Infineon Technologies AG

XETRA:IFX

Earnings Call Transcript 2021-Q1

[Operator]

Welcome to the Conference Call for Analysts and Investors for Infineon's 2021 Fiscal First Quarter Results. Today's call will be hosted by Alexander Foltin, Executive Vice President, Finance, Treasury and Investor Relations of Infineon Technologies. As a reminder, today's call is being recorded. This conference call may contain forward-looking statements based on current expectations or beliefs as well as a number of assumptions about future events. We caution you that statements that are not historical facts are subject to factors and uncertainties, many of which are outside Infineon's control and that could cause actual results to differ materially from those described or implied in such statements. Listeners are cautioned that Infineon's actual results could differ materially from the results anticipated or projected in any of these statements and they should not put undue reliance on them. For a detailed discussion of important factors that could cause actual results to differ materially from the statements made on this conference call, please refer to our quarterly and annual reports available on our website. At this time, I would like to turn the call over to Infineon. Please go ahead.

[Alexander Foltin, Head of Investor Relations]

Thank you very much, and good morning. Welcome, ladies and gentlemen, to our 2021 fiscal first quarter earnings call. The entire Management Board of Infineon is again on the call: Reinhard Ploss, CEO; Helmut Gassel, CMO; Jochen Hanebeck, COO; and Sven Schneider, CFO. New year, different day of the week, same procedure. Reinhard will start with some remarks on group and division results, market developments and business highlights. Sven will then comment on key financials, followed by Reinhard again updating you on our guidance. The illustrating slide show, which is synchronized with a telephone audio signal, is available at infineon.com/slides. After the introduction, we will be happy to take your questions, kindly asking that you restrict yourself to one question and one follow-up. A recording of this conference call, including the aforementioned slides and a copy of our earnings press release as well as our investor presentation, are also available on our website at infineon.com. Reinhard, the virtual stage is yours.

[Reinhard Ploss]

