Welcome to the conference call for analysts and investors for Infineon's 2018 fiscal second quarter results. Today's call will be hosted by Alexander Foltin, Corporate Vice President of Finance, Treasury, and Investor Relations of Infineon Technologies. As a reminder, today's call is being recorded. This conference call may contain forward-looking statements based on current expectations or beliefs, as well as a number of assumptions about future events. We caution you that statements that are not historical facts are subject to factors of 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 materially from the statements made on this conference call, please refer to our quarterly and annual report available on our website. At this time, I would like to turn the conference over to Infineon. Please go ahead.
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, CMO, and Jochen Hanebeck, Member of the Management Board responsible for Operations. Except for the host, everything else will be as you know it. Reinhard will start with some remarks on group and division results, market developments, and achievements during the quarter. Dominik will comment on some selected key financials, followed by Reinhard again, updating you on our guidance. After that, we will be happy to answer your questions. In order for everyone to have a chance to ask questions, please restrict yourself to one question and one follow-up in the first round. A recording of this conference call and a copy of our 2018 fiscal second 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. Revenues in the March quarter came in at EUR 1.836 billion for the group, a quarter-over-quarter increase of 3% and a year-over-year increase of 4%. Our underlying growth momentum remains strong. At a constant USD exchange rate, we have grown by about 12% year over year. Segment result increased quarter-over-quarter by 11% and year-over-year by 6% to EUR 314 million. The segment result margin stood at 17.1%. Order entry continued being strong during the March quarter. The book-to-bill ratio came in at 1.3. Overall, we met our Q2 guidance for revenues and achieved a slightly better than guided segment result margin in a continuously positive environment. Sustained strong order intake is meeting supply limitations in several product areas. Therefore, we continue our efforts to ramp up capacity to fulfill our customers' demand. Now to the divisions.
Automotive revenues came in at EUR 811 million for the quarter. This represents a 4% year-over-year increase and a 5% increase quarter-over-quarter. At a constant exchange rate, we would have grown 10% year over year. The book-to-bill ratio of 1.3 is evidence of the unchained growth momentum in automotive. The segment result increased to EUR 116 million from EUR 103 million in the previous quarter, which had been negatively impacted by a production-related one-off charge. The segment result margin stood at 14.3%. As in prior years, we faced annual price declines from volume purchase agreements in the March quarter, weighing on the margin. We continue to expect a gradual snapback of the ATV segment result margin in the next two quarters to the levels seen throughout the last fiscal year.
Looking at the 2017 market share rankings by Strategy Analytics, we strengthened our global number 2 position by gaining 0.1 percentage points. The gap to the number 1 narrowed by 1.6 percentage points. Our overall market share of 10.8% is based on strong positions in power sensors and microcontrollers addressing core functionalities outside infotainment. From a regional perspective, we became number 1 in Europe, the world's largest market for the automotive semiconductors. Our largest share gain we saw in China, where we strengthened our number 2 position. It is also in China, the world's most important market for electromobility, where we have established a back-end manufacturing joint venture with SAIC, the largest local OEM. The entity will manufacture automotive frame-based hybrid pack IGBT modules and sell to Chinese tier 1s and OEMs. Infineon will deliver IGBT chips to the joint venture.
The setup will enable us to share invest and save import tariffs. Pilot production has already started, with volume production scheduled for the second half of this calendar year. Meanwhile, we are constantly winning new business across all areas of our automotive business. For example, a major Chinese tier 1 chose an Infineon chipset for the transmission control unit. The solution includes an Infineon microcontroller and two application-specific ICs. In industrial power control, we posted revenue of EUR 317 million compared to EUR 296 million in the December quarter. Quarter-over-quarter, this means a growth of 7%. Year-over-year, this marks an 8% increase. At a constant exchange rate, the segment would even have grown 13% year over year. We saw particularly strong growth in drives, traction, and home appliances. Drives saw their strongest quarterly revenue level since 2011, when the market was highly influenced by public infrastructure spending programs.
Order entry remained very strong. The book-to-bill ratio came in at 1.3. Various product classes remain in allocation. The segment result came in at EUR 62 million, markedly up from EUR 48 million in the prior quarter, for a segment result margin of 19.6%. This improved profitability was caused by productivity gains and a favorable product mix, with gate drivers seeing an all-time high. Macro indicators remain solid and point to sustained market growth above long-term trend. We see continuous momentum across applications, be it automation drives, renewable energies, traction, or home appliances. Coming to power management and multi-market. Revenues of PMM were EUR 543 million, staying essentially flat quarter-over-quarter, despite currency headwinds and the fact that the sale of parts of our RF Power business for cellular infrastructure to Cree in early March reduced revenues by a mid-single-digit million euro amount.
