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{complink 2565|Infineon Technologies AG} is profitable but only barely so, and current trends in the general economy and within several of its end markets point to major turbulence ahead for the German semiconductor company. After a series of turnaround programs executed over several years, Infineon is still in recovery mode, and it probably will be for at least the next several quarters.
On Tuesday, Infineon's share price and valuation fell more than 6 percent after it said it would report lower-than-expected results for its fiscal fourth quarter, which will end Sept. 30, including a slight decline in sales from the fiscal third quarter. For the first quarter of fiscal 2013, the company expects “a revenue decline of up to ten percent relative to the fourth quarter of the 2012 fiscal year.”
Infineon clearly remains in jeopardy, but this situation could be worsened by management missteps that, in my opinion, were inspired by an overexaggeration of the challenges it faces. First, the bad news: Though sales grew sequentially in the last two quarters, they are expected to decline for the next two. A decline of as much as 10 percent from a year earlier would be huge for a company that has been steadily ramping up its growth and initially appeared to be on an upward trend. Margin pressure is also expected to intensify, with operating margins dropping from a high of 13.6 percent in the fiscal first quarter of 2012 to as low as 5 percent a year later.
What does the company plan to do, and what actions must it avoid? Infineon says the management board “will define and implement measures to improve profitability beyond the first quarter of the 2013 fiscal year.” It did not specify further, but I expect it to squeeze savings out of selling, general, and administrative expenses, which have hovered at around 12 percent of sales for the last three quarters. It may also tamp down R&D costs and try to reduce the cost of goods sold to improve the gross profit margin, currently at around 36 percent. All these actions will invariably involve job cuts.
Investors and executives shouldn't underemphasize the company's strength, though. Yes, sales are weakening, and margin pressure is building, but the two are closely related. The company's cost structure isn't too high, and the drop it expects in the operating margin is only because sales will not be as robust as anticipated. Furthermore, Infineon is in the relatively strong position of having adequate cash to fund ongoing operations. With €2.1 billion (about $2.8 billion) in cash and short-term investments as of the end of the June quarter and only €192 million in long-term debt, Infineon isn't in danger of defaulting on anything or even running out of cash.
Therefore, Infineon shouldn't cut expenses so deeply it gets hobbled when the market turns around, as I expect it will in the second quarter of 2013. I believe the electronics industry will experience weak sales in the next two quarters but should see a reversal by the second half of 2013. Companies that aren't prepared for growth by that time or that have retrenched key employees will not benefit from the rebound.
It's important to note that Infineon has already done a lot of the reorganization it needs to improve. On an annual basis, its sales have grown strongly in the last couple of years and may only be slightly lower in fiscal 2012 from the prior year. For the restructuring actions it has already taken to yield the desired results, Infineon's management must take the longer-term view and use the sales lull to invigorate operations, fortify alliances with customers, and crank out new products.
Yes, margins are under pressure today, but others are feeling the pressure, too, and it's as important to plan for future growth as it is to safeguard profitability. Cutting R&D may help improve operating margins, but it will also decimate the product pipeline, and that's really what drives growth and long-term profitability.
“Therefore, Infineon shouldn't cut expenses so deeply it gets hobbled when the market turns around, as I expect it will in the second quarter of 2013.”
You have to be very careful when you are trying to cut off expenses especially when this includes cut off jobs of high quality and trained personnel.
Nemos, This is always a difficult choice for executives and this is even more so for public companies. The margin pressure is an ongoing concern for executives who have to make sure they have a profitable business and so often have to cut costs when sales decline. At the same time they still have to find ways to ensure revenue growth after a market decline. So, “to cut or not to cut” is a question firms must confront when sales decline.
@Nemos:
I agree with you. It is very difficult to get these highly trained people. Also, Infineon has very good leading products and they should be very healthy once market truns around. They need to have wait.
@Bolaji:
Saving very marginal money with cutting jobs is not prudent. This is high risk decision and it may hurt them in long run.
@Nemos,
All good advice here. The company seems to be taking actions in order to be fully operational when the “market turns around”. As Bolaji said, the management needs to figure out how to balance R&D expenses and good profitability margins.
@Bolaji,
“”to cut or not to cut” is a question firms must confront when sales decline.”
Based on historical data what do you think executives usually do in such situation? I think there is a higher probability that they will cut costs in order to save their profit margins.
@_hm,
It is sometimes tough for executives to come up with the good predictive analysis about the future. What is important here is first to save money so that you won't be out of cash when the market recovers.
Why only PhD? Any graduate and post graduate will do almost equally good.
In recent times environment engineering has come up quite well. And why not the way environment is getting polluted or disturbed these days its important that there are separate courses for it. I am sure the graduates would be never out of job. I remember way back in late nineties when someone chose this environmental engineering as main discipline we all asked why didnt you tkae electronics or computer science and the answer was becuase those seats were full. I am sure that person must be doing very well now. Coming to design for environment, I guess its so vey difficult to set any methodology and process or create any particular syllabus. As there are so many divisions inside that. But soon we got to do that.
