This call for analysts and investors for Infineon's 2018 fiscal third quarter results. Today's call will be hosted by Alexander Foltin, Corporate Vice President, Finance, Treasury, and Investor Relations of Infineon Technologies. As a reminder, today's call is being recorded. This conference 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 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 material 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 now like to turn the call over to Infineon. Please go ahead.
Thank you. Good morning and welcome, ladies and gentlemen. Also, on behalf of the entire management board of Infineon, Reinhard Ploss, CEO, Dominik Asam, CFO, Helmut Gassel, Chief Marketing Officer, and Jochen Hanebeck, Chief Operations Officer. We will proceed as usual. Reinhard will start with some remarks on group and division results, market developments, and quarterly business highlights. Dominik will then comment on key financials, followed by Reinhard again, updating you on our guidance. After that, we will be happy to take your questions. In order to allow broad participation, we kindly ask that you restrict yourself to one question and one follow-up. A recording of this conference call and a copy of our 2018 fiscal third quarter earnings press release and investor presentation are also available on our website at infineon.com. Reinhard, please go ahead.
Thank you, Alexander, and good morning, everyone. In the June quarter, our group revenues were EUR 1.941 billion, up 6% both quarter-over-quarter as well as year-over-year. With this, we have solidly met our guidance, taking into account the stronger than anticipated US dollar. Our underlying growth momentum remains strong. At a constant US dollar exchange rate, we would have grown by just over 10% year-over-year. Our segment result for quarter three was EUR 356 million, an increase quarter-over-quarter by 13% and year-over-year by 5%. The segment result margin stood at 18.3%, which was slightly ahead of our guidance, even when adjusted for currency effects. As in prior quarters, we saw strong order entry and other signs of positive business dynamics. Our continuous effort to ramp capacity allow us to better serve our customers and grow our revenue base.
However, we could not fulfill demands in several product areas due to supply limitations. We see a growing order backlog leading to a book-to-bill ratio of 1.5. Let me put this into perspective. The power semiconductor market is currently in allocation. This typically leads customers to scramble for capacity and to aggressively place orders. We are taking these numbers with a pinch of salt. Now to the divisions. Automotive revenues came in at EUR 836 million for the quarter. This represents a 3% quarter-over-quarter increase and a 9% increase year-over-year. At a constant exchange rate, we would have grown 13% year-over-year. The segment result increased to EUR 120 million from EUR 116 million in the previous quarter, implying a segment result margin of 14.4%.
Margin progression was limited, given that a meaningful share of the incremental revenue came from products for electric drivetrain, which has not reached average margins yet. Positive volume effects were dampened by increasing mainly ADAS-related R&D efforts. In recent weeks, there have been several signs of macro uncertainties affecting worldwide vehicle sales, such as the threat of a tariff war or the introduction of a new certification procedure in the EU. Our automotive business is driven substantially more by increasing content and per car by unit growth. We are seeing unchanged momentum driven primarily by xEV and ADAS. The exceptionally high book-to-bill ratio of 1.6 is evident of this. In the same fashion, we keep winning new business across a broad range of our automotive target areas.
With classic applications, we were awarded the next generation TPMS platform for major European Tier 1 with start of production in 2021 and a lifetime value in excess of EUR 100 million. On the electric drivetrain side, a major North America Tier 1 selected an Infineon chipset for the xEV inverter platform for one of the world's largest OEMs. The combination of an IGBT module with a driver, an RX microcontroller, and a power management IC is highlighting the strengths of our xEV system solution. The value of this design win is also more than EUR 100 million. Our offerings for ADAS applications saw good traction with customers. A large Japanese supplier chose our AURIX 2T microcontroller for its domain platform enabling sensor fusion in level 2 automated cars. Volumes will start to ramp next year with a low triple-digit euro million lifetime value.
As a first step into automotive time-of-flight applications, a major European OEM selected our 3D sensor chip for both a gesture camera and an in-cabin camera for ambient sensing, which can, for example, be used for occupant sensing. Let's come to Industrial Power Control, where we saw revenues of EUR 349 million, an all-time high quarterly figure compared to EUR 317 million in the March quarter. Quarter-over-quarter, this translates into a growth of 10%. The year-over-year increase was 9%. At a constant exchange rate, IPC would have grown 11% year-over-year. While almost all application fields contributed to this development, drives, major home appliance, wind, and industrial power supplies saw particularly strong growth. We are continuously adding capacity to serve demand, yet various product classes remain in allocation. Order entry remained very strong, and the book-to-bill ratio came in at 1.4.
