Everyone, welcome to the conference call for analysts and investors for Infineon's 2019 fiscal third 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 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 materially 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 like to turn the conference over to Infineon. Please go ahead.
Good morning, welcome, ladies and gentlemen, to the summer edition of our quarterly earnings release. Here with me present is the entire Infineon management board. Reinhard Ploss, CEO. Helmut Gassel, CMO. Jochen Hanebeck, COO. Sven Schneider, CFO. Following our usual procedure, Reinhard will start with some remarks on group and division results, market developments, and quarterly business highlights. Sven will comment on key financials before Reinhard again will update you on our guidance. As practiced since the beginning of this fiscal year, we will illustrate our introductory remarks with some slides that are being shown live and in sync with this call at infineon.com/slides. After the introduction, we will be happy to take your questions, kindly asking that you restrict yourself to one question and one follow-up.
A recording of this conference call, including the aforementioned slides and a copy of our 2019 fiscal third quarter earnings press release, as well as our investor presentation, are available on our website at infineon.com. Reinhard, please go ahead.
Thank you, Alexander, and good morning, everyone. Quite a lot of what we are going to discuss today will sound reminiscent of our last quarterly announcement at the beginning of May. The market environment remains challenging. Cyclical pressure are persisting, and we continue to steer our course through what feels like the bottom of an ordinary semiconductor cycle. We have closed our third fiscal quarter much in line with what we had projected. Our revenues came across the quarterly 2 billion mark again and came in at EUR 2,015,000,000. The increase of 2% quarter-over-quarter was supported a bit by the slightly stronger US dollar. At a constant exchange rate, we would have seen an uptick of 1%. All four of our divisions saw slightly increasing revenues. Year-over-year, our revenues grew by 4% in euro terms and by 1% at a constant US dollar exchange rate.
The Segment Result Margin for the June quarter amounted to EUR 317 million, corresponding to a Segment Result Margin of 15.7%, a bit ahead of our guidance. A major reason for the decline compared to the previous quarter's figure of 16.7% are the costs related to underutilized capacities. Our book-to-bill ratio of 0.7 for the quarter is clear evidence of the ongoing slowdown. U.S.-China trade talks produced some hopeful news, but a clear resolution for a stable global trade framework has yet to be found. Lead times across application have further contracted. For inventories, both our own as well as those at distributors, we had predicted a peak in summer, and we are indeed seeing first signs of that. At the same time, we see our assumption validated that broader recovery will be a theme for 2020 rather than for the second half of this year.
I will comment more on this at the end of my introduction when I will also give you a short update on our planned acquisition of Cypress. Let's first come to the divisions. Automotive revenues were EUR 888 million in the June quarter, up 1% against the previous quarter. Compared to quarter three of last fiscal year, the increase was 6%, or assuming a constant US dollar exchange rate, just under 4%. We continue to observe a bifurcation of demand, whereas classic automotive applications are declining, reflecting the lower number of cars produced. Power components for the electric drivetrain and sensors and microcontrollers for ADAS are remaining on a growth trajectory. The Segment Result of ATV came in at EUR 98 million, resulting in a Segment Result Margin of 11% compared to EUR 112 million and a 12.8% of one quarter earlier. The decline is mainly due to underutilization charges.
These result from our decision to lower production volumes in the light of elevated inventory levels throughout the supply chain. The book-to-bill ratio for the June quarter stood again at 0.8, a reflection of weak car production and sales, especially in China, as well as ongoing macro uncertainties. Two weeks ago, the market researchers from IHS again lowered their prediction for global light vehicle production for calendar year 2019 to now a decline of 3.7%. We had already built a slightly more conservative number in our own projections, affecting our business with traditional automotive applications such as engine management or body and safety functions. Wholesale car sales in China were again significantly down year-on-year in the June quarter by around 13%, according to the China Association of Automobile Manufacturers. Within this period, the monthly decline was lower in June than in April and May.
Retail sales even saw an increase in June. This was, however, likely driven by strong discounts on cars compliant with the China 5 emissions standard before the introduction of China 6 in key cities as of 1st July 2019. There are no signs of a general recovery of the auto market in China for the time being. In contrast to this, the electrification of the drivetrain remains a strong structural driver in all major car markets, irrespectively of some short-term fluctuations induced by the phasing in and out of regulations and subsidy schemes. Infineon continues to successfully address the secular trend. With our industry-leading portfolio of power semiconductors, we can completely address customers' needs in terms of performance, quality, and volume. Two recent developments testify to this.