Hi, Barbara
This is very interesting as well as good news. I have a question, though, what kind of certification do they offer after completing the program? I don't think this is a PhD program.
This program is an example of the many new careers that will lead to new jobs that don't exist yet. This comes to my mind as I remember some discussions about robotics and automation, and so many people being afraid of seeing a day when robots will take all the jobs and leave humans jobless. As we see, there are going to exist plenty of new opportunities, and job positions we don't know about yet.
-Susan
SP,
“I remember way back in late nineties when someone chose this environmental engineering as main discipline we all asked why didnt you tkae electronics or computer science and the answer was becuase those seats were full. I am sure that person must be doing very well now.”
Indeed, that person sure have found more possibiities in the past decade within environmental engineering, a field that maybe was not so popular in the 90s, but for sure it is today, and will have much more opportunities in the near future.
-Susan
Obviously _hm that is something which can be considered in the future.
Well In feel you need to take some risks here. If you try to be in the defensive mode all the time and save money it will do no good for you. Predective analysis is not accurate 100% but it can predict and throw you some suggestions which you can decide and take.
I think it is a great idea to help in this area and to ensure th einformation is in one easy to access place. It is a good initiative and hopefully will be better that the piecemeal efforts of yore.
Infineon is a strong company with real presence in the industrial and automotive markets. With a large cash pile I would not worry too much about its future but I sure hope management get its act together soon.
@Susan: This is one of the areas where an ethical side of engineering practices will be taught and I find it to be a much-needed area. I think it should become more popular over the years.
@_hm: I think the kind of research required for this program will be very extensive and may exceed the research conducted at undergraduate or graduate level. This is why a PhD might be a preference.
Taimoor,
Yes. The fact that the world is developing a more conscious understanding of the environmental issues in exsitence will also help to increase its popularity. And yes, an ethical aspect of engineering practice is needed.
-Susan
Hi Susan,
The certification comes from the developers of the program, which have many decades' worth of experience behind them. This really isn't an academic program attached to a university. Within electronics, there are all kinds of standards and certifications that come from individual companies, trade associations, NGOs, etc. IPC and IEEE for example, develop standards and certify users to these standards. The DfE Online team included companies, trade associations and third-parties as part of the development process. For this particular program, the developers are more than qualified to grant certification.
So Barbara, its kind of certification and not really a program or standard coursework that is typical of a university program. It sounds like a knowledge of best industry practices to make a design for environment then. I was curious about the duration, cost and who can really benefit from this certification?
Hi himan: yes, the confusion over the type of certification prompted me to put 'PhD' in quotes. Only a university can grant a PhD. To answer your question, the course has 8 modules, all self-paced. You can be certified in 1 module or the entire course. (I think the modules are about an hour each, but they also provide supplementary activities so it may be more than an hour.) The cost is based on the number of users–a single user is in the $1,000-range; for corporations, the cost caps out so they don't pay per user. I think anyone could benefit from the program as it covers design as well as procurement. There are analytical tools in the course that can help determine ROI of a specific activity or design, for instance.
I believe you can see a demo of the program through the link provided in the blog.
@Susan: While concern for environment is one key ethical element in the area, there are also other things that can be added to it. This would include things like ethical labor practices and workforce treatment.
The devil is in the details, and in Infineon's case, its operational details and timing of strategic adventures, like the DRAM business fiasco that seem to plague them.
German subsidies (like the one's given to AMD in Dresden for example) often lead to badly timed investments and subsequent fast obsolescence…..in my opinion.
Its not just INVEST vs CUT based on macroeconomics or industry cycles. Its WHAT, WHEN AND HOW that matters.,,,in my opinion.
True and I feel labour will be the key factor here. if they can get cheap labour which is ideal, they will feel that they have covered basically every aspect.
Barbara,
You think the Program will be Hit?
Far too many people today are questioning the rationale of taking out Gigantic Loans to pay for Education Degrees in the first place.
Was just reading some Department of Education data on Student Loans.
As of today,over USD 120 Billion worth of Federal Loans are now in Default.
http://www.ed.gov/news/press-releases/first-official-three-year-student-loan-default-rates-published
http://www.bloomberg.com/news/2012-09-28/student-loan-defaults-soar-as-government-scrutiny-grow.html
In such a sceanario,I don't think taking on Bigger loans to pay for more education is the solution to anybody's problem.
Yes if the company is willing to pay for this education themselves;it is a completely different story.
Regards
Ashish.
@tech4people,
“Yes if the company is willing to pay for this education themselves;it is a completely different story. “
Some companies might be willing to do that, but we should not count on that. Also, student loan repayment is conditioned upon their future income, right?
