Siemens AG

XETRA:SIE

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Siemens 2021 First Quarter Conference Call. As a reminder, this call is being recorded. Before we begin, I would like to draw your attention to the safe harbor statement on Page 2 of the Siemens presentation. This conference call may include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. At this time, I would like to turn the call over to your host today, Mrs. Eva Riesenhuber, Head of Investor Relations. Please go ahead, madam.

[Eva Riesenhuber, Head of Investor Relations]

Good morning, ladies and gentlemen, and welcome to our Q1 conference call. All Q1 documents were released this morning and can be found also on our website. I'm here today with our CEO, Joe Kaeser, who will start with a brief introduction; and with our Deputy CEO, Roland Busch; and CFO, Ralf Thomas, who will review the Q1 results and FY '21 outlook. After the presentation, we will then have time for Q&A. Please be aware that the Siemens AGM starts right after this call, and we have to limit the time of the call to 45 minutes since there is a lot on the agenda. With that, I hand over to Joe.

[Josef Kaeser]

Thank you, Eva. Good morning, everyone, and thank you for joining us to discuss our first quarter results ahead of our virtual AGM. And I'm sure you're all keen to hear what the company has to say about the full fiscal '21 guidance, so I'm not taking too much of your time. I believe it's fair to say that Siemens delivered an outstanding first quarter 2021. It accelerated the trend, which we have seen in 2020 in basically all metrices. When we look at order growth of 15%, revenue up 7% and profit on industrial business, up 39% year-over-year, this company must do something right, especially if we remind ourselves that we are comparing the actual numbers year-over-year with a pre-COVID quarter. There are several reasons for this, and Roland and Ralf will dive deeper into the analysis and what it means for full fiscal 2021. I'm particularly pleased with the performance of Digital Industries as it seems that this business not only outperformed expectations, but also peers. Being a decisive driver of the company's valuation, I'm deep respectful of what Klaus Helmrich has put together here as he was CEO of that enterprise. Another reason for performing well is structural in nature. The company's closer focus on its core industrial priorities has also been quite beneficial for the shareholders. After the final decision of the energy spin-off was made at the extraordinary AGM in July 2020, the rerating started slowly but surely. We accelerated with the listing of Siemens Energy in late September and has continued since then. As you're all aware, we've just got another all-time high yesterday and we'll see what happens today. I'm also pleased with the performance of the Siemens Energy shares since then, the accelerated rerating of the new Siemens AG has clearly been high up in our wish list, and I'm sure in yours, too. And you all know there is much more potential to unlock in this record. Well, folks, ladies and gentlemen, this is also the time to take one last look back to where it all began and what happened since then. There are many ways to do so. If I was a shareholder, which I am, as you can potentially imagine, I want to see what has been in it for me, for example, looking at total shareholder return. Well, it is not on me to judge, but I hope you agree it could have been worse. Anyway, the question would be, could it have been more? I would say, it could have been more. Maybe it should have been by international standards. But in striving for more, I had to realize that there was a balance to strike between the desirable and the doable. So I then forward what's doable in Germany. With that, I'd like to thank you for a great time together. Be open and fair to my successors, they deserve it. And with that, I hand over to Roland early. Thank you.

[Roland Busch, President, CEO & Member of Management Board]

