IFX.DE FY2025 Q3 Earnings Call Transcript
Date: 2025-08-05
Source: Financial Modeling Prep

Operator: Ladies and gentlemen, good morning, everyone. Welcome to the conference call for analysts and investors for Infineon's 2025 Fiscal Third Quarter Results. Today's call will be hosted by Alexander Foltin, Executive Vice President, Finance and 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 conditions, performance and strategy of the Infineon Group. These statements and/or assessments are based on assumptions and management expectations 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 development, financial conditions, performance and strategy may therefore differ materially from what is discussed in this conference call. Beyond disclosure requirements stipulated by law, Infineon does not undertake any obligations to update forward-looking statements. At this time, I would like to turn the call over to Infineon. Please go ahead.
Alexander Foltin: Good morning, ladies and gentlemen. Thank you for joining our summerly earnings call covering the third quarter of our 2025 fiscal year. On this call, you have our CEO, Jochen Hanebeck, our CFO, Sven Schneider; and our CMO, Andreas Urschitz. Following our proven routine, Jochen and Sven will provide an overview on the market situation and divisional performance, key financials and our 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, namely infineon.com/ investor. There, you will also find a recording of this conference call, including the aforementioned slides. A, copy of our earnings press release as well as our investor presentation. At this time, Jochen, over to you.
Jochen Hanebeck: Thank you, Alexander and good morning, everyone. Let me start today's call with some broader perspectives. Semiconductor markets are slowly coming out of one of the most protracted downturns in history. After long rolling cyclical correction affecting different end markets at different points in time, we should expect a rolling recovery to set in. And we are indeed seeing more evidence of it. Our June quarter marked the second consecutive one with sequential growth at constant currency, even above 9%. In the September quarter, we expect revenues to grow again and it will be the first quarter in 2 years with year-over-year growth, considering a material adverse currency development. That said, the usual dynamics of supply and demand remain influenced by geopolitical and macroeconomic turmoils. In the light of rising U.S. tariff schemes, customers order on short notice and are refraining from any broader restocking. Hence, we continue to expect some near-term headwinds, which we will address with our proven cycle management. From a more structural point of view, I would like to offer a fresh look at Infineon. Aligning the presentation of our product categories closer to industry standards, the success of our strategy to build an unmatched and system relevant portfolio of competencies becomes even more apparent. Taking our revenue from the 2024 fiscal year as the basis, around 40% relates to power discretes and modules, our historical stronghold covering silicon, silicon carbide and gallium nitride around 30% pertains to analog and sensors. This includes, for example, drivers, DC-DC converters and smart power switches and of course, our broad array of sensors as well as our portfolio of specialty memories. The final 30% belong to the control and connectivity category encompassing our automotive security, industrial microcontrollers as well as broad spectrum of wireless and wired product families. The later will be strengthened further through the acquisition of the Automotive Ethernet business from Marvell on which I will share good news with you in a moment. For Infineon's differentiation and value creation, it is imperative to have this complementing portfolio and related deep set of competencies. Based on them, we will be able to also address applications, which are yet to emerge and following our P2S approach will then deliver long-term value. Now let me continue with a look at our June quarter financials. In our third quarter, we recorded revenues of EUR 3.704 billion. This represents a sequential increase of around 3% despite a substantial negative currency effect with an average U.S. dollar-euro exchange rate of 1.14 for the quarter versus 1.05 for the quarter before. The strong underlying volume pickup, especially in GIP and PSS is a reflection of customers having worked through the inventories in these areas. Segment result amounted to EUR 668 million with a segment result margin of 18%. The improvement in comparison to the previous quarter resulted mainly from volume growth and lower idle costs overcompensating the adverse currency development. Our order backlog stood at around EUR 18 billion at the end of June, influenced mostly by the significantly weaker U.S. dollar compared to the end of Q2. Now to our divisional review, beginning with Automotive. In the third quarter of the 2025 fiscal year, ATV achieved revenues of EUR 1.870 billion, a slight increase in comparison to the previous quarter. The segment result of ATV amounted to EUR 371 million, corresponding to a segment result margin of 19.8%. The slight downtick is related to currency and mix effects overcompensating lower idle cost. Global car sales have been fairly healthy in the June quarter, led by strength in U.S. and China. Going forward, however, there are concerns on potential tariff-led weakness in the former and negative news flow around inventory build, price wars and removal of trade-in subsidies in the later. So there's cautiousness around the overall auto market for the rest of the year to be considered. Regarding semiconductor inventories, we see the risk that some customers lower their inventory targets yet again, due to significant financial constraints, implying the possibility of further destocking to unsustainable levels. In this environment, we are building on the unique strength of having the broadest automotive semiconductor portfolio. And with the Ethernet business from Marvell, we will leverage a highly complementary technology by combining it with our existing broad MCU portfolio to provide our customers even more comprehensive leading solutions for software-defined vehicles. We have obtained all necessary regulatory approvals for the transaction in a very short period of time. We expect the closing to happen in the near future and are excited to welcome several hundred experts in the field of Ethernet, which will also help us to make even broader inroads into other areas of physical AI, such as humanoid robots. Now to some design wins. We are pleased to report that we are designed into the world's most advanced active suspension system by U.S.