Compared to the same period in the prior year, revenues increased by 4%. At a constant exchange rate, PMM would have grown 18% year-over-year. The PMM segment result came in at EUR 108 million. The segment result margin stood at 19.9%. Some productivity gains and positive price developments more than compensated negative currency impacts. The power business remains very strong across all applications and products, evidenced by high order entry, leading to a book-to-bill ratio of 1.4. In both AC/DC and DC/DC, we saw unabated customer demand, with both areas continuing to be supply constrained. Our CoolMOS benefits from increasing pull coming from our customers in electro mobility for onboard chargers and charging infrastructure. Demand for server power supplies and power stages remains strong.
With our digital AC/DC control IC, we are seeing good traction in a broad range of applications spanning PCs and industrial power supplies, TV power supplies, and lighting. During the second quarter, we closed the acquisition of Merus Audio in Denmark, broadening our product portfolio in low-power Class D audio amplifiers and supporting our development of system solutions for the growing human-machine interface market. Looking ahead, we see 5G evolving in a meaningful growth driver for power ICs as well discretes. Ericsson presented a massive MIMO radio platform with five times the number of MOSFETs going into the power stage rather the current standard. Within the smartphone component business, we recorded a business win in cooperation with an Asian RF module supplier for a platform at a global handset leader. A look at chip card and security.
We posted revenue of EUR 164 million compared to EUR 162 million in the December quarter. This represents an increase of 1% quarter-over-quarter and a decrease of 3% year-over-year. At a constant exchange rate, revenues would have increased by about 5% year-over-year. We saw particularly solid growth in our business in government ID as well as embedded SIM used for cars and other applications. Headwinds in the market of classic SIM and payment led to revenue declines. The book-to-bill ratio come in at 0.9. The segment results to the EUR 27 million, marking a segment result margin of 16.5% and meaning that the segment could retain its profitability level despite difficult market conditions due to a favorable product mix. In the second quarter, we won several project for government ID in South America countries as well as with our payment solution.
We secured strategic projects wins with our embedded security products at leading OEMs of industrial and ICT applications. To ensure easy integration of security in IoT or connected devices, we launched our turnkey solution, OPTIGA Trust X. We note that Daimler builds on eSIMs from Infineon as automatic emergency call saves lives. We also partnered with Juniper Networks to further protect routers and network equipment. With this, I would like to hand over to Dominik, who will comment in more detail on our key financial figures.
Thank you, Reinhard, and good morning, everyone. As in the previous quarter, our underlying growth is somewhat masked by the adverse currency developments. Quarter-over-quarter, the euro strengthened noticeably against the US dollar, from 1.18 in the December quarter to 1.23 in the March quarter. This caused a negative impact of about EUR 40 million on the top line. In a year-over-year comparison, the headwind from the euro/dollar exchange rate is even more pronounced, as the greenback depreciated by about 16% as compared to the average exchange rate of 1.06 in the March quarter of 2017. Note that this implies that Infineon has delivered growth of almost 21% for the quarter just passed in US dollar terms. Gross profit increased to EUR 682 million. This implies a gross margin of 37.1% after 36.4% in the December quarter.
Research and development expenses and selling general and administrative expenses came in at EUR 200 million and EUR 209 million respectively. Included in these numbers are EUR 39 million of non-segment result charges. Of that amount, EUR 28 million are International Rectifier acquisition-related amortization and other charges. EUR 16 million of the non-segment result charges hit our cost of goods sold, EUR 2 million R&D, and EUR 21 million SG&A. Excluding acquisition-related and all other non-segment result effects, the adjusted gross margin stood at 38%, compared with 37.4% in the December quarter. Depreciation and amortization, including non-segment result effects, trended up slightly to EUR 211 million. Included in this figure are EUR 24 million related to the amortization and depreciation of fair value step-ups from the purchase price allocation from International Rectifier.
The combined effect on other operating income and expense from the sale of parts of the RF Power business to Cree, including the accounting gain on the disposal, as well as impairments of related capitalized research and development expenses, was a positive EUR 257 million, which we recorded as part of our non-segment result. Against that net gain, we recorded transaction-related expenses of EUR 8 million in non-segment result. Total non-segment results stood at positive EUR 218 million. Continuing with tax, we booked an income tax expense of EUR 62 million in the March quarter, which included the tax on the gain from the sale of the RF Power business. The effective tax rate was 12%. Free cash flow from continuing operations came in at EUR 334 million after negative EUR 135 million in the previous quarter. Proceeds from the sale of RF Power business are reflected in free cash flow.