Ladies and gentlemen, a warm welcome from my side as well. And dear Joe, thanks for your trust and support over the past months and the last 15 years. Siemens started a new chapter on October 1, and I'm happy to say we, indeed, had a very good start. Our Q1 results show how strong and agile Siemens can be when it comes to grasping market opportunities. I'm very proud of what our teams have achieved all around the world. They did an outstanding job. They handled the risks and the challenges of the pandemic, and despite all this, achieved excellent performance. When Ralf and I talked to you after Q4, we promised we will not miss out on opportunities, and we delivered. Some of our verticals recovered clearly faster such as automotive and machinery. Particularly in December, customer demand was much stronger than expected. As a result, capacity utilization, our high-margin, short-cycle product businesses went up. Profit conversion was excellent. From a regional perspective, China stood out. The Chinese economy has recovered from the downturn. GDP is now higher than it was before the pandemic. Demand in China is strong, both from the domestic market and from export market. The country is currently winning global market share in manufacturing, and our customers trust Siemens to increase their capacity. Trust is built long term. So during this crisis, we benefited from this trust. We helped Chinese customers modernize and expand. But it was not all China. Take Germany, for example, the export industry here also recovered faster than expected. However, markets are still volatile, we remain cautious. The pandemic is not yet over. It is impossible to predict the effects from the second and from the third wave, and we don't know how fast vaccinations will make a difference. But no matter what comes, we will keep empowering our customers. We will deliver innovative and sustainable solutions, and we will support our customers' digital transformation. Here are a couple of recent highlights. Just a few weeks ago, we signed a memorandum of understanding with the Egyptian government to build a high-speed rail system. Over the last couple of years, Siemens had built 3 huge power plants in the country to supply energy to 14 million Egyptians, a capacity boost of 40%. We delivered them on a very, very tight schedule, on time. Next is transportation. We and our partners will help the country build a state-of-the-art railway system, connecting cities, cutting journey times, creating jobs, reducing pollution. The turnkey project includes rolling stock, right infrastructure, and of course, systems integration. On top, it comes with an attractive 15-year maintenance contract in part because we are a leader in digital rail automation and data-based predictive maintenance. We expect first orders to be booked in fiscal 2022, and we will keep you updated on the progress. But let's get back to China for a moment. We often talk about the benefits of combining domain know-how with a strong digital offering, and here are the proof points that this combination is working. The joint venture, BMW Brilliance, wants to increase its production capacities in China. They choose us a partner. Or take Guangdong Huaxing Glass, Asia's largest glass manufacturer, they want to improve their product quality further and they want to produce more efficiently and more flexibly. To help them achieve their goals, we developed a one-stop lean digital factory solution, which will be rolled out across 15 of their factories. This is all about long-term value for our customers. In another highlight, our Smart Infrastructure business is very successful in selling to data centers. The COVID pandemic has driven up e-commerce significantly at the same time we need more processing storage of data. Our building automation and electrical infrastructure systems are optimized for data center. They help our customers to reduce the energy consumption as well as the operating cost. Our team won several multimillion orders with data center operators and so-called hyperscalers. So how does all this translate into our financials, let me give you a brief overview for the Siemens Group in Q1. Orders went up 15% at EUR 15.9 billion with a strong book-to-bill ratio of 1.13. All business contributed to this increase. Mobility's large orders in Germany and Austria were key drivers. For example, there's a large order for digitalizing the German rail infrastructure and more to come. Revenue was up across businesses and regions by 7% to now EUR 14.1 billion. Top line growth was much higher than expected. This comes partly from our business in China where we were up 21% year-over-year, but growth came from other places, too. Top line growth in Germany, for example, increased by 8%. Adjusted EBITA of our 4 industrial businesses rose sharply to EUR 2.1 billion, benefiting from strong top line-driven profit momentum. In addition, we made clear structural improvements. And our discretionary spending was very low. This helped us with profitability. Just to give you one data point here, travel and related expenses were down by 64% year-on-year. Well, that's a level that we will not be able to maintain going forward. All together, this led to an excellent margin performance of 16% and translates into strong earnings per share of EUR 1.72. Ralf and I were very satisfied with our progress when it comes to achieve a more consistent free cash flow development throughout the year. EUR 1 billion of free cash flow in the first quarter is an excellent start. And Ralf and myself, we are promising we will keep our eyes on the ball. For many companies, a pandemic is not a time for growth, but some of our businesses and regions saw conditions improve. Based on the assumption that this continues in the coming quarters, particularly for our short cycle, we raised our outlook for the fiscal year. We expect a book-to-bill ratio above 1, we expect mid- to high single-digit comparable revenue growth and net income in the range of EUR 5 billion to EUR 5.5 billion. With that, over to you, Ralf. Let's take a closer look at some of the figures for our first quarter.