Volkswagen has chosen Infineon to become a partner in its strategic supplier network, FAST, which stands for Future Automotive Supply Tracks, and serves to intensify the cooperation with the most important suppliers. With this competence in electromobility, Infineon contributes significantly to Volkswagen's modular electric drive platform. Hyundai has selected Infineon silicon carbide products for the main inverter of their upcoming generation of electric cars. Our trench-based device will help to increase power efficiency and therefore extract higher mileage from a given battery capacity. Our automotive microcontroller family, AURIX, continues to see good traction. A leading European Tier 1 selected an AURIX 2G for its next-generation fail-operational braking platform. A major Japanese Tier 1 selected already the following third AURIX generation for its future engine management and xEV inverter, thereby confirming the versatility and long-term reliability roadmap of Infineon's automotive microcontrollers. To Industrial Power Control.
The segment recorded revenues of EUR 357 million, an increase of 3% compared to the previous quarter. Wind and solar remained growth engines, whereas home appliances showed weaker than typical seasonality, and industrial drives were essentially flat. Year-on-year revenue was up by 2%, illustrating the slow momentum and cautious sentiment in many industrial applications. The Segment Result for the third quarter was EUR 55 million, resulting in a Segment Result Margin of 15.4% after 19.3% in the previous quarter. The decline was mainly driven by lower fab loading and, to a lesser extent, charges related to new product ramps. A general demand pattern is consistent with previous quarters. High and medium power components are proving robust. Low power discretes as well as gate drivers remain soft. Overall, this resulted again in a book-to-bill ratio of 0.7 for the June quarter, unchanged from one quarter earlier. Order entry is stabilizing.
Inventories levels are showing early signs of coming down from the elevated levels caused in part by lower utilization rates in our production. The business momentum across most industrial application is weakening, as evidenced by manufacturing-related indicators. In this difficult environment, renewable energy is holding up very well. Wind and solar power remain on a significant growth path, uncertainty around China feed-in tariffs notwithstanding. Our differentiated high-power module addressed critical performance and quality requirements, and here we even continue to be in allocation. Now to Power Management and Multi-Market. The segment revenues came in at EUR 598 million, an uptick of 1% over the prior quarter, helped by demand for mobile phone components and a stronger US dollar. Compared to the June quarter of last year, this constitutes an increase of 3% in EUR terms and a decline of 2% at a constant US dollar exchange rate.
The segment result of PMM amounted to EUR 145 million, equal to a Segment Result Margin of 24.2% after EUR 132 million and 22.3% in the previous quarter. A favorable currency development and some inventory-related effect drove the increase. In a challenging business environment, the market for most of our business lines is stabilizing on current level. Demand for MOSFET remains subdued, shipments of components into the supply chain are currently below sales through. Controller ICs and power stages for servers are witnessing ongoing sluggishness in line with the global server and data center market. In an overall difficult environment, demand for onboard chargers for electric vehicles and components for 5G remain resilient. The picture for handset-related products is somewhat brighter, driven by seasonality, market share gains in silicon microphones, the ramp of radar and time-of-flight components, as well as a growing accessories market.
The book-to-bill ratio for PMM stood at 0.5 for the June quarter, but this needs to be put into perspective. Given that more capacity has become available throughout the industry, customers are cleaning up their orders. Cancellations are affecting mainly delivery dates that are further out in the future. Despite that, the backlog of PMM remains equivalent to about one year of sales. Going forward, markets are expected to remain in their soft stage in the near term. Structural demand drivers such as 5G, electric vehicles, battery-powered applications or e-scooters remain intact, but inventories will have to be worked down further before these lead to a stronger product pull at the supplier level. On the handset side, we see positive momentum for our innovative solutions going to both the smartphones as well as the accessories, such as our sealed dual membrane silicon microphone with a superior signal-to-noise ratio.
Let's now come to digital security solution, where we recorded a 2% sequential revenue increase to EUR 167 million. This was mainly driven by continued increasing demand for our payment solution, SECORA Pay. Compared to the June quarter of last year, revenues declined by a rate of 5%. The book-to-bill ratio stood at 0.8, indicating an ongoing flattish business. The Segment Result came in at EUR 19 million, corresponding to a Segment Result Margin of 11.4% compared to 11.6% a quarter earlier. Going forward, our embedded security products experience good traction with project win in both consumer and enterprise device markets. We continue to see strong momentum in the area of security solutions for contactless debit and credit cards, including the fitting software.
With this, I would now like to hand over to Sven, who will provide comments on our key financial figures for the quarter and also give you an update on where we stand with respect to financing the planned acquisition of Cypress.
Thank you, Reinhard, and good morning, everyone. Let me start with some more details on the margin development in Q3. The gross profit was EUR 735 million after EUR 749 million in the previous quarter. The gross margin declined from 37.8% to 36.5%, driven mainly by underutilization charges due to lower fab loading. Excluding non-segment result effects, the adjusted gross margin stood at 37.2%. Research and development expenses and selling, general and administrative expenses came in at EUR 243 million and EUR 214 million respectively. The net other operating income amounted to EUR 5 million. The non-segment results stood at minus EUR 34 million, predominantly related to amortization and other charges resulting from the International Rectifier acquisition. Of that amount, EUR 14 million hit our cost of goods sold, EUR 1 million R&D, and EUR 13 million SG&A.