Our after-tax return on capital employed came in at 31.2% in the March quarter, after 14.6% in the December quarter. The increase is essentially driven by the increase in net operating profit after taxes, or NOPAT, resulting from the gain on the sale of the RF Power business. 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 purchase price allocation, and the related depreciation amortization. Excluding acquisition and divestiture-related bookings and deferred tax effects, the adjusted return on capital employed, again, was well in excess of 20%. Let me now hand back to Reinhard, who will comment on our outlook.
Thank you, Dominik. For the 2018 fiscal year, we now expect revenues to grow between 4% and 7%, assuming a rate of 1.25 for the U.S. dollar against the euro for the remainder of the fiscal year. This guidance now reflects the deconsolidation of the parts of the RF business sold to Cree, which was previously still included with a mid-double-digit revenue number for the time after closing. You will notice that we have nevertheless slightly increased the midpoint of our guided revenue range by raising the lower bound by a percentage point. It will also impact our investments, which we now see at around €1.2 billion.
The relative growth expectation of the divisions are as follows: ATV will grow meaningfully above group average, IPC should come in around group average, and PMM should come in below group average, but making up for the revenue lost due to the sale of RF Power. Chip Card might see a revenue decline. With the first half of our fiscal year 2018 in the bag and some ability to pass on cost increases, the segment result margin should come in at 17% of sales at the midpoint of the guided revenue range. This proves the robustness of our business model to cope with adverse currency movements. For the June quarter, we expect revenues to increase seasonally by 3%, ±2 percentage points. This also assumes a rate of 1.25 for the U.S. dollar against the euro for the remainder of the quarter.
The segment result margin should come in at 17% at the midpoint of the guided revenue range. Ladies and gentlemen, let me summarize the key points for the second fiscal quarter. First Business momentum remains strong with a very high order entry across a broad range of application and products, and no signs of a slowdown. For this, we are adjusting our guidance slightly upward. We expect that we will be able to at least compensate for the loss of revenue resulting from the sale of parts of the RF Power business. Second, Infineon can grow profitably. Productivity gains from 300 millimeter allow us to deliver a 17% segment result margin against a weaker U.S. dollar. Third, we want to address customer demand for power discretes in the best possible way, and will continue the accelerated ramp to add new capacities.
Our objective is to invest decisively in order to fully capitalize on the long-term opportunities presented by the structural growth drivers of our target markets. Finally, let me remind you that we are going to host a capital markets day in London for investors and analysts. On the 12th of June, my fellow board members and I, together with the presidents of our four business segments, will provide our view on the future course of Infineon. We are looking forward to seeing many of you there. Ladies and gentlemen, this concludes our introductory remarks. We are happy to take now 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 one 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 one. We will now take our first question from Janardan Menon from Liberum. Please go ahead.
Yeah. Hi, good morning. Thanks for taking the question. I have two small ones, if I may. One is on the increase in capacity that you're doing right now in the quarter, which you announced that you're going to 1.2 billion. I was wondering, can you give us an idea on how much of your capacity increase is allocated to electric vehicle-related technologies, and how much would be the rest? Would the majority be catering to that, or how could you break that up? Thanks. I have a brief follow-up.
Janardan, thank you for your question here. Here we are growing across all the power applications where the major investment is going to. As we communicated, the major growth will come from automotive in the area of power discretes and power modules. We do not have a concrete percentage range, what we are addressing there. Currently, we see a steady growth. The actual increased investment will kick in significantly later in quarters as the build-up and the effectiveness will take two to three quarters. Here we will see how the business is, but the continuous growth of automotive will be very strong.
Understood. In terms of the 300 millimeter fab at this point, in the previous quarter, you had said there was some sort of start-up cost because you were going quite fast. Can we assume that is now behind us, and in the June and the December quarters, if everything is as expected today, the increasing utilization of that fab will be a positive on your margin?
Janardan, this will be answered by Jochen.
Yeah, hello. We stated that we achieved this cost crossover of our new 300 millimeter facility in Dresden by the turn of the year from 2017 to 2018. However, as we are ramping up the capacity at full speed, we incur additional ramp-up costs. They overlay this picture which you have just described correctly.
Which means that at the end of the day, as long as we are growing so significantly, we always have a certain amount of cost installing new equipment.
Okay, that cost is sort of a continuous process as you keep adding capacity.
Correct.
Understood. Okay. Thank you very much.
We will now take our next question from Andrew Gardiner from Barclays. Please go ahead.
Good morning. Thanks for taking the question. I had another couple on the automotive side. Reinhard, in the answer to the prior question, you alluded to the fact that the CapEx that you're putting to work today is going to result in output two to three quarters down the line. I'm just wondering if you can give us a bit more insight as to what you're thinking over that sort of medium-term horizon for automotive. Clearly, book-to-bill remains strong. We all know the structural drivers of the industry. Do you anticipate, therefore, automotive to continue growing at sort of similar kind of rates, currency adjusted, into the next fiscal year?