The segment result for the June quarter was EUR 71 million compared to EUR 62 million in the prior quarter, yielding a segment result margin of 20.3%. Increased operational expenses offset some of the margin contribution from additional revenues. We see unabated momentum across applications with particular strengths coming from industrial automation and home appliances. Also, renewable energy is holding up well. The cut in feed-in tariffs in China will certainly lead to a short-term slowdown of photovoltaic installation there. However, some of that drop will be offset by demand from other regions, and also wind power and energy-saving applications are showing encouraging signs. From a regional perspective, we see significant business opportunities in Japan and are currently building a meaningful project funnel with customers there. In Power Management & Multimarket, we posted revenues of EUR 580 million, 7% up quarter-over-quarter.
Compared to the same period last year, revenues increased by 4%. At a constant exchange rate, PMM would have grown 11% year-over-year, despite the revenues lost due to the divestiture of parts of the RF Power business to Cree towards the end of the previous quarter. The PMM segment result came in at EUR 137 million. The segment result margins stood at 23.6%. In the prior quarter, the segment result had amounted to EUR 108 million for a segment result margin of 19.9%. Certain non-recurring effects related to provisions and inventories had a single-digit million EUR positive impact in this quarter. The power business is benefiting from additional production capacity coming online, yet remains supply constrained. Somewhat related to this, strong order entry is leading to a book-to-bill ratio of 1.8. Strong demand drivers can be seen across a multitude of applications.
China and Southeast Asia are witnessing a proliferation of e-scooters and electric low-speed vehicles. Big data calls for hyperscale data centers with power levels per server of 1,600 watts and above. More and more power tools are becoming cordless and are moving to even higher power levels and larger batteries. Wireless charging of smartphones become a market standard. The growing human-machine interface market. We recorded business wins with our industry leader, XENSIV MEMS microphones and Class D audio amplifiers, which will be delivered into voice control devices like smart speakers of two major North American artificial intelligence heavyweight. Now, a look at Chip Card & Security. The segment increased revenues by 7%, from EUR 164 million in quarter two to EUR 175 million in quarter three. Year-over-year, this represents a decrease of 5%, or 2% down, assuming a constant US dollar exchange rate.
All business areas, including payment, TPM, and authentication, contributed to the sequential quarterly revenue growth. The book-to-bill ratio stood at 0.8. The segment results stood at EUR 29 million, equivalent to a segment result margin of 16.6%, slightly up from the prior quarter. While the market environment remains challenging for the foreseeable future, we could secure several project wins with mid-term relevance. Among them, one at a major PC manufacturer with our OPTIGA TPM solution. Overall, Chip Card & Security is currently doing about a quarter of its business with software-enabled solution, underscoring our system competence. Our IoT security solution continued to see traction with several project wins at various OEMs engaged in different verticals, including smart home, industrial, and networking equipment.
In order to help developing new approaches to AI security and self-driving cars, Infineon will lead the research alliance SEC4Cars, security for connected autonomous cars, of 50 industry and academia partners. With this, I would like to hand over to Dominik, who will lead you through our key financial figures.
Thank you, Reinhard, good morning everyone. Our sequential revenue growth rate of 6% in the June quarter benefited from about two percentage points of currency tailwind. The average US dollar/euro exchange rate declined from 1.23 in Q2 to 1.19 in the June quarter. You can still apply our usual rule of thumb of a $0.01 change in the exchange rate, translating into a EUR 9 million revenue impact per quarter. Year on year, the US dollar continued to cause some headwind, as it depreciated by about 8% compared to the average exchange rate of 1.10 in the June quarter 2017. For sake of comparison with our competitors, this implies year-over-year growth of more than 14% for the third quarter in US dollar terms.
Please note that going forward, we expect to see mid to high single digit million euro amounts of revenue in other operating segments, reflecting certain services we will render to Cree in the aftermath of the divestiture of parts of our RF Power business. Gross profit increased to EUR 742 million, for a gross margin of 38.2% after 37.1% in the March quarter. Research and development expenses and selling, general and administrative expenses came in at EUR 218 million and EUR 210 million respectively. The net operating income amounted to EUR 5 million. We incurred EUR 37 million of non-segment result charges. Of that amount, EUR 32 million are International Rectifier acquisition-related amortization and other charges. EUR 18 million of the non-segment result charges hit our cost of goods sold, EUR 2 million R&D, and EUR 17 million SG&A.
Excluding acquisition-related and all other non-segment result effects, the adjusted gross margin stood at 39.2%, compared with 38.0% in the prior quarter. Depreciation and amortization, including non-segment result effects, increased from EUR 211 million-EUR 219 million. Therein, EUR 24 million and EUR 26 million respectively relate to amortization and depreciation of fair value step-ups from the allocation of the purchase price for International Rectifier. The portion of depreciation amortization, which hits our segment result, increased from EUR 187 million-EUR 193 million, reflecting the increasing levels of investments in property, plant and equipment we need to make to cope with the unabated demand by our customers. Continuing with tax. In the June quarter, we incurred an income tax expense of EUR 49 million as compared to EUR 62 million in the previous quarter, which had included the tax on the gain sale of the RF Power business. The effective tax rate was 16%.
