Ladies and gentlemen, welcome to the conference call of Infineon Technologies AG on the publication of its Q2 fiscal 2023 earnings figures. After the presentation, you will have the opportunity to ask questions. If you wish to ask a question, please press star one on your keypad. During the conference, should you require the assistance of an operator, please press star four. I'd now like to hand the floor to Bernd Hops.
Thank you very much, Mr. König. Good day, everyone. Welcome to our conference call on the earnings of the second quarter of fiscal 2023. Participating at this conference on behalf of the board of management of Infineon are Jochen Hanebeck, CEO, and Sven Schneider, CFO. Dear participants, first of all, Mr. Hanebeck, as usual, will give you an overview of the business performance at Infineon, after which Mr. Hanebeck and Mr.
Schneider will be happy to field any questions you may have. Mr. Hanebeck, the floor is now yours.
Thank you, Mr. Hops. Hello and welcome. Listeners, half the fiscal year is behind us, and Infineon is well on the way. By the end of March, we raised our guidance for the second quarter and the fiscal year as a whole. The main reason for our growing confidence is the continuing strength and resilience of our automotive industrial business, especially in the sectors of electromobility and renewable energy. It fit in with this that the two divisions serving these markets achieved segment result margins of more than 30% in each case in the last quarter. Our clear focus on long-term structural opportunities of decarbonization, digitalization, and the creation of customer benefits with sub-system solutions have proven to be the right recipe for profitable growth. Semiconductors are essential in order to master the energy-rated challenges of our day and to shape the digital transformation.
We are making a major contribution for a future worth living in. The mood in our markets has not changed much since the last talk three months ago. In a generally volatile macroeconomic, economic environment, automotive and industrial applications continue to exhibit robust dynamism. Contrary to that, there's a cyclical weakness of demand in applications in the fields of consumer electronics, communications. The fact that Infineon is swimming its way successfully through these choppy waters is shown by the figures for the second quarter. Infineon achieved revenue of EUR 4.19 billion. Despite the headwinds caused by the currency changes, this is up by 4%. Compared to original expectations, the automotive industrial business has grown even more strongly.
Supported by the higher revenue, the segment results grew to EUR 1.1 billion. The segment result margin was 28.6%, following 28% in the previous quarter. Large unit numbers and positive effects from the product mixture and the sustainable pricing policy have contributed to increasing our profitability. Our order books, composed of confirmed and unconfirmed orders, fell in the second quarter as expected. Our customers' ordering behavior is becoming more normal. As of the end of March, order books were sort of EUR 36 billion, following EUR 38 billion three months earlier. Putting that into perspective, that figure still corresponds to more than two years revenue. The free cash flow increased from EUR 25 million in the previous quarter to EUR 193 million.
Some of the pros, the increase comes from the proceeds from our high reliability D.C. converter business. The sale to U.S. Micross Components was completed in February. The results of the four divisions in the second quarter. The automotive segment achieved revenue of EUR 2.08 billion and thus for the first time exceeded the EUR 2 billion mark in one quarter. The significant increase by 11% compared to the previous quarter was supported by all the product groups. In particular, microcontrollers, special memory chips, and power semiconductors developed strongly. On a year-on-year basis, we see an increase of revenue by 40%. The current strength of automotive business reflects the fact that the automotive division achieved half the total revenue of Infineon in the second quarter.
The second result improved further to EUR 647 million and the second result margin was 31.1%, which is a new record, following 28.4% in the previous quarter. Our customers acknowledge the value of our solutions and our reliability. That can be seen from the fact that in the list of the globally leading automotive semiconductors in 2022, Infineon is again the number one. That's shown by the market data provided by TechInsights, formerly Strategy Analytics. The two structural megatrends, electromobility and automated driving, are supporting the resilience of our business in a time when the delivery bottlenecks in standard automotive components is gradually being overcome and the delivery times have become more normal. In the case of microcontrollers, the shortage is likely to continue this year.
In power semiconductors for vehicle electrification, irrespective with these are chips made from silicon or silicon carbide, we expect that the shortage will continue with this in the long term. There are two reasons for this. First of all, electric vehicles becoming more widespread, and secondly, there's an increasing global demand in the field of renewable energies. In most product categories, the market will gradually transition from allocation to a more normal and stable supply and demand situation. Where we see that higher inventory reaches, especially in the field of microcontrollers and single chip systems, are reflecting the wish of industry to move beyond the just-in-time concept. Instead, to have a more resilient value-added chain.