-based ClearMotion. This 48-volt high-end application [indiscernible] AURIX MCU in combination with OPTIREG power management IC and analog mixed signal product and our OptiMOS switch featuring a world-class forward resistance of only 1.2 milliohm. The system is not only used by a European premium sports car manufacturer but is also employed in further cutting-edge vehicles like the NIO ET9 in China. A further highlight for the quarter is a mid-triple-digit million lifetime design win for the power distribution in a new class of cars of a European premium OEM. This innovative vehicle lineup will feature a broad set of smart power components like our PROFET smart switches across a broad range of ADAS, chassis and e-architecture applications. Let's now move to Green Industrial Power, where revenues increased by 9% quarter-over-quarter to EUR 431 million. At a constant U.S. dollar-euro exchange rate growth would have been double digit. Key applications like power infrastructure, renewable energy as well as automation and drives, all contributed to the sequential improvement. As a consequence, GIP segment result has improved notably to EUR 61 million in the third quarter of our 2025 fiscal year equivalent to a segment result margin of 14.2%. Structural growth drivers continue to strengthen demand and expand business opportunities, particularly in power infrastructure. This end demand is now meeting more normalized customer inventories with a few pockets of additional destocking remaining, laying the path for the typical seasonal pattern. We are proud to announce that Infineon power modules are being deployed in the world's largest grid forming project paired with a large-scale energy storage system in China. This plant combines a storage capacity of around 400-megawatt hours with a photovoltaic system and is able to power roughly 270,000 households. It Is capable of autonomously adjusting voltage and frequency during grid fluctuation or outages without relying on external voltage signals, a prime example of differentiation due to our unique expertise to build highly reliable modules required in such an application. Now to Power & Sensor Systems. PSS recorded revenues of EUR 1.053 billion, in the June quarter, a growth of 8% quarter-over- quarter, which at constant currencies would have been above 10%. Continued significant growth momentum we see for our power solutions for AI servers was a key contributor. The segment result of PSS increased to EUR 198 million, corresponding to a segment result margin of 18.8%. The increase was driven by higher volumes and lower idle costs more than offsetting adverse exchange rate effects. AI remains a powerful engine of growth with infrastructure expansion and data center build-outs accelerating dynamically, aligning with our projection to achieve related revenues of around EUR 600 million this fiscal year, rising to around EUR 1 billion next year. Cornerstone of our success in this market is the unmatched breadth of our product portfolio. We are not only offering individual power conversion stages but are collaborating closely with leading customers to optimize the entire power flow from grid to core, now and in the future. As an example, in May, we announced a significant collaboration with NVIDIA to develop the industry first 800-volt high-voltage direct current power delivery architecture for AI data centers. This innovative system will considerably improve energy-efficient power distribution and allow for direct power conversion close to the core, supporting the increasing demands of data centers as they scale beyond 100,000 GPUs and require over 1 megawatt per rack. Another highlight from our sensor portfolio are the automotive radar MMIC serving the newly emerging central radar architecture in which the compute is done solely in the central high- performance compute box, leaving only the MMIC at the edge part, which is then connected via the Ethernet to the central box. We see this architecture being adopted very quickly in China and are therefore, perfectly positioned to benefit from the rollout of ADAS. To complete the divisional review, let's take a look at Connected Secure Systems, CSS recorded quarterly revenues of EUR 349 million, representing a 2% decrease compared to the March quarter, reflecting an unfavorable currency development. The segment result of CSS declined slightly to EUR 39 million, corresponding to an unchanged segment result margin of 11.2%. IoT and security markets move sideways as macroeconomic uncertainties continue to weigh on consumer sentiment and corporate spending. Against this backdrop, innovation remains key. This covers both continuous improvements as well as leapfrog developments. An example for the former are our security solutions, where we have recently celebrated the cumulative delivery of 10 billion Integrity Guard-enabled devices. An example of a step change is the introduction of the first security chip that even quantum computers cannot hack at present, of which we reported 2 quarters ago. We now booked the first large design win for OPTIGA TPM, a future-proof security solution with a post-quantum cryptography protected firmware to be integrated into the next version of a market-leading gaming console. Now over to Sven, who will comment on our financial figures.