A further EUR 6 million of other operating expenses are related to transaction expenses for the Cypress acquisition. Our investments into property, plant, and equipment, intangible assets, and capitalized development costs in the third quarter of the 2019 fiscal year amounted to EUR 344 million, essentially flat against EUR 349 million in the prior quarter. Depreciation and amortization, including non-segment results effects, went up slightly from EUR 233 million to EUR 238 million. Included in these figures are in each case EUR 21 million related to the amortization and depreciation of fair value step-ups almost entirely from the purchase price allocation from International Rectifier. The portion of depreciation and amortization included in our segment result therefore moved from EUR 212 million to EUR 217 million. Before commenting further on our financial result, cash flow and liquidity position, let me briefly jump to the Cypress financing.
After announcing the transaction at the beginning of June, we've already completed the first important refinancing steps. At the time of the signing, we had a fully committed acquisition facility in place provided by three underwriting banks. As you will recall, we intend to ultimately finance around 30% of the transaction value of EUR 9 billion with equity. The guiding principle behind this is our clear objective to remain an investment-grade company. In the meantime, we've already raised more than half of the total envisaged equity amount. On June 18th, we successfully placed 112.8 million new shares by way of an accelerated book building and took in a little over EUR 1.5 billion. With this very important step, we achieved an early de-risking and alleviated the overhang that had weighed on our stock.
We are now in a position of greater flexibility with respect to timing and choice of instrument for the remaining equity needed. In any decision-making, we will carefully consider the interests of our shareholders and assess the level of closing certainty of the Cypress transaction. In addition to the share placement, we successfully syndicated the acquisition financing facility among a well-balanced consortium of 20 national and international banks. In other words, from financing point of view, we are ready for Cypress closing at any time. Coming back to the financial result. Our financial result for the June quarter was minus EUR 31 million after minus EUR 9 million in the preceding quarter. It contains an expense of EUR 3 million related to the aforementioned acquisition financing facility.
Furthermore, it is burdened by EUR 22 million that were incurred from an economic hedge we had put in place to protect us against adverse capital market movements in connection with a potential share placement. Now that we have completed the accelerated book building, we have unwound those hedge instruments. A different type of risk related to the Cypress financing is currency fluctuations. As the majority of the funding will come from euro sources, but the purchase price will have to be paid in U.S. dollars, we decided to effectively lock in the euro-U.S. dollar exchange rate for the acquisition with deal contingent instruments. These instruments qualify for hedge accounting, which means that the fair value changes are reflected directly in equity. In the quarter just ended, we recorded a negative EUR 95 million in other comprehensive income, or OCI. Now to taxes.
Income tax expense in the June quarter went down to EUR 28 million compared to EUR 46 million in the previous quarter. This results in an effective tax rate of around 11%. Our cash tax rate was 8%. Both rates were positively affected by a one-time true-up related to the 2018 U.S. Tax Reform. Throughout the 2019 fiscal year, we continue to expect a rate of around 15%. With respect to discontinued operations, we had recorded a loss of EUR 18 million in our second fiscal quarter, predominantly related to adjustments of provisions in connection with the ongoing Qimonda litigation. In the third quarter, there were no new developments, and the result from discontinued operations was zero. Continuing with free cash flow from continuing operations, it improved from an outflow of EUR 137 million in the March quarter to an inflow of EUR 63 million in the June quarter.
This figure includes a negative amount of EUR 12 million related to the Cypress acquisition and its financing. Our gross cash position as of June 30, 2019 amounted to EUR 3.4 billion, containing the proceeds from the equity raising. Considering financial debt of EUR 1.5 billion, our net cash position stood at EUR 1.9 billion. Our reported after-tax return on capital employed stood at 12.4% in the June quarter. Excluding acquisition-related bookings, in particular, goodwill, fair value step-ups, amortization, and deferred tax effects, the adjusted return on capital employed stood at around 19%. I will now pass back to Reinhard again, who, as usual, will comment on our outlook.
Thank you, Sven. In the beginning, we already talked about the challenging business environment and the stabilizing situation in our markets. The inventory correction has started, but given the absence of macro improvement, it will take more time until reach levels return to their long-term averages. Visibility, therefore, is still limited. The decline of China industrial and automotive indicators appears to moderate, but we think it is too early to read a snapback story on that. In the current deceleration, our core power business remains resilient, with good momentum for differentiated power components for electric drivetrain and a number of industrial applications like renewables. Now, specifically to our guidance. We assume that September quarter will again be subseasonal with quarter-over-quarter revenue growth of 1% ±2 percentage points based on an exchange rate of 1.15 for the U.S. dollar against the EUR.
