Infineon (IFNNY) Q2 Earnings Beat Estimates, Revenues Up Y/Y

Infineon Technologies AG (OTC:IFNNY) reported second-quarter fiscal 2019 adjusted earnings of €0.24 per share (or approximately 27 cents per share), surpassing the Zacks Consensus Estimate by a penny. However, the figure declined 7.7% from the year-ago quarter.

Revenues increased 8% year over year to €1.983 billion (or almost $2.252 billion) in the reported quarter.

Strength in three of the company’s four business segments, namely, Automotive (ATV) Industrial Power Control (IPC) and Power Management & Multimarket (PMM) drove the top line.



Notably, shares of Infineon were down 3.9% yesterday. The decline can be attributed to Infineon’s view that macroeconomic headwinds are likely to impact its near-term performance. Shares of the company have returned 10.9% year to date, compared with the industry’s rally of 22.1%.

Segmental Highlights

ATV accounted for 44% of total revenues, advancing 8% year over year to €875 million. The segment witnessed robust adoption of advanced driver assistance systems (ADAS), and electric drive train devices during the quarter.

IPC represented 18% of total revenues, increasing 9% year over year to €347 million. Sturdy adoption of products utilized in wind power plants and strong traction business aided results. However, sluggishness in energy saving home appliances, photovoltaic devices, and industrial drives limited growth.

PMM contributed 30% to total revenues, advancing 9% on a year-over-year basis to €591 million. Soft demand for products utilized in smartphones and weakness in end markets hindered growth sequentially.

Management noted that inventory pertaining to power supply components remained high in the broader supply chain. This can be attributed to sluggish demand across end markets.

Chip Card & Security or CCS has been renamed to Digital Security Solutions or DSS, effective from Oct 1, 2018. DSS segment revenues contributed 8% to total revenues, and came in line with the year-ago figure at €164 million. Strong demand in payment card domain and embedded SIMs (eSIM) utilized in vehicles, supported the segment.

Revenue Break-up by Geography

Region-wise, Europe, Middle East, Africa revenues declined 0.8% on a year-over-year basis to €631 million (32% of total revenues). Specifically, Germany contributed €302 million, down 1.3% from the year-ago quarter.

Revenues from Asia-Pacific (excluding Japan and Greater China) advanced 9.3% on a year-over-year basis to €295 million (15% of total revenues).

Revenues from Greater China improved 7.7% to €640 million, representing 32% of total revenues. China, in particular contributed €494 million to Greater China revenues, advancing 13% from the year-ago quarter.

Revenues from Japan increased 13.5% from the year-ago quarter to €143 million (7% of total revenues).

Revenues from Americas surged 30.5% from the year-ago quarter to €274 million (14% of total revenues). Specifically, the United States contributed €227 million, up 35.9% from the year-ago quarter.

Operating Details

Adjusted gross margin expanded 50 bps from the year-ago quarter to 38.5%. Segment result improved almost 6% from the year-ago quarter to €332 million. However, Segment result margin contracted 40 bps on a year-over-year basis to 16.7%.

Segment-wise, ATV, IPC, PMM and DSS margins contracted 150 bps, 30 bps, 240 bps and 490 bps, to 12.8%, 19.3%, 22.3% and 11.6%, respectively, on a year-over-year basis.

Research & Development (R&D) expenses as a percentage of revenues expanded almost 100 bps to 11.9%, while Selling, General & Administrative (SG&A) expenses contracted 70 bps to 10.7% on a year-over-year basis.

Operating income came in at €305 million, declining 42.7% from the year-ago quarter. Operating margin (operating income as a percentage of revenues) came in at 15.4%, compared with year-ago figure of approximately 29%.

Balance Sheet & Cash Flow

Infineon ended the second quarter with €809 million in cash & cash equivalents, down from €827 million reported in the previous quarter.

Total debt (including current portion) as on Mar 31, 2019, was €1.549 billion, up from €1.533 billion reported at the end of the previous quarter.

Infineon generated €213 million as cash from operations compared with the previous quarter’s figure of €309 million.

Free cash flow in the reported quarter came in at (€137 million), compared with (€221 million) recorded at the end of the previous quarter.

Guidance

Third-quarter fiscal 2019 revenues are anticipated to inch up 1% (+/- 2%) on a sequential basis. Segment margin is anticipated to be around 15%.

On Mar 27, 2019, Infineon had trimmed revenue guidance for fiscal 2019, anticipating macroeconomic woes to linger. The company maintained the revised guidance. For fiscal 2019, management anticipates revenues to reach €8 billion, primarily owing to tough macroeconomic conditions. Notably, per the prior guidance, the company projected revenue growth to come in at almost 9% (+/- 2%), which it now expects at around 5.3%.

Segment result margin is projected to be almost 16% compared with previously guided figure of 17.5%.

ATV and IPC segment revenues are envisioned to grow above the company’s growth average. PMM revenues are anticipated to grow below the company’s growth average. However, DSS revenues are anticipated to decline in “mid-single” digits in lieu of difficult market situation.

Management anticipates investments to come in at €1.5 billion in fiscal 2019. The planned investments include costs pertaining to the company’s efforts on the new chip production of 300-millimeter (mm) wafer at Villach, Austria.

Over the long term, Infineon envisions revenues to grow by 9% and aims segment result margin of 17%, per its target operating model.

Conclusion

Infineon is bearing the brunt of uncertain macroeconomic conditions & imposition of tariff owing to trade war between the United States & China. The company’s requirement of large capital investments to maintain a competitive cost position is likely to weigh on margin expansion.

However, the company’s expanding presence in high-growth markets including ADAS, 5G, renewable, hold promise, and are likely to revive fortunes in the long haul.

Zacks Rank & Stocks to Consider

Infineon carries a Zacks Rank #4 (Sell).

Some better-ranked stocks worth considering in the broader sector, include Ciena Corporation (NYSE:CIEN) , Cirrus Logic, Inc. (NASDAQ:CRUS) and Synopsys, Inc. (NASDAQ:SNPS) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Ciena, Cirrus Logic and Synopsys is pegged at 16.8%, 15% and 10%, respectively.

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