We believe that the strong structural increase in the number of semiconductors in the car will continue on a constant growth in, for this business, even if the automotive market will simply remain stable. As a leading provider of automotive semiconductors, we are in a good position to continue being successful, which has confirmed our latest design and innovation activities with strong partners. We have intensified our cooperation with Continental, the automotive supplier, in developing electric and electronic vehicle architectures, the next generation. These can consist of up to 100 individual controllers. The aim of cooperation is to have an orderly and efficient architecture with central high-performance components and a small number of high-power zone control units. The use of these powerful zone control units is the next decisive step to a software-defined vehicle.
For its zone control units platform, Continental is going to use our AURIX microcontrollers for the third generation. Thanks to the unique properties, it means that vehicle in functions can switch from standby mode to active mode in the fraction of a second. This means the microcontrollers make a decisive contribution to improving efficiency, safety, and comfort in future vehicle generations. In the field of vehicle architecture, in addition, we've been successful with Chinese automotive manufacturer, BYD. We'll supply not just microcontrollers, but also our smart power switches for the new zonal electronic architecture for BYD. Which will make it possible to have a far smarter and reliable power distribution in future vehicles. An example, we can see that this is strong evidence of our approach from the product to the system.
In the field of electro mobility, we are expanding our long-term cooperation with Delta Electronics from industrial to automotive applications. Delta is a global leading company in the field of power and energy management. In a joint innovation laboratory, we are going to develop more efficient and more powerful solutions for the rapidly growing market of electric vehicles. The cooperation is concerned with major components in vehicles such as voltage transformers and onboard chargers. More good news for Infineon in the field of electro mobility is this, we're intensifying our cooperation with the South Korean manufacturer, Hyundai. For the next generation of high-end car models, the Genesis brand, we shall supply the silicon carbide chips, where the volume is going to be in the three-figure million range. Our successful business relations with the Hyundai Kia Motors Corporation is therefore being expanded further. Our industrial business.
The Industrial Power Control division changed its name as of the 1st of April. It's now called Green Industrial Power. Traditionally, the focus of the division's revenue is on power semiconductors for efficient power supply to in the industrial sector. With this business, GRP is successful, and we expect that it will continue to grow. Nevertheless, in future, the energy transition will be what is accountable for above average growth in this division in future. It will be driven in particular by renewable energies and the expansion of the necessary energy infrastructure. Electrification, decarbonization, and energy efficiency are important subjects for us and our customers. With the new name, we are underscoring our contribution to this change. With its existing name, the division achieved a record quarter at the end of March.
Revenue was EUR 558 million, which is 12% more than in December quarter. All the fields of application contributed to this. The segment result increased to EUR 181 million. The segment's margin continued to grow, and for the first time, reached 32.4%. In the previous quarter, it was 28.8%. The outlook for Green Industrial Power remains positive. With a strong demand for application in connection with decarbonization, we can more than compensate the weaker demand in the field of domestic appliances and industrial drives. In the field of wind and solar power, we are in a leading position. Our power semiconductors set the standard for higher efficiency along the entire power conversion chain.
In this connection, we are very happy to report a design win with the high-performance modules for offshore wind parks built by a major European power company. This is a volume in a EUR 3-figure million range. The continuing growth in energy efficiency, whether in industrial or automotive applications, is supported by the increased use of silicon carbide technologies. In order to put our supply of silicon carbide basic materials for production on a more reliable basis, we are taking a decisive step, and the most recent step was seen in yesterday's press release we probably saw. SICC and TanKeBlue, two Chinese silicon carbide suppliers, have concluded long-term supply agreements with us. They both supply competitive, high-quality silicon carbide wafers and balls as starting materials for manufacturing our silicon carbide semiconductors. Both partners will provide a double-digit % share of our long-term forecast demand.
The agreements are controlled on, based on materials with a 150 millimeter wafer diameter. Later on, with the transition to 100 millimeter wafers, these suppliers will be providing the same with the material. We see that the market is developing as we expected with respect to silicon carbide raw materials. With these agreements, we have assumed a strategy of diversifying our supplier bases by procuring silicon carbide material from different suppliers in different countries, which increases the resilience for us and our silicon carbide customers. Currently, there's more than 3,600 of them. We are securing material from new competitive sources whose quality satisfy the highest standards on the market. Let's now turn to the power and sensor systems segment. Revenue in the second quarter was EUR 925 million.