For the entire fiscal year 2018, a cash tax rate of 15% remains a reasonable assumption. Free cash flow from continuing operations came in at EUR 192 million, after EUR 334 million in the previous quarter, which included the proceeds from the sale of parts of the RF Power business. This sale is also reflected in a quarter-over-quarter comparison of our reported after-tax return on capital employed, which came in at 17.0% after 31.2% in the March quarter. Return on capital employed furthermore continues to be strongly affected by bookings related to the acquisition of International Rectifier, in particular goodwill, fair value step-ups in the context of the purchase price allocation, and the related depreciation amortization. Excluding acquisition-related bookings and effects and deferred tax effects, the adjusted return on capital employed stood at around 24%, i.e. again, significantly exceeding our cost of capital.
Let me now hand back to Reinhard who will comment on our outlook.
Thank you, Dominik. For the last quarter of our fiscal year, we expect revenues to increase by 3%, ±2 percentage points. This assumes a rate of 1.2 for the US dollar against the euro for the remainder of the quarter. The growth expected for ATV as well as for IPC is in line with group average. PMM should come in meaningful above group average. CCS revenues are expected to decline. The segment result margin for the fourth quarter should come in at 19% at the midpoint of the guided revenue range. As a consequence, revenue for the entire 2018 fiscal year are now expected to grow by between 6.4%-7.4% against the previous year. At the midpoint of the revenue range we guide for the September quarter, the full 2018 fiscal year segment result margin should come in at 17.5% of sales.
Our guidance for annual investments remains unchanged at around EUR 1.2 billion. Depreciation and amortization, we continue to see at around EUR 850 million. Ladies and gentlemen, let me summarize the key points for the third fiscal quarter. As in previous quarter, Infineon continues to see a very high order intake across a broad range of application and products. This gives us confidence in the strong fundamentals of our specific businesses. We are carefully monitoring macro indicators for signs of a possible slowdown, but as reflected in our guidance, we see unabated momentum. The direct impact of currently imposed and discussed tariffs on us is very moderate. A major effect would only result from a significant world GDP growth deceleration, which we are currently not seeing. What we are seeing is that our business is getting geographically more diversified. For example, with inroads into Japan that we are making in several segments.
We are executing along the pillars of our strategy that we explained at our recent Capital Market Day, growing our core business on the basis of technology leadership and highest quality product. Strengthening this core with adjacent fields based on our application and system understanding. Leveraging our technology competence in new application and markets. Consistently expanding manufacturing capacities. Leveraging our unique 300 millimeter capabilities. Regarding the latter, our customers' reaction to our recently announced plan to invest into a new 300 millimeter fab at our Villach site have been very positive. This encourages us to capitalize on the long-term opportunities presented by the structural growth drivers of our target market. Ladies and gentlemen, this concludes our introductory remarks. We are happy to take your questions.
Thank you. Our question and answer session will be conducted electronically today. If you would like to ask a question, simply press the star key followed by the number 1 on your telephone. If you are joining us today using a speakerphone, please ensure that your mute function is turned off. Once again, to signal for a question, please press star 1 now. We will take our first question from Janardan Menon from Liberum. Please go ahead.
Hi. Good morning. Thank you very much for taking my question. I have a question on the comment you just made towards your closing remarks, which is that you expect PMM revenues to grow meaningfully above the group average. Just wondering what exactly is driving that. Are there any specific smartphone-related ramps that you're seeing in the quarter, which is driving some of that? Is it more the kind of business that you talked about before, which is the e-scooters and the servers, et cetera? I have a brief follow-up.
Thank you, Janardan, for the question. I think Helmut will answer this.
Yes. Good morning. There is a regular, I would say, seasonal uptick coming up in PMM and the smartphone business, but generally, it is driven predominantly out of the power business again.
Understood. Going back to the point you made about the tariffs, that you are not seeing any signs of that, it is unabated demand that you are continuing to see. I was just wondering if you could give us a little bit more flavor on that. There seem to be car makers who are saying that they are affected. They have publicly said that, and they have also announced price increases in China and things like that. Is it that on an overall basis that you are not seeing any effect, but at certain customers you are seeing some effect which is compensated by strength at other customers? Or is it that, even among customers that you might have made public statements, in your own order book, you are not seeing any kind of effect whatsoever?