Sven Schneider: Thank you, Jochen and good morning, everyone. In our June quarter, we saw a positive gross margin momentum on the back of sequentially rising sales volumes. Despite currency headwinds, our adjusted gross margin came in at 43% after 40.9% in the quarter before. The reported gross margin increased quarter-over-quarter by 220 basis points from 38.7% to 40.9%. Lower idle costs in the June quarter contributed to these positive developments. Furthermore, we see benefits from those parts of our Step Up program that focus on structural improvements to our cost of goods sold. We have been able to achieve these benefits earlier than originally anticipated, contributing a notable positive impact from the second half of this fiscal year onwards. On the OpEx side, research and development expenses stayed at EUR 560 million in our fiscal third quarter. Our selling, general and administrative expenses went up to EUR 410 million after EUR 376 million in the previous quarter, including the impact of annual merit increases. Net other operating expenses amounted to EUR 121 million containing, among others, costs and further charges related to the recently concluded sale of our Austin manufacturing site to the U.S. foundry SkyWater and Step Up related expenses. These charges are part of the nonsegment result, which amounted to minus EUR 244 million for the June quarter. The financial result for the third fiscal quarter amounted to minus EUR 40 million after minus EUR 28 million in the quarter before. Income tax expense for the June quarter amounted to EUR 95 million, equivalent to an effective tax rate of 24%. Cash taxes for our third fiscal quarter were EUR 87 million. Adjusting for PPA effects, the quarterly cash tax rate stood at 18%. Our investments into property, plant and equipment, other intangible assets and capitalized development costs went down quarter- over-quarter from EUR 470 million to EUR 442 million. Depreciation and amortization expenses, including acquisition-related nonsegment result effects, decreased from EUR 483 million to EUR 463 million. Our free cash flow improved quarter-over-quarter from EUR 174 million to EUR 288 million, driven by a higher business volume with better margins, the cash-in received for the sale of our Austin fab as well as lower investments. Trade working capital had a small negative impact. Within that, our inventory reach remained flat, with DIO at the end of June, standing at 176 days. We continue to actively manage utilization, targeting a reach level of around 150 to 160 days towards the end of our running fiscal year, which we deem appropriate for a pending upturn. Thus, idle charges will continue to be a material margin drag in the near term. Now to our liquidity and leverage. At the end of June, our gross cash position equated to around EUR 1.5 billion, fully in line with our liquidity target. Our gross debt amounted to EUR 5 billion. Besides free cash flow, the main movement within the quarter affecting these figures was a repayment of EUR 400 million of short-term credit facilities. Our gross leverage is 1.4x. Net leverage is amounting to 1.0x. For the funding of the upcoming acquisition of the Automotive Ethernet business from Marvell, we will draw down the committed acquisition facility from our banks, consisting of EUR 1 billion and USD 1 billion tranche. The remaining purchase price will come from our own liquidity. Finally, our after-tax reported return on capital employed for the third fiscal quarter of '25 came in at around 6%. Now back to Jochen, who will comment on our outlook.
Jochen Hanebeck: Thank you, Sven. Today, we're in the position that most of our peers typically find themselves in, namely having to guide just the next quarter given that our fiscal year ends in September. Short-term visibility is currently characterizing our markets caused by customers ordering on-site. Volatile macroeconomic and geopolitical factors are overlaying a cyclical recovery. The elongated period of the destocking has largely come to an end. Customer and distributor inventories are now at fairly healthy levels. Demand signals indicate a modest recovery, in particular for consumer oriented and more recently, industrial applications. On the data center side, AI-related infrastructure build-outs continue to fuel strong demand. And Automotive visibility is lower, as explained earlier. On the macroeconomic side, the worst-case scenario regarding tariffs has not materialized, yet recent agreements between the U.S., Japan, the EU and some other countries suggest directionally higher tariffs compared to previous frameworks. Negative effects on semiconductor demand, whether indirect or even direct remain likely. This is the background which frames our forecast for the September quarter. In line with the further weakening of the U.S. dollar versus the euro, we changed the assumption again from [ 1.25 to 1.15 ] and predict our revenues for the September quarter to amount to around EUR 3.9 billion. This would equate to about 5% sequential growth, making our fourth quarter the strongest as usual. By division, ATV is forecast to grow less than group average, GIP and PSS should see growth in excess of the group's rate, whereas CSS is expected to grow at the corporate average. To account for the indirect impact of tariffs and trade conflicts, which are highly difficult to grasp, we had previously have cut the underlying revenue prediction for our fourth fiscal quarter by 10%. Now our sense is that the effect in the Q4 is less pronounced than we had guesstimated. The somewhat stronger than anticipated business development is, however, offset to a degree by the incrementally weaker U.S. dollar. For the fourth quarter, segment result margin, we expect a high teens percentage level. We expect that the positive fall-through from higher sales will be compensated to a certain extent by underutilization charges, consciously incurred to manage down our inventories in the light of tariff risk and the weaker U.S. dollar exchange rate. The outlook for the 2025 fiscal year is resulting from our first 3 concluded quarters and our predicted Q4 as follows. Annual revenues are expected to be around EUR 14.6 billion or slightly down from the previous year. Our margins are holding up better than previously anticipated. We expect our full year adjusted gross margin to be at least 40% from previously around 40% and our segment result margin to land at a high teens percent level from the mid- to high teens level before. Idle charges of an annualized amount of around [ EUR 1 billion ] constitute a significant margin burden, the cyclical part being equivalent to around 600 basis points. On the other hand, we are reaping positive contributions from our Step Up program sooner than expected, as Sven had already mentioned. Investments, including capitalized development expenses will amount to a reduced level of around EUR 2.2 billion. For annual depreciation and amortization we anticipate around EUR 1.9 billion, including around EUR 400 million resulting from purchase price allocations, which are recognized in our nonsegment result. We upgrade our free cash flow expectation as follows. Our reported free cash flow is expected to organically increase by around EUR 100 million, reflecting the better business performance and should amount to around EUR 1 million. Considering the impact of the upcoming closing of the Marvell Ethernet acquisition, the figure would then land at around minus EUR 1.2 billion. The adjusted free cash flow, net of the acquisition and of investments into major front-end buildings is now expected to come in at around EUR 1.7 billion. Before going into Q&A, ladies and gentlemen, let me summarize. The inventory correction in our markets has largely run its course. We closed the third quarter of our 2025 fiscal year fully in line on the revenue side with profitability slightly above the upper end of the expected range, despite a meaningful weaker U.S. dollar. Cyclical dynamics are overlaid by continued geopolitical and macroeconomic headwinds, notably tariff impacts. Customer in, particularly in automotive are driving on-site. While we see such tariff-related impacts as less severe for our Q4 than originally feared and adverse currency development is diminishing that benefit. We continue to manage the cycle prudently in this volatile environment and focus on what we can control, expecting both sequential as well as year-on-year growth in the September quarter. At the same time, we build on our strength in highly attractive growth markets like artificial intelligence, energy infrastructure and software-defined vehicles, the later fortified by integrating the Automotive Ethernet business from Marvell. With our comprehensive portfolio of power, analog and sensors and control and connectivity solutions, we are ideally positioned to serve high-growth markets and drive future innovation.
