Q3 2025 Infineon Technologies AG Earnings Call
And gentlemen, good morning. Everyone, welcome to the conference call for analysts and investors for Infineon 2025 Fiscal Q3 results.
Today's call will be hosted by Alexander Falin, Executive Vice President of Finance and Treasury, and Investor Relations at Infineon Technologies. As a reminder, this call has been recorded. This conference call contains forward-looking statements and/or assessments about the business, financial conditions, performance, and strategy of the Infineon Group.
The 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 part, partially, or entirely beyond our control in finance, 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.
Good morning, ladies and gentlemen. Thank you for joining our summer earnings call covering the third quarter of our fiscal year 2025.
On this call, you have our CEO, Jochen Hanebeck; our CFO, Sven Schneider; and our CMO, Andreas Rasha.
Following our proven routine, we will provide an overview of the market situation, divisional performance, key financials, and our outlook.
After that, we will start our Q&A session.
As usual, the illustrating slideshow, which is synchronized with a telephone audio signal, is available at Infineon Slides.
We will again provide a PDF with your hands and SW introductory remarks in the course of the call on our website, namely, 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, over to you.
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 the long rolling cyclical correction affecting different markets at different points in time, we should expect the rolling recovery to set in; and we are indeed seeing more evidence of it. The 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 two 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 light of rising U.S. tariff schemes, customers are ordering on short notice and are refraining from any broader restarts. 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's alignment. The presentation of our product categories is closer to industry standards, and the success of our strategy to build an unmatched and system-relevant portfolio of competences becomes even more apparent. Taking our revenue from the 2024 fiscal year as the basis, around 40% relates to power, discrete, 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 Spark's 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 and Compassing, our automotive and security industrial microcontrollers, as well as a broad spectrum of wireless and wired product families. The latter will be strengthened further through the acquisition of the automotive Ethernet business from Adele, which I will share good news with you about in a moment.
For inconvenience differentiation and value creation, it is imperative to have this complementing portfolio and a related deep set of competitors.
Based on them, we will be able to also address applications that are yet to emerge, and following our P2S approach, we will then deliver long-term value.
Now, let me continue with a look at our June quarter financials.
From 3%, despite the substantial negative currency effect, with an average US dollar to euro exchange rate of 114 for the quarter versus 105 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.
The segment result amounted to €680.668 million, with a segment result margin of 18%.
The improvement compared to the previous quarter resulted mainly from volume growth and lower idle costs. This overcompensated for the adverse currency developments. Our auto backlog stood at around €18 billion at the end of June, influenced mostly by the significantly weaker US dollar compared to the end of Q2.
Now, to our divisional review, beginning with Auto mode.
And in the third quarter of the 2025 fiscal year, ATV achieved revenues of €1,870 million, a slight increase compared to the previous quarter. The segment result of ATV amounted to €371 million, corresponding to a second result margin of 19.8%. The slide down tick is related to currency and mixed effects, compensating for lower idle costs.
Global car sales have been fairly healthy in the June quarter, led by strength in the U.S. and China going forward. However, there are concerns about potential tariff leaks in the former, and negative news flow around inventory, build price wars, and the removal of trade-in subsidies in the latter.
So there's caution 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, this implies the possibility of further destocking to unsustainable levels.
In this environment, we are building on the unique strengths of having the broadest automotive semiconductor portfolio and 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 with 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 we 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 us-based, clear motion. This 48 volt. High-end application is during RX MCU in combination with optic, power management IC and analog mix signal product and our optimal switch featuring a world-class forward resistance of only 1.2 million. The system is not only used by a European premium sports car manufacturer but is also employed in further Cutting Edge Vehicles like the Neo 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 for a European premium OEM.
This innovative vehicle lineup will feature a broad set of smart power components, like our profit 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 €431 million at a constant US dollar exchange rate. Euro exchange rate growth would have been in double digits. Key applications like power infrastructure, renewable energy, as well as automation and drives all contributed to the sequential improvement. As a consequence, the GIP segment result has improved notably to €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 demand is now meeting more normalized levels. Customer inventories, with a few pockets of additional stocking remaining, are laying the path for the typical seasonal pattern.
And frequency during grid fluctuation or outages without relying on external voltage signals.
A prime example of differentiation due to our unique expertise in building highly reliable modules required in such an application.
Now to Power and Sensor Systems (PSS). PSS recorded revenues of €1,053 million in the June quarter, a growth of 8% quarter over quarter, which at constant currencies would have been above 10%.