Well, we have to differentiate between the various effects. Our direct imports from China into U.S. are very limited. There, definitely we see little effect due to the low volume there. The other part is how much we see in the automotive area. First of all, we do not see direct the effect on the OEMs because we have the business with the Tier 1s, which averages out the effects of the various OEMs. On the other side, as we mentioned, we are very strong on a global basis, in Asia, in U.S., and Europe. We expect that a potential shift between the various OEMs might happen, but this might not affect us as strongly. We currently see a strong trend to SUVs, which is in U.S. and other areas.
The net effects arriving at our company are pretty limited, and we expect that as long as the overall number of cars and the typical structure will not be affected, we will not be affected either. Only when the general sentiment of the consumable change and people will stop buying cars, that we might see. As said before, we currently do not expect that growth in automotive is influenced significantly by the number of cars sold. We even see a more or less flat market. The total growth comes from content, and we continue that this content remains high. Just as a reminder, the book-to-bill in this quarter was 1.6, and we believe that the content effects will strongly dominate the way forward. Therefore, the net effect on our business is minor.
Understood. Thank you very much.
Thank you. Our next question comes from Stefan Haerle from Oddo BHF. Please go ahead.
Yes, good morning. I have a question about the book-to-bill number that you have given because, in your preliminary remarks, you said that the customers, given the fact that some products are under allocation, had a kind of unusual behavior. Looking at the PMM book-to-bill number of 1.8, what is the share, according to you, linked to this unusual behavior, and what would be a more normal book-to-bill? Thank you.
Stefan, thank you for the question. Helmut will take that question.
Yes. I think we've already stated a couple of times that it's very unclear to us. It's simply not possible to clearly distinguish between what is due to double ordering and what is true demand going forward. As a matter of fact, the longer the allocation period is lasting, a normalization of order behavior is to be expected at some point in time. However, I don't think we're at this point, so we believe that there's still a significant portion in double ordering, and we will only know once the market turns.
Just as an adder to your PMM's business in general is affected, so we cannot differentiate between more and less business, as Helmut explained.
Okay. I know it's very early in the year to give an outlook on 2019, but what is the face or how will 2019 look according to you?
Well, Dominik, please.
Yeah. On the Capital Market Day, recall we guided for a 10%+ growth based on a USD exchange rate of 1.20, 17% segment result margin plus a little bit from operating leverage from OpEx. We have raised the guidance for the current fiscal year by 0.5%. Given the strong dollar we had in the current fiscal year, of course, that bodes well for next year. We don't want to go into specifics right now. Obviously the strong book-to-bills, if anything, increase our confidence.
A remark here for general understanding. Our order books, even so, we will see some, let's say, phase out in the case allocation will go back and business comes more to normal. We still believe that our order books will be strong enough in order to support this growth, even in a more normal growth environment.
Okay, thank you very much.
Thank you. Our next question comes from David Mulholland from UBS.
Hi. Just following up on the last question on the book-to-bill. I think in prior calls, when you've made similar commentary, you've also said that you often take a bit of a haircut to what you see, and I think you made in your remarks, you said you take some of the order numbers with a pinch of salt. Can you just clarify whether the kind of 1.5 book-to-bill number for the group or even specific within PMM, whether you have actually taken any haircut and kind of realistic view on what you think demand might be within what you're saying in book-to-bill? Secondly, I'm just thinking slightly longer term. There's quite a few design wins that you've called out in terms of the automotive design wins for EV and on the sensor side and a few others.
A lot of those aren't starting production until 2020. Given the success you're having, obviously you've already guided quite strongly for 2019, but it feels like momentum is just building here. Can you give a comment on how you see how confident you feel beyond 2019 as well, given design wins?
Well, the second question will be answered by Helmut. The first I take. The book-to-bill is involved. We do not haircut the book-to-bill. We report as it comes in. We haircut it when we put it into the consideration of our future growth. Anyhow, our next year's growth will, in a significant portion of our business, be limited to the ability to ramp capacity. There is, of course, considering the reported book-to-bill, a significant reduction or, let's say, haircut to our growth outlook.
Yes, with respect to the automotive business, I think already in this quarter, we have stated that a significant portion of the automotive business growth has been related to xEV, and that remains solid. Momentum for xEV, I would say, is remaining on a very high level as to new business wins. I think one of the highlights that Reinhard reported also was again on xEV. I think it's fair to say, as we have said before, that xEV and ADAS are good for at least 50% of our automotive group growth going forward.
Thank you.
Thank you. Our next question comes from Johannes Schaller from Deutsche Bank.
Yeah, thanks. Two, if I could. You've been very clear on what you see in the auto business right now and that you don't really see much of a slowdown. Just assuming we go into a scenario where there are less cars bought and you would actually see more of a unit slowdown than Currently see. Let's assume, actually, the demand in your other segment stays pretty strong. Can you give us a bit of an idea of how quickly you could accommodate and maybe adjust production to sell more into the other segments if we go into a situation where we have some auto production cuts that are more severe than what we currently have? I have a second question. Thank you.