Alexander Foltin: All right. Dear analysts, this concludes our introductory remarks for this quarter and we are now opening the call for your questions. Seeing the lineup of a dozen we kindly ask you to limit yourself to 1 question and 1 follow-up. Operator, please start the Q&A session now.
Operator: [Operator Instructions] And we'll take our first question from Francois Bouvignies from UBS.
Francois-Xavier Bouvignies: So my first question would be, I mean, Jochen, you talked about it and Sven as well on this dynamic around Q4. So last quarter, you said that you would have a guesstimate of 10% of revenues, so EUR 400 million of revenues roughly related to tariff impact. Now if we look at your guidance, I mean, similar to what you guided 3 months ago. So it means that this EUR 400 million is still there or there is some offset. So obviously, you mentioned currency. Currency according to my math is more like EUR 70 million impact. So do you assume still some tariff on this Q4 out of this EUR 400 million minus currency, so you have EUR 300 million left? Or what is happening to the underlying business?
Sven Schneider: Francois, Sven. I'm taking your question. So first of all, your assumption on the dollar is broadly correct. There is this negative contribution from [ 1.25 to 1.15 ] now on the tariffs. As you rightly pointed out, we have said last time that we expect this guesstimate of, give or take, 10% of Q4, which was translated into EUR 400 million. Now it is very hard to tell you really also from today's perspective, what this number looks like. We, again, do not see it in order books. We do not get explicit feedback from customers. Customers are ordering on-site But as Jochen said in the outlook, we have lowered our impact for that fiscal year. And if you ask me about a -- to size it, I would say, without any indirect tariff impacts, it would not be EUR 3.9 billion, it would be a 4 handle, so to say.
Francois-Xavier Bouvignies: I see. So you have a kind of conservatism of a couple of hundreds of million in the quarter?
Sven Schneider: As I said.
Francois-Xavier Bouvignies: Correctly. Yes. Okay. So the second question is on the margins. Obviously, very strong margins. I mean it's very different versus peers where we saw some weaknesses, I mean, in the margins. So can you help me understand the sustainability of these margins. As Sven, you mentioned, the cost savings, maybe if you can try to quantify and how much of the cost saving can you get still from now? Because it seems very encouraging. And we just want to question the sustainability of it because your guidance of above 40%, obviously, for Q4 doesn't tell us much given your strong execution so far.
Sven Schneider: Yes. Thanks, Francois, we expected, especially the last question. So let me take them all in order. So first of all, if we look at Q2, Q3 and also now Q3, Q4, there is a positive impact on the margin from higher volumes. I mean, like-for-like 9% growth Q2 to Q3, like- for-like 6% to 7% growth Q4 that needs to be visible in the P&L. There is a negative FX component. And as we also said, from Q3 to Q4, there is again higher idle given that we have lowered in certain product categories, loading in order to keep our inventories in sync because as we said last time, everything needs to be consistent. If we take some indirect tariff risks into consideration, we also need to adjust loading accordingly. Otherwise, it wouldn't make sense. Now on the Step Up savings, the levers we are pulling since last year, we are very confident and happy with the development. And if you ask me for a split, it's pretty high level. It depends also on certain market dynamics, also on the volume development. in the next years, which we do not want to guide today. But I mean, if you think about this high triple-digit million euro savings which we have promised in first half, '27, I would say, close to half of that number will come in, in '25. We will probably be at, give or take, 2/3 of the number in '26 and then 100% in '27. And now last comment on the gross margin. Yes, we have increased the segment result margin from mid-teens to high teens. And yes, we have increased the gross margin guidance from around 40% to at least 40%. Let me put it that way. I feel very confident from today's perspective with the at least and that reflects probably your comment on the first 3 quarters being above 40% already.
Operator: Then the next question comes from Didier Scemama from Bank of America.
Didier Scemama: Great work on the margin progression. I echo what Francois just said. I've got a couple of questions. Maybe one for Jochen. So on your press release, your first paragraph mentioned the number of growth opportunities for the company, which I think we all agree with. I think one of them, which historically has been mentioned was electrification. So I just wondered whether there is a change in your perception of the electrification opportunity for Infineon in there. And also, how does that relate with the new categorization of the products or greater proportion or at least better visibility on the analog part of your portfolio, less so on the power discrete side?
Jochen Hanebeck: Yes. So the categorization on the product side is meant to make life easier for you because we feel that this is closer to the market standard. If you talk about the 5 growth areas, which we always talk about e-mobility, software-defined vehicles, renewables, AI data center, IoT, I would say from today's perspective that while e-mobility is maybe also due to the policies in U.S. is maybe losing a lot of -- a little bit of momentum. On the other side, AI, the data center is gaining momentum and particularly also SDV is gaining momentum while renewables is probably shifting in focus more from energy generation to power distribution and IoT remains with potential high upsides in the longer run with humanoid robots. So if that helps and answers your question.