To continue significant growth momentum, we see that our power solutions for AI servers were a key contributor.
The second result of PSS increased to €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 centers build-out accelerating dynamically. This aligns with our projection to achieve related revenues of around €600 million this fiscal year, rising to about €1 billion next year.
The 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 we are also 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 a new media to develop the industry's 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 is 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 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 €349 million, representing a 2% decrease compared to the March quarter, reflecting an unfavorable currency development.
The second result of CSS declined slightly to €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 the prop developments.
An example for the former is 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 two quarters ago. We have now booked the first large design win for Opta TPM, a future-proof security solution with 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?
Thank you, and good morning, everyone.
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.
General and administrative expenses rose to €410 million in Q3 2025, up from €376 million in the previous quarter, reflecting the impact of annual merit increases.
Net other operating expenses amounted to €121 million, containing, among others, costs and further charges related to the recently concluded sale of our Austin manufacturing site to the US foundry, SkyWater, and step-up related expenses.
These charges are part of the non-segment result, which amounted to minus €244 million for the June quarter.
The financial result for the third fiscal quarter, amounted to minus 400 million euros of the minus 28 million euros in the quarter before income tax expense for the June quarter, amounted to 95 million euros. Equivalent to an effective tax rate of 24%. Cash taxes for a third fiscal quarter where 87 million euros, adjusting for PPA effects, the quarterly cash tax rate, stood at 18%,
Our investments into property, plant, and equipment, as well as intangible assets and capitalized development costs, went down quarter over quarter from €470 million to €442 million. Depreciation and amortization expenses, including acquisition-related non-segment result effects, decreased from €483 million.
To 463 million euros.
Our free cash flow improved quarter over quarter from €174 million to €288 million. This improvement was driven by a higher business volume with better margins, the cash received from the sale of our Austin Fab, as well as lower investments.
Trade working capital had a small negative impact. Our inventory reached 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 fiscal year, which is deemed 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 €1.5 billion, fully in line with our liquidity target.
Our gross debt amounted to €5 billion, alongside free cash flow. The main movement within the quarter affecting these figures was a repayment of €400 million of short-term credit facilities.
Our gross leverage is 1.4 times net. Leverage is amounting to 1.0 times.
For the funding of the upcoming acquisition of the OA Motive Ethernet business from Marvel, we will draw down the committed acquisition facility from our banks consisting of €1 billion and $1 billion trench.
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 2025 came in at around 6%. Now, back to Johan, who will comment on our outlook.
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-time, visibility is currently characterized as a characterizing. Our markets caused by customers ordering on site.
Volatile, microeconomic, and geopolitical factors are overlaying a cyclical recovery. The elongated period of 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 applications, and more recently, industrial applications on the data center side. AI-related infrastructure build-out continues to fuel strong demand, while automotive visibility is lower.
Explained earlier.
On the macroeconomic side, the worst-case scenario regarding terrorism 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 were the indirect or even direct, remained likely.
This is the background which frames our forecast for the September quarter, in line with a further weakening of the US dollar versus the Euro. We changed the assumption again from 1 1 1.
Amounting to around $3.9 billion, this would equate to about 5% sequential growth, making our fourth quarter, as usual, the strongest.
By division, ATV is forecast to grow less than the group average, Gip and PSS should see growth in excess of the group's rate, whereas CSS is expected to grow at a corporate average to account for the indirect impact of terrorists and trade conflicts, which are highly difficult to grasp. We had previously cut the underlying revenue prediction for our fourth fiscal quarter by 10%. Now, our sense is that the effect in Q4 is less pronounced than we had estimated, given the somewhat stronger than anticipated business. Development is, however, offset to a degree by the incrementally weaker US dollar.
For the fourth quarter.
Segment results margin: We expect a high teens percentage level. We anticipate that the positive fall-through from higher sales will be compensated to a certain extent by underutilization and charges consciously incurred to manage down our inventories in light of tariff risk.
And the weaker U.S. dollar exchange rate.
The outlook for the 2025 fiscal year is resulting from our first three concluded quarters and our predicted Q4. Annual revenues are expected to be around 14.6% 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 percentage level.
From a mid to high teens level before.
Idol charges of an annualized amount of around €1 billion constitute a significant margin burden, their 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 we had already mentioned.