Thank you, Alexander, and good morning, everyone. Infineon has been off to a strong start into the 2021 fiscal year. Driven by rising demand across multiple end markets, we saw a pronounced sequential revenue increase in the December quarter, different from our typical seasonality. As we could serve the bulk of the additional demand from existing available capacities, the revenue uptick was accompanied by a notable margin expansion. The strength of these positive developments allowed us to more than offset the adverse U.S. dollar movement. Broadly speaking, the current market environment is characterized on the demand side by both a cyclical recovery and continued structural momentum on the supply side by tightness affecting various parts of the value chain. The automotive market has rebound with regulatory tailwinds supporting EVs, industrial and also related IoTs are slowly returning to growth. Work-from-home dynamics remain vibrant and digitization is accelerating, giving a push to communications infrastructure, smartphones, data centers and certain consumer applications. As demand is outstripping supply in many subsegments and inventories are in some areas, especially in the channel on the low side, confidence with respect to 2021 is improving. Once again, high levels of agility and flexibility are required of our workforce as we are moving rapidly from underutilization into allocation in many areas. Of course, significant uncertainties continue to linger, first and foremost, from the coronavirus pandemic and from trade tensions and we are not turning to blind eye on them. Having said this, we firmly believe in the underlying strength of our business and adjust our projections upwards also moving faster on investments. I will get back on to this in my outlook section at the end. Let's first take a closer look at the quarter under report. In the December quarter, we printed revenues of EUR 2.631 billion, 6% more than in the previous quarter and ahead of the midpoint of our guidance. All segments contributed to this growth, in particular, automotive. The average U.S. dollar-euro exchange rate worsened quarter-over-quarter from 1.16 to 1.19. Assuming a constant exchange rate, sequential growth would have been 7%. The year-on-year comparison is not meaningful given the consolidation of Cypress. The segment result amounted to EUR 489 million, resulting in a segment result margin of 18.6%. The stronger-than-anticipated margin expansion was mainly driven by the fall-through from a positive revenue development meeting available manufacturing capacities. Consequently, quarterly underutilization charges went down substantially, benefiting especially automotive. Furthermore, we had a couple of positive nonrecurring effects. Sven will provide more details in his part. Our book-to-bill ratio at the end of the December quarter stood at 1.6, the reflection of strong demand, but also of supply the tightness. Now into our divisions. Starting with automotive. In the December quarter, the segment posted revenues of EUR 1.150 billion, a 10% increase compared to the quarter before. Core markets globally continued their rebound and showed another strong uplift in demand. As a consequence, all our product areas benefited with particular strength in components for electric vehicle. This positive momentum had a substantial impact on ATV's profitability. The segment result came in at EUR 185 million, equivalent to a segment result margin of 16.1% compared to a 5.6% in the previous quarter. The strong margin improvement was driven by a significant reduction in underutilization charges in the wake of a considerably higher fab loading. The book-to-bill ratio for the December quarter increased to 1.5 caused by underlying demand, but to a certain extent, also by orders higher than actual demand in few of tight supply conditions. Semiconductor shortages are being felt in the overall automotive supply chain and the recovery is happening faster than expected last summer. Many products are in allocation and foundry capacity, especially for microcontrollers, is a limiting factor. It will take time to bring more capacity online. Regarding power semiconductor and sensors, we are well positioned regarding the situation due to our in-house capacities. Infineon is committed to supporting its customers in the best way possible and act as a reliable partner. This has been the case last year when we ran inventories at above normal level to minimize supply disruption, and this is the case now when we increase our capacity-related investments further. Current supply constraints should not overshadow underlying trends. 2021 is shaping up to be a strong year for automotive semiconductors. As global light vehicle production should grow in the mid-teens year-over-year and structural momentum is coming from ADAS and EV, the adoption and penetration appear to be accelerating. In the December quarter, the share of battery, electric and plug-in hybrid vehicles of new car sales of the top 5 West European carmakers was about 14%. Also in Mainland China, so-called new energy vehicles have resumed their growth path with more than 600,000 units being sold in the last calendar quarter of 2020, representing a share of about 8%. In the U.S. penetration, levels are still around the 3% mark. However, under the new administration, the regulatory framework and public infrastructure spending are expected to favor clean mobility. In other words, xEV inflection points occur at different points in time in different regions. But overall, electromobility is taking off and Infineon has an unrivaled product portfolio to offer fully scalable solution for all types of vehicle electrification. As evidence of this, a couple of weeks ago, we scored a triple-digit million-euro design win at a major car OEM established outside Europe for main inverters with modules based on silicon carbide and IGBT technologies. On the ADAS side, we continue to see accelerating adoption of platforms that can be scaled up to Level 2+, which bodes well for our high popular suite of sensors and microcontrollers. Recently, a major Asian Tier 1 selected our 77-gigahertz solution for a short-range RADAR application. Now to Industrial Power Control. IPC witnessed an unusual seasonal upswing in the December quarter and recorded revenues of EUR 362 million, 4% more compared to the previous quarter despite currency headwinds. By application area, the picture is a mixed one. Renewable energy showed continuous growth and have surpassed the EUR 100 million quarterly revenue mark for the first time. Also, home appliance were strong, driven by pent-up demand and energy saving regulations. In contrast to this, industrial drives move side ways and transportation continues to be hampered by low travel activities. The segment result came in at EUR 61 million after EUR 69 million in the quarter before. The segment result margin, correspondingly, it declined to 16.9% from 19.8%, reflecting adverse currency movements and unfavorable product mix. Book-to-bill improved to 1.4 at the end of the December quarter in part driven by customers putting in longer-term orders. Channel inventories have come down further and are now at a very healthy level. The overall market sentiment for industrial is turning more optimistic as macro indicators and application-specific forecasts point to a sustained recovery in 2021. We see industrial drives and automation on a slow but steady recovery path with some near-term volatility from the timing of CapEx projects. For renewable energies, we expect sustained growth. The generation of electricity from natural resources is a secular theme. The green deals in different geographics already provide significant policy and fiscal support. Any further regulation push would constitute upside potential. Also, home appliances are on the [ positive ] trajectory, driven by energy efficiency regulations for domestic air conditioning in China. In contrast, investments into train and also e-buses are being pushed out due to COVID effects on public transportation. Recovery in these areas will be delayed, but the structural attractiveness is undiminished. As a product highlight, we have introduced the world's first molded 1,200-volt IPM, or Intelligent Power Modules, with silicon carbide MOSFETs. This product is targeting industrial drives and aircon application, the next tipping points for silicon carbide in the industrial sector. Let's now turn to Power & Sensor System, which recorded revenues of EUR 779 million, 3% more compared to the previous quarter. Whereas the server business was essentially flat at high levels, we noted several pockets of distinct strength: low voltage switches, in particular, for power tools; connectivity components for PCs and laptop; and once again, MEMS microphone for our smartphones and accessories. The segment result of PSS came in at EUR 197 million, resulting in a segment result margin of 25.3%, a little lower than in the previous quarter, which had seen some positive one-off effects. In the last quarter, we saw strong ordering momentum, reflecting in a book-to-bill ratio of 1.6 at the end of the December quarter. At the same time, channel inventories are very low with supply tightness being felt across several product categories. Our remote workforce and stay-at-home regulations affecting aspects of life, such as schooling and entertainment, continue to provide a boost to demand in areas like battery-powered do-it-yourself tools, PCs and laptops and gaming consoles. Besides these cyclical developments, structural trends are unabated as digitalization is irreversible. A key example our cloud data centers. Here, we see sustained momentum for server DC-DC controllers and power stages. The rollout of 5G networks will enable and foster edge computing. On the handset side, 5G is expected to catalyze the growth of premium devices. With our product portfolio, combining power sensing, radio frequency, control and connectivity, we are poised to benefit from this multitude of growth drivers. One critical success factor is innovation. A very recent example is our extensive PAS CO2 sensor. Using photoacoustic spectroscopy, the sensor allows highly accurate measurement of CO2 concentration with an exceptionally small form factor. Use cases can be found in areas like ventilation control in buildings, smart agri-ppliances, agriculture or in-cabin air quality monitoring. In the current pandemic, the sensor can help to reduce the risk of airborne viral transmission in places like offices, conference or classrooms. It makes us proud that the facilities of the planned next Munich Securities Conference will be equipped with it. Now to Connected Secure Systems, which recorded revenues of EUR 335 million, a slight increase compared to the previous quarter despite currency headwinds. There would have been room for higher sales figures as demand, especially for general purpose microcontrollers and WiFi components is vibrant. However, CSS is affected by supply constraints on the foundry side. The segment result of CSS amounted to EUR 45 million, equivalent to a segment result margin of 13.4%, slightly ahead against the previous quarter. The book-to-bill ratio is a staggering 2.6. The figure being somewhat distorted by the fact that several large customers have put in annual orders. Having said this, underlying demand in practically all application areas outside identification documents and ticketing continues to be very strong. Once again, we are witnessing the confluence of cyclical and structural factors. COVID restrictions lead to increasing demand for application like home health, home fitness, remote controls, gaming consoles and contactless payment. The proliferation of smart and connected device, be it on the industrial side, automotive or customer side, drive the need for solutions combining connectivity, control, low power and security. Linked to this, we have seen good design win momentum across our WiFi, bluetooth and microcontroller offerings. Our WiFi/Bluetooth combo chipset have been selected for a new infotainment platform by a major automotive Tier 1. We also have won key sockets at leading IP camera providers. In microcontrollers, we have achieved key design wins at leading OEMs in industrial, printer and consumer markets. On the product side, we have extended our OPTIGA Trust family with a dedicated solution for secure wireless charging, addressing charges for small personal electronic devices like smartphones, earbuds, tablets, various health device with a charging power up to 15 watts. Additionally, we have launched one of the industry's only dedicated WiFi 4 solution to deliver the latest WPA 3 security standard targeting IoT applications. Now over to Sven, who will comment on our key financial figures.

