Infineon Meets Financial Expectations & Comments on Cypress Acquisition

July 31, 2019 by Paul Shepard

Infineon Technologies AG has reported results for the third quarter of the 2019 fiscal year (period ended 30 June, 2019) including: Revenue of €2,015 million; Segment Result of €317 million; Segment Result Margin of 15.7 percent. The company also reported:

  • Outlook for Q4 FY 2019: Based on an assumed exchange rate of US$ 1.15 to the euro, revenue is expected to grow by 1 percent (plus or minus 2 percentage points) quarter-on-quarter. At the mid-point of the revenue guidance, the Segment Result Margin is expected to come in at around 14.5 percent
  • Outlook for FY 2019 confirmed: Revenue of €8 billion with a Segment Result Margin of 16 percent
  • Acquisition of Cypress at an enterprise value of €9 billion announced; initial financing steps successfully completed with capital increase of €1.5 billion and syndication of acquisition financing.

"Infineon remains on course. Although the global economy remains sluggish, Group revenue again grew in the third quarter," stated Dr. Reinhard Ploss, CEO of Infineon. "Demand was solid overall, despite the lack of significant growth momentum. Regardless of the ongoing unfavorable macroeconomic conditions, we still expect to achieve our targets for the current fiscal year. The underlying drivers of our future markets are very much intact and continue to provide good long-term growth prospects to Infineon."

In the third quarter of the 2019 fiscal year, revenue grew by 2 percent from €1,983 million to €2,015 million quarter-on-quarter. The slightly stronger US dollar compared to the second quarter had a positive impact. All four segments - Automotive (ATV), Industrial Power Control (IPC), Power Management & Multimarket (PMM) and Digital Security Solutions (DSS) - contributed to growth with slightly higher revenue figures.

The third-quarter gross margin was 36.5 percent, compared to 37.8 percent in the second quarter. Included therein are acquisition-related depreciation and amortization as well as other expenses totaling €14 million, mainly relating to the previous acquisition of International Rectifier.

The adjusted gross margin decreased from 38.5 percent to 37.2 percent quarter-on-quarter. Segment Result amounted to €317 million, compared to €332 million for the preceding three-month period. The Segment Result Margin went from 16.7 percent to 15.7 percent quarter-on-quarter.

The non-segment result for the three-month period under report was a net loss of €34 million, compared to a net loss of €27 million in the previous quarter. The third-quarter non-segment result included €14 million of cost of goods sold, €13 million of selling, general and administrative expenses, and €1 million of research and development expenses.

In addition, net operating expense amounting to €6 million were incurred in connection with the planned acquisition of Cypress Semiconductor Corporation ("Cypress"), USA.

Planned acquisition of Cypress

On 3 June 2019, Infineon and Cypress signed an agreement for the purchase of Cypress. Infineon intends to acquire Cypress for a cash price of USD 23.85 per share, corresponding to an enterprise value of €9 billion.

"The planned acquisition of Cypress is a landmark step in Infineon's strategic development. With this transaction, Infineon is entering a new dimension," commented Dr. Ploss. "The Infineon and Cypress portfolios complement each other ideally. The acquisition will enable us to strengthen our core power semiconductor business in the long term. With Cypress, Infineon will be able to gain an even stronger foothold in important future markets and accelerate the pace of growth."

Infineon's Supervisory Board and Cypress's Board of Directors have already approved the proposed transaction. Completion of the transaction is subject to approval by Cypress shareholders and regulatory approvals in the relevant jurisdictions as well as to customary closing conditions. The transaction is expected to close towards the end of the 2019 calendar year or early in 2020.

Initially, a small group of banks had provided binding loan commitments to finance the transaction. The ultimate financing structure is oriented towards maintaining an investment grade rating. Infineon therefore intends to finance approximately 30 percent of the transaction using equity capital. The remainder will be raised through debt instruments and available cash. In view of the equity portion, a capital increase against cash contribution was carried out on 18 June 2019.

Approximately 113 million new shares were issued and net proceeds of €1.5 billion raised. Following this step, the remaining acquisition financing has meanwhile been successfully syndicated among a larger consortium of banks.

Outlook for the fourth quarter of the 2019 fiscal year

Based on an assumed exchange rate of US$1.15 to the euro in the fourth quarter of the 2019 fiscal year, Infineon expects revenue to grow by 1 percent quarter-on-quarter (plus or minus 2 percentage points). The Power Management & Multimarket segment is expected to grow faster than the average for the Group as a whole. Automotive segment revenue is forecast to grow roughly in line with the Group, whereas the Industrial Power Control and Digital Security Solutions segments are predicted to report a low single-digit decrease in revenue. At the mid-point of the revenue guidance, the Segment Result Margin is expected to come in at 14.5 percent.

Outlook for the 2019 fiscal year

Based on the first three quarters and expectations for the fourth quarter, Infineon confirms its revenue expectation of €8.0 billion for the 2019 fiscal year. Revenue in the previous fiscal year totaled €7.6 billion. Revenue is therefore likely to grow by a bit above 5 percent year-on-year. This forecast is based on an assumed EUR/USD exchange rate of 1.15. The Segment Result Margin is expected to come in at 16 percent.