our hand, the extension of more and more volume now coming out of Kulim and at the same time our leading edge technology, the silicon carbide trench. So I do not see it as a general automotive pricing change and I don't know exactly what this competitor has in mind.
Sandeep Deshpande: Understood. And a follow-up on your business with the hyperscalers, et cetera. There you clearly gained more share than you expected in the first half of the year because of how the share between yourselves and some of your other competitors played out in the platform. So what we are hearing through the supply chain that share between yourselves and the competitors is going to change somewhat into the second half of the year. Is that going to play out in your revenues? And is that going to impact your revenues into the second half of the year at all?
Andreas Urschitz: So it's all within what we've been stating before. So we are about to grow the revenue towards EUR 600 million, so coming from EUR 400 million in the previous year. Next year, we go towards the EUR 1 billion. So having said that, obviously, we are gaining share in that growing market against competition. So I can just reiterate what has been said before.
Jochen Hanebeck: Last year, EUR 250 million, not EUR 400 million. So we are growing and yes, there’s always some noise, Sandeep, but rest assured, we will deliver.
Operator: The next question comes from Jakob Bluestone, BNP Paribas.
Jakob Bluestone: I just had a question on the CapEx guidance. You cut your CapEx by EUR 200 million. Is that just currency? Or are there areas where you're scaling back in anticipation of the potential tariff effects?
Sven Schneider: Yes. Jakob, Sven here. There is a minor currency effect, but the bigger one is push out of major front-end buildings into next fiscal quarter that relates mostly to Dresden and Kulim. And if you want a split of the EUR 2.3 billion, ballpark, very rough a bit more than EUR 1 billion is maintenance and the capitalization. A good half is for the front-end buildings and a good half is for capacity growth, the latter mostly around AI and wide bandgap.
Jochen Hanebeck: And maybe let me add to this. I mean, we talked about the tariff effect. We don’t know how it will play out. We would still consider Dresden module 4 necessary because we would foresee if then the tariffs will play out in a way of a delayed upturn. But mid- to long term, of course, our structural growth drivers kick in like the AI topic we just discussed. And therefore, it’s more of a, let’s say, detailed timing question now. One, exactly we ramp up Dresden in which modular steps rather than any second thought on whether we need to module at all. We need it, and we will ramp up according to demand in a modular way.
Operator: The next question comes from Andrew Gardiner, Citi.
Andrew Gardiner: I had one on the -- just on the outlook and how you're perhaps managing between what you're telling us in terms of the financial communication and the actual operations. I fully appreciate you trying to derisk numbers for this year. I think we all appreciate that relative to the approach some of your global peers have taken. But when you got orders actually increasing and customers aren't actually changing anything yet, are you -- you're factoring in an underutilization charge in the guidance that you're giving us. But are you actually slowing the fabs already? Is there -- how are you managing that risk? You can tell us that you're taking a guess in terms of the communication to the market. But it's obviously much more difficult, more risky for you to just take a guess as to how to actually manage the fab loading and your production.
Jochen Hanebeck: Yes, a very good question. And we are preparing measures for the summer to potentially reduce our loading further. We will observe the order entry for the next, let’s say, 2, 3 months. And then we still have actions, time to act. And of course, our high inventory levels also help us to balance any short-term movements. But it’s a bit of a challenge. You’re spot on.
Operator: The next question comes from Adithya Metuku from HSBC.
Adithya Metuku: So firstly, just thinking through the -- thinking about the underlying guide. You clearly upgrading your guide, excluding the impact from tariffs and FX. So I just wondered if you could give us some color on which end markets are driving this underlying upgrade? Where are you seeing better trends than you expected maybe a quarter or 2 ago? And then just as a follow-on to the previous question. If your tariff assumptions turn out to be conservative, say, midway through the quarter, how quickly can you ramp up production to meet end demand? Any color around that would be great.
Sven Schneider: Adi, I'll take your first question,. So I mean, let's go back again to what we have done and depicted. I mean if you just take no currency and no haircut, then we would be in line with the previous guidance. And even with the currency change, we would still be around last time's guidance. So I do not think that's an upgrade. It's a confirmation of the previous guidance without the tariff haircuts. And it's just a confirmation of what we said from November onwards that there is this modest recovery in our key end markets in the second half once the inventory digestion has happened. That's how I would characterize the guidance and the upgrade.
Jochen Hanebeck: And on the second question, it's basically the other side of the question that has been asked just before, if we are too conservative on this assumption on this guestimate of the tariff impact. Then, of course, we would need to continue with our loading. And here, of course, we have several means in our hands going from overtime budgets where we can ask colleagues to stay at home or come in. We could also make use of the German scheme of short-time work, thank you, which is also rather flexible. So I think we have a lot of ways to manage the loading, but it's -- as I said before, it's a bit of a challenge.