Well, Andrew, Helmut will answer this question. In general, we are not commenting on the overall revenue guidance for the next year. Helmut will give you some insights on that.
Yeah, I think based on the order intake that we have seen, we will expect a continued growth of the automotive group above group average. Expect a double-digit growth for the remainder of the fiscal year. Given the growth trends in electromobility and ADAS, it will continue to grow stronger than Infineon average. The structural growth drivers will remain intact.
Okay. Then a quick follow-up, if I could, again, on auto. You mentioned during the prepared comments that the pressure you are seeing on the automotive margin at the moment, there was a one-off manufacturing impact in the December quarter. You have had annual price declines in the current quarter. Can you give us a bit more detail as to when you think you can get back to the 16%-17% margins that you were achieving around a year ago? Is that not this quarter, but perhaps the final fiscal quarter and into next year?
Yeah. Dominik, please.
Yeah, absolutely. You're absolutely right. This should happen Q4. By Q4, I think we should see again, 16% plus segment result margin. That's at least what we're currently planning. That's Q4, sorry. That's Q4 fiscal, to be clear on that.
Understood. Thank you.
We will now take our next question from Sandeep Deshpande of JP Morgan. Please go ahead.
Thanks for letting me on. My question is regarding the IPC business. You're showing considerable margin strength in IPC as well at this point. Has there been a change in product mix in IPC or has there been any other change in IPC which is driving the much better margin in IPC? Then, secondly, a smaller follow-up. Could you comment on how much of your revenue overall at this point is coming from the ADAS markets and auto electrification market mix?
Sandeep, thank you for your question. Dominik will answer your first question and Helmut the second one.
On IPC, we see some strong performance from manufacturing as well as a good structural move, and frankly, also a little bit better price decline outcome because of the strength in the market and compounding all these factors. This is what makes for the margin expansion there.
Yes, Sandeep, as we have stated in the previous quarters, we always combine ADAS and xEV, and they combined still account for high single-digit % of automotive revenue today.
Thank you.
We will now take our next question from Aleksander Peterc of Societe Generale. Please go ahead.
Yes. Hi, good morning, and thank you for taking my question. Again, really on automotive margins, you mentioned in your full-year outlook that in terms of OpEx, R&D costs should grow faster than revenue, I would expect that is mostly going into automotive. Should I understand that that will be mostly over by Q3 and then Q4, we're back to normal? Maybe could you quantify that pressure on margins coming from this R&D hike? Thank you.
Yeah. Alexander, thank you for your question. Dominik will go into detail on that.
If I understand you correctly, you are again referring to the division ATV, automotive only, and as I commented, we think that we can bring up the margin to the kind of level we have seen in the second half, fourth quarter, prior year. 16% should be reachable by Q4, and that already digests basically the roll on of OpEx. We have been actually a little bit behind the planned OpEx increases because simply at the current growth speed, it's tough to simply hire the people we require here. Of course, this is not something we want to defer forever from that perspective. There will still be some roll-on of OpEx in the current fiscal year, but that is all included in the comments I made on the Q4 target, so to speak.
Just to be clear. All of the OpEx hike is happening this year, and nothing is carried over into the fiscal 2019?
Our general guidance, we don't give a guidance for next year, but we have a long-term guidance on how we think about scaling OpEx. We always say that if we scale revenue by a certain percentage number, R&D will scale in line with that growth of the revenue of the top line. That means no operating leverage, so to speak, from R&D. We grow R&D as we grow sales. On selling expenses, we try to be moderately below that number. We say 90% of the growth will be increased in selling expenses, and obviously in admin functions, general administrative functions, we try to clearly be lower than revenue growth, we say 60% or so. That gives you some indication how we think about scaling our OpEx in the mid to long run.
Thank you.
We will now take our next question from Amit Harchandani from Citigroup. Please go ahead.
Good morning, everyone. Amit Harchandani from Citi, thanks for taking my question. My first question actually goes back to the sale of the RF Power business. You've shown clear discipline in making that move and prioritizing areas where you believe you can be a market leader. When I think about this, then I think about how your chip card business is moving in recent times and how potentially you're looking to use outsourcing, I'm just trying to think, what are the strategic merits of being invested in the chip card business versus potentially exploring a strategic option for the same and reinvesting proceeds in some of your other businesses which are growing faster. I'm curious to know your thoughts on the synergies that you continue to see between chip card and the rest of the business.