[Sven Schneider, CFO & Member of Management Board]

Thank you, Reinhard, and good morning, everyone. As usual, I begin by commenting on our margin development. In the first quarter of our 2021 fiscal year, gross profit amounted to EUR 985 million, resulting in a gross margin of 37.4%. Excluding nonsegment result effects, the adjusted gross margin came in at 40.3%, 370 basis points up from the 36.6% we had recorded in the previous quarter. The main reason for this steep increase was the reduction in idle costs. Utilization in our front-end facilities snapped back to mid-90% level. Also, the back-end side saw loadings increase over the quarter. All in all, underutilization charges moved down from around EUR 150 million in the September quarter to around EUR 70 million in the December quarter. Research and development expenses went up to EUR 333 million from EUR 308 million in the previous quarter. Selling, general and administrative expenses amounted to EUR 311 million. R&D expenses included EUR 8 million of nonsegment result charges, SG&A expenses, EUR 60 million. The net other operating expense was EUR 9 million, there in EUR 14 million of nonsegment result charges. Besides the positive impact of strong business volumes that overcompensated the weakening of the U.S. dollar, we had a couple of smaller benefits of a nonrecurring nature, such as unusually high billings for IP licensing or pulled in public funding, summing up to about 1 percentage point of segment result margin that can be characterized as one-off. The nonsegment result for the quarter amounted to minus EUR 157 million after minus EUR 197 million in the preceding quarter. Around EUR 125 million of the nonsegment result in Q1 related to the Cypress acquisition, mostly depreciation and amortization from the purchase price allocation. The financial result for the December quarter was minus EUR 26 million, after minus EUR 28 million in the previous quarter. Income tax expense amounted to EUR 49 million for the first quarter of the current fiscal year, equivalent to an effective tax rate of 16%. Also, cash taxes amounted to EUR 49 million, resulting in a cash tax rate adjusted for PPA effects of 12%. For the current fiscal year, we expect this rate to be around 15%, primarily as a result of the existing German tax loss carryforwards. We expect to benefit from these tax loss carryforwards for about another 5 years. At the end of that horizon, the cash tax rate should be close to our expected long-term effective tax rate of about 22%, 25%. Our investments into property, plant and equipment, other intangible assets and capitalized development costs in the December quarter were EUR 283 million after EUR 332 million in the quarter before. Depreciation and amortization, including also acquisition-related nonsegment result effects, amounted to EUR 368 million for the quarter, slightly down from the previous quarter's figure of EUR 379 million. Free cash flow from continuing operations once again exceeded 10% of revenues and came in at EUR 313 million compared to EUR 387 million for the September quarter. A notable contribution came from a positive working capital effect. Cash collection on our receivables was strong prior to the end of the calendar year. And our own inventories came down by around EUR 100 million quarter-over-quarter, reducing the DIO to 107 days. Our reported after-tax return on capital employed, or RoCE, stood at 7.8% for the first quarter. As you are well aware, the impact of an acquisition on this indicator tends to be quite large. Excluding bookings related to the acquisition of Cypress and International Rectifier, in particular, goodwill, fair value steps up -- step-ups and amortization as well as deferred tax effects, the adjusted RoCE was around 27%. This development clearly shows our capacity to earn a surplus on our cost of capital. Let me close my section with a look on liquidity and financing. Quarter-over-quarter, our net debt position improved by EUR 437 million, driven by strong free cash flow and, to some extent, a currency impact. Our gross debt went down quarter-over-quarter from EUR 7 billion to EUR 6.7 billion. On the one hand, we made scheduled repayments of EUR 174 million within the quarter. On the other hand, the weaker U.S. dollar lowered the equivalent euro amount of our dollar-denominated financial debt. Using illustrative 12 months figures for EBITDA, our net leverage comes out at 1.7x and gross leverage is 3.3x, showing the good progress we are making on our deleveraging path. Our strong liquidity stands at EUR 3.3 billion of gross cash. The pillars of our capital structure management remain unchanged: investment-grade rating, strong liquidity position and a clear commitment to deleveraging. I will now pass back to Reinhard again, who will comment on our outlook.

[Reinhard Ploss]