Okay. This question will be answered by Jochen Hanebeck.
Good morning also from my side. The ability for structural change in our manufacturing sites is given to a good extent. However, there are some limitations when it comes to high power or sensors. In general, I would say we'll be able to follow here the market in a pretty good manner.
Another point, Mr. Schaller. Of course, when we see a slowdown, I would say the softer landing, let's call it, or a reduced growth in automotive, because we still assume that even a reduction of numbers of car produced will be, I would say, compensated more by the content. We will guide our investments, which are coming online in the right way, that we are then shifting to the other business. You had another question?
That is clear. Yeah. Secondly, one of your peers in the U.S., Power Integrations, they talked a bit about some very recent order push-outs from distributors, particularly in the appliances and in white goods market, talking about an impact from the tariffs that we've seen on things like washing machines, I think. In your major home appliances business, it doesn't really look like you've seen anything like that. Can you comment maybe a bit on the specific situation you see there?
Well, the major home appliance, I think we see two effects. One is the structural growth of those and our market share situation. Our current market share is still on a lower part, and that is an opportunity to increase this. We have not seen significant or any push-outs in this area. We are, I would say, still in an extremely high load and allocation situation there. Not really any effect seen on that. On the other side, we have to concede then in allocation situation, you will not see the market as clearly. As we have not seen any effect in the order books, it is obvious that on the power side for the drives, the market is still on the stronger part.
While I think the power supplies for major home appliances may be not specific to the inverterized home appliances and the percentage of inverterized home appliances may continue to rise and even on a net effect increase despite the total number may decline.
That's very helpful. Thank you.
Thank you. Our next question comes from Jerome Rommel from Exane BNP Paribas.
Yeah. Good morning. Quick question on the allocation. Could you give us an idea of where the lead times in term of weeks are for MOSFET and IGBTs? Also, we heard from your client that you increased prices in some specific areas, namely the MOSFET. What kind of price increase are you going through and when do you think the situation will normalize from a pricing standpoint? Thank you.
Yeah. Thank you, Jerome. I think both questions will be answered by Helmut.
Yes. In terms of lead time, I think we've already previously reported that in some product areas, lead times can exceed 26 weeks. Generally, we have an order confirmation window of maximum up to 52 weeks, and there is actually products that also are at that limit. Yes, order lead times have risen tremendously. Sorry, can you repeat the second question? Because I didn't fully understand it.
Pricing pieces.
Yes, but.
On pricing. We heard from some of your clients that you increased pricing specifically for MOSFET in the June quarter. Can you elaborate a little bit on the pricing environment?
Well, I would say quite usual when demand is very high, it also has an impact on price. Therefore, I think it's a direct relation to what the demand situation is going to be going forward. Right now, as you have just stated, the demand is still very strong.
Just to be clear, should we continue to expect price increase going forward for your calendar Q4?
Well, I think here you have to be considering that some of our price increases we put in place will become effective only in later time. The further development of prices will depend on the overall environment, which we cannot predict in detail because we do not know what competitors are adding capacity. Nevertheless, I think here we will see that this effect on the prices will have a longer-lasting effect.
Yeah. Just probably want to add to that point. The pricing, in some areas, we have firm agreements with our customers that are lasting for a certain period of time. We certainly honor our contracts in all cases. Last but not least, our price increases have been a function also of some substantial material increases from our suppliers and therefore has been a reaction to those. Of course, it's not possible for us to understand what those are going to be going forward. Thank you very much.
Thank you. Our next question comes from Sandeep Deshpande from JPMorgan. Please go ahead.
Thank you. Two questions if I may. Firstly, on the automotive market, can we just talk about IGBT and the continuing design wins of your IGBTs into the auto electrification market? Do you see that leading models, because there are multiple car vendors where you've already been designed in. Have you had any further wins with major customers and the longevity of these IGBT wins? Secondly, regarding Chip Card, this business did not grow, or is not guided to grow this year. Do you have projects that will start ramping up into 2019 that will help the business grow into 2019? Thank you.
Sandeep, IGBT. We continue to win business IGBT on a very broad basis. The longevity of this business is very typical for automotive. It is designed in the model and will, from our point, not be changed in the model lifetime. Our impression is that the people are so busy with electrifying new models and provide a bigger base of models for hybrid or electric vehicle that redesigns are unlikely in the near term. We see this business as pretty stable and a longer-term business. Also, people are understanding increasingly well that the source of IGBT on planet is limited and that electrification of their drivetrain depends on reserving the capacity there. I think here the business win with IGBT will go on. Nevertheless, as I already stated, this is still a product segment with a margin which we have to improve moving forward.