Breaking it down by divisions, PMM is expected to grow slightly above group average. ATV should develop in line with it. For IPC and DSS, we expect a small sequential decline. At the midpoint of the guided revenue range, we expect a segment result margin of 14.5% of sales, incorporating increasing underutilization charges due to the lower production volumes. With these predictions of our fourth fiscal quarter, we are simultaneously confirming our full 2019 fiscal year guidance. As a reminder, we are expecting revenues to come in at EUR 8 billion, equivalent to an annual growth rate of a bit above 5%, with a segment result margin of 16%. Our guidance for investments, including capitalized development cost, remain unchanged at around EUR 1.5 billion for the current fiscal year. Depreciation and amortization are expected to amount to around EUR 1 billion.
Let me now update you on the status of our planned acquisition of Cypress. Sven has already talked about the financing. We continue to be fully convinced of this compelling strategic rationale of creating a leader in power system solutions, and we are pleased about the reception by the investment community improving even further. After the boards of both companies have approved the transaction, Cypress has now called for a shareholder vote by the end of August. In the meantime, we have begun to file for regulatory approvals. From our dialogue with the relevant authorities so far, we remain confident about a closing at the end of 2019 or the beginning of 2020. We are executing on closing the acquisition as planned and will keep you updated about any significant new development. Ladies and gentlemen, let me summarize the key points.
Our June quarter has come in as we anticipated, even slightly better in terms of Segment Result. In a stabilizing market, we are confirming our full year guidance with another quarter of small positive revenue development ahead. We are balancing cycle management with enabling sustainable growth. By this, we will damp negative margin impacts and safeguard profitability. We have successfully taken first important steps for the Cypress financing and continue to work towards its closing. Ladies and gentlemen, this concludes our introductory remarks and we are happy to take your questions now.
Thank you. Our question and answer session will be conducted electronically. 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 off. Once again, to signal for a question, please press star one now. We will take our first question from Sandeep Deshpande of J.P. Morgan. Please go ahead. Your line is open.
Yes. Thank you for letting me on. Could you, Reinhard, comment on what trends you're seeing particularly in the automotive customer base, given that we've seen these cuts in estimates for production from auto companies, and in particular, you mentioned that you're not seeing the same trends in auto electrification and some of your ADAS segments, what you're seeing in those segments? Thank you.
Good morning, Sandeep. Thank you for your questions. I think as we have been one of the companies pretty much ahead of the rest, guiding the weaker environment, we stand basically firm on what we have said. Automotive markets are down. I think it is quite in line with the latest communications you heard in the market. Here, we definitely see that our product base, which is more along the number of cars, is very much in line with this, while the xEV is still pretty strong. We even have not clearly seen major effects from the change of incentives in China. This is always very difficult to resolve precisely as production volumes and sell-out are a little bit diverging. We see a pretty firm development there. Helmut may give some flavor later. ADAS is also unchanged.
Car companies are adding the features or people are buying these as add-ons at a very constant rate, and we see continuous growth there. Of course, compared to the growth rates we have seen last year for EV, which was between 60-plus % and ADAS not as same level, these continue to be strong. Nevertheless, let me mention already at that point, this marks a little bit the challenge for automotive. We communicated that we are seeing the necessity to continue to work on the profitability on the xEV products and solution, which is ongoing and where we are pretty much in plan. Nevertheless, we see additional headwind due to the fact that the conventional business has come down due to the number of cars sold more strongly, and this will take some more time on the, I would say, achieving the target profitability on ATV.
All overall, I think, Helmut, you may give some insights and detailed car numbers.
Yes. Morning, everybody. Good morning, Sandeep. When it comes to car unit sales, as we had predicted earlier, we still see a low to mid-single-digit negative development overall. Something around -4% is what we're seeing. That being said, we do expect on a yearly basis, car sales in China to decline double-digit. Beginning of double-digit, of course. However, what we have seen and do see is continuous growth in xEV and ADAS. When you look at the total automotive revenue development in Infineon, it is actually, I'd say, almost exclusively driven out of these two structural growth drivers. Business in classic automotive is actually declining as compared to previous years. That's also, as we reported earlier, a reason for the negative margin development as well.
In June, we had a special effect in China simply because there was, number one, as Reinhard mentioned, the China VI standard coming into effect in 14 cities and provinces. This has driven some additional sales of China V vehicles. The subsidies for electric vehicles have also declined quite substantially as of July. As still the six biggest cities in China limit the licenses to non-new energy vehicles, there's still good momentum overall also for electric vehicles in China.
Thank you, Helmut. To conclude on this topic, even so, we do not guide beyond the running quarter, we see the automotive market on the cautious side.
Thank you.
We will take our next question from David Mulholland of UBS. Please go ahead. Your line is open.