Thank you, Sven. Three months ago, we characterized our outlook as cautiously optimistic. Meanwhile, we are getting more confident, witnessing the current demand recovery across many end markets. We expect tailwinds to extend well into this year. The lingering COVID situation and geopolitical risks are important caveats, and supply chain limitations may well cap the upside. From a fundamental perspective, however, we expect our structural growth driver to continue to gather steam in 2021. This is a frame in which we adjust our outlook upwards despite moving the assumed U.S. dollar-euro exchange rate from $1.15 to $1.20. For the running second quarter of our 2021 fiscal year, we anticipate revenues to slightly grow and to come in between EUR 2.5 billion and EUR 2.8 billion. For ATV and PSS segment, we expect a low single-digit percent revenue increase quarter-over-quarter. IPC's revenue should stay flat, whereas CSS should see a low single-digit percent decline because supply constraints will hinder us from shipping to end demand. At the midpoint of the guided revenue range, the segment result margin is expected to be around 16.5%. The sequential decline will be mainly driven by 2 factors. As you know, in the March quarter typically rises and long-term customer contracts are being reset. Secondly, with the change of the calendar year, we will convert the remuneration scheme of former Cypress to Infineon standard while this will not lead to higher overall pay. The compensation of cash and share-based elements will change. This will burden the segment result margin due to a shift towards a relatively more cash-based pay components. For the full 2021 fiscal year, we now expect revenues of around EUR 10.8 billion, plus or minus 5%. Incremental strength more than offsetting the adverse currency development is expected to come from ATV and PSS. The higher revenue level will lead to a corresponding uplift of the segment result margin, which we now expect to come in at around 17.5% at the guided revenue level. Compared to our last projection, we see puts and takes, the weaker U.S. dollar will have a negative impact. And you know our rule of thumb, whereby each cent has an impact of roughly EUR 14 million on our revenue and EUR 4 million on our segment result. At the same time, we expect the strong business momentum to help us overcompensate the currency burden. Linked to additional revenue, underutilization charges are anticipated to come down by around another EUR 50 million compared to the previous guidance to an annual value of around EUR 200 million, reasonably close to their structural minimum. The overall positive business developments will lead to a higher variable compensation with a dampening effect margin on expansion. Going forward beyond 2021, we continue to see highly attractive growth opportunities, some of them like xEV accelerating. The current market situation is underlying the importance of remaining on the front foot regarding capacity expansion. Therefore, we plan to increase investments in property, plant and equipment, other tangible assets and capitalized development costs in the 2021 fiscal year to around EUR 1.6 billion, dynamically adopting our investment spends to market developments. Among others, this will enable us to pull in the start of production of our new 300-millimeter facility in Villach by around 1/4 to the fourth quarter of our 2021 fiscal year. The expectation for depreciation, amortization remains at between EUR 1.5 billion and EUR 1.6 billion, including amortization of around EUR 500 million resulting from the purchase price allocation for Cypress and, to a lesser extent, still related to International Rectifier. The supportive business momentum should also benefit our free cash flow, which we now estimate to come in at more than EUR 800 million compared to more than EUR 700 million before. Before summarizing and opening the call for Q&A, it's my pleasure to announce that Infineon is planning to host the Capital Markets Day later on that year. Specifically, we are targeting the 4th and 5th of October for our IFX day and kindly request that you save that date. It will be a bit over 3 years from our last Capital Markets Day in London 2018 and about 1.5 years from the closing of Cypress acquisition. We plan to provide you a comprehensive update of our strategy and business model, growth drivers and the state of Cypress integration and midterm financial targets. We cannot be sure about which format of the event the pandemic will allow by then, but we'll keep you informed about logistics and agenda as we go along. Now ladies and gentlemen, it's time to summarize. Infineon has a strong start into the 2021 fiscal year. We concluded the December quarter successfully with a bit over EUR 2.6 billion of revenue and 18.6% segment result margin and more than EUR 300 million of free cash flow. At present, demand in several areas, most notably, microcontrollers and IoT products is outstripping supply. Here, effects of allocation are evident, and inventories are on the lean side. The road to recovery will have speed bumps in the near term related to component shortage in several areas. COVID and trade tension remains significant, uncertainties that might well cause volatilities. Having said this, we have full confidence in the underlying strength of our business. Various of our structural growth drivers, especially those related to sustainability and digitization, are receiving a boost from accelerating adoption rates. Meanwhile, the Cypress integration is progressing as planned. We are preparing for a structural upturn and adjust our outlook upwards despite a weaker U.S. dollar. For the 2021 fiscal year, we expect revenues of around EUR 10.8 billion, a segment result margin of about 17.5% and free cash flow of more than EUR 800 million. We will consistently invest into both R&D and manufacturing capacity to capture growth opportunities and revenue synergies. Regarding manufacturing capacity, we plan to open Villach already in the last quarter of current fiscal year. In any case, it will be essential to stay resilient and quickly adopt to fast-moving market developments, something that Infineon has repeatedly proven to be capable of. Ladies and gentlemen, this concludes our introductory remarks, and we are now happy to take your questions.

[Operator]

[Operator Instructions] And we'll take our first question. It comes from Sandeep Deshpande from JPMorgan.

[Sandeep Sudhir Deshpande, Research Analyst]

I have 2 questions, if I may. My first question is on the EV market. Maybe Reinhard, you could help us understand how much in this EUR 10.8 billion that you are guiding to, do you see as your revenues directly from EVs? And when you -- when we look at the data coming out of Europe in terms of volumes of EV sold in Q4, the volumes are extremely high. And this is well beyond the U.S. automaker as such, really. So the question is, is Infineon seeing the benefit of this whole EV transition and that is helping your revenues? And the second question is on cost quickly, which is that your guidance on the margin in the March quarter is much lower. Is it mainly because of this change in compensation associated with Cypress issue? Or there are other factors which are driving this?

[Reinhard Ploss]

Sandeep, thank you for your questions. So regarding the EV, first of all, I want to comment on many people associate our -- the EV drivers mainly around power, but we are seeing a very good growth in the microcontrollers in the EV segment. Here, Helmut will go into more detail. And the second question then will be answered by Sven.

[Helmut Gassel]

Sandeep, yes, the EV market is growing extremely strongly. In 2020 alone, it has grown 36% versus 2019. And people are expecting that to accelerate significantly into '21, so more like double actually, but strongly coming from plug-in hybrids but also from battery electric vehicles. So we, in our case, are expecting something like a 40% growth in fiscal year '20 as compared to previous year coming from electric vehicles. So about, I'd say, 2/3 of the surplus growth that we at Infineon expect to the market value is driven by ADAS and EV again. So very strong momentum as expected.

[Reinhard Ploss]

Yes. Before handing over to Sven, Sandeep, don't forget the charging station. Here, we see across the company in various divisions also quite a significant demand, which, of course, is driven by EV, but not right away allocated to the EV segment. But now, Sven?