[Ralf Peter Thomas, CFO & Member of the Managing Board]

Thank you, Roland, and also good morning from my side, ladies and gentlemen. Since most business financials were already prereleased, let me give you some more color on key reasons for our outstanding first quarter's performance. As Roland said, our key markets for Digital Industries in automotive and machinery rebounded faster than originally anticipated. All automation businesses returned to order growth again, while software was lower on tough comps. Our automation businesses saw a stunning 34% order growth in China. Also Germany was up 13%, benefiting from a short-cycle recovery in export-driven end markets. Revenue growth in automation was driven by China, up by 27%, which overcompensated for single-digit declines in other major regions. We assessed that around 1/3 of this massive growth in China is attributable to restocking effects. Discrete automation was clearly up while process automation was flattish overall due to ongoing softness in the U.S., where we continue to see low investment levels in oil and gas markets. Software grew by 5% on strength in the EDA and Mendix segment, while the PLM business continues to see a cautious investment attitude at their customers, for example, in aerospace. Margin performance at Digital Industries reached a quarterly record of 22.5%, driven by a fairly unique accumulation of tailwinds. Main reasons are strong growth and higher capacity utilization in short-cycle product businesses for factory automation and motion control, combined with a very favorable mix therein. A strong contribution came from the software business, driven by EDA, whereas cloud and integration investments accounted for around 120 basis points negative impact in the first quarter. Besides the COVID-19-related low level of travel and marketing costs, structural improvements from our accelerated DI ONE cost-out program are also clearly visible in our bottom line. On top, lower severance costs accounted for 260 basis point margin improvement year-on-year. We like very much that Digital Industries generated more than EUR 500 million of free cash flow in the first quarter, which is typically seasonally weaker. After the prerelease, we were asked if December had been the main driver of out-performance. Historically, revenue distribution in our automation business is rather evenly split in the first quarter influenced by the number of working days around Christmas in many countries. However, this year, pent-up demand, restocking effects and faster industrial recovery led to an extraordinary strong December revenue share of 36% of quarterly revenue, close to EUR 100 million above our own expectations. Now let's have a look at our market segments and geographies. As usual, this page summarizes the regional perspective regarding top line, which I already talked about. When looking at our key vertical end market expectations for the next quarters, we see further recovery along broad-based improved sentiment in automotive and machinery, yet we know the situation is still fragile in terms of how the pandemic may develop and we stay tuned and alert to short-term volatility. Looking ahead, we still expect for the second quarter a similar negative currency impact on top line and even higher on margin compared to the first quarter. From today's point of view, for DI, we anticipate further decline comparable revenue growth in Q2. Based on this, we foresee the profit margin to be in the range of 19% to 20%, including our plan to record a high double-digit million amount of severance due to further structural optimization efforts. In addition, we see a gradual return of discretionary costs, combined with selective invest in higher OpEx to capture future growth opportunities. We are convinced DI is very well positioned, both in technology and geography to continue leveraging the upcoming opportunities in the marketplace. Let's move on to Smart Infrastructure, which delivered an excellent top and bottom line performance, also benefiting from several factors. Major contributor was its extraordinary strong short-cycle product business, supported by a faster-than-expected recovery in the industrial end market. Orders were up 7%, driven most notably by the increased north of 20% in electrical products, where we bundle our low-voltage and control product offering. However, I would like to mention, as I did for Digital Industries, that some of this growth may be due to restocking effects, in particular, ahead of announced price increases. The systems business was moderately up, while the solutions and service businesses were slightly down in line with their late-cycle market recovery as indicated. Revenue growth of 4% was broad based across all major regions with substantial strength in China, up by 20%. Germany was up by 5% and the U.S. grew by 2%. Product business was up by 6%, whereas systems grew moderately. Margin performance of 11.2% benefited from strong conversion as well as structural improvements from its competitiveness programs and discretionary cost savings. We expect momentum in our short-cycle product business to continue and our solution business to pick up towards the second half of the fiscal year. While the nonresidential building market is still soft with gradual improvements expected throughout fiscal '21, robust verticals like power distribution, data centers and health care will compensate for this to a certain extent. For the second quarter, we continue to expect a strong negative currency impact on both top and bottom line. We see continued top line momentum, and hence, comparable revenue to be moderately up. Margin will be slightly below the first quarter on partial return of discretionary and selective OpEx spending. Mobility showed a strong set of numbers in a still difficult business environment with pandemic-related restrictions in our factories and at customer sites. I would like to draw your attention to the fact that we increased disclosure transparency by reporting service revenues now on a regular basis. The Mobility team, again, delivered on its own ambitions regarding growth and profitability and clearly outperformed competition with industry-leading margins. We are confident that Mobility will continue to show substantial order growth in the second quarter based on a strong sales funnel and will deliver reliably moderate comparable revenue growth again. Given the mix and cost structure of the projects being executed in the second quarter, margin performance may be slightly below first quarter levels while free cash flow will clearly rebound from Q1.Let me briefly point out a few important topics below our industrial businesses. Siemens Financial Services developed in line with our expectations and improved quarter-over-quarter on a robust debt business. Within Portfolio Companies, the fully consolidated businesses kept on improving their operational performance and mostly compensated for ongoing losses at Valeo Siemens joint venture. We continued to execute our full potential plans, and therefore, expect severance charges of a high double-digit million amount in the second quarter. Corporate items benefited from positive effects related to the transfer of assets to the German Siemens Pension-Trust in the magnitude of EUR 138 million, including the stake in Bentley Systems as indicated before and included in our outlook. For the full year, we see compared to our Q4 guidance some upside potential in the Siemens Energy investment item and in the tax rate. As always, we will give you a detailed update with our Q2 numbers. As Roland already highlighted the raised outlook for the Siemens Group, I will give you the updated framework for the businesses. Digital Industries now expects clear comparable revenue growth. Margin is expected at 19% to 20%, 200 basis points up. Our Infrastructure continues to anticipate moderate comparable revenue growth with a margin at 10.5% to 11.5%, up by 50 basis points. Mobility confirms to achieve mid-single-digit comparable revenue growth with a margin of 9.5% to 10.5%. It's important to note that effects related to Siemens Healthineers' planned acquisition of Varian are excluded, which we will assess as soon as closing is achieved. With that, I hand it back to Eva for our Q&A.