Investments including capitalized development, expenses will amount to A reduced level of around, 2.2 billion euros for annual depreciation and amortization. We anticipate around 1.9 billion euros including around 400 million euros resulting from purchase price allocation which are recognized in our non segment result.
We upgrade our free cash flow expectation. As follows, our reported free cash flow is expected to organically increase by around €100 million, reflecting the better business performance, and should amount to around €1 million, considering the impact of the upcoming closing of the model Ethernet acquisition. The figure would then land at around minus €1.2 billion for the adjusted free cash flow. Net of the acquisition and investments into major front-end buildings is now expected to come in at around €1.7 billion.
before going into,
Let me summarize, the inventory. Correction 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 the meaningful weaker US dollar cyclical, Dynamics are overlaid by continued geopolitical and macroeconomic. Headwinds notably tariff impacts customer in particular and Automotive are driving on site.
While we see such tariff-related impacts as less severe for our Q4 than originally feared, adverse currency developments are 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 strengths and highly attractive growth markets, like artificial intelligence, energy infrastructure, and software-defined vehicles. The latter fortified by integrating the automotive Ethernet business from mother.
With our comprehensive portfolio of power, analog, sensors and control, and connectivity solutions, we are ideally positioned to serve high-growth markets and drive future innovation.
All right, dear analyst, 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
Question from UBS, please go ahead.
Thank you very much for the opportunity. So, my first question would be, I mean, you talked about yoga and Venezuela in this dynamic around Q4. So last quarter, you said that you would have a guest estimate of 10% of revenues, so $400 million of revenues roughly related to tariff impact. Now, if we look at your guidance, I mean, you know, we are similar to what you guys did, you know, three months ago. So it means that this $400 million...
Um, is still there or there is some offsets. So obviously, you mentioned currency currency for according to my math is more like 70 million, uh, impact. So, do you assume still some tariffs on on this? On this Q4, out of this 400 million minus currency. So you have 300 million
Uh, you know, left, uh, or what is happening to the underlying business.
Hello. Take your questions. So, um, first of all, your assumption on the dollar is broadly correct. There is this negative contribution from 1,125 to 115. Now, uh, 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 $400 million. Now it is very hard to tell you really also from today's.
Perspective. Um, 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. Uh, but as you often 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 $3.9 billion; it would be $4.4 billion. So to say,
I see, so you have a kind of conservatism of a couple of hundreds of million in the quarter.
As I said correctly. Yeah. As I said, um,
So the second question is on the margins obviously very strong margins. I mean it's very different versus Spears where you know we saw some weaknesses I mean in in in the margins so can you help me uh, understand the
Uh, the sustainability of this margin, says the venue mentioned, you know, the cost savings. Maybe if you can try to quantify how much of the cost saving you can get still from now, because it seems very encouraging. We just want to question, you know, the sustainability of it, because your guidance is above.
40% of your sleep. You know, for Q4, that doesn't tell us much, given your strong execution so far.
Yeah, I think so far, we expected especially the last question. So let me take them all in order. So, first of all, um, if we look at Q2 Q3 and also now Q3 Q4, uh, there is a positive impact on the margin from, 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, uh, in the, in the pnl, 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, um, our inventories in sync, because as we said last time, everything needs to be consistent. If we take some indirect tariffs into consideration, we also need to adjust loading accordingly, otherwise it would make sense. Um, now on the on the step-up, um,
Savings, uh, in, you know, the levers. We are pulling since last year. Uh, we are, um, very confident and and, uh, I'm happy with the, the development. Um, and if you ask me for a split, it's it's pretty high level. It depends also on on certain market dynamics also on the volume.
Guidance from around 42, uh, 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 three quarters being above 40 already.
Thanks a lot.
Then the next question comes from dtsk. Mama from Bank of America, please go ahead.
Uh yes, thank you for taking my question and uh, great work on the uh, on the margin progression. The IO West Los Angeles said. Um, I've got a couple of question, maybe 1 for, for Johann. Um, so on your, on your press release, your your first paragraph, mentions the number of, you know, growth opportunities for the companies. Uh, which I think we all agree with. I think 1 of them, uh, which historically has been mentioned was electrification. So I just wanted, uh, whether there is a change in your perception of the electrification opportunity, for infini on in there and also how does that relate with the new categorization of the products? So you greater proportion or at least better visibility on the analog part of your portfolio less. So, on the power discrete side, thank you.