Chip Card. I think here we are winning business and I would say in many areas, especially in government and other areas, is pretty solid. The payment market is still under pressure and I think here it is not about the winning business as a problem, but the general price pressure in this market. We expect that the development of the Chip Card revenue remains in a more, I would say, difficult situation from the total boundary condition. Definitely we are winning in the area of Industrial IoT and TPM products, but this is, from the nature of the business, take off much more slowly than banking and SIM card product.
Are you participating in the eSIM market at all?
The eSIM market, yes of course, we are participating in the eSIM market. Which I would say we put into the category eSIMs for automotive, where the eCall in Europe is driving the business quite strongly and a similar application, eSIM is also an Industrial IoT application which moves quite nicely. As I said before, it is not a jumpstart business, but here we definitely can make a point based on the quality thinking in the company, because these are products which have a lifetime of, I would say, typical automotive and industrial even longer.
Thank you.
Thank you. Our next question comes from Adithya Metuku from Bank of America.
Yeah. Good morning, guys. I had two questions. Firstly, just on the revenue mix in the quarter, with strength in PMM and IPC, which helped your margin to the group level. I just wanted to understand, given the allocation situation currently in Power Products, was there an element of prioritizing higher margin and more profitable customers in the PMM and IPC businesses that led to the mix developing the way it did? My second question is just on the margin forecast for this year. You're already raising your margin forecast for this year, only a month and a half after your CMD. In terms of your medium-term outlook for roughly 100 basis points in segment result margin expansion, do you feel that there is an element of conservatism in there? How should we think about that going forward? Thank you.
Adithya, thank you for the question. The first question will be answered by Helmut, the second I leave to Dominik.
We have a limited degree of freedom in any given quarter to change product mix to different customers and higher margin businesses. As we said before, some of these order lead times are 26+ weeks. If you have confirmed an order in 26 weeks from now, limited ability to adjust that. Nevertheless, whenever we do have an ability, of course we're optimizing that. In between, we have to honor our commitments.
On the longer-term margin development, recall in the Capital Market Day, the logic was basically we jump off a certain margin we currently run at, then we add gradually the one percentage point or so, which is pretty much related to the economies of scale we gain in OpEx. These economies of scale in OpEx are of course, still valid. Yes, we are jumping off a slightly higher base in fiscal year 2018. As I said before, that bodes well for the kind of margin development going forward because it's simply giving us a better start, a higher base to jump off. The details as to how this will feed into 2019 guidance, I only want to give in November.
Well, one general remark I want to add here. Our strategy is not to optimize our business very short-term. We also talk to the customers, they understand that a long-term partnership has a significant value. Our current strategy is to optimize, to a certain degree, our current segment result, but in a significant portion also to secure long-term, high-value business for Infineon. They are completely knowing that this is the best way to go to Infineon for doing that.
Understood. Thank you.
Thank you. Our next question comes from Tammy Qiu from Berenberg. Please go ahead.
Hi. Thank you for taking my question. I would like to discuss margin a little bit. Automotive margin for the first three quarters of the year has been below 15%. I am just wondering what can bring it back to above 15% level, such as drivers of more sophisticated business mix apart from FX movement. Also going forward, when you talk about autonomous driving and EV applications, are we seeing auto chips being more sophisticated, therefore we can see a margin uplift from there? Also in addition, when you move to silicon carbide, are we likely to see margin going down from there because the market is more competitive than IGBT? Thank you.
Thank you for the question, Tammy. Dominik, please.
In the margin, Q3 was a little bit of a rough spot for ATV in margin terms, and we think that already in the Q4 margins should see an improvement which is stronger than the improvement we see on a group average. Bear with us for Q4, then I think it is a clearer view. It is true, though, that currently we see our EDT business ramping fast, and it is still at relatively low volumes on the other hand, which means that the margin is not so great. I think it is wrong to extrapolate from that and thinking of layering EDT volumes on top of it, diluting our margins further from there.
To the contrary, we think that as we improve the margin, while the margin in EDT, as we stated before, is slightly lower than in the rest, given that we improve the margin in EDT by virtue of higher economies of scale, we are actually seeing some progress. This is a key driver. Then obviously there are some microcontroller design wins which are going to feed into the margin over the next coming years. This is why we are confident that over a planning horizon, we can gradually improve the margin from the current levels. I would say that this year, next year is the trough level, so to speak.
I also want to comment on the EV side and the silicon carbide. Considering the situation the automotive industry is in, the hybridization, and to a certain degree, also the EVs are facing the expectation of the consumers to get this at a similar price level compared to today's combustion engines. The situation here is that the price negotiations for the IGBT modules always had been very tough. The competitiveness for silicon carbide is definitely not different, even so there are more people who raise their voice that they can become successful in silicon carbide. I would say this is still something to come, and the cost situation for silicon carbide is way above today's IGBT segment. We do not expect that silicon carbide will make the life more difficult in the EV than it is today.