[Eva Riesenhuber, Head of Investor Relations]

Thank you, Ralf. We are now ready for Q&A. [Operator Instructions] So operator, please open the Q&A now.

[Operator]

[Operator Instructions] We'll now take our first question from Andreas Willi from JPMorgan.

[Andreas P. Willi, Head of the European Capital Goods]

My first question is to Joe. First, thank you for your time and discussions over the years. You're leaving with a very strong quarter and a strong trajectory for the company. What do you think is the biggest unfinished business or opportunity you leave behind for Roland and the team? And the follow-up question on the discussions we just had on China and DI, could you maybe give a little bit more insight into what type of customers are driving this growth and how you would compare that maybe to the market growth as well? Is it driven by exporters in China or more domestic companies? And within automotive, maybe a little bit more color on EVs, new companies versus the traditional auto customers.

[Josef Kaeser]

Well, thank you, Andreas, and thank you also for being around for quite some time. We've had our moments together since 2006, but it's been a nice journey. Look, I mean, thank you for the question, but honestly, there's nothing worse than an unasked advice to successors. I mean that's why I believe that Roland and the team knows really well. I mean I have Roland here to my right and Ralf to my left. And if I just step out as the middle man, there's a great couple to represent the company going forward. So that's why I believe they know what to do and how to now organically throughout the company on its core area. So -- but I don't know, Roland, what you think the next -- the biggest challenge will be, but I'd rather defer that question to you.

[Roland Busch, President, CEO & Member of Management Board]

Thank you very much. I mean just to give you a couple of ideas. Number one is that we invested in the past into an innovation within acquisitions, EUR 10 billion in software, but also our high F&E spending, that this has to turn into profitable growth. That's what we have to do. And this comes along with, of course, a change also in the value which we are providing to our customers. We are selling a lot of products. Customers are looking for more values. We talk about IoT solutions and the like. We talk about still, and you're asking every time, the profitability gap of our Smart Infrastructure businesses. We are working on that. We are working on our cost savings, also on corporate costs. That's something, which is ahead of us. We're going to report on this one, too. And maybe another area where we are working on is looking how we can transform more of our businesses, software, in particular, into recurring revenues as a service, more cloud-based. And last but not least, I think you'll like hearing that, to make a better cash flow and a more stable cash flow over the quarters. So I think there's a lot on our plate, and we look forward to work on all of that.

