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Executives

Ulrich Pelzer – Corporate VP of Corporate Development and IR

Peter Bauer – Chairman and CEO, Head of Automotive, Industrial and Multimarket Business Group

Marco Schröter – CFO and Labor Director

Hermann Eul – EVP, Head of Communication Solutions Business Group

Reinhard Ploss – EVP, Head of Operations

Analysts

Didier Scemama – RBS

Sandeep Deshpande – JP Morgan

Janardan Menon – Liberum Capital

Simon Schafer – Goldman Sachs

Gareth Jenkins – UBS

Stéphane Houri – Natixis

Günther Hollfelder – UniCredit

Gaurav Mehta – Credit Suisse

Jérôme Ramel – Exane BNP Paribas

Gunnar Plagge – Nomura

Tobias Loskamp – Kepler Capital Markets

James Crawshaw – S&P

Infineon Technologies AG (OTCQX:IFNNY) F1Q10 (Qtr End 12/31/09) Earnings Call Transcript January 29, 2010 4:00 AM ET

Operator

Good morning everyone. Welcome to the conference call for analyst and investors for Infineon Technologies fiscal first quarter of the fiscal year 2010 results. Today's call will be hosted by Mr. Ulrich Pelzer, Corporate Vice President of Corporate Development and Investor Relations of Infineon Technologies. As a reminder, today's call is being recorded.

This conference call 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 of 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 the risk factors section of our most recent annual report on Form 20-F on file with the SEC, and available on our website.

At this time, I would like to turn the call over to Infineon. Please go ahead.

Ulrich Pelzer

Yes, thank you very much. Good morning and hello everyone on behalf of Infineon to our conference call for our fiscal first quarter results. With me here in this conference call from the Infineon management is the entire board, Peter Bauer, our CEO; Marco Schröter, our CFO; Reinhard Ploss, for operations; and Hermann Eul, responsible for technology, R&D as well as sales and marketing.

As per usual, Peter will open up with a couple of introductory remarks followed by Marco Schröter, and then we will open up the call to Q&A. Over to you.

Peter Bauer

Thanks. Hello everybody. Welcome to the conference call on the results of the first quarter. Let me just start with a couple of remarks after we raised guidance shortly before Christmas, the operating performance of the first quarter should not have come as too much of a surprise to you.

I would like to give you some more detail on the company's performance during the first quarter, before I hand over then to Marco, who will make a few more remarks on our financials. I will conclude with an outlook for the second quarter and an update on the guidance for the full 2010 fiscal year, which we're raising in light of what is shaping up to be a strong first half year. Well, and then we open up the call for the Q&A.

Revenues for the first quarter came in at €941 million, a significant increase of 10% compared to the prior quarter, and of 27% year-over-year. If you look at that on a constant currency basis, just for information and excluding acquisitions and divestitures, revenues increased 12% on a quarter-over-quarter and 34% year-over-year.

This sequential increase reflects growth in our Automotive, Industrial & Multimarket, and Wireless Solutions segments. Mostly driven by the economic recovery and improved demand in the supply chain, as well as at our end-customers. As in the prior quarter, we experienced solid bookings during the quarter with an overall book-to-bill ratio of 1.18. The combined segment results increased to €88 million up from €52 in the fourth quarter.

As in the prior quarter all four operating segments contributed with positive segment results. We are pleased with the combined segment result margin of 9.4% compared to the 6.1% in the fourth quarter of the 2009 fiscal. In addition to the higher sales levels, the increase in factory loading contributed positively towards the increase in combined segment results. And at the end of the first quarter, production in front end and assembly was running nearly at full capacity with utilization rates generally ranging between 90% and 100%.

We can realize further upside with the flexible corridors at our production partners or with investments to address minor capacity bottlenecks. These positive effects in the first quarter more than compensated for the increase in operating expenses due to the termination of short-term work and unpaid leave, and the negative impact of the US dollar against the euro.

Normally, the strong improvement in combined segment results would have led to a strong increase also in operating income. However, as you saw in our press release this morning, we deconsolidated ALTIS, our joint venture with IBM in France, at the end of the first quarter. And in conjunction with this deconsolidation, we booked a non-recurring operating charge of €81 million, negatively impacted operating income.

Despite this charge, net income was very solidly positive at €66 million. At the net income level, the aforementioned €81 million charge in relation to the deconsolidation of ALTIS was offset by a one-time gain relating to the same of the wireline communications business to Lantiq of €160 million after tax.