The ADAS development, maybe, Helm, would you comment on the margin development of ADAS?
Generally, I think the power discrete business, and probably including IGBT modules, have been a tough spot, tougher than most of the IC space. When you look at ADAS, it's generally, in our terms, it's an IC business. Therefore, average margins are higher in that ADAS space than they are in xEV.
Thank you.
Thank you. Our next question comes from Achal Sultania from Credit Suisse.
Hi, good morning. Two questions. First, on the industrial business. Obviously, you've basically raised guidance for industrial revenue growth this year a number of times. This market is quite fragmented. Can you just help us understand what's, in that industrial business, which part has actually done much better than your expectation? Is it factory automation? Is it renewables? Any color on that would be helpful. Secondly, on the auto side, can you give us some sense as to what your exposure for EV and ADAS is, if you were to look at % of sales of ATV? Thank you.
Achal, thank you for the question. The industrial business, we see nearly in all of these areas, growth. First of all, the area for drives and automation. There we are seeing good growth momentum for a general positive development in the area of adding manufacturing capacity, which is after a long time of pretty flat automation business there, one positive momentum. The next is the area of the small drives being in home appliances and air conditioning. There we see two effects. First of all, the effect of the structural growth. That means more and more % of these systems are using inverterized drives. The next is that we see that our offering, compared to other players in the industry, where we have a slower market share, is pretty positive, including the overall system offering means the controllers, the driver, and the MOSFET.
The area of renewables had been solid for quite some time and is considered to continue to be solid. We do not see significant increases there, this is growing solidly. We also see in the high power area, which had been moving a little bit slower, that means area of trains and the rest also, a good growth rate. Basically, we can say we do not really have one segment in IPC which is, I would say, showing any lower growth or weakness.
With respect to the share of EV and ADAS business, we have reported that we had 13% of the joint businesses of the ATVs of fiscal year 2017. As we report, they are growing nicely also off of that base. We're responsible for half of the growth of the ATV group, so that is still in the mid-teens, currently, but continuously creeping up in share.
Okay.
Please recall on the Capital Markets Day, we've really broken out the 2017 revenue base. Precisely, we even split, I think, into EDT and ADAS separately. I think it was 7% because of the group revenues, 4% or what was it?
Of total revenues.
Of total revenues, yeah. XEV, 4% of total revenues, which translates basically, ADAS was 2%, you get the split. It's true, that dovetails with the 13% of ATV revenues if you put it together. As Helmut commented, you are growing at mid-double-digit percentages, like 50% or so in the current fiscal year. We're not going to split that every quarter. Bear with us for the full year results and then we give you some precise data again.
Okay, that's clear, Dominik. Thank you.
Thank you. Our next question comes from Aleksander Peterc from Societe Generale.
Yes, good morning. Thank you for taking my question. I have a first question really on ATV, which is a little bit behind our expectations. I'm just wondering why we're not seeing the same top-line beat and the growth and segment margin momentum as in PMM and in IPC in the quarter. I know you've mentioned some cost pressure in R&D in ATV. Is that going to go away as of Q4 already, as you've hinted previously that Q4 ATV margin will improve? Secondly, just on gross margins, although we've seen some positive pricing trends to your end product in some areas, particularly in power, I'm wondering what's affecting that at the gross margin level, at group level. Is it higher input costs or other areas that are diluting this positive pricing effect in power? Thank you.
The first question I will take, the second, Dominik. The ATV. I think we highlighted that one major effect on the current segment result situation of ATV is the significant growth or portion of the xEV IGBT modules, which we see a lower margin there. We will continue to improve this margin, but this is not done on a quarterly effect. This will take longer time. We do not expect an effect on this improvement in the next quarter.
Maybe on the overall margin, that's not only the R&D. The R&D is going to stay high in ATV because we are really pushing ahead, we're charging ahead with our growth plans there. We do see a certain lift in ATV margins. As I commented, it will be an expansion margin we hope in the Q4 relative to Q3, which is higher than the group average. The longer-term gross margin development, you're absolutely right. All these puts and takes like wafer prices, copper prices, on the input side. Also, don't forget the roll-on of depreciation we have because of the strong investment to follow our customers' demand. They weigh on the margin first, but then there is some offset on the price side. All these puts and takes are currently leading to the guidance. It's all embedded in the guidance for Q4 you've received.
For next year, again, we'll comment in more detail in November as we always do.
Great. Thank you very much.
Our next question comes from Sébastien Sztabowicz from Kepler.