Hi. Thanks. I just wondered if you could comment on the underutilization charges, how much that's actually been in the quarter and how that's been actually recognized by division. I assume it's mostly in Automotive and IPC given margin trends, it'd be real helpful if you can help us quantify that. Just one quick follow-up on the Hyundai design win that you mentioned. Obviously good to see a silicon carbide win being named, but can you possibly comment on whether that's going to be used across all vehicles, just high-end? Whether what the timing of that ramp will be and whether that changes your view on the pace of silicon carbide development, given what you're now seeing.
David, thank you for your questions. Let's start with the Hyundai design win. I think, Helmut, can you please comment on the silicon carbide topic?
Yes. That's a design win of a specific new vehicle platform. We cannot comment on which platform and when it's actually starting to ramp. Yes, it is only one vehicle right now. Of course, we expect it to broaden over the time.
In general, the adoption of silicon carbide is a mixed bag. Definitely we see companies continue to design in IGBTs at a very high volume rate. The silicon carbide is decided on, I would say, selectively. Nevertheless, we see a certain ramp-up of the adoption of silicon carbide, I would say use cases in the car industry, but not with a very clear strategy behind if it is high-end or if it is broad market. Here we have given a certain guidance some time ago that it will start at the higher end cars. Maybe that is still true, but we believe that it is coming down and reaching the mid-level a little bit earlier than assumed before. We will continue to report on that as we move forward, but I think this is a topic which has to be watched out.
Don't forget, the current revenue and the majority of the revenue stream in the next years is IGBT-based. Now to underutilization charges. Jochen will answer that question.
Yeah. Hi, David, also from my side. The underutilization, of course, we always have some structural underutilization, where the demand does not fit the capacity. This year compared to last year, of course, the underutilization goes up significantly to a low triple digit million number. This is caused by the cycle, and here we are running, especially our factories in Kulim and Dresden at a level of 70%-80% utilization, whereas other fabs like Villach and Regensburg are still filled up. Of course, we reduced our volumes which we purchased at external subcontractors significantly.
Can you comment on how that breaks down in terms of the impact by division? Is that more being felt in ATV and IPC versus PMM?
Yeah, correct. It's mainly ATV, IPC, where DSS is mainly outsourced anyway, the business is stable and PMM has a significantly higher outsourcing share. Yeah, your assumption is correct.
Thank you.
We will take our next question from Jerome Ramel of Exane BNP Paribas. Please go ahead.
Yeah. Good morning. Quick question for PMM. What was the split between power and wireless for fiscal Q3?
Thank you, Jerome. Helmut, do you have this number?
I'm sorry, I don't have the precise number on top, but off the top of my head, I'd say the split is roughly 75% power, 25% out of wireless RF business.
It is changing, Jerome, because moving forward, we announced that now wireless will be stronger. I would say we have seasonal differences on this, so it can range to a number below that and up a little bit more. I think that is somehow the range.
Thank you. Maybe a follow-up question on silicon carbide. What is your view on the total market, let's say by 2024, 2025, in terms of penetration of silicon carbide? You say that you start to see maybe silicon carbide get into the mid-range of vehicles. Do you have a clear view of how big the market will be by, let's say, 2025?
Oh, it's a difficult question. I can check if we have the number. This topic of that there is a trend to range down to the mid-level is, I would say, many of these volume will have a start up in this timeframe. It is not a, I would say, high volume run rate of these types of cars. While here, if you look at IHS is expecting to have 2.5 billion in 2024. I'm extremely cautious because at the end of the day, electromobility, especially in the mid and lower and the more compact cars, if forced by the regulators, are subject to car cost. We have reported about being part of the VW platform, which is also spreading out beyond VW. At least this is what is to be heard in the press.
I think based on that overall picture, we believe that IGBT will significantly dominate. The absolute numbers, I'm cautious, but you can say it's a clear double-digit percentage of silicon carbide in the xEV drivetrain. It's also adding that there is still a lot of other components. We've too much focus on the inverter only. You have to think about the chargers, the DC/DC converters, and the onboard charger, which is all in all predominantly conventional.
Thank you very much.
We will take our next question from Amit Harchandani of Citigroup. Please go ahead. Your line is open.
Thank you. Good morning, all. Amit Harchandani from Citi. Two questions, if I may. My first question relates to the trends on the top line, particularly around inventory situation that you see across different end markets. I think you referred to it in case of PMM. If you could give us a sense for dynamics between inventory versus end unit demand across your end markets, and how do you see that shaping up, and what does that mean for your own days of inventory? Maybe you could comment on lead times over there as well. Secondly, if I may, on the margin side, could you maybe help us better understand pricing dynamics? There's obviously the annualized negotiations at the beginning of the year, and then I guess some commoditized portions have different puts and takes.