That is a decline compared to the previous quarter by 11%. This development is due to the market weakness available of consumer electronics, computing, and communication, which I mentioned at the beginning. The decline in revenue also affected profitability of the division. The segment result was EUR 197 million. Segment result margin was thus 21.3%, falling 28.9% in the previous quarter. Looking forward, we expect that applications connected to decarbonization will continue to run well. These include, for example, rooftop solar power systems and charging stations for electric vehicles. On the other hand, for most of the markets, we don't see any improvement for PSS. We shall continue to monitor the inventories and adjust our capacity utilization accordingly.
Even though the conditions are difficult in the short term, the long-term trends remain strong, particularly the dynamic demand for the gallium nitride-based solutions. In some of our key applications, gallium nitride will be the preferred technology by 2030, especially in mobile chargers, power supplies for computer centers, rooftop solar systems, onboard chargers for electric vehicles. There, gallium nitride will play a more and more important role. Development activities in the field of gallium nitride technologies is to be extended. That is why, as we announced at the beginning of March, we are planning the takeover of GaN Systems. The technology company was founded in 2008 and is based in Ottawa in Canada. It is a world leader in development of gallium nitride-based solutions for e-power conversion.
It employs more than 200 employees and has development sites in Canada, U.S.A., Taiwan, and India. By joining forces, we can significantly increase the development of our gallium nitride solutions and expand our leading position in power systems. We are currently working on the necessary approval by the authorities. We expect to close this takeover in this fiscal year. Now, Connected Secure Systems. In the second quarter, the division posted revenue of EUR 550 million, which is about 4% more than the previous quarter. The improved supply situation for our contract manufacturers had a positive effect, possibly as payment cards, microcontrollers, and embedded security solutions. The segment result improved to EUR 155 million, which is an all-time record.
The segment result margin jumped from 23.5% the previous quarter to the record 28.2%. With a pricing policy which is beneficial for us and higher unit numbers, we're able to more than compensate for the negative influence of the exchange rate developments. Even if demand in consumer goods markets remains weak, the long-term opportunities for growth for applications in the Internet of Things, both in consumer and industrial sector remain strong. This is shown by the lasting design win dynamism. In the second quarter, microcontrollers and connectivity solutions were selected by major manufacturers in the fields of domestic appliances, smart home, automotive, industrial applications. We can also report a further success in the field of government documents in the U.S.A. The United States Government Publishing Office signed a 10-year agreement with us for supplying security solutions for U.S. passports.
It's the third time that we've been selected as the supplier for this electronic document. We supply the chip, the software, and the packaging. Another example of how with system solutions, we are creating added value and thus helping us to be successful with our customers. It's not least this that shows the technological capacity of Infineon, which is based, among other things, on our secure U.S.-based supply chain. With that, ladies and gentlemen, I come to the outlook. As I've already explained, we continue to see a bifurcation of the semiconductor markets. On the one hand, where there are strong structural trends supporting our application in the automotive sector, especially electromobility and automated driving. The same applies to industrial sector, especially in the field of renewable energies.
The market conditions for our consumer applications, computer centers, and communications infrastructure remain challenging for the time being. The situation of supply in the meantime is improving, and the customers are reacting with their order behavior to the shorter delivery times, but they are not overreacting. On the contrary, they see the importance of the availability of semiconductors, especially in the field of applications with strong structural growth. We are more than confident with the development in the second half of the fiscal year. Out of the third quarter and the rest of fiscal 2023 has been based on assumption of an exchange rate of U.S. dollar to EUR from 1.05 to 1.10. We expect a stronger headwind because of the currency changes for our business.
Nevertheless, in the third quarter we expect revenue of about EUR 4 billion. In other words, a stable development of revenue. With the forecast revenue, the second result margin will probably be about 26%. That figure takes into account the weaker U.S. dollar. In addition, we're expecting cost increases, such as because of ramping up manufacturing. There's also the effect of the cycle management and the costs from a certain underutilization of capacity and the poor demand in the field of consumer electronics communications, which will have effects on us, and these effects will be felt. For fiscal 2023, we expect revenue of EUR 16.2 billion ± EUR 300 million. We are increasing our revenue expectations compared to the earlier guidance of EUR 15.5 billion. That's within the mid, middle of the revenue range of around EUR 700 million.
That's despite the negative currency developments. With a constant exchange rate of 1.05, the expected increase in revenue would be almost EUR 1 billion. Compared to fiscal 2022, our forecast sees an increase in growth by 14%. We're also expecting an improved segment result margin of about 27%, following 25% previously. Decarbonization, digitalization are progressing. Both trends are driving the structured demand for semiconductors, and in the years ahead will create a growing demand for our products and solutions. Seizing opportunities for Infineon and serving our customers long term is reason why we're investing. We had the groundbreaking ceremony in Dresden on Tuesday for a new Smart Power Fab, and we're very proud that we were able to achieve this important milestone after the announcement of the project last November.