Hello. Thanks for taking my question. On the pmdtechnologies ag partnership on three different ToFs, it seems that the active stereo vision technology is gaining traction, notably within the Android ecosystem. Do you have any strong technology IP with stereo vision? Do you see any opportunity in this specific technology and market? Coming back to automotive, how do you see short-term demand in Europe? Because it seems that Volkswagen will reduce production volumes by close to 20% in the third quarter. Do you have anything to offset that? In China, in autos, we have seen a little bit the car inventories going up a little bit during the quarter. Could you make an update in the Chinese automotive market? Thank you.
Thank you, Sébastien, for your question. Stereo vision is not an area where we are active in. We are focusing clearly and, I would say, recognizing the 3D picture by time-of-flight as well as radar, as in a complement. Stereo vision also would require to be engaged in the normal pictures, or, say, camera sensors, which we do not do. We see it as a complement and a sensor fusion area, which we are engaged. The Chinese automotive market, Helmut will answer.
Yes. Actually, the car unit sales growth this year in China so far has been higher than what we had anticipated. Therefore, a slowdown in the second half of the year is not going to change our guidance at all. Don't forget, last but not least, car unit sales has a lesser impact, or much lesser impact, on our revenue guidance than BOM growth.
The one question we did not get, can you repeat your third question, please?
It was on the European market and the short-term demand in Europe, because it seems that Volkswagen could reduce its production volumes by 20% in Q3. Looking at the size of Volkswagen among European car maker, it could have a big impact on European production volumes in the third quarter.
Yeah. Jochen will take that question.
We see a stable order picture for automotive this quarter. Of course, there are the normal topics like the summer breaks. In addition, this WLTP topic, but our order picture is stable for the running quarter in automotive.
In Europe?
Yes.
Thank you.
Thank you. Our next question comes from Guenther Hollfelder from Baader Helvea Bank. Please go ahead.
Yeah, many thanks. Just one question left on the financial side. Income from investments, you had a negative EUR 5 million. I think in the past, we saw the positive contribution from the Siemens Bipolar joint venture here. Is there already an impact from the new China JV here on this line? What's the outlook here going forward?
Guenther Hollfelder, thank you for the question. Dominik is ready to answer.
Great question. Thank you. Indeed, it was some ramp-up type of cost, but you should not expect a loss at that kind of height going forward. It will be lower. It will be negative, but very minor going forward as it ramps. If after ramping, of course, we'll enjoy the harvesting of that ramp in the later quarters. Yes, you're right, there was some kind of catch-up for the prior quarters, which was negative on the equity pickup.
Will you book also a positive contribution from the Siemens JV here in the fourth quarter, or have you already booked something in Q3?
Frankly, I don't want to go into comments now on this joint venture, but it's a very marginal thing anyhow. It was never a major contribution anyhow. I think you can happily neglect it.
Okay. Yep. Thank you.
Thank you. Our final question today comes from Douglas Smith from Agency Partners. Please go ahead.
Yeah. I was wondering if you could expand a bit on your commentary on winning business in Japan. Japan is obviously the home market for some of your competitors. Are you winning there because of your capacity that you have, or is it technology and products?
Douglas, thank you for that question. We are winning in Japan because of several reasons. Both of what you mentioned are very good reasons. I think here in automotive, we are winning in the ADAS segment quite well, which is, I think, technology-based. On the other side, it is also very clear that the Japanese automotive industries are looking outside Japan in order to touch base with the innovation capability of Infineon and most likely also other non-Japanese vendors. I think here anyhow, it is very well known that the overall supply base in Japan has, I would say, shrunk to a certain degree and focused on certain areas, but we are strong in ADAS and in general power over there. We also are growing nicely for the IPC business, where it's, I think, again, a matter of availability of products and deliveries.
I think here, all the understanding that the future growth requires a partner who can ramp capacity as well as technology.
I would just like, Helmut here. To add one point. I think quality is a major differentiator in Japan, and I think we've been investing in improving our quality quite a time, and that is now being recognized as well. This is now clearly being seen. Yes, we have received very positive feedback on our capacity expansion and long-term investment. Especially in the Villach 300 millimeter investment has been highly recognized in Japan as well.
As a quick follow-up on that, the capacity issue, is it the case then that many established competitors are not expanding at the rate you are?
Well, we cannot comment on what the competitors are doing, our impression is that the capacity coming online from others seem to be currently lower than what we can add. Long term, that it's very clear that you need clean room space to put equipment in, and currently we do not see a lot of announcement in building new clean rooms from the competition.
Got it. Thank you.
All right. With that, we would like to conclude this quarterly conference call. Further questions, feel free to contact the IR team here in Munich. Thanks very much for listening, for your questions. Have a pleasant and summerly day.
Thank you. That concludes today's conference call. Thank you everyone for joining us. You may now disconnect.