[Ralf Peter Thomas, CFO & Member of the Managing Board]

Yes, Andreas, let me take the DI question with regards to China. I mean what we said before is that, to a certain extent, we do also see restocking effect taking place. It's hard to really assess that in detail and to quantify. So what we concluded is about 1/3 of the effect may have been driven by restocking effects. So just to mention that beforehand. Then with regard to the structure of growth momentum in China, had a very focused -- a very intense focus on discrete manufacturing. You anticipated that also with your more details in the question then. It was, to a large extent, driven by bouncing back in machinery and automotive. On the machinery side, I think we can see a very rich content in export-oriented industries in China and that is reaching from home entertainment to masks. But they all have one thing in common: the automation content in the business models of our customer industries is fairly high and ramping up their capacities is very much supported by our contribution. So we are quite happy with that. On the automotive side, I mean, it's very tough to assess what is EV driven and what is traditional carmakers, as you put it. But I would say that wherever we see kind of greenfield approaches over capacity is extended, we clearly benefit assuming that the focus of that will be EV driven. We are quite confident that we see more to come as the Chinese government has been clearly indicating where their focus is going to be in the years to come. So overall, strong focus on discrete in the Chinese market's momentum. Export driven, yes, but also a lot of content for domestic demand being driven by the governmental programs.

[Operator]

We will now take our next question from Simon Toennessen from Jefferies.

[Simon Toennessen, Equity Analyst]

Yes. Also from my side, thank you, Joe, for the discussions over many years. Firstly, can you talk a bit about the change in the drop-through margins you're expecting, particularly for the short-cycle part of the DI portfolio. You historically mentioned that automotive and machine tooling can generate leverage of 60%. You now have this unique effect of short-cycle recovery and a lower cost base. I mean if I were to assume 100 basis points severances and 100 basis points investments for the year, your guidance implies around 7% drop-through margins. Is that the right level we should think about? And then, secondly, on the U.S. performance in the DI...

[Eva Riesenhuber, Head of Investor Relations]

Simon, you keep breaking up.

[Simon Toennessen, Equity Analyst]

One thing. It's maybe the order decline in the U.S. The main competitor over there mentioned strong order recovery in that quarter in North America, particularly from orders in products. Did you hear the question?

[Ralf Peter Thomas, CFO & Member of the Managing Board]

I got that down. So Simon, let me first start with your first question. I mean, the drop-through on margins in DI. I mean this is mainly driven by scale. As you know, in automation, we have a tremendous margin conversion and the incremental volume that I mentioned, in particular in December, that has been surprising us to a certain extent. The team has been still able to master that incremental demand and that's what Roland has been referring to. We have a very solidly established supply chain that was able to cater for this incremental need. So scale is of the essence. We do benefit from the recovery in machinery and automotive. As you rightly stated, this is making up for a large part of our customer base and we have particularly been benefiting from the Chinese momentum, if I may put it that way, I elaborated on that already a bit. But we also should not underestimate the impact of the cost-out programs that have been initiated. You remember, back in the Capital Markets Day the year before last year, we said that the DI team has been committing themselves to quite a massive cost-out program. They have been even accelerating that. And now we are reaping the fruit of that at a point in time where we got top line momentum plus that cost-out momentum. There's more to come, as you do know. The team is very ambitious about that. And as I quantified already in the press call this morning, the fact that travel and entertainment costs have been coming down substantially driven by the COVID regime and the restrictions thereof, I think it's also worth to mention that DI alone has been benefiting in the area of a mid-double-digit million amount in the first quarter. It would be naive to expect this is going to continue on that level in the quarters to come. But a certain extent of that we intend also to use as incremental momentum on the way forward. And last but not least, would also draw your attention again to our cloud investments. I mean we have been very transparent on that. And with the 120 basis points that we invested in the first quarter, I think we also have been contributing to the case -- the business case way forward and that is, I think, striking a very decent balance between cost-out and drop-through to the bottom line and investing in future growth momentum. I have to say that the DI team is doing a tremendous job. I mean, the SI team as well and also Mobility, but DI being affected by that massive volatility in the market so intensively, they are really doing an outstanding job in that regard. Talking the U.S. market, that was your second question. I think that was -- the line was a bit difficult to understand at that point in time. But the U.S. market in automation has been, of course, also benefiting from some discrete momentum -- discrete manufacturing momentum, also double digitally growing there, but on a relatively low volume, yes, while the process industries are still suffering. They are typically lagging, as you know. And also machinery is not that strong, unfortunately, for us in the U.S., but we are working on that, as you do know. So that mixed basket is finally concluding for us. We are concluding of that, that there is momentum that may build up later in the year and we are also very, very intensely monitoring each and every opportunity arising there, in particular, when it comes to software business where we were able to grow based mainly on the EDA opportunities also in the mid-teens in the first quarter, which is quite impressive, I think.