[Sven Schneider, CFO & Member of Management Board]

Yes. Sandeep, so your question with regard to the reduction of the margin in Q2. There are a couple of factors I want to highlight. The first, as you rightly mentioned, we are changing that compensation scheme for Cypress legacy, which is a shift from NSR to SR, so nonsegment to segment result. And the second one is, as I mentioned in this script, typically, this is the quarter for price resets. So there's also an element of that in the margin included. And lastly, if you look at the Q1, we mentioned that, give or take, 1 percentage point of the 18.6 is nonrecurring given the IP and also the public funding pull in. So if you take that into consideration, you see that the real differential is more on the magnitude of 1 percentage point down and not 2 percentage points down.

[Operator]

Our next question comes from Johannes Schaller of Deutsche Bank.

[Johannes Schaller, Research Analyst]

Yes. Congratulations on the good results. So I mean when we look at your full year guidance of EUR 10.8 billion, given you talked about adding capacity, you talked about the capacity shortages and supply bottlenecks the industry is seeing. Is there -- if demand stays strong into the second half, is there any upside to that number really? Or are you more or less capacity limited and that EUR 10.8 billion is basically factoring into pretty full capacity utilization throughout the year? And then also, given you're pulling Villach forward and you're investing obviously in other fabs, how should we think about the capacity for the entire group or maybe, say, the potential revenues that Infineon could generate once we exit the FY '21?

[Reinhard Ploss]

So thank you, Mr. Schaller. Let's start with the capacity and Jochen will answer it. I think it's a pretty complex picture so.

[Jochen Hanebeck, COO & Member of Management Board]

Yes, indeed, Reinhard. So Mr. Schaller, we entered this phase with elevated inventories, which served us very well coming in now into the boom. We told you that we finished the short-time work already in September and then we ramped up now the existing capacities at Infineon. Now to bring on more capacity, of course, we moderately only reduced our CapEx budget last year, which implies that we also have certain capacity steps coming in on-stream this year. But of course, at some point, we will be also limited. So there is the upside to the revenue you quoted, it's probably not that high. On the foundry side, I think it's a different story. I think we can read it everywhere. After this rebound, after the initial phase of COVID where there was a strong demand in terms of communication, consumer infrastructure and political interventions, on the global level, we got into this supply-constrained situation across many nodes in the foundry world. So there, I would say it's even more limited than on the internal side where we are the master of our own decisions. For next year, of course, things then will line up very nicely as the new facility in Villach will be ready to start production in late Q4, fiscal Q4 and then serving in terms of demand very nicely for 22.

[Johannes Schaller, Research Analyst]

That's very clear. I understand it's a complex topic. And maybe just a very quick follow-up. I mean it looks like you're winning more on the silicon carbide side again. I think this is an incremental design when you just -- just mentioned. Can you give us just a bit of an update in terms of the road map because this is obviously a very critical period now for design wins as you alluded to in the past.

[Reinhard Ploss]

Yes. Mr. Schaller, here, it's very clear, we still see that a lot of competition has a huge challenge to follow our technology road map. We are very much ahead of many others introducing the trench-based MOSFET, many others say they still have to learn. So from the technology capability, we are very well off. We are also having secured our supply with long-term contracts with various manufacturers on the wafer side. Also on the boule side, Jochen has reported about this last time, where we see an advantage using our wafering technology on this, I would say, advanced cutting technology. And I think here, what you are seeing that we are more and more moving to a dominating overall technology portfolio. And what we also see that, especially the ability to serve IGBT as well as silicon carbide solutions, kick in very strongly. So many people say, yes, I take an IGBT module, same footprint for the lower power and silicon carbide one with the same footprint for a higher power. So I think here, we are progressing extremely well and adding capacity for silicon carbide in our Villach factory. So I think not much else to be reported. It's interesting. We still believe that the majority of the xEV drive to be seen the next time and there are some special companies having a very specific drive will come from IGBT and silicon demand. Jochen was talking about the capacity. I think here, we are in close discussion with the OEMs and Tier 1s in order to make sure that they understand the challenge of the value chain for xEV in the coming years, and we are preparing as a total industry for that. With this, to Sven.

[Sven Schneider, CFO & Member of Management Board]

Yes. Mr. Schaller, just to add, because you asked for the road map, that's more mid- to long term. But also short term, I mean, we have already stated that we expect a 70% growth in this fiscal year where the majority of the growth is expected to come from automotive. So it fits well to the road map, which was just described.

[Operator]

Our next question comes from David Mulholland of UBS.

[David Terence Mulholland, Director and Equity Research Analyst]

I guess just wanted to touch on a different topic. You obviously talked about very strong demand and booking levels within CSS. And obviously, a lot of that seems to be related to some of the prior Cypress product. So I wonder if you can just give us an update on how the kind of demand levels and design wins that types you talked about before have been come through post-acquisition? Is that in line with what you expected or maybe even trending above given those strong bookings levels? And then just secondly, one quick follow-up. Can you just help us clarify on that one-off nonrecurring effect in the margin in Q1, how much of that was within the automotive margin? Because obviously, there's a very strong step up sequentially within the automotive segment.

[Reinhard Ploss]

Thank you, David. So the Cypress picture, there's a little bit of mixed picture. You do not see the potential, which is popping up there and coming because here, we reported in the various divisions to have a supply constraint from the foundry situation, overlaid by execute demand as well as geopolitical crunch. Jochen already highlighted this. I just want to add one point before I hand over to Helmut. Maybe there is a certain upside during the year because we believe similar then in -- I can remember pretty well 2000 -- '99, 2000, 2001, there was a overly exact rate demand from the communication industry. If there is a normalization, then we see upside potential. Otherwise, as Jochen pointed out, it may take longer. So now to Helmut and then to Sven.