Um, yeah, so the categorization on the product side, uh, was is meant to make life easier for you because, um, we feel that, um, this is closer, uh, to the market Standard. If, if you talk about the 5, uh, growth areas, which we always, um, talk about e-mobility software, defined vehicles, um, Renewables. Um, AI data center iot, I would say, from today's perspective that
Um, uh, while e-mobility is, is maybe also due to um, the policies in, in, in us. Um, is maybe, uh, losing a lot of a little bit of momentum. Uh, on the other side, AI data center is gaining momentum and particularly also STV is gaining momentum. While, uh, Renewables is probably shifting in focus more from energy generation to uh, power distribution and iot, uh, remains with, uh, potential high upsides in the longer run, uh, with humanoid robots. Um, so if that helps, uh, and answers your question, and did you even made that this is of course um um, numbers from 24 and we will update them. But if you look at these 5, key core drivers, uh, Electric
Electrification stands at 16% of Revenue, whereas STV so software, defined vehicles or Renewables each at 7. So it is a very and remains a very important growth driver.
I was just talking relative changes.
Now, very clear on that. Thank you very much.
is on, um,
on the, on the margin side. So I think you mentioned, you gave some a lot of details on the the gross margin progression. Um, do you feel more confident now, that the 45% through cycle gross margin is potentially going to be exceeded in The Next Step cycle that you could revisit the i4s, uh, or is it too early to say given the the current uncertainties in the market?
Oh, I mean, on the 1 hand, um, DV I think we have already printed gross margins uh around or even above that level. Uh, number 2 is, if we now, talk about, at least 40, uh we um, have to factor in the 600 basis points on 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, uh, nothing has changed intrinsically. However, we also need to, uh, mention that. I mean, it also depends a bit on the currency you
You may be, you may recall that when we um 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, and with step step up is focused very much on Cross margin improvements.
Excellent, thank you very much.
Then the next
then.
1 second, please.
The next question comes from Jenna and Manon from Jeffries. Please go ahead.
Hi, good morning. Uh, thanks for taking the question. Um, my question is going back to the margin Trend again. Um, so you, you you've sort of achieved a much higher level of margin Without Really seeing that much of an increase in your utilization levels, uh, and you're still carrying the 1 billion, uh, 600 basis points of headwind there. Um, Can can you give us based on current visibility? And I, I, I grant that visibility may be less, but the way you, you know, if you achieve your, your current guidance for, uh, Q4, uh, can we, can we assume that the utilization levels will start reducing? Uh, I mean increasing, and the headwind will start reducing from the fiscal first quarter of 2026, or would there be a longer period, of, of, sort of digestion, before you will see that upward trend.
Yeah, John, I 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, uh, unique uh, window of opportunity in this quarter. So we will only be guiding for Q4, and the rest will come, uh, in uh, in November. And I mean, we also need to really look how the volatile Market, uh, develops and how all these terrorists and geopolitical issues play out. And we will take all that into consideration for the guidance in November.
Understood. Uh,
yep.
Just just to follow on also on the margin uh your you know, you beat your margin guidance, by about 300 basis points on the, on the segment margin side. Now I I understand that some of it will be the, uh, the the Step Up program and the higher Revenue. Uh, but the revenue Trend was was known to you even before uh because you sort of met your Revenue guidance. Uh, so was there any other Factor uh specifically with pricing better than expected? Or was there any other uh positive factor which uh which helped and contributed to those 300 basis points?
Yeah. So first of all, I mean we have guided for Mid teens and now we are guiding to high teams. Now we can debate for a long what mid teens all includes. I 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, Jonathan are mostly unchanged.
And that's it and maybe I can squeeze.
1 last 1 and, uh, which is when you talk about the 1 billion of Revenue, um, in in, uh, AI power in 26, uh, how much of that is, uh, do you expect to come from market share increases as platforms change? And how much of that is coming from? Uh, just current expectations of how AI, uh, volumes will rise into next year.
Um, I think it's both. Uh, remember, uh, when we entered, uh, platforms with a major customer that, uh,
Uh, step up uh, only took place within this fiscal year.
Uh, um, so that, of course, projected to a full fiscal year, um, is part of it. Um, but then, of course, also, uh, the general build out of, uh, AI, uh, is contributing so both effects and in, in, in also, a very nice growth, in our module, um, uh, vertical module business, um, with, uh, certain customers where the modules obviously, command a much higher, um, uh, price.
Understood, thank you very much.