Adithya Metuku: Understood. Maybe just a quick follow-up on silicon carbide. Post the BYD announcement around the megawatt charging, I just wondered if you are seeing any additional interest in SiC design wins picking up from customers for fast charging.
Jochen Hanebeck: Yes. I think the presentation of BYD is interesting, even though it’s, first of all, a topic of the battery and, of course, of the infrastructure. We offer also 1,500, 1,700 volts silicon carbide MOSFETs. Whether this becomes mainstream, we need to see. But the value proposition of silicon carbide is fully intact, even without that topic. And for battery electric vehicle, it’s the choice and we see it fast – quickly being adopted across the globe.
Operator: [Operator Instructions] The next question comes from Lee Simpson, Morgan Stanley.
Lee Simpson: So let's keep it to 1 question then. Maybe I'll just ask on product development. We've had a lot of questions already on the tariffing. I thought it was quite interesting. You mentioned a couple of developments there. I think the PSOC, especially the work in CAPSENSE, looks quite interesting. Could you maybe just surmise for us what the end markets would be. It does look as so physical AI might be something you're considering. And then maybe just associated with product development. Are we assuming that -- you've done superjunction for quite some time, but trench in superjunction here for silicon carbide that looks like a first for the market. And did you say 800 volts? And is that really being targeted at China?
Jochen Hanebeck: So I take the question even though Sven raised the topic of superjunction. So indeed, we are coming out with our first superjunction trench combination for silicon carbide, which I believe propels us ahead because combining trench and superjunction is the perfect match. If you add superjunction to a planer or other constructions, it doesn't add so much benefit. So we are very enthusiastic about the capabilities of this cell, and we will also communicate here more into the market soon. Again, contributing to the mantra, we stay ahead in terms of cell generations compared to competition, whether they are based in the east or in the west. In terms PSOC CAPSENSE, that's a very interesting IP. So far, we used it for capacitive sensing. So if you think about, for example, your major home appliances at home, likely they use this technology, but you might also have experienced a situation where you have a wet hand and then these capacitive-based buttons do not work. And that's why we're working for a while on inductive, where you can then use it also perfectly with wet hands to give you a very practical example. And also, we are using this technology now for liquid level sensing. There are many industrial applications where you need to know the level of liquid in a given box or whatever. And that's also a very nice application. So we offer now inductive and capacitive sensing. And Sven wants to add to R&D. Please go ahead.
Sven Schneider: I’ve probably triggered the question. I also need to contribute. So therefore, Lee, just to add. The step-up initiative, as we said, is initiative to structurally improve our competitiveness. But on the other hand, it should by no means damage our innovation strength of pipeline. And so I think that’s – this quarter is a very good example, where on the R&D, we keep investing into the right profitable growth bucket, whereas on the SG&A side, you see the first impact. So I think that’s pretty relevant.
Operator: The next question comes from Sébastien Sztabowicz, Kepler Cheuvreux.
Sébastien Sztabowicz: One on the fab loading. Where are you standing right now in both your front-end and back-end fab? And how do you see your fab loading moving into the second part of the year given your assumption for top line and the 10% haircut?
Sven Schneider: Fab loading, Sébastien, in the 70s and in the high 60s. This is the answer to the first question, front-end, back-end.
Jochen Hanebeck: Front-end and back-end yeah.
Sébastien Sztabowicz: And for the second part of the year, where do you see the loading trending?
Jochen Hanebeck: Yes, that depends now on whether this guesstimate materializes or not. If it doesn't materialize, I think it will gradually -- slightly, gradually go up. But of course, if this effect happens, as outlined by Sven, we might have to adjust the loading, but that's incorporated in the guidance. So we have taken out the EUR 400 million in Q4, including then the higher underutilization charges.
Sven Schneider: Therefore, on the underutilization charges, Sébastien, we said EUR 1 billion, give or take. So we had to now include more in the Q4 than previously. So therefore, the split has changed also a bit. Now it’s, give or take, 55% first half, 45% second half. Last time I said 60-40. So you see here this shift coming from the haircut-related additional idle in Q4.
Operator: Ladies and gentlemen, that was the last question. I would now like to turn the word over to Alexander Foltin for closing remarks.
Alexander Foltin: Thanks, everyone. Radio Infineon will go off the wires for today. But we are certain you will remain tuned in. For doing so and any further questions, please feel free to contact the IR team here in the Munich studio. Take care. Good day and good luck.