Infineon Technologies AG (IFNNY Quick QuoteIFNNY - Free Report) reported adjusted earnings of €0.21 per share in fourth-quarter fiscal 2016, which increased 10.5% from the year-ago quarter. Including stock-based compensation, the company reported 23 cents in the quarter, which missed the Zacks Consensus Estimate by couple of cents.

Revenues increased 4.8% year over year to €1.67 billion in the quarter. In dollar terms, revenues were $1.87 billion, which missed the Zacks Consensus Estimate of $1.89 billion. The top-line growth came on the back of strong sales in two of the company’s four business segments, namely, Automotive and Industrial Power Control.

Meanwhile, earnings increased 26.7% to €0.76 per share in fiscal 2016, driven by 11.7% growth in revenues, which totalled €6.47 billion. Organic revenue growth over the last 12 months amounted to 7%.

Segment Details

Automotive revenues increased 12.6% year over year to €690 million. The year-over-year growth was driven by higher global vehicle production, particularly, continued strong demand in the premium segment. Further, Radar-based solutions for driver assistance systems and products deployed in hybrid and electric vehicles continued to sell well during the quarter.

Notably, demand for Infineon’s 77-gigahertz radar solutions for advanced driver assistance systems was strong throughout the year. The company is the leading supplier for the most important manufacturers of radar systems in Europe, North America and Asia.

In fiscal 2016, Infineon sold more than 12 million of 77-gigahertz radar chips – much higher than in the previous six years combined.
 

Industrial Power Control revenues increased 3% year over year to €279 million on higher demand for renewables-related and home appliances products. Renewable energies now account for more than a fifth of the segment revenues. However, demand for electric drives and home appliances declined slightly during the quarter.

Power Management & Multi-market revenues were flat on a year-over-year basis at €535 million.

However, Chip Card & Security revenues declined 4.4% from the year-ago quarter to €173 million.

Operating Details

Adjusted gross margin contracted 310 basis points (bps) from the year-ago quarter to 36.3% in the reported quarter.

Research & Development (R&D) and Selling, General & Administrative (SG&A) expenses as percentage of revenues decreased 160 bps and 80 bps, respectively.

Still operating margin contracted 70 bps on a year-over-year basis to 14%, primarily due to lower gross margin base.

Segment-wise, Industrial Power Control, Power Management & Multi-market and Chip Card & Security operating margins contracted 150 bps, 280 bps and 190 bps, respectively. This was partially offset by 50 bps ATV operating margin expansion.

Liquidity

Infineon’s cash and cash equivalents were €625 million as of Sep 30, 2016, up from €610 million as on Jun 30, 2016. As of Sep 30, 2016, the company’s long-term debt totaled €1.75 billion, down from €1.77 billion as on Jun 30, 2016.

Cash flow from operating activities declined $49 million sequentially to €447 million at the end of the quarter.

Acquisitions

Recently, Infineon bought Dutch lidar specialist Innoluce. By using laser rays lidar systems in cars can measure the distance and speed of other objects to monitor the traffic environment. The Innoluce deal expands the company’s automotive sensor technologies product portfolio.

On Nov 17, 2016, Infineon signed a purchase agreement to acquire 93% of the shares of MoTo Objekt Campeon GmbH & Co. KG (MoTo) for €113 million. MoTo is the owner and lessor of the existing Campeon office complex in Neubiberg, near Munich, the location of Infineon’s headquarters.

The acquisition will be funded from the company’s existing cash balance. The acquisition will earn a rate of return well above Infineon’s borrowing cost and as from the beginning of fiscal year 2017 is accretive to the segment operating income.

Guidance

Infineon anticipates the global semiconductor market to grow in fiscal 2017 at a very moderate pace. For the fiscal year, the company expects year-over-year revenue growth of around 6% (+/- 2 percentage points) and segment operating margin of 16% at mid-point of revenue guidance.

The Automotive segment is estimated to grow at a substantially faster rate than the group average. For fiscal 2017, the company expects to sell between 25 and 30 million 77-gigahertz radar chips. Infineon has started expanding manufacturing capabilities at its Regensburg facility to address the growing demand of the chip.

Growth in Industrial Power Control segment is forecast to be roughly in line with or slightly above the group average. The Power Management & Multi-market and Chip Card & Security segments are both expected to report growth rates below the group average.

Infineon has decided to raise the target for the Segment operating margin throughout the cycle from 15% to 17% due to estimated positive impact on future earnings from further ramp up and higher utilization of the 300-millimeter plant in Dresden as well as by cost benefits resulting from integrating International Rectifier’s manufacturing landscape. Moreover, favorable foreign exchange rate is a factor.

Investments in property, plant and equipment, intangible assets and capitalized development costs is anticipated to be €950 million for fiscal 2017. This figure includes approximately €35 million for a new building at Infineon’s headquarters in Neubiberg near Munich.

The ratio for investments as a percentage of revenue (at the mid-point of the planned revenue range for fiscal 2017) excluding expenditure on the new office building is approximately 13%. Depreciation and amortization are expected to be about €830 million.

Due to MoTO acquisition, free cash flow is anticipated to decline in fiscal 2017. Going forward, the acquisition is expected to add €20–€30 million per year.

For the first-quarter of 2017, Infineon expects revenues to decrease 4% (+/- 2%). At the mid-point of the forecast revenue range, the segment operating margin is expected to be 14%.

Our Take

We believe that Infineon has significant growth opportunities in the Automotive market due to growing hybrid and fully electric vehicles globally, including China. Growing demand for its IGBT transistors for partially and fully electric cars along with radar chips are worth mentioning in this regard.

We believe that the company’s focus on developing energy-efficient solutions will be a key catalyst going ahead. In this regard, the acquisition of Wolfspped from Cree will expand the company’s compound semiconductors product portfolio and will enable it to serve growing markets such as electromobility, renewable energies and cellular infrastructure.

However, we believe slowdown in smartphone sales can prove to be a major drag. Additionally, the cyclical nature of the semiconductor industry, constant and swift technological changes, rapid product obsolescence and price erosion is likely to be major headwinds going ahead.

Zacks Rank & Key Picks

Infineon carries a Zacks Rank #4 (Sell). Better-ranked stocks in the broader sector include NVIDIA (NVDA Quick QuoteNVDA - Free Report) and Intersil . While Intersil carries a Zacks Rank #2 (Buy), NVIDIA sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NVIDIA’s long-term earnings growth rate is currently pegged at 10.3%, while Intersil’s is expected to be 5%.

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>