Thank you, Amit, for the question. Chip card, for us, is a core competence which carries over into other segments. The IT security element becomes more and more relevant for automotive and also in the IoT space where PMM is going into. As a company, we are moving more and more to selling solutions. We do not sell solutions as such, but we provide the customers with overall solution. Here is a very good synergy and a leverage from the chip card segment into others. Notably, the automotive microcontroller contain a security element designed and architectured by chip card, which we would not have been able to do it in this performance without the chip card segment. You do not see the chip card capability one-to-one in a chip card only.
Therefore, we believe that chip card is an element which we would like to retain, and regarding the revenues and earnings, we are happy with chip card, and we do not see a need to reprioritize or redirect investment in R&D.
Thank you.
We will now take our next question from Alexander Duval from Goldman Sachs. Please go ahead.
Yes, hi, everyone. Many thanks for the question. Just a couple of quick ones. First of all, I wondered if you could talk a little bit about inventory levels in auto and industrial segments. Can you give an update on what you are seeing in the broader market? Secondly, you have talked about bulging orders this quarter. Can you give a bit of color on the kind of linearity you saw through the last few months? Many thanks.
Yes. Thank you, Alexander. The questions Helmut will take over.
Yes, Alexander, thank you. We see a very healthy inventory level throughout the supply chain. The inventory to sales ratio continues to slightly decline, further indicating that there is no change in trend as compared to the past month. I am not sure whether I fully understand your question on the bulging orders. I think basically there is a continuation of high order income and the supply chain is hiking to keep up with the demand. As stated by Reinhard in the intro statement, in automotive as well as in industrial, the book-to-bill ratio of last quarter was in the range of 1.3, clearly indicating that there is a very high demand going on.
Last but not least, on a continued basis of coming in orders significantly higher than revenue potential, we also have a meanwhile triple-digit million figures of unconfirmed orders, which simply we cannot, let's say, set aside within a reasonable timeframe. That continues to grow also.
Very helpful. Thank you.
We will now take our next question from David Mulholland from UBS. Please go ahead.
Hi. Just two quick questions on the financials for me. Firstly, on the depreciation and amortization guidance, it looks like it's come down a little bit in the quarter, or your full-year guide's gone down. Can you maybe comment a little bit on what's changed? Secondly, just on the fiscal Q3 margin guidance where essentially you're guiding to flat sequentially. I think normally the fiscal Q3 quarter is whenever you're able to start doing a bit more on cost after you face the price downs in fiscal Q2, and historic trend has seen a much bigger step from fiscal Q2 to fiscal Q3. Can you maybe just mention or explain why we're not seeing that normal seasonality in this year?
Thank you, David. Dominik, please answer the question from David.
On the seasonality, what you see is that we basically guided, I guess, 3% growth. There is a little bit of an implied currency headwind, but it's very minor because when we say 1.25, what we mean is really 1.25 for the remaining five months of the fiscal year. That's from today, basically. That is giving you a tiny headwind, and from that perspective, we see the Q3 guidance as very much in line with normal seasonality. The order of magnitude of about 4% up if adjusted for currency is very much in line with the long-term normal seasonality. On the margin expansion side, I mentioned that we are basically running a little bit behind schedule, so to speak, in terms of beefing up our research and development and selling expenses because we want to continue to push growth aggressively.
Given the constraints we had in terms of hiring, there was a little bit of a pent-up demand, so to speak, which we have anticipated coming in the second half of the year. Therefore, we've not guided a margin expansion, so to speak, in the Q3, if you look at the 17% we've guided. There was another question. First question was DNA. Yeah.
D, DNA.
There's a little bit of RF Power, which has been eliminated, of course, by the divestiture. We mentioned that there's also some capitalized R&D related to the RF Power stuff, which has disappeared from our P&L, from our balance sheet and as a consequence in future amortization. Secondly, we had also a little bit of a timing shift while the investor sales number is increasing. It's more back-end loaded than initially planned, and that means that some depreciation, which was anticipated already hitting the current year's P&L, is now coming early next fiscal year.
That's right. Maybe if I could just squeeze one quick one in. Last year you gave us some good visibility on the progress you're making on longer term design wins towards the xEVs for 2019, 2020 and so on. I think you gave a figure of EUR 1.2 billion for fiscal 2017. I wonder if you could update us now that we're halfway through the year on how growth in those longer-term design wins is progressing this year.
Well, Helmut will answer this in detail. On the other side, what we expect or we see is a certain uncertainty about what will Europe have as an effect in the number of electric cars coming or hitting the market in 2020 and 2021, with all the diesel discussions. All the design wins, which we do not fully can correlate to the cars built, but the number is pretty significant. Helmut, please comment on that.