[Helmut Gassel]

Yes. As Reinhard already pointed out, the CSS business obviously comprises of the former Cypress business as well as the Infineon side. On the Infineon side, I think one thing that is also driving demand quite significantly is the contactless payment and the payment market overall. So that is a significant contribution to that as well, not to forget about it. And it is still a significant portion, around 15%, of the total division's revenue. Now on the legacy cyber side, it's really a relatively broad application base. We have smart home and industrial applications. We're seeing gaming, wearables, et cetera, so that is rather broad in coming from WiFi businesses as well as Bluetooth combo chipsets. I think we're making -- continue to make good progress in winning new sockets there across the board globally. But of course, there is limitations on the supply side, as Reinhard mentioned already.

[Reinhard Ploss]

But here, I have to add one element, which I'm very thrilled about, is the software capability coming with Cypress. And there, we definitely see an accelerated and even higher value than anticipated before. And it's a really great team we have on board. Sven, your turn.

[Sven Schneider, CFO & Member of Management Board]

Yes. David, you asked about the Q1 onetime composition or nonrecurring composition. So it is IP licensing that is automotive. And there is some funding pull in that is, I would say, mostly automotive. So in total, the bulk of both elements is attributable to automotive.

[Operator]

Our next question comes from Janardan Menon from Liberum.

[Janardan Nedyam Menon, Technology Analyst]

My first question is actually on inventories. You said channel inventories are quite low. Can you give us a comment on your customer inventories like your Tier 1, the Tier 1 levels? And specifically, what I'm trying to get at is also if there's a shortage of microcontrollers, which is not your microcontrollers, but somebody else's microcontrollers, but you are able to deliver power semiconductor, sensors and perhaps your own ORx microcontrollers as required by the customer. Does that mean that your inventory levels at these customers will be rising faster right now than the industry? Or how do you see that inventory dynamic add in the channel and the customers coming through over the next few quarters? And my second question is actually on your silicon carbide. Just a clarification, to be honest. So is the new design win you have announced today, am I correct in understanding that, that is your third silicon carbide design win? And your first one was, I think, [indiscernible] you're already shipping in volume silicon carbide for their E-GMP platform, which they are launching their cars soon? There's been a lot of noise on that platform in the news recently in the last 24, 48 hours. In these platforms, can one assume that once you are designed in or you are the supplier for either IGBT or silicon carbide, then any car which -- or any maker which uses that platform, OEM which uses that platform will be typically using you as a supplier?

[Reinhard Ploss]

So Janardan, I hope I have understood the last question correctly and I will answer it. The rest will be, I would say, I will hand over to Helmut. so it is very typical. When you are in a platform at an OEM, you're in. And then the question will it be used by others, I think, of course, it will not necessarily be used by other OEMs. But if you are in an OEM which has several brands, you might see a reuse of that. I hope I have understood your question correctly. The question about...

[Janardan Nedyam Menon, Technology Analyst]

My question -- sorry, my question was actually that Apple is widely rumored to be building a car with Hyundai on the [ E-GMP ] platform.

[Reinhard Ploss]

So our policy, we do not comment about customers in detail. But our intention is, of course, to have an outstanding footprint not only in -- the various, I would say, suppliers here. But I think we will see what happens when we open the car. More, I cannot comment on it. But I believe that our offering, and don't forget our offering in quality, that is not about a that you throw in silicon carbide in a car and then have a regular replacement of it. It is something you put it there and can forget it. And I think here, we are coming from the, I would say, maybe over-performance side regarding the commitment in, I would say, electrical parameters and quality. But I do not want to elaborate on this more. But very quickly on the inventory side, we can make it short. Helmut will do that.

[Helmut Gassel]

Yes. Before I get there, just one comment, you may remember that we had a long-lasting relationship with Hyundai, even had a common innovation center. So you can trust that we are very well entrenched with Hyundai. On the inventory side, I think, in particular, to where the shortage is, if the car production is limited, you can assume that there is no inventory anywhere. So whatever is being made currently is getting shipped immediately through the supply chain, to the car OEMs. And fluctuations with one product being there, another one not, are also very limited. Again, I think there is no substantial buildup at all and definitely not from our side at all.

[Reinhard Ploss]

Yes. So we will not chip into the channel. We will keep the channel healthy. Design win, just not to forget, yes, it is the third major one. But I think I said it already, but it's nice to repeat it.

[Janardan Nedyam Menon, Technology Analyst]

And when will that start shipping?

[Reinhard Ploss]

I think next year.

[Helmut Gassel]

Yes, in '22.

[Reinhard Ploss]

'22.

[Operator]

Our next question comes from Dominik Olszewski from Morgan Stanley.

[Dominik P. Olszewski, Research Analyst]

So the book to build data is obviously very useful, but perhaps a bit more color. If we look at your Q1 results as you reported and the outlook you provided, are you able to provide any sense of maybe quantifying how much the revenues have been constrained by these shortages and bottlenecks that we've discussed earlier this morning? Obviously, some of that may reflect some overbooking. And then just the second question is, a few days ago, we had reports around OEMs like VW looking at more direct relationships with chip makers. So does that, for example, represent an opportunity for yourselves to sell more module-based business or any other broad color?

[Reinhard Ploss]

Dominik, thank you for your question. We cannot answer this so easily. We have a very good insight in the automotive segment. While the CSS and PSS area, where the foundry also is limiting, is not so 1:1 traceable to the end markets for us. But -- and I'm looking at Helmut. Do we have some ideas on how much it effects?

[Helmut Gassel]

I can add some color. The highest book-to-bill ratio we had in the last quarter was actually with CSS. And that definitely shows some clear signs of allocation, meaning there is overbooking to be expected. Quantifying that is impossible, frankly speaking. The lowest book-to-bill was actually in automotive. But that because our book-to-bill ratio is based also on what we actually can confirm. So it's confirmed orders compared to actual revenue. So more growth was not possible.