It is the biggest in single investment in history of our company, and we're expanding our manufacturing capacity substantially and also speeding up for the green digital change in Europe and the world. The importance of the new fab goes far beyond Infineon. That is demonstrated by the presence of the President of the European Commission and the Federal Chancellor at the groundbreaking ceremony. It was an honor to welcome Ursula von der Leyen, Olaf Scholz, and other leading political decision-makers at our site. We're very happy with the political support for the project. The new fab will make a major contribution to strengthening the position of Europe in the global semiconductor manufacturing industry. European Chips Act is an important step to establish a semiconductor ecosystem in Europe on a global level and to secure the value-added change to key industries.
In less than 15 months, we have succeeded in creating a comprehensive framework for opening up new prospects for semiconductor companies with development sites in Europe. Our forecast for investment in capital goods, otherwise other intangible assets and capitalized development costs, is unchanged. We are expecting about EUR 3 billion this year still. For free cash flow, taking into account additional revenue and increased profitability, we now expect a level of EUR 1.1 billion. Assuming unchanged expenditure on front-end buildings amount to EUR 700 million, the adjusted free cash flow will probably be around EUR 1.8 billion. That would correspond to 11% of revenue. The planned takeover of GaN Systems is not yet taken into account in the figures that I've announced. Listeners, that brings the end of my remarks.
Together with Sven Schneider, I'm now available to answer any questions you might have.
Ladies and gentlemen, we shall now open the Q&A session. If you'd like to ask a question, please press star three on your keypad. If you want to withdraw a question, please press star two. Once again, please press star and one to ask a question. Please press star one to ask a question. Mirko Reipka from Der PLATOW Brief is going to ask the first question. Please go ahead, sir. Good morning.
I have one question. I would like to know your reaction to the criticism about the subsidies for such a profitable company as Infineon currently is. People are saying that would have been unnecessary, and the money might have been better spent elsewhere. Perhaps you can make a statement on that also in light of what is happening in the United States, and what is being spent in the inflation program.
Would Infineon potentially have erected the fab somewhere else if the subsidies hadn't been available?
Yes, I understand that the billions of EUR that are supporting the semiconductor industry also open up a bunch of questions. In an ideal world, I could well imagine there not being any subsidies for factories at the global level. Reality is different. A number of countries, a number of different regions have identified the strategic value of the semiconductor industry. It's an industry that has an extremely large networking factor compared to other industries, and it's essential in order to drive the digital and green transformation. Having said that, to a certain degree, we do need, let me see how to put it, a level playing field between the regions so that investments the size of Dresden can be made.
Of course, in addition to the very important support aspect in Dresden, there were other factors that played a role and spoke in favor of Dresden, the ecosystem being one, our very skilled labor being another one, and the third one being the economies of scale of the factory, which are substantial. I believe that the whole story is quite convincing, not just for Germany, but also for Europe. The criticism has been that it was corresponding to EUR 1 million per job, I must contradict that. There are more serious estimates by Silicon Saxony, for example, where the factor of jobs that are aside or on top of the ones that we are creating range up to a factor of eight. That puts that figure into perspective quite substantially, actually.
Therefore, for us as a company, but also for Germany and Europe, this is a very good move.
Mr. Hanebeck, I have a follow-on question. If the subsidies had not been in the offing, what would Infineon have done? Would you have gone to United States? Would you have received subsidies there, or would Dresden still have been worthwhile?
Well, as I said before, there were several reasons that played a role in our deciding on Dresden. I'm not going to give you a further breakdown. We have a factory in Texas, in Austin, resulting from the Cypress acquisition. We do have options to grow in all regions in which we're active. However, for the reasons I mentioned, we opted for Dresden.
Thank you.
Next up is a question from Mr. Reeves from Agence Express. I'm going to read it out because it's been submitted in writing. In Europe at present, there is a great effort to increase chip production domestically in order to be protected from shocks and bottlenecks, the type of which we've experienced in pandemics, and in order to reduce dependency on Asian centers of production that can be susceptible to geopolitical tensions such as Taiwan and South Korea. The question is this: Where does Infineon identify the biggest challenges in ramping up chip production in Europe? Are the funds of EUR 34 billion proposed under the European Chips Act sufficient to actually make a move?