Yes. As you rightfully stated, for last fiscal year, the actual figure that we had reported was EUR 1.5 billion worth of design wins. The cumulated xEV design wins over the last three years was EUR 2.5 billion. I think the comment as to the current fiscal year, which is still rather young, I would say the momentum is unchanged and coming in nicely. We continue to see the strong growth in the xEV space. There's more and more programs globally coming in, and it's all IGBT-based, predominantly frame-based power modules design wins.
That's great. Thanks very much.
We will now take our next question, Michael Vitali from Credit Suisse. Please go ahead.
Hi. Just on ATV. Just trying to think about the second half of this year. It seems like based on the guidance, it seems we should expect re-acceleration in growth, even on constant currency basis, like somewhere around low teens, maybe mid teens in the back half of the year. Just trying to understand how much of that is influenced by this China partnership that you announced with SAIC. Is the CapEx increase that you announced, is that also driven by the China partnership? Thank you.
Michael, one general remark is that we are in many areas now capacity constrained in an increased way. You do not see in all areas the full growth potential which comes from the market. The growth in ATV, Helmut can comment very briefly. The SAIC CapEx is not consolidated, it's not in our numbers, and we do not see yet significant effects from there. SAIC will start production only in second half of 2018. As moving forward, we will report on that. Helmut, please.
On EV, basically already said that the momentum continues. I don't necessarily see a re-acceleration because EV growth has already been strong in the first half already. As Reinhard Ploss mentioned, there already is some capacity constraints also in the way we can grow our EV business. Overall, I would say, outside of EV, the BOM growth of automotive vehicles continues to accelerate or grow forward. Partially driven by a higher SUV range, as well as by a higher take rate of options in the mid-class range as well. It's not all about EV, but a significant growth in all areas of automotive.
Thanks, Helmut Gassel. If I have a brief follow-up on, I think last quarter, or was it quarter before? You mentioned a EV launch from NIO, where you said that power content is almost as high as EUR 900. Can you give us some color as to what has been the latest trend? We understand EV is happening fast, but are we seeing a trend that the content in the newer EV models is increasing even faster than you expected?
No, Michael Vitali. This depends strongly on the type of the product. The NIO is a top-line SUV, which is highly powered. Here we communicated a content of EUR 900 for power, and this is very unique. In general, we don't see that there is an acceleration on the power on the EV. Coming in general, we expect that, and it depends on what the take rate will be on the EV versus the plug-in hybrids. Plug-in hybrids may be also a significant portion for Europe. China is something where I think here is different effects.
What we see as a significant growth driver, the very mild hybrid, let's call it a micro hybrid, which are the 48 volt, which helps to improve on the CO2, but is only compensated for some of the diesel to gas movements in order to and it can be installed in the car at a much lower cost rate. The picture becomes much broader with this from very high power as NIO to, I would say, very cost effective, like a 48 volt, which is not even a module.
Great. Thanks, Reinhard.
We will now take our next question from Johannes Schaller from Deutsche Bank. Please go ahead.
Yeah. Hi, thanks for letting me on. Two questions. The first one, just really on the capacity tightness that we're seeing across the industry and what that is doing to your margins right now. You were talking over the last few quarters about rising wafer costs and how that is a headwind. Now I think it's probably the first time you're officially talking about better pricing negotiations or better pricing in PMM and IPC. Where are we on those two developments? Is there more of a negative surprise maybe to come from wafer costs? As a second question, just out of the EUR 1.2 billion investments you're now guiding to, could you give us a sense how much Dresden 300 currently accounts for in that number? Thank you.
The first question I want to answer more on a general comment. The allocation orders is something which is reducing the efficiency of production, is dragging away the, I would say, concentration or the efforts of marketing and sales in order to do new business. In general, we do not appreciate an allocation level as we have. The book-to-bill ratio also, we assume that there are some double ordering inside. Therefore, we appreciate best, let's say, a relatively tight market with a good view to the market. The price increases, here definitely we honor the long-term contracts we have. For the new business, we are adopting prices which we have communicated in the IPC and PMM way. You can say in some areas, there is a benefit from the overall market tightness in power.
I would not say that there is a real change from headwind to tailwind. Nevertheless, the situation is a little bit more balanced. The Dresden question will be answered by Jochen.
Hello, Mr. Schaller. Maybe to carry on the first part, the wafer substrate pricing, we expect even further increases also next year. Of course, we observe the market here very carefully, in 300 as well as 200 millimeter. On the CapEx, of course, in such a time frame, we allocate most of our capital towards the capacity expansion, which mainly goes into Dresden and Kulim at the same time in order to benefit here also from the eight-inch expansion.
If we want to get a rough sense how much Dresden is right now?