[Operator]

We will now take our next question from Ben Uglow from Morgan Stanley.

[Benedict Ernest Uglow]

I mean, first of all, a big, big shout-out and thank you to Mr. Kaeser for being open and transparent over many, many years. You've treated us like grownups and we really appreciate it. Sorry, I did just want to make that point before we go into the detail. So I guess what we're all trying to figure out is this sort of transition from the growth in China, a lot of which looks like it was automotive-related to what is happening in other parts of the industrial economy. Could you just -- and I know you've touched on various things already, Ralf. But in terms of outside of automotive, if we think about North America and we think about Europe, do we have clear signals and clear intentions from other industries of a sort of pickup and maybe even a restock effect outside of China, i.e., what we're trying to navigate right now is how much of this is due to 1 or maybe 2 industries which are interconnected and how much is kind of broad based? So that's my first question. And my second question is really on the restock in China, which is amazingly powerful as ever. Has that continued into January ahead of the Lunar New Year?

[Ralf Peter Thomas, CFO & Member of the Managing Board]

Thank you, Ben. Of course, again, a bunch of relevant questions, which we have been asking ourselves when we have been assessing the situation, in particular, with regards to the way forward and the guidance we have been giving. So let me start with restocking in China and how did the business develop in January. You do know it's hard to assess in particular, in China, how channel partners are behaving. There are also legal restrictions. So you don't have full transparency through to the end customers in each and every market segment. That's why I have been carefully choosing my words when I said we assessed and estimated about 1/3 of the Chinese momentum coming from restocking. We are doing, of course, a lot of regression analysis in that field. And from that, what I see from January is there is still a lot of lively momentum in the Chinese market. It's not a secret that Chinese New Year is going to create another crystal ball to read, how that is going to affect then the second quarter and the way forward. Therefore, I don't dare to quantify what I'm talking about here, but the momentum in January did not indicate that beyond that restocking effect of 1/3 I mentioned before would be materially affected, yes? So in particular, the last 2 weeks in January have been encouraging from our perspective when it comes to the factory outputs that we saw. Talking -- how is the world looking like outside China and outside automotive. Of course, Europe very much depends on export opportunities when it comes to Germany, Italy, but also other smaller but relevant countries for our offering, like Austria, where we can apply our full domain know-how and grow with our customers entering new business models. So that machine building environment is quite sensitive to the volatility created by COVID, but also has been picking up materially. I don't see a change in pattern here for the second quarter. We have been very carefully guiding you also with regard to the second quarter where we do have a relative high level of visibility in the short-cycle business where we have backlog on levels that are not impressive compared to project businesses, but still quite high. So Europe, I think, is on a decent transitionary path, but will, of course, depend also on China, which, again, is driven by export momentum and extraordinary impact from COVID opportunities, as I have been pointing out before. And with regard to the U.S. beyond automotive, that was the center of your question. Beyond automotive in the U.S., I think process industries are still fairly shaky. And you do know also from our competitors' reporting that it may take some time before there is a stable momentum built up. That also depends probably on political decisions that are still not fully transparent with their impact on the market.