Sven Schneider: And Didier, if I may add this is, of course, numbers from '24 and we will update them. But if you look at these 5 key core drivers, electrification stands at 16% of revenue, whereas SDVs or software-defined vehicles or renewables, each at 7%. So it is a very -- and remains a very important growth driver.
Jochen Hanebeck: Absolutely. I was just talking negative changes.
Didier Scemama: Very clear on that. My follow-up is on the margin side. So I think you mentioned -- you gave some -- a lot of details on the gross margin progression. Do you feel more confident now that the 45% through-cycle gross margin is essentially going to be exceeded in the next up cycle that you could revisit the high 40s? Or is it too early to say, given the current uncertainties in the market?
Sven Schneider: I mean, on the one hand, Didier, I think we have already printed gross margins around or even above that level. #2 is, if we now talk about at least 40%, we have to factor in the 600 basis points on idle costs. So if we would go back into a growth scenario with limited or no idle, then of course, this would also come on top and there is the positive fall-through of the incremental revenue, which is not included. So nothing has changed intrinsically. However, we also need to mention that. I mean, it also depends a bit on the currency. You may ne -- you may recall that when we announced our new target operating model, of 25% through the cycle, the dollar was at 1. Now we are at 1.15, and of course, that has a negative impact, as you know, from our fall-through ratio. But incrementally, why not, yes.
Jochen Hanebeck: And with Step Up is focused very much on gross margin improvements.
Operator: The next question comes from Janardan Menon from Jefferies.
Janardan Nedyam Menon: My question is going back to the margin trend again. So you've sort of achieved a much higher level of margin without really seeing that much of an increase in your utilization levels and you're still carrying the 1 billion -- 600 basis points of headwind there. Can you give us based on current visibility -- and I [indiscernible] that visibility may be less but the way you -- if you achieve your current guidance for Q4, can we assume that the utilization levels will start reducing -- I mean, increasing and the headwind will start reducing from the fiscal first quarter of 2026? Or would there be a longer period of sort of digestion before you will see that upward trend?
Sven Schneider: Yes, Janardan, I understand your question. But as we said before, we are always the first to guide for the full fiscal year. We are the only ones not only guiding for 1 quarter but for a year. So please give us this unique window of opportunity in this quarter. So we will only be guiding for Q4 and the rest will come in November. And I mean, we also need to really look how the volatile market develops and how all these tariffs and geopolitical issues play out and we will take all that into consideration for the guidance in November.
Janardan Nedyam Menon: Understood.. Just to follow on also on the margin. You beat your margin guidance by about 300 basis points on the segment margin side. Now I understand that some of it will be the Step Up program and the higher revenue. But the revenue trend was known to you even before because you sort of met your revenue guidance. So was there any other factor? Specifically, was pricing better than expected? Or was there any other positive factor which helped and contributed to those 300 basis points?
Sven Schneider: Yes. So first of all, I mean, we have guided for mid-teens and now we are guiding to high teens. Now we can debate for long what mid-teens all includes. I would not now immediately jump to this 300 basis points conclusion. But the upside comes mostly from what I said, from revenue fall-through and from earlier than anticipated Step Up savings. The other things, as you rightly point out, Janardan, are mostly unchanged.
Janardan Nedyam Menon: Understood. And maybe I can squeeze one last one, which is when you talk about the EUR 1 billion of revenue in AI power in '26, how much of that is -- do you expect to come from market share increases as platforms change? And how much of that is coming from just current expectations of how AI volumes will rise into next year?
Jochen Hanebeck: I think it's both. Remember, when we entered platforms with a major customer that step-up only took place within this fiscal year. So that, of course, projected to a full fiscal year is part of it. But then, of course, also the general build-out of AI is contributing. So both effects and in -- also a very nice growth in our module -- vertical module business with certain customers where the modules obviously command a much higher price.
Operator: And the next question comes from Sandeep Deshpande from JPMorgan.
Sandeep Sudhir Deshpande: My question is regarding -- again, back to your margin. When you look at your inventory, your inventory in the quarter remains at the same level as the prior quarter and you're saying that it is going to go down towards 150 to 160 days by the end of the year. But even 150 to 160 days is not your normalized levels of inventory. So how do we see this inventory and utilization impacting your margin later in the year, given that your overall levels of inventory seem to be higher than what you used to hold in the past as such?
Sven Schneider: Yes, Sandeep, thank you for the question. I mean as we said a couple of times now in the last quarter, it's a fine balance. We need to draw between revenue, between inventories, between cash flow, profitability, loading and all these topics. And so if we think now Q3, Q4, we said it in the intro Q4 -- Q3, sorry, benefited from better and lower idle costs quarter-over-quarter. In Q4, idle costs will go up quite a bit. So that is included in our guidance. And the reason we also have given is to keep the inventory levels in the 150 to 160 days and not to overshoot them materially. But you are also right with your statement that 150 to 160 days are not our normal target. The normal target would be more in the 120 days. So it's cycle management and we manage what we can control here. And I would say the trend and the absolute numbers are pretty okay compared to some of our peers.