[Reinhard Ploss]

I think generally, the amount of unconfirmed orders is really, I would say, accelerating significantly. The effect Helmut has explained is true for all segments. So I think here, our biggest disappointment is that we could report on many more synergy effects from the Cypress acquisition not having these limitations, but we do not quantify it as there is not a clear visibility.

[Dominik P. Olszewski, Research Analyst]

And then just around your relationship directly with OEMs?

[Reinhard Ploss]

Oh, we have a very good relationship we have with Volkswagen even a kind of have a contractual one.

[Helmut Gassel]

Correct. These are based on innovations. We do not have -- we do not ship to the OEMs. We are actually -- the products go to the Tier 1s, to the suppliers of the automotive industry. But we do have a lot of, let's say, direct interaction with the OEMs based on future developments and innovations.

[Reinhard Ploss]

Yes. So the OEM is more and more interesting to talk directly to us because it's not only about microcontrollers, it's about the whole architecture of the car, where even the power segment does not only is relevant for EV, the total supply of a driving computer with 100% reliability. Let's say, power supply matters a lot. So we even assume that we are at least well connected as competitors even not further on.

[Operator]

Our next question comes from Adithya Metuku from Bank of America.

[Adithya Satyanarayana Metuku, Associate]

So 2 questions. Firstly, there's been a lot of news flow around price rises in the industry. I just wondered if you could talk a little bit about how we should think about your ability to raise prices and any impact on revenue growth through this fiscal year? And secondly, given the high book-to-bill, can you talk about how we should think about any risk of double ordering? The last time book-to-bill was at these levels was in mid-2018, which in hindsight turned out to be a short-term peak in terms of demand acceleration and share price. So any thoughts around that would be helpful.

[Reinhard Ploss]

Yes. Thank you, Adithya. The price, so a significant portion of our business is covered this year in price negotiation, which we concluded prior to the year change. Already quite successfully on, I would say, a moderate price decline, you see the effect currently. We are honoring our contracts. This is, I would say, a matter of fact for the values system we have. Of course, we debate with the customer about extra charges for foundries and other elements. But here, we -- what we are definitely doing, especially when it comes to expediting volumes and spot volumes, we charge the customer accordingly. This has been done very successfully, and we see opportunities in some areas like CSS and the former Cypress business, lesser on the automotive side. In some areas, we also have long-term contracts with the customer securing supply, especially in the industrial range, where we also honor our contracts because we expect that our customer does the same, which helps us in the downturn. So the other question was about inventory?

[Sven Schneider, CFO & Member of Management Board]

Risk to double ordering book-to-bill. Yes, I can comment on that. Yes, in times like this, when there's a super steep rise in demand, there usually is double ordering in the books. As we have stated earlier, we do not quantify those numbers. From past experience, once the demand is met by supply, you can see a cancellation of those double bookings. The normal demand remains, meaning confirmed orders usually are not being touched by this.

[Operator]

Our next question comes from Jerome Ramel of Exane BNP.

[Jerome Ramel, Analyst of IT hardware and Semiconductor]

Yes. First question is, how much [ current ] is currently outsourced? And specifically for the microcontroller, how much of your microcontroller business is also? The question behind is some of your Japanese peers or even your European peers have high proportion made internally. Could it be -- could it have an impact for you guys in terms of market share? And second question, I think the German Economy Minister, Mr. Altmaier, talked about Europe investing up to EUR 50 million for the semiconductor industry. So I would like to understand what kind of implication it could have from your opinion? And specifically on your strategy on manufacturing to not go below 65-nanometer node, could it change in the future? Could you revisit your mind on this one?

[Reinhard Ploss]

Yes. So Jochen is the expert on the capacity aspects. Jochen, please.

[Jochen Hanebeck, COO & Member of Management Board]

Yes. Thank you, Reinhard. So big picture is manufacturing strategy, power sensors, technology differentiates. We do it in-house. We are well set up. And we have a low outsourcing share, basically some parts and that's more trailing edge. Whereas in microcontrollers, especially we know 90 nanometers. And we have a high outsourcing share, of course, combined with the outsourcing share of Cypress. That's beyond 90 nanometers or, including 90 nanometers easily in the range of 70% to 80%. Here, we have distributed the volume across several of the big global foundries. We have good relation, long-term contracts. Of course, we suffer from supply constraints. But again, I think combined with our inventory situation, we are managing the situation reasonably well, of course, having some hotspots.

[Reinhard Ploss]

Yes. very brief on this side...

[Operator]

Our next question comes from Amit Harchandani from Citigroup.

[Reinhard Ploss]

Sorry. Sorry. Give me 1 second. I have not answered all for -- so but you will have your turn in a second. I forgot to switch my mic on. We are in strong, I would say, a close discussion with the politics. There is a European scheme on supporting the digitization, which is also benefiting the microelectronics. That had been a first scheme called important project of common European interest one where we are benefiting with in Villach, in Austria as well in Germany. There, we are at the dispute on the next one where we see that further financing will come from the European Commission. The R&D are a part of that. Regarding our manufacturing strategy, we will not return to deep submicron manufacturing because that is a large-scale business and we are much better off to cooperate with the foundries. And of course, if there is an opportunity in Europe, we will be supporting this. Now very sorry. And please go on.

[Amit B. Harchandani, Director & Head of EMEA Technology Research]

Amit Harchandani from Citigroup. Two, if I may. Firstly, you touched upon how the relationship with the OEMs is shaping up in the automotive space. More broadly, could you comment on how is your relationship with end applications even beyond automotive? Do you see your customers getting increasingly involved and liaising with you as maybe the role of semiconductors shift across different applications given the structural trends we have seen? So that would be my first question. And my second question relates to the ongoing trade tension. If you could, firstly, remind us what level of exposure do you have to domestic China? And whether that's actually these trade tensions are forcing you to rethink how you're organizing your supply chains, your outsourcing decision, your customer planning? If you could give a sense for what do you feel the impact from trade wars has been for you right now, and how it could shape up for you in the future?

