Infineon (IFNNY) Q3 Earnings Miss Estimates, Revenues Up Y/Y

Infineon Technologies AG (OTC:IFNNY) reported third-quarter fiscal 2019 adjusted earnings of €0.23 per share (or approximately 26 cents per share), lagging the Zacks Consensus Estimate pegged at 29 cents. Moreover, the figure declined 4.2% from the year-ago quarter.

Revenues increased 4% year over year to €2,015 billion (or almost $2.264 billion) in the reported quarter.

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

Segmental Highlights

ATV accounted for 44% of total revenues, advancing 6% year over year to €888 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 2% year over year to €357 million. Sturdy adoption of products utilized in wind power plants, photovoltaic devices, and industrial drives aided results.

Infineon Technologies AG Price, Consensus and EPS Surprise

PMM contributed 30% to total revenues, advancing 3% on a year-over-year basis to €598 million. Higher adoption of AC-DC power supplies, strong US dollar and seasonality in products utilized in smartphones aided growth. However, management noted sequential decline in demand for DC-DC applications.

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 but declined 5% from the year-ago figure to €167 million. Strong demand in payment systems couldn’t mitigate the weakness in other applications.

Revenue Break-up by Geography

Region-wise, Europe, Middle East, Africa revenues improved 1.3% on a year-over-year basis to €628 million (31% of total revenues). Specifically, Germany contributed €302 million, up 2.7% from the year-ago quarter.

Revenues from Asia-Pacific (excluding Japan and Greater China) advanced 1.4% on a year-over-year basis to €294 million (15% of total revenues).

Revenues from Greater China improved 5.3% to €692 million, representing 34% of total revenues. China, in particular contributed €551 million to Greater China revenues, advancing 13.1% from the year-ago quarter.

Revenues from Japan increased 5.5% from the year-ago quarter to €153 million (8% of total revenues).

Revenues from Americas grew 8.3% from the year-ago quarter to €248 million (12% of total revenues). Specifically, the United States contributed €203 million, up 10.9% from the year-ago quarter.

Infineon Technologies AG Revenue (Quarterly)

Operating Details

Adjusted gross margin contracted 200 bps from the year-ago quarter to 37.2%. Segment result declined 11% from the year-ago quarter to €317 million. Segment result margin contracted 260 bps on a year-over-year basis to 15.7%.

Segment-wise, ATV, IPC and DSS margins contracted 340 bps, 490 bps and 520 bps to 11%, 15.4% and 11.4%, respectively, on a year-over-year basis. PMM margin expanded 60 bps to 24.2%.

Research & Development (R&D) expenses as a percentage of revenues expanded 90 bps to 12.1%, while Selling, General & Administrative (SG&A) expenses contracted 20 bps to 10.6% on a year-over-year basis.

Operating income came in at €283 million, declining 11.3% from the year-ago quarter. Operating margin (operating income as a percentage of revenues) contracted 240 bps year over year to 14%.

Balance Sheet & Cash Flow

Infineon ended the second quarter with €722 million in cash & cash equivalents, down from €809 million reported in the previous quarter.

Total debt (including short-term portion) as on Mar 31, 2019, was €1.535 billion, down from €1.549 billion reported at the end of the previous quarter.

Infineon generated €396 million as cash from operations compared with the previous quarter’s figure of €213 million.

Free cash flow in the reported quarter came in at €63 million, compared with (€137 million) at the end of the previous quarter.

Status of Cypress Acquisition

During the reported quarter, Infineon had announced agreement to acquire Cypress Semiconductor Corporation (NASDAQ:CY) for approximately €9 billion.

In a bid to sustain liquidity, the company will fund the acquisition through 30% of total contract value by equity, and remaining via debt and cash on hand. The shares of the company had been declining post the acquisition announcement on apprehensions over debt financing and integration of business.

On Jun 18, 2019, the company issued 113 million shares and raised net proceeds of €1.5 billion. Post this, Infineon stock is up 20.3%, outperforming the industry’s rally of 4.6%.



Infineon notes that the remaining financial backing for the deal is “successfully syndicated among a larger consortium of banks.”

After fulfilling the regulatory approvals, Infineon anticipates closure by end of 2019 or early 2020.

Guidance

Fourth-quarter fiscal 2019 revenues are anticipated to inch up 1% (+/- 2%) on a sequential basis. Segment margin is anticipated to be 14.5%.

PMM segment revenues are envisioned to grow above the company’s growth average. ATV revenues are anticipated to improve in line with the company’s growth average. However, DSS and IPC revenues are anticipated to decline in low-single digits.

For fiscal 2019, management anticipates revenues to reach €8 billion, indicating year-over-year growth of 5.3%.

Segment result margin is projected to be 16%.

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.

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. Cypress Semiconductor acquisition is expected to aid Infineon to strategically expand portfolio and capitalize on the high-growth markets including automotive and IoT.

Zacks Rank & Stocks to Consider

Infineon currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector worth considering are Rosetta Stone (NYSE:RST) and Anixter International (NYSE:AXE) . Both the stocks flaunt 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 Rosetta Stone and Anixter is currently pegged at 12.5% and 8%, respectively.

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