And the next question comes from Sandeep. Daesh Panda, from JP Mall. Please go ahead.
Knock your normalized levels of inventory. So, uh, 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.
Yeah, Sandy, thank you for the question. Um, I mean, as we said a couple of times now in the in the last quarter, it's a, it's a fine balance, we need to, we need to draw between, uh, revenue between inventories, between cash flow, profitability loading, and all these topics. And um, so if we think now Q3 Q4, uh, we said it in the intro, Q3 Q3 sorry. Benefited from a better and lower idle costs quarter. Over quarter in Q4 Idol costs will go up quite a bit so that is included in our guidance. And the the, the reason we also have given is to keep the inventory levels in the 150 to 60 days and not to overshoot them materially. But you are also write with your statement that 150260 days are not our normal Target. The normal Target would be more in the 120 days.
So, uh, it's a cycle management and we manage what we can control here, and I would say the trend and the absolute numbers, um, um, pretty okay, compared to some of our peers.
Thank you. Uh, and I want to just follow up with uh, you can on the overall Market environment, particularly in the automotive, uh, many of your peers and you yourself are saying that the uncertainties remain is there. I mean, how should we quantify the potential impact, uh, of the new US 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 infinite or this will, you know, because of the other growth that you're seeing in Adas and other areas in Autos that this will not have an impact on anything.
Yeah, of course, if less, uh, EVS in the region, uh, uh, are sold. Uh, then this has a certain impact on us on on ever, you need to then balance this with the effect in in other regions, right? In in, in Europe. Um, there is a certain, uh, recovery in noticeable. Whereas in China, it's, uh, was running on Full Steam. We need to see now how this price war finally plays out. But um, there are of course also structural effects like um um the move towards uh STV which helps
Us, but I would still call out as the main effect in the automotive Market, these quarters, um, uh, the inventory across, uh, the whole value chain. Because, um, obviously many, oems, many tier 1s are in difficult, uh, Tara and, uh, natural reaction in these, uh, times is cash flow management and I would call out as that 1 as the primary effect. Of course, absent of any, uh, currency. Uh, uh,
Exchange.
Rate. Uh, changes.
Thank you.
The next question comes from Jacob. Bluestone from BMB pariba exam. Please go ahead.
Hi, thanks for taking the questions. Um, so I was just hoping to if you could expand a little bit on the order backlog, which was down by 2 billion. Uh, appreciate it may just be rounding, but I'm not sure the currency move. Looks like it's enough to explain that. Um, and that's it. It's just the rounding issue. So was there anything else behind the the drop in the order backlog. And and maybe if you can expand a little bit on this sort of backlog. Uh, but for the different segments,
Thanks. Now, Jacob, you, you hit the nail on the head? It's a rounding topic. Uh, so if you, if you want the very accurate numbers, the, the previously rounded 20 billion was 19.5, or 19.6 and now the rounded 18 or 18.3. So, we are talking about give or take 1.2 to 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. Uh, I think this 1 move from 107 to 117 uh and this translates into give or take a billion. So short answer is uh, nearly everything of that is currency related.
It's mostly phasing, so cost-cutting is coming through faster for the step-up program. Um, but do you think maybe, you know, the overall quantum might be bigger than you originally anticipated in terms of cost savings?
I mean there are some different pockets of cost-saving. There are cost savings from the selling side, the cost savings from the cock side. There are cost savings from from Central and admin and best cost country transfers and, and also job reductions. So, there are many different areas, but some of them also on the cock side to be fair and transparent our volume dependent. So uh given that our volumes are definitely not at the levels. Uh, we originally thought we have to take that into consideration. So therefore, we are reconfirming, the original targets but not increasing them.
And the next question comes from Andrew Gardner from City. Please go ahead.
Good morning. Thanks for taking the question. Um, sin. I just wanted to come back to the way you uh answered 1 of the prior questions about striking a fine balance between
Some of these different factors are Revenue, inventory Fab loading, um, you know, knowledge that the 150 to 160, inventory days, that you're targeting is above historical, normal levels, but you're comfortable with that and you sort of started, you know, cycle management. If I take that to suggest that you, you you don't want to take the Fab level, the loading levels down any further than this. Um, you're sort of at a, you know, you're striking that balance, right? If we were to go much further and obviously the the unloading charges would continue to increase.
Um, so I'm just trying to understand that balance, right? So we expect this sort of level of unloading to be as low as it gets.