[Reinhard Ploss]

Okay. Thank you very much for your question. I would say here, regarding our customer base, in many areas, digital, mobile, we are talking to the, I would say, kind of OEM. The one who is really making the device and there, to a large degree, we are in very close contact with the relevant ones. The automotive segment has a slightly different concept whereas the Tier 1s play a major role. And here, we balance the debate with the OEM on supply, I would say, in the due manner because we do not want to frustrate the Tier 1s by being too close to the OEMs. The only other segment where you see kind of a, I would say, more longer supply chain understanding the decision-maker is in the industrial scheme. Where, for instance, when you look at robotics, there is, I would say, a company who's making the drives for the motor, selling to the robotics. But here, I think also we are in a reasonably good content -- contact to all. Regarding China, there -- so here, I think automotive is still the one which is the most complex one. Regarding China, Helmut?

[Helmut Gassel]

Yes. We have about 40% or 37% in Greater China, whereof 25% of is in mainland China. First, I think very important is that a significant portion, people are guessing about half, at least, of that is then reexported again. So we have seen certain announcements that people are rearranging the supply chain, meaning our customers are starting to manufacture in other areas where we can simply follow and are happy to follow them into other countries. Vietnam is being one prominent example. With respect to our own supply chain, I'm happy to hand over to Jochen.

[Jochen Hanebeck, COO & Member of Management Board]

Yes. Thank you, Helmut. So let's separate the OSAT or assembly and test from the foundry. Foundry, in general, so front-end services, we have very limited exposure to China. In back end, first of all, I think the interest of the various parties, countries, governments is mainly geared towards the front-end technology side. This, you can also read out of the fact that recently, the tax base was changed to the silicon level and no longer to the package level for custom. And therefore, we feel okay with our assembly and tests exposure to China where we make use of certain OSAT partners. And of course, we have here, again, also our own facility in Wuxi where we do those things we would like not to share with the broader base.

[Reinhard Ploss]

Thank you, Jochen. I think here one comment from my side. In general, we decide on manufacturing strategy on, I would say, technology protection, availability of resource and scale of economy, especially in the front end. Regarding our strategy tapping markets, our Cypress acquisition was clearly a move to tap the U.S. market where we had been underrepresented, especially on the collaboration and the high-tech scheme, which definitely is moving on very nicely. Same with Japan, where we have been focusing on, especially the automotive side since some while. So we are, I would say, interesting to work together with all the major industries across the planet, and this is turning out to be pretty successful.

[Amit B. Harchandani, Director & Head of EMEA Technology Research]

If I could just clarify, please, on the China comments. So just to confirm, you haven't necessarily seen any potential sort of moves to use more indigenous Chinese semiconductors or go for local components in response to these so-called trade tensions? There's been no change in the dynamic on the ground, in your supply chains going to domestic Chinese customers?

[Reinhard Ploss]

Yes. So definitely, we see effects like these. So we are not in a different well than the rest. But we see it very different by verticals. Some are more dynamic, some focus only on cost, where this is not only true. So here, we expect our growth expectations for the company already have considered that there will be, and it's nothing new, further move to China local supply. But as figured out, as Helmut before, the -- we do should not only look into China local. We should in China supplying the rest of the world. And I think here, we are reasonably off. Infineon is still very much convinced that we can differentiate on performance and technology advancements and system solution. We do not fight for the least-cost products.

[Operator]

Our final question today comes from Achal Sultania.

[Achal Sultania, Director]

Just a quick one on the margins on your CSS business. So if I look at the margins there, you've been around in the low-teens range over the last few quarters. Most of the business there is microcontrollers and connectivity, which typically are much higher margins if you look at the industry average. So how should we think about the path to getting that low-teens margins in CSS towards maybe high-teens or 20% over time. Is it just about scale or you need to address new product areas where margins are typically higher?

[Reinhard Ploss]

Yes. The profitability of the Cypress products is pretty good. But the total situation, Sven will give you some more insight.

[Sven Schneider, CFO & Member of Management Board]

Yes. Achal, so I think the first one is that you are right, there is a positive contribution from Cypress. So that's accretive to the CSS business, as you have also spotted. Secondly, we have mentioned some supply constraints, which will be with us for, let's say, the next quarters. The third element, therefore, I would ask you not to be too optimistic on the CSS profitability development in the next quarters is that, as mentioned, especially on CSS, there is a significant contribution for the mid- to long-term revenue synergies from P2S. And as we mentioned before, in order to harvest these revenues in some years from now, we need to invest now into revenue, which comes later. So that will be something which will, of course, be, let's say, negative to the CSS margin in the short term. And lastly, as mentioned before in one of my answers to one of your colleagues, the change of the compensation from a nonsegment result through segment result affects all 3 divisions: automotive, PSS and CSS. But given the size and the relative size, the biggest impact is visible on CSS.

[Achal Sultania, Director]

And just one clarification on one of the questions earlier. What was the kind of xEV growth that you were talking about for this year? I missed the numbers. Sorry.

[Sven Schneider, CFO & Member of Management Board]

It's in the range of 70% is what analysts predicts '21 versus '20, fairly even share between battery and plug-in hybrid vehicles.

[Reinhard Ploss]

Market growth.

[Sven Schneider, CFO & Member of Management Board]

Market growth.

[Alexander Foltin, Head of Investor Relations]

All right. That is now time to wrap up. Thank you very much. The question-and-answer session is now closing. We are wrapping up our first fiscal quarter conference call. For any further topics, please feel free to contact us in the IR team here in Munich. Thank you very much, stay healthy and optimistic, and have a great day. Bye-bye.