[Roland Busch, President, CEO & Member of Management Board]

Ben, let me -- this is Roland speaking. Let me add some points. Where we see still a good momentum is everything, which is on electronic semiconductors as well as pharma or food. Interestingly, we saw also machinery and not only automotive related, but also general machinery picking up. Where we said the last time that we believe that they come -- this machinery market comes back to a level before corona at 2022, we see this pulls ahead by 1 year. And we see also stronger residential demand. This was also from our short-cycle businesses, too. By the way, automotive, last time we said we expect this market to come back by 2025 to pre-corona levels. This could accelerate by 2 years. And as Joe said -- as Ralf said, oil and gas, aerospace, there's no change from our perspective at this point in time.

[Eva Riesenhuber, Head of Investor Relations]

[Operator Instructions]

[Operator]

We will now take our next question from Alexander Virgo from Bank of America.

[Alexander Stuart Virgo, Director]

I'll keep it super, super brief. I just wanted to clarify, Ralf, your comments on Q2 guidance for growth in DI because I thought I heard you say further decline in comparable revenue growth. And I'm sort of listening to the way you're talking about what you saw in China and what you're seeing in January, and I just want to make sure I've understood the dynamics that you're talking about there. That would be really helpful. Joe, best of luck with the future. Thanks very much for your help.

[Josef Kaeser]

Thank you.

[Ralf Peter Thomas, CFO & Member of the Managing Board]

Yes. Alex, thank you. I mean DI growth momentum driven by China, I also -- we mentioned that there was also quite promising new orders giving us more visibility short term in the short-cycle businesses not only, but with a focus in DI. And for the second quarter, I think we will see a continuing growth momentum also on fairly high levels. And what -- the big question mark, as you have been rightfully stating, is how is that going to continue for the second half of the fiscal year. And that was the reason why we mentioned that we will stay tuned and very carefully observing also weak signals in the market. You do know that once burned, twice shy, looking back to the third quarter in fiscal '19. We very respectfully are watching the market opportunities. And as Roland said before, we are tuned not to miss out on any growth opportunity even though they may be unforeseen, and the robustness of our supply chain will be critical in that regard. We are very, very intensely monitoring that. And therefore, for DI, the second quarter, I think, will be both an opportunity on automation and on software.

[Operator]

We will now take our next question from Jonathan Mounsey from Exane BNP Paribas.

[Jonathan R. Mounsey, Analyst of Capital Goods]

Maybe if we look sort of somewhere else out in capital goods across to Alstom-Bombardier. I guess the deal completed just last week, trading a number of monopoly positions for that new entity in many rail networks. I'm just wondering how you see this. Is this an opportunity for you? Do you think there's a good chance you'll be asked to come into those markets to create a bit more competition? Could we see sale dis-synergies for them, and therefore, extra sales growth for you? And on that, the industry consolidation, do you think it's now over in Mobility? Or could you participate in something further in the next couple of years?

[Roland Busch, President, CEO & Member of Management Board]

So to your first question, we -- I mean it's correct, it's closed. The remedies are still under discussion and we'll see how that goes. But we see more an opportunity also, in particular, in the near to midterm because this is a hell of a work of integrating. We have quality issues with the markets, saw quality issues from one of our competitors there. So therefore, I do believe it's an opportunity. And we also see, and this is going back to the recent tenders and awards that customers are looking more and more into the life cycle cost considerations. So it's not about buying cheap, it's about operating to the best cost. And here is about uptime availability. So technology has a much, much stronger impact on this market in the future rather than sheer size. So -- and this is the card we are going to play. You have -- maybe saw that, that we got service order for the high-speed fleet from Deutsche Bank, where we have proven that we can do a very good service. And this is not only we do that only on our fleet. We get also from other's fleets. And also the energy efficiency, for example, which has improved by 20% compared to our prior products. That's something what customers really appreciate. After all, it's about providing capacity over the life cycle. And that's where we are focusing on. Well, the market -- you know the market well. There are the big ones and then you have smaller ones. There's always an opportunity to look for consolidation in the market. Still, there are many players out there. And yet, at the same time, if you look at the smaller ones like [indiscernible], for example, they play in a niche and they it that very well. They have limited engineering costs when they tap their product. They're going for specific markets. They don't go for the high volume. This is something where really maybe Alstom, Bombardier or Siemens come in. So therefore -- and they make some decent margins and good cash flow. So therefore, there's no need to some extent for them to be consolidated, so to speak. But I do believe there's still some movement in the market if you ask me for the next couple of years to come.