If you could help us better understand how pricing was across segments in the June quarter, and how do you see that shaping up? Thank you.
Amit, thank you for your questions. I think both go to Helmut.
Yes, good morning, Amit. Helmut Gassel here. We had said earlier, actually last call, that we see a peak of inventory in the channel in the summertime. We do see signs of that. Actually, what we call weeks of sales in the channel have come down by roughly one week, a little bit more than one week. That was predominantly driven by an increase of sale out of that. If you look at that a little bit by region and/or by business, one can say that automotive is still, I'd say, on the weaker side, meaning inventories are still, say, five to six weeks higher than what we see as a target for that channel. Whereas other businesses, in particular PMM, has really come down to an almost normal level. That was predominantly driven by some strong sell through.
PMM is starting to pick up out of the channel. If you look at it from a regional perspective, yes, China is still high, but has come down quite significantly, again, predominantly driven by the PMM side of the house. Whereas Americas and Japan are now actually increasing in inventory to some degree, simply because automotive has slowed down in those region in the channel. All in all, as we have said, we have seen a peak
The inventories are starting to come down. You then look into the inventories beyond that, meaning at our customer side, that's when the picture becomes pretty blurry. Usually when we see pickup in the channel, we can also expect that to come out there, too. Second question, as to the pricing dynamics, I'd say all in all, a quite normal development, meaning when the market is softer, pricing pressure increases. This first materializes in the multi-source or let's say, a more commoditized part of the business, whereas in the differentiated business, pricing holds strong.
Yeah, I think-
Thank you, Helmut.
Yep. Sorry?
We can take the next question, please.
Our next question comes from Janardan Menon of Liberum. Please go ahead. Your line is open.
Hi. Good morning. Thanks for taking the question. I just want to follow up on the PMM side, a few points. One is, you were sounding quite cautious on how demand from servers, PCs, et cetera, seems to be trending at this point on your order book. Some of the other companies, like Intel, Samsung, et cetera, seem to be a little bit more positive on those end markets. I was just wondering where the sort of divergence there could be coming, or are you actually seeing any signs of improvement in some of those markets, given especially how important servers are for you from the overall PMM division point of view? If you could give us a little bit more color on the smartphone sensor trends right now, both in terms of radar as well as time-of-flight 3D sensing.
What kind of design wins are you seeing there, and how do you see that trending through the second half of this year and into next year? That'd be useful. Thanks.
Janardan, thank you for your question. I think for us, the picture for the servers is nothing where we can comment on Samsung's and Intel's view. We may have not the long-term contracts view on that side. We are guided by the shorter-term demand we see from the manufacturing side over there. Here, I think we have a very reasonable inventory level, so clarity along the value chain should be given. I think also, the server business of PMM is not anymore so dominating PMM's revenue as before. It's just about 15%, while other application have gained a lot of share. With this, we would not see changes of servers to be extremely significant, but of course, visible. The next topic is the smartphone. Two comments from my side, and then Helmut will follow up on the design wins.
In general, what we see is after a long phase for radar and time-of-flight where the people thought about the use cases, the topic of face recognition to unlock the phone and to add further capabilities of 3D picturing and many other elements are kicking in. Time-of-flight gains momentum in the industry. I would say we have a lot of design wins, but this is overlaid by the success of the very phones, which is a little bit different. While radar still seems to be more uncertain compared to time-of-flight about the intended use case. Even so, we see also there that we are seeing design wins, but on a significant lower level. Helmut, can you give more flavor on it?
I think we always said this is more of a wild card to Infineon. We have not fully included it in our business case. That is fundamentally still true, but we are a little bit more positive and optimistic as we see adoption of the use case, as Reinhard mentioned, in particular for the time-of-flight technology. As you know, we have one, the LG, I think, G8 phone, and that was launched with our time-of-flight camera at Mobile World Congress earlier this year. Like always, this is individual projects and depends on individual success of the phones. It's a business that's more difficult to predict, in particular when the number of phones is still rather small that is picking up on it.
Yes, when it comes to radar, we are free to talk about that Google Pixel has actually adopted the technology. The same as I said before still remains true. We have to see how this device is being adopted by the market overall. That's, I think, what we still say. We take it as an upside. We like what is coming. It has good momentum, specific numbers are tough.
Yeah. To add a technical flavor, the people want to have a full display smartphone, which I would say is more difficult to have the radar, which is in the front, in the user-facing side, to be integrated. Let's see. We will stay tuned on this. As Helmut said, it's an option and not a major, I would say, not yet planned growth driver for Infineon. Thank you.
Understood. Thank you.
We will take our next question from Adithya Metuku of Bank of America. Please go ahead. Your line is open.