Um, 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, uh, from a managing the cycle point of. So point of view, that's why this 150 days. Of course steering now, exactly under utilization and and, and, uh, and, and, and revenue. Uh, as it comes in is very difficult. But, uh, from a cycle point of view, we would not steer now down to our 120, uh, day, uh, Target in, in, in, in a normal, um, environment. So this 150 days, 15060 Days maximum.
Is is something, um, which we feel comfortable with, and, you know, peers are way above, uh, 200 days, uh, plus and um, but we feel comfortable. Um, as I said in 15060,
Thank you, understood.
Then the next question comes from Joshua Buhala, from TD Carvin. Please go ahead.
Hey guys, thank you for taking my question. Um, I wanted to ask about, um, Downstream inventory actually, so I think in your repair remarks you mentioned that, um, Gip and PSS, um, things are low, but but your customers are refraining from restocking and then in Auto, it sounded like uh, levels are healthy but you're worried that they might take them, you know, below healthy levels. Currently, is that the right way to categorize? You know, how you're thinking about your, your customers inventory, right now? As we think about, you know, and you utilizing
This is Andreas speaking. Uh, so let me take your question.
Uh, so uh, bottom line.
Uh, I tend to agree to to what you've been saying. So, uh, in most of our segments, uh, customers have been, uh, kind of managing the inventories downwards. Uh, so having said that, uh, the inventory correction is, uh, well, ongoing in most of the segments, some of our market segments,
Uh we believe uh they might have reached even unhealthy status with regards to inventory reduction. Uh, IE. We see that at the couple of selective uh Automotive accounts to just name 1 example. So the way how we are reacting in that regards is, and they come back to what Johan said before, managing our uh, inventory with a proper reach to then, uh, uh, fast react when the market comes back based upon, uh, inventory. We put on stage and last not least, we continuously discuss with our customers.
Customers to restock, but why are we speaking?
Uh, uh, there is, uh, so to say a couple of activities in that, uh, regards ongoing last statement, this the inventory, uh, to talk about this 1, uh, we see that at the very healthy level. So we manage, uh, our Distributors and together with our distribution partners and average inventory of 12 weeks. And that we find, uh, to be a, a solid position, uh, for, uh cyclical. Uh, so to say, uh, Market to come back. Yeah.
Yes.
Okay, thank you. Um and then before my follow up here within your maintained uh, AI data center number of 600 million this year and a billion next year, any metrics you're able to give us. Um, either customer or or application diversity across, you know, 48 volt versus second stage and PSU like, how much should we, um, expect those buckets to contribute this year? And next year, or or any metrics you can give on the customer diversity side. Thank you.
Uh, yeah, so first and foremost, uh, uh, for next year, we, uh, plan to go for this, uh, and we still confirm and continue to confirm the 1 billion. Uh, even though they are currency effects. So, let me underline that 1, uh, other than this coming back to the nature of your question look. So, in finan, has by far the broadest product portfolio, uh, in order to serve the entire power flow from grid to core to a very effectively and affectively uh Power. Uh latest generation of AI data centers. So that means we are playing in 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 played and also in the intermediate bus conversion. So this is in contemporary architectures. The 48 volt down to to 12 volt conversion.
Again, with digital power competency that we do have together with the drivers and and world's best mosfets, if you will. Again, it's about efficient switching. And last but not least, we power, the core and that is all the, the circuitry, all, uh, silicon in essence that is needed. In order to utmost, efficiently power, the GPU, uh, Power hungry needs, if you will. So coming back to, uh, going into erection of.
And where do we see, uh, that particular pronunciation of a growth? Let me say it like this: We are growing in all the areas, uh, in a pretty similar manner. If there's some pronounced growth, I would rather say this in the areas of the switch mode power supply. There is, it is a converter. And, of course, due to the increasing number of the GPUs going forward in the new architectures, also the core power supply.
Thank you. I appreciate all the color.
Question comes from Stefano Yuri from Auto BHF.
Please go ahead.
Yes. Um, good morning actually. I have a question about the the 2 Division that have been you know, driving growth uh during this quarter and seemed to be still driving growth in the next quarter which this jip and PSS. Uh, can you uh, maybe help us understanding if it's uh, on the client side inventory replenishment. Or it's just now tracking demand and that, if if the end markets are sound and if you can, you know, quote, a few examples of of Market, where you feel particularly comfortable. Thank you.