[Operator]

We will now take the next from James Moore from Redburn.

[James Moore, Partner of Capital Goods Research]

Joe, may I also say my congratulations on making your ships sail so well, and good luck.

[Josef Kaeser]

Thank you.

[James Moore, Partner of Capital Goods Research]

My question is on -- very welcome, on the DI profitability. Your underlying margins in DI are up 600 bps for the quarter and you guide to 200 bps to the year. You've explained some of the moving parts there. But could you give us a flavor for whether the software margin development is better, the same or worse than the automation margin development for either the quarter or the year?

[Ralf Peter Thomas, CFO & Member of the Managing Board]

Thank you, James, for this interesting question. I mean, first of all, as I said, we are very much benefiting at the moment from EDA demand, yes. Semiconductor businesses around the globe are obviously very much benefiting from their market momentum, and we are grasping that opportunity. We do have a tremendous conversion rate there, and we have been really enjoying a great margin development on the software side from that. We do foresee this momentum being up for the next quarter. Visibility, as I said, is fairly good at the moment, but we are very respectfully observing the market and it would be too early to conclude whether this will be sustainable for the rest of the fiscal year. At the same time, I mentioned that and I would like to repeat that we intensively invest into further opportunity to grow cloud-based, so to speak, and that investment of being 120 basis points will continue for the next couple of quarters. So if we compare the momentum in software to the underlying and what is sustainable and that we need to take that into consideration as well. So for the time being, we are very happy with the margin development of software, but we will strike the best possible balance between investments and drop-through margin also on the software side.

[James Moore, Partner of Capital Goods Research]

And just to make sure I understand that, are we talking about 120 basis points for cloud investment as a guide for the full year? And if you were to look out for the next couple of years, does that number go down towards 0? Or should we consider that's a good number for the coming 2, 3 years?

[Ralf Peter Thomas, CFO & Member of the Managing Board]

What I said is 120 basis points for the first quarter of fiscal '21. I expect that level to be maintained for the rest of the year, give or take, but we are ready to invest into additional incremental opportunities if they arise, yes. That's what I meant with respectfully observing the market opportunities. Way forward in the years to come, there will be a shift. We mentioned in very much detail, I think, in the past that we had MindSphere investments and that has been now changing to Software-as-a-Service as focus. We also continue to groom our Mendix opportunities, and therefore, the split may change. And we will give you more color on that at the Capital Market Day when we will intensively discuss our way forward for the software business in DI.

[Eva Riesenhuber, Head of Investor Relations]

Thanks a lot to everyone for participating today. As always, the team and I will be available for further questions, and we will get back to everyone who is still in the queue and we couldn't squeeze you in. Apologies for that. With respect to the Siemens AGM, you can watch the live webcast of the speeches from Jim Hagemann Snabe, Joe Kaeser and Roland Busch via the Investor Relations homepage. Please stay healthy, and goodbye.

[Operator]

Thank you for joining today's conference. Thank you for your participation, ladies and gentlemen. Once again, let me repeat the instant replay numbers. Participants in Germany, please call the replay number [phone] access code 9173910#. Participants in Europe, please the call replay number [phone] access code 9173910#. Participants from the United States, please call the replay number 1 [phone] access code 9173910. This replay service will be available until tomorrow night. A recording of this conference will also be available on the Investor Relations section of the Siemens website. The website address is www.siemens.com/investorrelations. Thank you.