Sandeep Sudhir Deshpande: And I want to just follow up with, Jochen, on the overall market environment, particularly in the Automotive. Many of your peers and you yourself are saying that the uncertainties remain. Is there -- I mean, how should we quantify the potential impact of the new U.S. rules on EVs and subsidies because of what we saw in Europe when the EV subsidies were removed in Europe, will this have an impact on Infineon? Or this will -- because of the other growth that you are seeing in ADAS and other areas in autos that this will not have an impact on Infineon?
Jochen Hanebeck: Yes. Of course, if less EVs in the region are sold, then this has a certain impact on us on -- however, you need to then balance this with the effect in other regions, right? In Europe, there is a certain recovery noticeable, whereas, in China, it was running on full steam. We need to see now how this price war finally plays out. But there are, of course, also structural effects like the move towards SDV, which helps us. But I would still call out as the main effect in the automotive market these quarters, the inventory across the whole value chain because obviously, many OEMs, many Tier 1s are in difficult terrain and a natural reaction in these times is cash flow management. And I would call out as -- that one as the primary effect, of course, absent of any currency exchange rate changes.
Operator: The next question comes from Jakob Bluestone from BNB Paribas Exane.
Jakob Bluestone: So I was just hoping to -- if you could expand a little bit on the order backlog, which was down by EUR 2 billion. I appreciate it may just be rounding. But I'm not sure the currency move looks like it's enough to explain that unless it is just a rounding issue. So was there anything else behind the drop in the order backlog? And maybe if you can expand a little bit on the sort of backlog but for the different segments.
Sven Schneider: Jakob, you hit the nail on the head. It's a rounding topic. So if you want the very accurate numbers, the previously rounded EUR 20 billion was EUR 19.5 billion or EUR 19.6 billion and now the rounded EUR 18 billion are EUR 18.3 billion. So we are talking about, give or take, EUR 1.2 billion to EUR 1.3 billion reduction in order backlog. The currency impact because here it's not the average currency rate. It's the currency rate at the end of the quarter. I think this one moved from [ 1.07 to 1.17 ] and this translates into, give or take, EUR 1 billion. So short answer is nearly everything of that is currency related.
Jakob Bluestone: Understood. And then just secondly, just on your cost cutting. I mean, it sounds like it's mostly phasing, so cost cutting coming through faster for the Step Up program. But do you think maybe the overall quantum might be bigger than you originally anticipated in terms of cost savings?
Sven Schneider: There are some different pockets of cost savings. There are cost savings from the selling side. There are cost savings from the COGS side. There are cost savings from central and admin and best cost country transfers and also job reductions. So there are many different areas but some of them also on the COGS side, to be fair and transparent are volume dependent. So given that our volumes are definitely not at the levels we originally thought, we have to take that into consideration. So therefore, we are reconfirming the original targets but not increasing them.
Operator: And the next question comes from Andrew Gardiner from Citi.
Andrew Michael Gardiner: Sven, I just wanted to come back to the way you answered one of the prior questions about sort of striking a fine balance between some of these different factors, revenue, inventory, fab loading. You've acknowledged that the 150 to 160 inventory days that you're targeting is above historical normal levels but you're comfortable with that. I think you sort of cited cycle management. Can I take that to suggest that you don't want to take the fab level -- the loading levels down any further than this. You're sort of at a -- you're striking that balance right? If we were to go much further, obviously, the unloading charges would continue to increase. So I'm just trying to understand that balance, right? Should we expect this sort of level of unloading to be as long as it gets?
Jochen Hanebeck: We are -- our belief is that as the market will somehow recover, we don't know exactly how it will look like. We feel that elevated inventories are the right thing from a managing the cycle point of view. That's why this 150 days. Of course, steering now exactly underutilization and revenue as it comes in is very difficult. But from a cycle point of view, we would not steer now down to our 120- day target in a normal environment. So this 150 days, 150 -- 160 days maximum is something which we feel comfortable with. And you know peers are way above 200 days plus and -- but we feel comfortable, as I said, in 150 to 160 days.
Operator: Then the next question comes from Joshua Buchalter from TD Cowen.
Joshua Louis Buchalter: I wanted to ask about downstream inventory actually. So I think in your prepared remarks, you mentioned that GIP and PSS, these things are low but your customers are refraining from restocking. And then in auto, it sounded like levels are healthy but you're worried that they might take them below healthy levels currently. Is that the right way to categorize how you're thinking about your customers' inventory right now as we think about end utilization?
Andreas Urschitz: This is Andreas speaking. So let me take your question. So bottom line, I tend to agree to what you've been saying. So in most of our segments, customers have been kind of managing their inventories downwards. So having said that, the inventory correction is well ongoing in most of the segments. Some of our market segments, we believe they might have reached even unhealthy status with regards to inventory reduction, i.e., we see that at a couple of selective automotive accounts to just name one example. So the way how we are reacting in that regards is and I'll come back to what Jochen said before, managing our inventory with a proper reach to the fast react when the market comes back based upon inventory we put on stage. And last not least, we continuously discuss with our customers on, so to say, them getting aware of the current situation with regards to what is in the entire value chain in terms of inventories. So we continue to push customers to restock. But while we are speaking, there is, so to say, couple of activities in that regards ongoing. Last statement, this inventory, to talk about this one, we see that at a very healthy level. So we manage our distributors and together with our distribution partners, an average inventory of 12 weeks and that we find to be a solid position for cyclical, so to say, market to come back, yes.