Yeah, I think the, the Highlight Andreas just, uh, mentions so, um, in a, a powering AI, it's, uh, clearly and demand. Uh, we even have some bottlenecks to manage to follow the demand of the customers.
Are clearly uh, areas in these 2, uh businesses, which are, um, pulling through, uh, within Automotive. It's also. Um, there are Pockets, um, microcontroller is running from 1. Um, Peak volume quarter to the next, um, other areas are a bit bit softer. Um, so it's, it's not, uh, homogeneous. Um, but clearly areas, um, um, um, I can highlight for structural growth,
If I can have a follow up, it's, uh, it's on the Opex. Um, because there's been um, a big increase in sgna. Um, and um, Can can you maybe help us understand how Opex are going to evolve in the coming quarter especially uh in the in in in the context of your uh you know, cascading plan. Thank you.
uh, so basically, um,
Stefan. The, the the answer is Merit increase. So they have kicked in, and they impact very much, the, the sgna. Um, now you can ask the follow-up, why is it not visible? Then on R&D, the R&D is also a net number, uh, where we also include funding and there are also some positive effects from 1 quarter to the other. So the real answer is Merit.
Then the next question comes from Johannes, Shala from Deutsche Bank. Please go ahead.
Yeah good morning. Thanks for taking my question. Um the first 1 would just be if we could zoom in 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? Finished date a little bit from mid 27. I mean when you gave us the the plan timing um but is there maybe 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 the savings? And should we assume that you can actually keep the majority of that as as profitability? And then I have a quick uh second question after that.
Mr. Uh, Shalah Janice. Um, I think we mentioned all elements. Um, uh, there is a volume-dependent part in the Step Up saving, which only, uh, obviously will materialize when the volume, uh, goes up.
Um, that's why we are not feeling comfortable at this moment in time to raise or pull in, um, uh, the target. Uh, but we are very, um, happy with the progress. Uh, also on the, on the Personnel side, even that number is only like, like 25% of the overall savings, but we have concluded in Europe also in Co determined countries. Um, um, the agreements, uh, with the affected employees. Of course, it doesn't become financially effective immediately. Uh, but we have a solid uh uh, planning base in that regard. Uh, in other countries, of course, um um um, the effects to become Financial effective is is faster. Uh, but overall very good momentum.
Um, and it's really coming, uh, from the cost side of things, uh, uh, uh, uh, structurally, uh, particularly in in, in, in, in, in Cox. Um, uh, also, you may have seen that we made progress on our manufacturing footprint optimization. Uh, so we are not only talking about, uh, uh, Factory, uh, manufacturing footprint. We are taking actions. Uh, this is also, of course, supporting, uh, the trend on, uh, Cox. Um, uh, it's really not that, uh, pricing is now, uh, supporting, uh,
Across margin. Uh, there is price pressure in China as we have highlighted also in the past, uh, in particular in in areas like uh, like igbt related uh, uh products. Uh, and um, in silicon carbide, we see some competitors uh, from outside China. Uh uh going in very aggressively into the market so it's not pricing. It's really uh, cocks.
It looks like some of that pricing competition here is, you know, kind of starting in industrial. It's also maybe now taking a little bit of place in automotive on the low-end EV side. Just.
How do you think about the 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?
Yeah, on the, on the igbt side, it's I think it's evident. There is Chinese competition and, and we focus on on that, uh, that part of the market, um, uh, which is attractive for us. Uh, mainly markets which require performance. Uh, I gave you an example in my script. Um,
Or in my talk, when I talked about this grid shaping facilities, there all of a sudden, uh, um, uh, hi. Hi requirements. In terms of performance, uh, uh, are required in, in order to really, uh, uh, Force, the grids to the,
Um, frequency, um, uh, required. So, uh, great play for us. Um, uh, entry-level battery electric vehicles, probably not a play for us, neither residential solar in China, very interesting. Not very interesting. Um, in silicon carbide, the competition is more global competition. And as I said here, it's more that some players are aggressively going into.
Not up some crumbs in the market. Uh, uh. Um, but um, um, that's it and on silicon carbide. Of course, we are benefiting from not being vertically integrated, um, to stress that 1 more time. So, um, we have the benefit of, um, um, um, yeah. Going, uh, being in a multi-source situation where we order, um, the best material at the best price.
Hopefully that gave you some more color on that market.
Very helpful. Thank you.