Good morning, gents. I had two questions as well. Firstly, just on this silicon carbide design win, I just wondered if you could give us some color on what's the dollar content. Would EUR 1,000 per car be reasonable, or would you think it could be higher than that? Secondly, on just this Hyperscale, I just wondered if you could give us a bit more color on how exactly you intend to finance the rest of the equity component. Also just some color on which part of the semiconductor market do you think Cypress's MCU portfolio would help you the most, i.e., in automotive, IoT? Any color here would be very helpful. Thank you.
Yes. Adithya, thank you for your question. Please understand, this is still being possible to relate the answers to specific design wins. We are not in a position to go into detail when the design win base has become broader. We will be happy to comment on the comparison of silicon carbide design wins and IGBT design wins. Helmut, you can add something to this.
Yeah, I just wanted to add that when it comes to the euro content per vehicle that is coming with this silicon carbide inverter, same applies as we had said before, that you can roughly expect the current price of the silicon carbide module as compared to IGBT in the range of two to three times the value. That's several hundred EUR value per vehicle content when it comes to the silicon carbide inverter.
The financing, Sven will answer.
Yes, Adi, hello. Sven here. First of all, let me recap. We have done a big chunk of the equity with the EUR 1.55 billion equity increase at a very early stage, as I mentioned in my introductory remarks, and have syndicated the credit facility to 20 banks with tenors up to five years. We will also carefully take the investor feedback into consideration and watch markets. We are under no hurry here, and as I have mentioned in previous calls, we have a huge universe of instruments on hand, which go from hybrid transactions, convertible transactions, to full rights issues. We will take the decision at the appropriate moment in time. Maybe if I just take the Cypress question. Where is Cypress MCU helping most?
This is industrial and IoT, to a smaller extent in automotive, which is also reflected in the composition of the revenue synergies.
I think here to add, there is a very clear focus for Infineon where we will gain a significant portion of the revenue stream. You know we are very good in drives for industrial applications, battery-powered application, and many of those, which is a significant revenue stream for Infineon, which we will complement and where we also will bring value in our application knowhow and synergizing with Cypress in order to have the right product, this right software support. While Cypress today already has a significant focus on automotive, where we will have a lower value in the synergies.
Well understood. Thank you.
If you find your question has been answered, you may remove yourself from the queue by pressing star two. Our next question today comes from Johannes Schaller of Deutsche Bank. Please go ahead.
Yeah, thanks a lot. Good morning. Two questions if I could. Firstly on the existing R&D collaboration.
Oh, sorry, Johannes Schaller. We cannot hear you. You come in bits and pieces. What we will do, we postpone you.
No.
Sorry, please again. Unfortunately, not understandable. It is very small bits and pieces which we get.
Yeah, Johannes, your line is breaking up. Let's postpone it and have a call with the IR team in the afternoon, I suggest.
You dial in again. Please move on.
We will take our next question from Achal Sultania of Credit Suisse. Please go ahead.
Hi. Good morning, everyone. Can you talk about the pricing and margins in your EV business? I think my understanding was that EV has already been margin diluted given significant investments. Now if we think about China cutting EV subsidy, how are your talks progressing with the car makers and the Tier 1 suppliers around how we should think about margins in the EV business going forward if there is going to be such a big subsidy cut? As in, who takes the pain or the hit on margins in this scenario? Any color around that would be helpful.
Well, thank you for the question, but very clear. The topic of the subsidies is nothing which really affects our pricing. We have communicated that the pricing or the margins in the xEV is not very strong, that we are working on improving this. There we are well in plan. Nevertheless, still a way to go, as we have indicated some quarters ago already. I think here we see a constant, I would say, fight of the industry to reduce the cost. Definitely here our solution is not to address this by pricing, but by innovative solution, which are able to cut the system cost of the xEV, which is much stronger than having a one or two percentage points price discussion on the IGBT or silicon carbide modules.
For us, this is still a margin up strategy, and we will not compromise there just to get more business.
Okay, thanks. Maybe a follow-up on, in general, at the group level. I think if I look at the September quarter guidance, 14.5% EBIT margins. That will be almost 500 basis points down year-on-year. Is it fair to assume that a majority, probably 75%-80% of that headwind in margins is all under loading fab charges, and then maybe the rest 15%-20% probably is about higher depreciation. Rough math, is that ballpark right?
I think here, the underutilization, maybe Jochen can comment. I think Sven takes it. The other point is, don't forget, we already said for EV, for automotive, that we have a structural issue from the, let's say, traditional products, which have the target margin compared to the EV, which is off the target margin, as just discussed. The other is managing the inventory. Maybe Sven can comment that.
Yeah, I think, Reinhard, you answered that already, largely. The structural component, especially in automotive, will continue. The still lower profitable growing quicker than the other part of the business. The rest of your assumption that the underloading cost will be a burden to Q4 is correct.
Okay, thanks. Thanks a lot, Sven.