Joshua Louis Buchalter: Okay. So net, you would say things are at healthy levels downstream right now?
Jochen Hanebeck: Yes.
Joshua Louis Buchalter: Okay. And for my follow-up, within your maintained AI data center number of EUR 600 million this year and EUR 1 billion next year, any metrics you're able to give us on either customer or application diversity across 48-volt versus second stage and PSU, like how much should we expect those buckets to contribute this year and next year? Or any metrics you can give on the customer diversity side?
Andreas Urschitz: Yes. So first and foremost, for next year, we plan to go for this and we still confirm and continue to confirm the EUR 1 billion, even though there are currency effects. So let me underline that one. Other than this, coming back to the nature of your question, look, so Infineon has, by far, the broadest product portfolio in order to serve the entire power flow from grid to core to very efficiently and effectively power latest generation of AI data centers. So that means we are playing in all the areas, starting with the switch mode power supply. So where we are using silicon carbide, gallium nitride, silicon switches for highest efficiency power conversion from the AC to the DC. So we play then also in the intermediate bus conversion. So this is in contemporary architectures, the 48-volt down to 12-volt conversion, again, with digital power competency that we do have together with drivers and world's best MOSFETs, if you will. Again, it's about efficient switching. And last not least, we power the core and that is all the circuitry, all silicon in essence that is needed in order to utmost efficiently power the GPU power hungry needs, if you will. So coming back to going into direction of the EUR 1 billion, where do we see that particular pronounciation of a growth? Let me say it like this, we are growing in all the areas in pretty similar manner. If there is some pronounced growth, I would rather say it is in the areas of the switch mode power supply, the AC-DC converter and of course, due to the increasing number of the GPUs going forward in new architectures, also the core power supply.
Operator: And the next question comes from Stephane Houri from ODDO BHF.
Stephane Houri: Yes. Actually, I have a question about the 2 divisions that have been driving growth during this quarter and seem to be still driving growth in the next quarter, which is GIP and PSS. Can you maybe help us understanding if it's on the client side, inventory replenishment? Or it's just now tracking demand and that if the end markets are sound and if you can quote a few examples of markets where you feel particularly comfortable?
Jochen Hanebeck: Yes. I think the highlight Andreas just mentioned. So in -- powering AI, it's clearly end demand. We even have some bottlenecks to manage to follow the demand of the customers. Whereas in GIP, I think the pockets where inventory seems to be healthy, where the pull-through is now taking place is areas like power distribution, namely, but also parts of transportation. So it's a mixed picture but also, for example, pockets in solar with our latest greatest high-performance solar string inverter module, we are basically sold out for the rest of the year. So, there are clearly areas in these 2 businesses, which are pulling through. Within Automotive, it's also -- there are pockets. Microcontroller is running from a one peak volume quarter to the next. Other areas are a bit softer. So it's not homogeneous but clearly, areas I can highlight for structural growth.
Stephane Houri: And if I can have a follow-up, it's on the OpEx because there has been a big increase in SG&A and can you maybe help us understand how OpEx are going to evolve in the coming quarters, especially in the context of your cost cutting plan?
Sven Schneider: So basically, Stephane, the answer is merit increase. So they have kicked in and they impact very much the SG&A. Now you can ask the follow-up, why is it not visible then on R&D.? The R&D is also a net number where we also include funding and there are also some positive effects from one quarter to the other. So the real answer is merit.
Operator: Then the next question comes from Johannes Schaller from Deutsche Bank.
Johannes Schaller: First one would just be, if we could zoom a little bit more on the Step Up program, obviously, very strong progress here. Maybe walk us through the kind of next steps, what remains to do from here? And also, is there any scope to maybe bring forward the target finish date a little bit from mid-'27, I mean, while you gave us the planned timing but is there may be scope to accelerate that or not really? And then how should we think about the cost benefits? I think initially, when you provided the plan, you obviously said a lot of uncertainties, how much of those savings we can maybe keep on a net basis. Now it looks like pricing is holding up actually quite well. So how should we think about the savings? And should we assume that you can actually keep the majority of that as profitability? And then I have a quick second question after that.
Jochen Hanebeck: Mr. Schaller Johannes, I think we mentioned all elements. There is a volume-dependent parts in the Step Up saving, which only obviously will materialize when the volume goes up. That's why we're not feeling comfortable at this moment in time to raise or pull in the target. But we are very happy with the progress also on the personnel side, even that number is only like 25% of the overall savings but we have concluded in Europe, also in co-determined countries. The agreements with the affected employees. Of course, it doesn't become financially effective immediately but we have a solid planning base in that regard. In other countries, of course, the effect to become financially effective is faster. But overall, very good momentum. And it's really coming from the cost side of things, structurally, particularly in COGS. Also, you may have seen that we made progress on our manufacturing footprint optimization. So we are not only talking about factory manufacturing footprint, we are taking actions. This is also, of course, supporting the trend on COGS. It's really not that pricing is now supporting the gross margin. There is price pressure in China, as we have highlighted also in the past, in particular, in areas like IGBT- related products. And in silicon carbide, we see some competitors from outside China going in very aggressively into the market. So it's not pricing. It's really COGS.