Houngbo,
Not at all.
The moment you graduate;the clock starts ticking on all your Student Loan Payments!
If The company is willing to foot the bill for this expense,I see no problem;Just feel most students are too cash-strapped today to pay for this expense.
Regards
Ashish.
@tech4people,
“The moment you graduate;the clock starts ticking on all your Student Loan Payments! “
Thanks for ellaborating. I didn't know about that as most of my university courses was funded through grants and scholarship. What happens if students are not able to pay their loans back?
@Bolaji: What about the competition Infineon faces? Has that been one of the causes that has led to this situation faced by Infineon?
“.. how to balance R&D expenses and good profitability margins.”
@Hospice: That's one of the most critical decisions that any manufacturing company has to take. Either to cut expenses and show a healthy profit margin or to invest into R&D for better profits in future. Striking the right balance is very difficult and most companies struggle with it.
Taimoor competition is always a plus factor for any company. It may sound bitter for them but in long term it will do loads of good since because of compitition they have to make certain decisions which they might not have even thought about plus work hard and think differently to stay in the market
Very true flyingscot I too feel they have the financial backing plus resources to survive this kind of a situation but yes truly their management should act wisely here
Thanks Barbara for providing the details and link. So, one can finish the certification in one-day work hour (i do not know the intended difficulty levels).
@Hospice, i do not think that anyone need to answer the question 'what if you cannot repay your loan'. Don't we all know the harse reality of this democracy that if a student cannot repay loan then he/she will be a bonded labour of the bank and govenment will ensure that bank are bounded by law to limit their torture to keep student alive. And on the other hand if a bank fail to repay loan then government say,” oh my friend…which loan…have a cup of tea and please keep the keys of my treasury.”
Barbara, it’s a PhD or certification course. Only universities are authorized to issue such research degrees. I think there are scopes for some research degree too because its quiet new and interesting area.
@Jacob: It's a certification program. The headline was meant to be clever.
Hi tech4: I think this is a very good program and will not require a student loan. It is a certification based on completion of the course.
Taimoor,
Of course. I didn't mean to exclude any aspect of it.
-Susan
Like all businesses in an economic crunch, Infineon faces challenges in bringing cost-effective products to market. Infineon chips often have the edge, though, in performance and reliability. This suggests it will always have a foothold in the electronics market, and maybe even as an acquisition target.
Stochastic, The semiconductor market is not one of the economic segments where large acquisitions are likely anymore. Few companies have the means to take on such a large acquisition (Infineon's market value as of Monday Oct 1 was $7.2 billion which means a potential buyer would have to pay a sizeable premium of 15 to 30 percent or more) and the ones who do may not have a good reason for doing it. So, an acquisition is unlikely, unless leverage buyout specialists get involved.
Infineon executives will cut costs. They'll do it even if they believe it's not in the long term interest of the company. Managing a public company is a lot more complex than for a private company. They have to answer to investors who want short term results and that's often delivered with cuts!
>>In such a sceanario,I don't think taking on Bigger loans to pay for more education is the solution to anybody's problem<<
You are right. But are you expecting that to stop when demand for university graduates to fill lucrative and better jobs is high? Or do you think certification of this kind is enough for substitution for degree certificates? Meanwhile, are there loans available for many students today compare to pre-recession times?
Hospice,
That's when the fun starts!!!
Search online for Student Loan collector Horror Stories.
Man,its not a pretty existence at all for most people.
Extemely,extremely frightening for most Young people as the Debt-Burden never seems to ease.
They are forced to Delay Buying Cars(and other Discretionary items),Delay Marriage ,Delay starting their families and Delay Buying their Own Homes.
Its not a pretty existence for most Debt Slaves.
Not at all.
Regards
Ashish.
Wale,
If you see the tremendous Decline in MBA Applications for all the Top Schools this Year;you will know that this is no longer the case.
Even in Highly Specialized Fields;more and more Students are extremely wary before Taking Loans worth Thousands and Thousands of Dollars for a Degree which may not even promise a lucrative job at the end of it all.
Regards
Ashish.
Interesting! What implication would online courses running freely by the top universities around the world have on their high tutions?
Wale,
It depends.
If the Online Course is priced at the same price as Offline Tuition Fees[Which seems to be the established practice];it won't have any difference on costs.
On the other hand,if its priced much-much less[Say 40%-50% less] then it can make an appreciable difference on Tuition Costs.
Regards
Ashish.
Wale, for online tuition the recurring costs are very less, so they have the flexibility to offer or fix the fee at any level, when compare with the in-class room training. But I know some universities are charging separately (optional) for contact classes along with the online training course. Since majority of the online class students are from working environment (employed), they are not that much bothered about the fee or other expenses. For them timings are the only constrains.
Thats interesting stoachastic. I never thought about that part but yes you are right on it.