And the next question comes from Te Teq from Baron Back. Please go ahead.
Hi, thank you for taking.
So, firstly is on the uh, AI guidance. It seems to be that you are achieving that 1 billion Target earlier than previously indicated. Uh, I'm just wondering, what is a journey from here? I are, are we going to grow at a similar level in a coming years? And also, there has been some discussion about potentially, uh, more AI companies will be introducing more suppliers. So how is your market share be looking like in the future? AI design.
So, um, we stay for the moment, um, with the €1 billion for next year. And again, I have to stress, uh, we, uh, €1 billion. So the currency headwind is already implying an, uh, increase, uh, beyond that. Um, we are not, uh, uh, guiding for the moment. Uh, but, um, under the assumption that the AI data infrastructure build-out is happening as currently planned, you can assume that this business will, uh, we will have a lot of fun and a lot of, uh, growth with it. Now, uh, to your SEC. The second part of your question. Yes. Um,
Um, um, other suppliers are talking about this opportunity. Um, here, um, I think, uh, it's, uh, important to find out, uh, who has, uh, the real system play, meaning a broad portfolio, meaning being able to sit down with a 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, uh, some crumbs on this sexy story.
Okay, thank you. Um,
Secondly, is relating to China auto business. Um, you mentioned that they have been some pricing competition. And recently, I think China has been saying that, uh, they try to avoid these kind of over capacity, issue and eliminate kind of, uh,
Extreme competition within the market is going to be supportive from your perspective on your pricing going forward. And also, can I potentially eliminate some of the local competitors from your side?
For mergers for consolidations, we have seen a local governments then rather protecting their, uh, their local OEM whether the price war on, the OEM level, it has come to a point where people are pulling uh, back. I I, I, I do not see enough, uh, evidences I've seen Trends, um, to equip the cars with even more features and keeping the price, uh, um, at a certain level, that would be, of course, uh, so helpful for us. Uh, but I think that market is in itself in a, in a situation where the fork needs to clear. Um, uh, ultimately, I think on all levels, um there will be less players starting with oems with tier 1s. Uh but probably also the number of uh particularly a local uh Automotive chip suppliers. Not
All of them will make it.
And the next question comes from Aditia Muku from HSBC. Please go ahead.
Yeah, good. Good morning guys. Thank you for letting me on. Um, just firstly on the uh, AI data center power supplies. Um, I understand what you're saying around the, um, breadth of your Solutions, um, and how that's going to help you compete better, uh, versus some of the other players in the market. But I just wondered from, you know, even today, there was an article, uh, talking about 10 silicon chip suppliers to Nvidia for their, uh, dcdc. Um, you know, power supply. Uh, I I just wanted from the perspective of your customers, like Nvidia, why are they collaborating with so many people?
Um, if, um, you know, if they don't have all these, uh, such a broad portfolio, uh, just any color you can provide to help us understand this landscape would be really helpful, and I've got a follow-up.
Yeah, in principle. You need to ask that. Uh uh customer. Um, I can only tell you that uh we feel that we are considered as a a partner with which uh the company wants to collaborate uh and 1 of the uh uh 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. Um, and and the rest please ask, uh, Jensen,
Okay, I got it. And, and just as as a quick follow-up, just on Gan um with um tsmc announcing that they're going to get out of The Foundry space. Um in the last month, I I I just wondered if you see any effect from this, you know, does this put you in a better position if if your competitors have to change their foundries? Um, how do you see this affecting the Gan landscape, uh, going forward?
Yeah, and one term, um, it's an IDM game. Uh, like in other, uh, power semiconductors, uh, this is not a spot where a foundry can really play to its strengths. Um, um, um, um, so we clearly see the trend towards an IDM game, which puts all the sublist companies, not only tactically now, in a difficult spot looking for a different foundry, but also systematically. Uh, uh, this will be, uh, hard for them to really, uh, compete. We are going ahead full steam. Uh, we are already completely on 8-inch, and we will deliver the first, uh, products, um, or, uh, in, in, in this calendar year from 300 mm. Mm. Um, so we are going full steam ahead. We see the value proposition. We believe the market models, uh, currently out there are way too conservative, uh, for what.
Is, uh, the potential in this, uh, material? Um, and um, yeah, we want to lead that market. Very simple.
Great. Um, 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're all putting on their flip-flops and sunglasses.
We wish you an amazing summer in this part of the world, often defined as August. Take care and have a good day.