Johannes Schaller: That actually already connects to my second question. It looks like some of that pricing competition has kind of started in industrial. It's also maybe now taking a little bit place in automotive on the low-end EV side. Just how do you think about that lower end market in power in China and how you're addressing the current dynamics that you're seeing there in terms of competition and pricing?
Jochen Hanebeck: Yes. On the IGBT side, it's -- I think it's evident there is Chinese competition and we focus on that part of the market, which is attractive for us, mainly markets which require performance. I gave you an example in my script or in my talk, when I talked about this grid shaping facilities. There, all of a sudden high, high requirements in terms of performance are required in order to really force the grid to the frequency required. So a great play for us, entry-level battery electric vehicles probably not a play for us, neither residential solar in China, very interesting -- not very interesting. In silicon carbide, the competition is more global competition. And as I said here, it's more that some players are aggressively going into notch up some crumbs in the market. But that's it. And on silicon carbide, of course, we are benefiting from not being vertically integrated, to stress that one more time. So we have the benefit of yes, going -- being in a multisource situation where we order the best material at the best price. Hopefully, that gave you some more color on that market.
Operator: And the next question comes from Tammy Qiu from Berenberg.
Tammy Qiu: So firstly is on the AI guidance. It seems to be that you're achieving that EUR 1 billion target earlier than previously indicated. I'm just wondering what is the journey from here? Are we starting to grow at a similar level in the coming years? And also, there has been some discussion about potentially more AI companies will be introducing more suppliers. So how is your market share will be looking like in the future AI design?
Jochen Hanebeck: So we stay for the moment with the EUR 1 billion for next year. And again, I have to stress, EUR 1 billion. So the currency headwind is already implying a increase. Beyond that, we are not guiding for the moment. But under the assumption that the AI data infrastructure build-out is happening as currently planned, you can assume that this business will -- we will have a lot of fun and a lot of growth with it. Now to your -- the second part of your question, yes, other supply -- or many suppliers are talking about this opportunity. Here, I think it's important to find out who has the real system play, meaning a broad portfolio, meaning being able to sit down with the customer, discussing architectures, discussing the benefits of gallium nitride versus silicon carbide versus silicon and who of these suppliers are more niche suppliers which, again, are just trying to pick up some crumbs on this sexy story.
Tammy Qiu: Okay. And secondly, it's relating to China Auto business. You mentioned that there has been some pricing competition. And recently, I think China has been saying that they try to avoid this kind of overcapacity issue and eliminate extreme competition within the market. Is that going to be supportive from your perspective on your pricing going forward? And also can that actually potentially eliminate some of the local competitors from your side?
Jochen Hanebeck: Yes. Very difficult to predict. I think we have seen moments in the past where the central government tried to steer the Automotive market. They tried to push for mergers, for consolidations. We have seen local governments, then rather protecting their local OEM. Whether the price war on a OEM level, it has come to a point where people are pulling back. I do not see enough evidences. I've seen trends to equip the cars with even more features and keeping the price at a certain level, that would be, of course, helpful for us. But I think that market is in itself in a situation where the fog needs to clear. Ultimately, I think on all levels, there will be less players starting with OEMs, with Tier 1s but probably also the number of particularly local automotive chip suppliers, not all of them will make it.
Operator: Then the next question comes from Adithya Metuku from HSBC.
Adithya Satyanarayana Metuku: Just firstly, on the AI data center power supplies. I understand what you're saying around the breadth of your solutions and how that's going to help you compete better versus some of the other players in the market. But I just wondered from -- even today, there was an article talking about 10 silicon chip suppliers to NVIDIA for their DC-DC power supply. I just wanted from the perspective of your customers like NVIDIA, why are they collaborating with so many people if they don't have all these such a broad portfolio. Just any color you can provide to help us understand this landscape would be really helpful. And I've got a follow-up.
Jochen Hanebeck: Yes. In principle, you need to ask that customer. I can only tell you that we feel that we are considered as a partner with which the company wants to collaborate. And one of the news coming out of that was or is this 800-volt architecture and more are in the pipeline. So I feel very -- I feel great about that partnership and the rest, please ask Jensen.
Adithya Satyanarayana Metuku: Okay. Got it. And just as a quick follow-up, just on GaN, with TSMC announcing that they're going to get out of the foundry space in the last month. I just wondered if you see any effect from this? Does this put you in a better position if your competitors have to change their foundries? How do you see this affecting the GaN landscape going forward?
Jochen Hanebeck: Yes, in one term, it's an IDM game. Like in other power semiconductors, this is not a spot where a foundry really can play to its strengths. So we clearly see the trend towards an IDM game, which puts all the fabless companies, not only tactically now in a difficult spot looking for a different foundry but also systematically this will be hard for them to really compete. We are going ahead full steam. We are already completely on 8-inch. We will deliver the first products in this calendar year from 300-millimeter. So we are going full steam ahead. We see the value proposition. We believe the market models are currently out there are way too conservative for what is the potential in this material. And yes, we want to lead that market, very simple.
Alexander Foltin: Great. So time to wrap up. Thanks for all your questions. So we are concluding our fiscal third quarter conference call. Any further questions, please reach out to the IR team before they are all putting on their flip-flops and sunglasses. We wish you an amazing summer in this part of the world, oftentimes defined as August. Take care and have a good day.