Uh-
Is it possible to give us a ballpark number or rather not?
A couple EUR 100 million goes into Dresden this year.
Understood. Thank you very much.
We will now take our next question from Jerome Ramel from Exane BNP Paribas. Please go ahead.
Yeah, good morning. Talking about the tightness and capacity, could you give us a little bit detail on where are your lead time for MOSFETs and IGBTs? Do you think they are the same situation for your competitor, or you think you might be losing market share because of the tightness? Second question for Dominik, how much of the R&D is now capitalized? Thank you.
Thank you, Jerome, for the question. The lead times for IGBT, Helmut, please.
Yes. As mentioned earlier, we are not able to confirm significant portion of the incoming orders, which is a clear indication that those orders exceed or would exceed a delivery time past two quarters, so beyond 26 weeks. To your question of are we losing or gaining share? Given the fact that we are rising our capacity as quickly as possible and the fact that we probably have the largest manufacturing base in front-end today, I think the math will tell that we are probably gaining market share in these days. Capitalization, I give to Dominik.
Maybe one add-on the market share gain. If you recall what I said, that we basically grew in dollar terms, which is the currency everyone uses to look at market share, grew by 21% in the March quarter. I'm really lacking the imagination how we cannot win market share with such a growth rate, because it's predominantly driven by the power discretes and modules.
I've got distracted for the second question. The capitalization on R&D. Capitalization on R&D, as we stated, a couple percentage points. Two percentage points of our investor sales ratio are R&D, and we're currently even a tick lower than that, but the two percentage point ballpark is a good number. Of revenues, that is. Two percentage points of revenues is in R&D, then if you look at the R&D as expense, you can add that if you want to have the gross R&D, of course, there are also some government grants on top of that. Our real gross R&D is significantly higher than the R&D we expense in the P&L.
Thanks.
We will now take our next question from Adithya Metuku from Bank of America. Please go ahead.
Yeah. Good morning, guys. Two questions from me. Firstly, you're guiding for an acceleration in organic growth. If I've done my maths correctly, you're guiding for organic growth of about 11.5% up from 10% you guided for last quarter. Can you give us some color on the end markets where your confidence has gone up in the quarter? Secondly, the last time you gave an update on the silicon carbide market was last year when you said 15 tier 1 OEMs are trialing your SiC solutions. Can you give us an update on the traction you're seeing with your SiC products for the automotive end market? Thank you.
Thank you, Adi, for your question. The color on the end market, of course, automotive is and will remain a strong growth driver, especially in the power segment, and the outperformance of the higher power segment with the MOSFET IGBT modules here. We even, as we give the guidance for the remainder of the year, automotive will be the strongest growth. Also the other businesses, but I would say very clearly dominated by power, shows structural strength. In the area of PMM's business, we have seen that AC/DC is getting stronger. Of course, also on one side driven by automotive, where it is in the area of chargers, onboard and wall chargers. Also in the DC/DC area, just to mention one element, this is the battery-operated tools where we expect to see also structural push.
Many other areas, I would say, are benefiting from our technology strengths, adding to what Dominik said, that we believe that we are also gaining market share on this side. I think here the basic growth drivers as a general market are positive and the structural growth drivers are staying up. The next question, silicon carbide in auto. We see the first adoption on the onboard chargers with very different inverter topologies. The introduction into the major drivetrain is still on a very low level.
Okay. Understood. Just a quick follow-up, if I could. You said in the press release you remain very confident on your 2018 guidance. Can you give us some color on the level of conservatism you priced into your guidance? Thank you.
Well, it's very difficult to say. Some of the numbers, Dominik can answer, but the orders on hand. While here it is very clear that we do not see any risk from the market in near term. From the financials, Dominik, please.
I think we should also highlight that there is not much upside because there could be a capacity constraint. The real constraining factor for our growth in the current fiscal year is what we can produce. On the margin side, I alluded to this issue that basically we are a little bit behind the curve of hiring in some areas, and we try to accelerate that. If we may not be able to do that, then there would be some upside relative to what we said, but that would then spill over into next fiscal year, and that's why I would not put too much emphasis on that, but really stick to the guidance we've given here.
Thank you.
We will now take our next question from Bastien Soulanjo from Kepler. Please go ahead.
Yeah. Hello. Two question on auto. Have you seen any change in the long-term outlook for your ADAS-based business for the coming years, notably following the Tesla and the Uber accidents at the end of March? Also what was the top-line growth of your EV and ADAS business in Q2? Thank you.
Yeah. Thanks for the question. One general remark from my side regarding ADAS, then Helmut goes more into the details. The majority drive of ADAS is currently in driver assistance and not of automated cars. I think here we will see a long growth periods on, I would say, improved driver support while fully automation will take a significant time and will not make a significant portion of the revenue stream related to ADAS. Helmut, please go.
