Slump in Demand Causes Inventory Pile-up for Infineon

Infineon Technologies AG, a German chipmaker, said on Tuesday that an inventory pile-up would plateau this summer and will keep pressure on profit margins. The pile-up was blamed to a slump in demand.

Infineon makes high-performance power chips that are utilized in everything from cars to server farms and smartphones. The company has been forced by a China-led slowdown to revise its revenue guidance twice downward this year.

Meanwhile, even though he had declared a halt in an industry boom, CEO Reinhard Ploss stuck to his view that sales would increase 5 percent to 8 billion euros ($8.96 billion) in the year to September 30, adding that this was because the company reported flat sequential sales in the second quarter and said that the sales margins had held up better than what has been expected.

Ploss also said that the inventories will peak this summer.

“But at the end of the year, we still assume a high level of inventories compared to our target inventory level,”Ploss said in a conference call.

Infineon is basing its forecasts for fiscal 2019 on an expected low- to   mid-single-digit percentage decline in unit car production.

Semiconductor companies are stepped back their expectations of a rebound in demand, leaving market valuations looking extended after a sharp rally in technology stocks this year.

Infineon shares declined 0.6 percent after Tuesday’s results, but were still 16 percent ahead in the current year to date.

Other Areas Performing Better

Meanwhile, the demand for electric powertrains and assisted driving tech was still strong in spite of the reductions in Chinese subsidies for environmentally friendly vehicles that are powered by batteries.

It also said that it has won Germany’s Continental as the first customer for a more powerful, 48-volt automotive power system, called MOSFETs, which will be in production in 2021.

For the near term, pressure on margins will stay as Infineon slows down production to work off gross inventories that increased to 2 billion euros in the quarter to March, said Ploss.

Infineon met the forecast it gave for second-quarter revenue on March 27, which was four days before the end of the period, of flat revenue while the segment margin of 16.7 percent was slightly better than it had predicted.

It estimated that third-quarter revenues would grow by 1 percent, sequentially. However, segment margin, which is the manager’s preferred measure of operating profitability, would compress further, hitting 15 percent.

Overall, segment margin should be at 16 percent in the year as a whole, the company estimated. The company’s long-term goal is to grow the top line by 9 percent and a segment result margin of 17 percent.

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