We will take our next question from Florian Trisch, Commerzbank. Please go ahead. Your line is open.
Yes. Hi, gentlemen. Basically, follow-up when it comes to underutilization charges. If I understand you correctly, Q4 underutilization charges will be higher than in Q3. Is it a fair assumption to assume that Q4 will be the low point or basically the peak of underutilization charges, or do you expect an increasing negative effect also going into H1 2020? There's one question on the PMM margin. You mentioned that there is a positive effect from FX and inventory, or as well as an inventory effect. Can you quantify these two effects? Thank you very much.
Yeah. Mr. Trisch, thank you for your questions. Jochen will comment the underutilization effect, but please understand that we cannot give guidance for the further quarters. I think we can give you a flavor there, but commenting on three and four Q.
Yeah. Hello. You are right that Q4 is higher than Q3 in the underutilization charges. From today's perspective on inventory and end demand, I would expect that carries on at least into the first quarter, and then we would reduce the underutilization charges, but that is too early to say.
Okay. Don't forget, we announced that the peak will be in summer, so we still will have to watch and see.
Peak on inventory.
Peak on inventory. Thank you, Jochen. Let's move on.
Our next question will come from Stephanie Hoerer of Oddo BHF. Please go ahead. Your line is open.
Yes. Hello, everyone. I have a question about your CapEx plan for the remainder of the year. You haven't changed it. Could you start to guide us for the CapEx plan for 2020 and tell us more about the ramp of the 300-millimeter plans, and how you do in the current environment not to create too much overcapacity given the underutilization that you've been just talking about? Thank you.
Stephanie, thank you for the question. It goes to Jochen.
Hello. In terms of CapEx plan, we are committed to our target operating model, which we outlined at the Capital Markets Day last year in London. That means this year we are overshooting this target operating model. As said already last time, we will compensate for this in the following and next year. Therefore, we are compliant. From our point of view, this makes sense not to put the brakes on too much because still we will have the option then to increase revenue. Again, we are committed to our target operating model outlined there. With respect to Villach
The building is progressing on plan, and we will finish the construction when exactly we order then the equipment in order to get more capacity beyond Dresden, as obviously the Dresden ramp-up has been slowed down, is a decision we do have to take only in the winter timeframe. In terms of building, we go ahead.
Okay. Quick follow-up, if I may. On page 11 of your press release, you show interesting revenue by geography. We see that revenues from China are going up actually quite significantly on a sequential basis, but also on a year-on-year basis. Can you elaborate a bit on where is it coming from? Is it more automotive, industrial? Yeah, more information would be helpful. Thank you.
Yes, Helmut Gassel here. As I said before, it's predominantly driven out of the PMM business and from the channel. It's not automotive and into the other businesses. PMM and the channel in particular.
Okay, thank you very much.
We will take our last question today from Sebastien Sztabowicz of Kepler Cheuvreux. Please go ahead. Your line is open.
Hello, everyone. Thanks for taking my question. One question on silicon carbide. What is now the total system benefit of the silicon carbide technology as compared to the IGBT when you include in the cost component of the two technology in the equation? The second question is on power semis because it seems that ST Microelectronics seem to be a little bit more ambitious or successful in power semis. Have you seen any change in the pricing competition in your market for IGBT specifically? Thank you.
Thank you for the question, Sebastien. It is very difficult to answer this generally about the silicon carbide. For instance, in your renewables, when you think about solar inverters, the silicon carbide is significantly advantageous in overall system cost, and we see system cost reduction while the component cost goes up significantly. In the cars, it is a mixed bag. It is not as clear. We see a certain advantage due to the high efficiency of silicon carbide. Many people have some estimations on additional, let's say, battery reach about 3%. Of course, in the city it may be more, but there the value is not so much in the system cost, but in the system performance. In a standard drive, we see not very big adoption rates, but silicon carbide can also be beneficial in larger power supplies and many other areas.
In general, silicon carbide is, as a device, I would say, more expensive or significantly more expensive. Therefore, the advantage is in saving on the passive components. Regarding competitors, we of course never comment strategies from competitors, but I think here we see also continuous potential on the IGBT side, and we always stated we are strong in IGBTs, MOSFETs, silicon carbide MOSFETs and diode. We will always be able to choose the best solution for our customers, and we also can provide discrete components, bare dies and modules, which I think is a very good position in order to, I would say, fulfill the customer's wishes, which here is the major driver for making the choice.
Thank you.
That concludes today's question and answer session. I would now like to turn the conference back to Mr. Alexander Foltin for any additional or closing remarks.
Thank you very much all for your questions. Conclusion will be quick. We are concluding our fiscal third quarter conference call herewith. Further questions, please feel free to address them to us here in the IR team in Munich. Given that August has just started, we all wish you a fine summer break ahead. Concluding now, you may disconnect. Talk to you next time.