P&L Check

Chips are Up for Infineon

  • Why it matters

    Why it matters

    Infineon has put the days of roller coaster results behind it and is continuing to grow under chief executive Reinhard Ploss.

  • Facts


    • For two years in a row, Mr. Ploss has achieved the company’s 15-percent profit margin target.
    • The dividend has almost doubled since Mr. Ploss took office in 2012, to €0.22.
    • The decline of the euro against the dollar has helped to improve the company’s bottom line.
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Infineon Jahreszahlen – Platine mit Logo
Infineon has experience a roller coaster few years. Source: DPA

No other manager has managed to remain at the helm of Infineon for as long since the company went public in 2000. Reinhard Ploss has managed the Munich chip manufacturer for the last four-and-a-half years. And he’s doing a good job.

A look at the latest annual report shows that Mr. Ploss has a firm grip on the DAX-listed company, and many indicators have improved once again.

Most important for investors is the fact that Mr. Ploss has now kept his main promise for the second time in a row. He has achieved the 15-percent profit margin target set by his predecessor, Peter Bauer, and has even exceeded it slightly. This is not a given, because the semiconductor producer had failed to meet its target margin for years.

The operating return – Infineon chooses the sum of segment results as its basis – was 15.2 percent in the 2016 fiscal year, which ended on September 30. This is slightly weaker than the 15.5 percent from the previous year but still significantly stronger than in the past.

A cooling of the Chinese economy could deal a serious blow to Infineon.

Mr. Ploss will likely garner a lot of applause from shareholders at the annual meeting this Thursday at the Munich Exhibition Center. Investors benefit from the fact that Infineon, a former Siemens division, is consistently profitable. There is no longer any evidence of the roller coaster ride of results in the past. The dividend climbed to 22 cents per share this year. The distribution has almost doubled since Mr. Ploss, 61, took office in the fall of 2012.

But the dividend isn’t the only thing that’s going up. In the last fiscal year, income increased by 12 percent to just under €6.5 billion ($6.87 billion). The integration of International Rectifier contributed 5 percentage points of that increase. Infineon acquired its California-based rival in 2015.

All the same, 7 percent organic growth is still respectable, especially as the entire chip industry grew by only 1.5 percent last year. According to Gartner, a market research firm, Infineon owed much of its growth to the fact that smaller companies did poorly.

In contrast, the top 25 manufacturers, which include Infineon, achieved about 8 percent growth. They account for roughly three quarters of sales in the entire industry. Some of the world’s largest chip producers grew considerably through takeovers in 2015. Infineon competitor NXP, for example, increased its income by about 40 percent through the acquisition of rival Freescale.

The euro’s decline also benefits Infineon. Because most transactions in the industry are in U.S. dollars, the Germans benefit from a weak common currency. The rule of thumb for Infineon is that with each cent the dollar gains in value against the euro, revenue increases by €32 million in the fiscal year. Results for the segment increase by €8 million to 12 million with each cent.

In the last fiscal year, the average exchange rate was $1.11 per euro, compared to $1.14 in the previous year. This means that the euro’s decline provides Infineon with about €90 million in additional revenue and about €30 million in operating profit. If the euro regains value in the future, the company will suffer the corresponding losses. But that now seems unlikely. Chief Financial Officer Dominik Asam expects a euro-dollar exchange rate of 1.10 for the current year. This seems very conservative. One euro is currently trading at $1.06.

Shareholders can take comfort in the fact that all of Infineon’s divisions grew in the last fiscal year. Power Management & Multimarket (PMM) saw the strongest growth, with a 14-percent gain in revenue. The division primarily sells components for mobile communications and accounts for a third of consolidated revenue.

However, profit development for PMM was disappointing, with the profit margin declining from 18 to 16 percent. Infineon’s results are weighed down by higher development costs and temporary startup costs for a new plant in Malaysia. In addition, growth in smartphone technology fell slightly short of the company’s expectations.

Chip Cards is by far the most profitable division, as it was in the previous year. However, this is also the smallest division, with only an 11 percent share of total revenue. Its margin increased by 0.4 percentage points to 19.3 percent.

The Auto division, as the largest source of revenue, saw 0.8 percent margin growth. But with a profit margin of 14.9 percent, the business falls well short of the company average.

This is especially true of the Industry division, whose weak margin declined by 0.1 percent again to 11.7 percent. But here, too, temporary startup costs for the new production facility in Malaysia adversely affected results.

119 Infineon-01

This left €743 million in additional profits, a gain of about 17 percent. There is one main reason for the fact that profit increased more substantially than revenue: Last year, Infineon had to pay an €83 million cartel fine imposed by the European Union.

The acquisition of International Rectifier two years ago did not adversely affect Infineon’s operations. Still, the largest acquisition in company history continues to affect the balance sheet.

To take a look back, on September 30, 2014, the company had more than €2.2 billion in cash, after deduction of all debts. This cushion shrank last year as a result of the takeover, so that Infineon’s net cash position at the end of the 2015 fiscal year was only €220 million. For the year ended September 30, 2016, the company had increased its net cash position to €471 million.

Because of the takeover, the inflow of funds from current operations was in the negative by about €1.7 billion last year. In the latest fiscal year, Infineon’s free cash flow was back in positive territory, at €490 million.

This is by no means attributable to any excessive efforts to cut costs. Shareholders need not fear that their company will fall behind technologically. Mr. Ploss invested €826 million, or about 5 percent more than in the previous year. This brings the investment ratio to 12.8, which was somewhat lower than in 2015 but still higher than in 2013.

If Mr. Ploss meets his prognosis for the current fiscal year, the company will gradually approach its 2004 sales record. At the time, Infineon earned €7.2 billion in income. Now Mr. Ploss is promising a gain of 4 to 8 percent, for a total of no more than €7 billion.

But there are risks in Infineon’s business. For one thing, China is becoming more and more important for the company. The country accounts for 24 percent of revenue, a percentage point higher than in the previous fiscal year. Two years ago, Germany and China each accounted for 20 percent of revenue. A cooling of the Chinese economy could deal a serious blow to Infineon.

Not everything is going well strategically, either. Infineon had been waiting for official approval of its next planned acquisition. It had intended to acquire American competitor Wolfspeed for $850 million, but U.S. regulators blocked the deal, citing concerns over national security.

But the company was not adversely affected. Infineon is consistently profitable, with Mr. Ploss predicting a 16-profit margin for the current fiscal year. “We expect to see further growth in our markets in the coming months, and we are also optimistic about long-term trends,” he said recently.

This suggests that no one is about to deprive him of his record as the longest-lasting Infineon chief executive anytime soon. His contract continues until 2020, and a look at the company’s business figures offers no reason to remove Mr. Ploss prematurely.


Joachim Hofer covers the sports, leisure and IT sectors for Handelsblatt. To contact the author: hofer@handelsblatt.com

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