Yeah. Building on what you said, Reinhard. I'd say, number one, the fully automated vehicles, there's still some time to go. In the meantime, there is a growing rapid penetration also supported by regulation like emergency brakes in Europe, et cetera. In addition to the comment on Tesla, I think many other companies are really adding lots of sensors on the radar side as well as potentially going forward in the lidar side. Sensors are really a major driver, and they are already needed also on lower levels of automation. I think on that, the growth rate is heavily increasing.
Just a brief add on, please note, that was not a comment about our business relation to Tesla. It was a general remark along the strategy of Tesla.
The growth of EVs and ADAS in the last quarter?
We do not comment specific growth rates there, but what we can tell you is, which should not surprise you, that if you look at the high book-to-bill in automotive, the book-to-bill in that area was even higher. Reinhard already commented that the good order intake is continuing throughout the current fiscal year.
Okay, thank you.
We will now take our next question from Kevin Ku from Bloomberg. Please go ahead.
Hi, thank you for taking my question. We have seen that auto demand being very strong over the past few quarters. Can you talk us through what kind of visibility, from your design win perspective, you can see in the pipeline so that we can know auto will remain strong over the next, let's say, 12-18 months? The second question is on the margin of PMM. This quarter, I have seen that PMM margin is very strong compared to last quarter without revenue growth. Can you talk us through what's the fundamental driver there? What's the likely trend in the next two quarters so that we'll be able to see a close to 20% segment margin in PMM this year? Thank you.
Thank you for the question. The first one was the design win pipeline. It is very simple to answer this. The design win pipeline is extremely strong. The dominated growth driver currently is the high powertrain area, as we already commented, going into EV, but also being very broad as a second biggest growth driver is ADAS. Please note that all the standard products in automotive are growing as we have commented over the years. Assuming no significant changes in global situation, the base for continued strong growth due to design win is secured now as we communicated to match with capacity, which is currently our biggest challenge. The next was PMM margin and product mix. Dominik, please.
Indeed, the margin at PMM in the March quarter was quite healthy given there was limited increase in flat revenues. It was margin expansion. I'd say the prior quarter was more of a kind of not representative quarter. I think the March quarter is a better indication. Given the comments I made on the OpEx increases on the capacity constraints in the near term, which will be potentially de-bottlenecked in Q4. The kind of snapback or the further increases in revenue are a little bit back-end loaded for PMM. For the full fiscal year, to answer that question, we should see around 20% segment result margin. By the way, you need that type of margin. If you tie it back to the comments we made on the margin development in ATV, you have a bulk of the Infineon revenues already.
If you say you basically need about 20% margin for PMM to bring us to the 17% margin for the full group.
One add-on comment in general, as we report significant order entry and also comment that in some areas we may have double ordering. Our visibility in the automotive value chain is very good. We have a pretty good understanding about what are the demands and how they really reach the market. The view of the company in the automotive area, I think we have a reasonable understanding there, while PMM and IPC with the higher distribution and much broader customer base is a little bit more difficult to interpret.
We can take one more question, please.
We will now take our next question. Veysel Taze from Oddo. Please go ahead.
Yes, thank you for taking my question. Just one on the capacity constraints you mentioned. This seems to be a really a topic for you guys and in the industry in general. Despite the 300-millimeter fab you have increased, do you see down the road in one, two years ramping a completely new fab in order to handle the growth you are seeing?
Well, Jerome, thank you for your question. A general remark which was not given today is I think Infineon is in an excellent position regarding our manufacturing strategy for power and sensors to outgrow the rest of the market. In Dresden, we have clean room available, in Kulim, we have clean room available, and we follow a clear strategy which can be given in more details by Jochen, how we deal with clean room and the capacity extension.
Yeah, we do have-
Tell me a very brief follow-up on the IPC. This segment seems to was historically with the margin profile below target 17%. Going forward, are we now at the group level of 17% for this segment, or was that now an exception, what we have seen this quarter?
IPC had been, when you look back in history a longer time, had shown very good margins. In between, we had been facing in some areas in the portfolio, some challenges. We can clearly state that with 19.9% in Q2, IPC is better than the 17% target we have given for Infineon and we expect that IPC can maintain this level. Currently, all the results communicated that due to favorable product mix for driver IC, we see a peaking there, but it will be at least at or slightly above group average. Group target, sorry.
Thank you very much.
Yeah.
Okay. Thank you all for your questions. With that, we would like to conclude the quarterly conference call. For other questions, please feel free to contact us in the IR team here in Munich. Thank you very much again, and have a pleasant day.