Infineon's earnings Good, But Not Good Enough

The chipmaker has plenty of positive results to report for its 2014 fiscal year, but continues to chase its own profitability targets. CEO Reihnard Ploss faces shareholders on Thursday.
Quelle: dpa
(Source: dpa)

When Reinhard Ploss, Infineon’s chief executive, meets with shareholders at their annual meeting in Munich, he will report mostly positive results and, despite some concern about an expensive acquisition, won’t have to worry about any major confrontation.

In the 2014 fiscal year, which ended on September 30, the Infineon dividend doubled, sales were up and the profit margin also increased, although it still fell short of the company’s target.

Mr. Ploss will have to explain why he missed the target and also convince shareholders of the need to acquire U.S. rival International Rectifier for $3 billion, or €2.65 billion – Infineon’s most expensive acquisition ever. But that's about all.

It's been two-and-a-half years since Mr. Ploss took over the helm of the German chipmaker, a former unit of Siemens. A quick glance at the annual report suggests he's been doing a good job.

Operating profit margin – which, at Infineon, is based on the sum of operating profits at its business segments – was 14.4 percent, up from 9.8 percent in 2013, but still short of the company's own target of 15 percent.

Still, shareholders have little to complain about.

In 2014, the dividend rose by half to 18 cents per share and sales increased by 12 percent to €4.3 billion. The sales increase pays off directly, because profits in the chip industry are directly tied to capacity utilization in expensive plants. Income increases exponentially when order volume is up and plants are operating at full steam.

Infineon plans to invest €750 million in the current fiscal year, which is €50 million more than it had announced last fall.

In 2014, Infineon earned a net income of €535 million, almost twice as much as in the previous year.

The high capacity utilization wasn't the only factor, but an important one nonetheless. By comparison, the company incurred vacancy costs of about €160 million in 2013, compared to only €60 million last year – despite the fact that not all machinery was in use during the first few months of the fiscal year.

It's a different story in the current fiscal year - business has been booming from the beginning. As a result, costs associated with decommissioned plants will decline significantly again. There will always be vacancy costs, however, because machines are being regularly replaced or workers are reconfiguring production somewhere.

All four Infineon divisions grew last year, most notably industrial power control, with a 20-percent jump in revenue. The chip card division, however, remains the company's problem child. The division reported the smallest gains, with an increase in revenue of only 7 percent to about €500 million. It is also far less profitable than the other divisions, with an operating margin of less than 9 percent and an operating profit of only €43 million. By comparison, Infineon's top-performing division, industrial power control, achieved a return of more than 18 percent.

Mr. Ploss appears unwilling to sell the chip card division for various reasons. He has concentrated the company's security competency in the chip card division, including its encryption expertise, in a move that benefits all other segments.

The card business, according to Infineon,  also consumes far less capital than the other divisions, with make-to-order manufacturers taking on large shares of production. As a result, it can absorb a lower return.


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Mr. Ploss still hopes the chip card division will see significant growth in the current fiscal year, now that it has its production problems under control. The strategy paid off in the first quarter of the new fiscal year; revenue was up by more than a fifth over the previous year, profits tripled and the profit margin was just under 14 percent, bringing the chip card division on a par with the three other divisions.

Having more orders on the books also requires investing more money in new machinery, maintenance and software. The Munich-based company spent €668 million on equipment in fiscal 2014, or almost €200 million more than in the previous year. The investments, however, are still about €200 million below 2012 levels.

Nevertheless, the company isn’t putting its future at risk by investing only €700 million in new machinery. Three years ago, Infineon spent an unusually large sum of money to develop a groundbreaking new production process,  300-mm thin wafer technology.

Infineon plans to invest €750 million in the current fiscal year, which is €50 million more than it had announced last fall. "We are confident in the medium term, and we are investing a little more," said Chief Financial Officer Dominik Asam. The investments include €70 million for a new factory in Malaysia.

Despite all the money it is spending, Infineon still has plenty of cash on hand, with €317 million in free cash flow from continuing operations in the last fiscal year, a one-third increase over the preceding year.

Despite all the money it is spending, Infineon still has plenty of cash on hand, with €317 million in free cash flow.

As of the September 30 balance-sheet date, the group had a net cash position – the amount of cash it had on its books after deducting debt – of more than €2.2 billion. In the coming weeks, however, this comforting cushion will melt like snow in spring sunshine, and it will eventually disappear altogether, because of the €3 billion International Rectifier acquisition, which will not appear on the balance sheet until the end of the current quarter. Infineon borrowed money to acquire the Silicon Valley business.

International Rectifier's revenue will be reflected in this quarter's financial figures for the first time. The power management and multimarket division will add about 70 percent in sales, while industrial power control and automotive will gain 15 percent each. Only the chip card division will come away empty-handed. International Rectifier generated $1.1 billion in revenue in 2014, with an operating margin of about 7 percent.

Investors shouldn't be put off by the fact that Infineon will be servicing debt once again, at least not at the moment. Business is looking good for the coming months, and Infineon is also benefiting from the weak euro. Because the industry balances its accounts mainly in dollars, a one-cent change in the exchange rate results in a €3 million to €4 million shift in revenue and a €1-million shift in operating income per quarter.

The further the euro falls, the better it is for Infineon. This already led to a surprisingly strong result in the first quarter of the current fiscal year, with revenue increasing by 15 percent over the previous year, to €1.13 billion and net income growing by more than half, to €136 million.

These results prompted Mr. Ploss to raise the revenue forecast for the current fiscal year in late January. Without contributions from the recently acquired rival, revenue will increase by 12 percent, Mr. Ploss said at the time. He had previously forecast an 8-percent revenue increase. The rate of return, he added, could rise to 15 percent, compared with the previous prediction of 14 percent.

Maybe, Mr. Ploss will reach his 15-percent target after all.


Joachim Hofer covers the high-tech industry and the IT sector for Handelsblatt. To contact the author: [email protected]