Thank you very much. I'm going to respond in German, and I assume it's going to be interpreted. The semiconductor industry emerges from a situation of almost full globalization.
Over the last decades, players have established themselves in the United States, in Europe, in Taiwan, in Japan, in Korea, who have established benchmarks in their sectors across the entire industry, and in so doing, have been successful. As a result of globalization, this system and the increasing strategic valuation of the semiconductor industry system is basically facing a challenge. All major economies are making an attempt to grow the semiconductor industry in their territory, excuse me. This doesn't mean that any of the countries or regions will become fully independent. One-sided dependencies can be reduced to a certain degree, but it will be impossible to attain full autonomy. You also asked about the challenges, we're facing in Europe. Well, if we were to start from the beginning, in basic research, we are positioned quite well.
There are definitely some outstanding institutes such as imec and Fraunhofer and Leti. Of course, we have to strengthen them even further so that the ideas that are born from research can be industrialized better. Coming to industrial players such as Infineon now, where, of course, we have a great obligation to conduct good R&D. Skilled labor is, of course, one of the issues that takes center stage. We will have to make a big effort in this area at the university level. For a factory in terms of maintenance and operation and apprenticeships, we have a good program in Saxony with 70,000 employees who are already active in the ecosystem of the semiconductor industry. By the way, that was another reason why we decided to go to Dresden.
Going forward, what we need on top of that, of course, is further projects. The EU's goal of 20% regional production, and once again, this is not going to lead to autonomy, but it will reduce dependencies that are one-sided. We will require another few projects in order to make further headway in this direction.
Ladies and gentlemen, if there are any further questions, please make sure you register them by pressing star 1 on your keypad. The next question comes from Claas Tatje from Manager Magazin. Good morning or good day, actually, Mr. Hanebeck. You just touched on this 20% regional production. One possibility would be to work together with a partner such as TSMC in building a fab. What's your take on that?
Well, yes.
As a matter of principle, we welcome the further strengthening of the European ecosystem because this increases the sovereignty and resiliency of our supply chains, as I mentioned earlier today. Above all, we would welcome efforts in the area of chips for industrial applications, because these are the value-added change which in Europe are the most important, and the task at hand is to safeguard these.
The next question comes from Ilka Kopplin from the F.A.Z. Please go ahead, madam.
Hello, everyone. I have a question. Mr. Hanebeck, you told us in what areas semiconductors remain in demand, the auto sector being one of them. If I understood you correctly, you also said that even if demand slumped in the auto sector, you could cushion that because the number of semiconductors in each car is increasing.
Are there any signs of a potential dip in demand, perhaps, with respect to the automotive sector? Which may or may not have an impact on revenue? Is there any tendency that has been witnessed already?
Well, the semiconductor industry is very dynamic. I'm sure that you've followed that sales in the first quarter in China weren't that high. Everyone expects this to accelerate in the second half of the year. Things are always moving in semiconductor land. First of all, a lot of people desire to have their own car. On the other side, we also have inflation, which plays a role and poses an obstacle of sorts. To us, this isn't the key parameter. Of course, we sell more semiconductors if more cars are built.
However, our business is much more dependent on what we call content growth, and that is the number of semiconductors in each car. Here, above all, electric mobility is the prime topic, in particular in connection with issues such as silicon carbide, where the semiconductor share is increasing substantially. I can remember phases during which the global average was $300 per car. Now we're at $600-$700 per car, if you include a silicon carbide module and then move to higher levels of automation, Level 2 or Level 3, then you're easily moving in the EUR 1,000-3,000 range. This is what drives our business, not so much the number of cars that are sold worldwide.
Thank you very much.
We don't have any further requests for the floor.
Therefore, I should like to bring the Q&A session to an end. As always, however, should you have any questions later on, the team of IR will be happy to hear from you. Give us a call, send us an email, and we'll deal with your question right away. Having closed the Q&A session, I would like to ask Mr. Hanebeck to make his final remarks.
Thank you, Mr. Hops. Listeners, Infineon is in a very good position. The second quarter of the fiscal year has been completed very successfully, and we exceeded original expectations. The dynamic market in important automotive industrial applications such as electromobility and renewable energies remains robust. Consumer markets and also expenditure by companies on IT infrastructure, on the other hand, is developing weakly. In these sectors, there's no sign of an improvement at present.
For the current fiscal year, we are very confident overall. We are increasing guidance for revenue and profitability, this despite the headwind from the development of exchange rates. Decarbonization, digitalization remain the foundation of our business. Our solutions are driving the green digital transformation forward. Thank you for your interest. Goodbye until August.