Infineon (IFNNY) Q2 Earnings Top, Stock Down On View Cut

Semiconductor maker Infineon Technologies AG (OTC:IFNNY) reported adjusted earnings per share (“EPS”) of €0.18 (20 cents) in second-quarter fiscal 2016 which beat the Zacks Consensus Estimate of 18 cents by 11.1%. Also, adjusted earnings were up 38.5% on a year-over-year basis.

Despite healthy profits and earnings, investors were miffed with the slashed guidance for full-year 2016 revenues. This resulted in a 5.1% drop in share prices to $14.00 on Tuesday.

Meanwhile, the bottom-line improvement came on the back of a decline in operating expenses (namely research & development and selling & administrative) and decent top-line growth.

Inside the Headlines

Though revenues jumped 8.6% year over year to €1,611 million ($1,776.8 million) in the quarter, it missed the consensus mark of $1816 million by 2.1%. Decent performances by all the segments, especially the Automotive segment, drove the top line during the quarter. Surging demand for semiconductors in automotive and power markets has boosted sales for the company over the past few quarters.

Automotive (“ATV”) revenues increased 12.4% year over year to €670 million ($738.9 million). Stringent environmental standards continue to trigger demand for electric and hybrid vehicles worldwide, thereby boosting growth at this segment. Meanwhile, sales in the quarter primarily benefitted from above-average vehicle sales in all of Infineon’s key markets – Europe, North America and China.

Industrial Power Control (“IPC”) revenues increased 10% year over year to €265 million ($292.3 million) on higher demand for home applications based on renewable energy.

Power Management and Multi-market (“PMM”) revenues increased 6.9% to €496 million ($547.0 million). Stellar sales from cellular network infrastructure along with increased installation of charging stations in China (for AC-DC conversion) proved conducive to the quarterly sales.

Revenues at the Chip Card and Security (“CSS”) segment dipped 1.1% to €180 million ($198.5 million). While factors like rising demand of payment, government ID and security applications acted as a tailwind, seasonal factors offset sales in the authentication business, thereby causing the decline.

At the end of second-quarter fiscal 2016, Infineon recorded operating income of €174 million compared with €232 million in the year-ago quarter. Also, operating margin declined 480 basis points on a year-over-year basis.

Liquidity

Infineon’s cash and cash equivalents were €606 million ($688.1 million) of Mar 31, 2016, down from €651 million as on Dec 31, 2015. As of Mar 31, 2016, the company’s long-term debt totaled €928 million ($1,053.8 million), down from €1,779 million as on Dec 31, 2015.

For the three months ended Mar 31, 2016, the company had net cash from continuing operations of €195 million ($221.4 million), up from €135 million as of Mar 31, 2015.

Outlook

Infineon provided the third-quarter fiscal 2016 guidance wherein revenues are expected to increase 2% with a possible deviation of plus or minus 2%; whereas the segmental margin is predicted at 16% (the mid-point of the forecasted revenue range).

However, weakening of the U.S. dollar has compelled the company to slash its full-year fiscal 2016 outlook, much to the disappointment of the investors. Concurrent with the present macroeconomic scenario, revenues are expected to increase about 12% (with a possible deviation of plus or minus 2%) instead of the previous guidance of 13%. Also, segmental margin is projected to grow in the range of 15%–16% at the mid-point of the forecasted revenue range.

Taking the weakening dollar into account, both outlooks are now based on an assumed exchange rate of US$1.15 (initially assumed to be $1.10) for the second half of fiscal 2016.

For fiscal 2016, Infineon expects its PMM segment to perform the best, scoring higher than the group average. Based on the recent uptick in the automotive business, the company now expects its ATV segment to equal the group’s average (initially expected to lag the group’s average). While the IPC segment’s performance is expected to be in line with the group, CSS is expected to perform lower than the group average.

Our Take

Infineon is experiencing steady growth, thanks to its business strategy which is aimed at providing efficient and reliable yet economical products, in order to address key global challenges such as mobility, energy efficiency and security. The company’s strong foothold in the automotive and power markets is one of its major strengths. Going forward, we expect the company’s focus on key strategic areas including demographic trends, demand for resources and connectivity & digitalization to help it capitalize on key market trends and beat competitors. Furthermore, growing demand for energy-efficient products stemming from stringent government regulations also opens up tremendous scope for future growth.

Infineon currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the industry include Amkor Technology, Inc. (NASDAQ:AMKR) , AXT Inc. (NASDAQ:AXTI) and Silicon Motion Technology Corp. (NASDAQ:SIMO) . All the three stocks sport a Zacks Rank #1 (Strong Buy).

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