By the way, just to mention here what we heard this morning, our business and our guidance does include the wafer sale to Lantiq from our service agreements, but obviously going forward does not include any of the Lantiq business anymore. As such, the group net income is reasonably reflective of the earnings power of the company, despite the non-recurring effects that are included.

Let me now turn to our individual operating segments. The excellent operating results for the first quarter exceeded our original expectations as you know. Thanks to our leadership positions in the respective target markets, the Automotive, the Industrial & Multimarket benefited strongly from the general economic recovery.

All of our operating segments were positively impacted by lower cost for the underutilized facilities in the past, which in almost all of our segments more than offset the increases in operating expenses due to the termination of temporary labor cost reduction measures and the negative impact of the US dollar against the euro.

Let me begin with Automotive. Revenues were €279 million, up 17%, a stunning 17% from €238 million in the previous quarter. The significant increase in revenues was driven by increased car production worldwide, which according to the estimates of the market research institute, CSM [ph], should rise from 14.9 million units in the fourth fiscal quarter to 15.8 million units in the first fiscal quarter.

In addition to production growth, attempts to restore inventory throughout the supply chain contributed to demand as well. Segment results increased significantly on a sequential basis due to the strong improvement in revenues and improved capacity loading. This balanced the adverse effects, as I said, before of the termination of temporary labor cost reduction.

With customers continuing to order on short notice, booking behavior stayed strong with the book-to-bill ratio above one. Also inventories are still very lean. We still can handle most of the order entries, and do our best to solve supply shortages whenever they occur. That said, for the upcoming quarters, it is difficult to foresee to what extent current order trends will be sustainable, however, we are hearing still that the March quarter will be fine and still, actually on the premium segment will further increase.

How did regional demand in the auto industry develop during the first quarter? The OEMs in the United States increased orders again to meet a steady increase in the end customer demand. In Europe, the reminder of the car scrap programs was still driving good orders for the volume car segment, and at the same time, as I said before, the demand for premium cars began to increase in line with the economic recovery.

This trend should be sustainable into the second quarter. In Japan, demand was recovering slowly, whereas in China, auto production and demand continued to grow. In the 2009 calendar year, China moved to the first position in the volume of car sales, leaving behind the United States which were the former leader on the car sale market.

During the first quarter, we successfully expanded our position, especially in the emerging markets with new design wins with Chinese and Indian players.

Let me now turn to Industrial & Multimarket. First-quarter revenues increased 6% compared to the prior quarter, and you might remember the last two quarters also showed double-digit growth in the revenue line. Segment results improved significantly compared to the previous quarter, driven by higher sales, improved factory loading, and an improvement also in the segment’s product mix.

In addition, first-quarter revenues and segment results benefited from the settlement of patent infringement litigation with Fairchild relating to the super-junction power transistors. We leveraged our leadership position in those super-junction power transistors; we call it CoolMOS, by entering into a broad patent cross-license agreement with Fairchild at the end of December.

According to the agreement, Fairchild agreed to a one-time payment of $6 million to Infineon, which is reflected in our segment results, with $3 million in the first quarter, whereas the remainder will be split over five years. In addition, Fairchild will continue to pay royalties for the respective patents.

During the quarter, we saw a continued recovery from the economic downturn. Book-to-bill ratio was far above one, indicating strong momentum for the second quarter as well. One bit of evidence for this trend is the statement of the German Electrical and Electronic Manufacturers' Association, which in December 2009 reported an improved business climate for the seventh month in a row. Another example is a market research study from Gartner, which sees an increase of 22% in PC unit shipments in the December quarter compared to the same time last year. The strongest quarterly improvement in seven years was this.

These trends are mirrored by the strong increase in the segment’s first quarter revenues, mainly caused by strong end customer demand for computing, communications and industrial products, with the latter being especially strong in the traction business mainly in China. By the way, the growth in China for us in the reminder of the year will be over proportional to the worldwide growth, especially for Industrial & Multimarket.

Demand for high-powered products for solar inverters and industrial drives was also very strong. By contrast, our ASIC business for gaming applications experienced some early seasonal weakness, which would also last into the second quarter. Revenues of the Chip Card & Security segment decreased 6% compared to the prior quarter to €83 million, reflecting a typical seasonal slowdown in the segment’s mobile communications and payment businesses, which in chip card always comes before Christmas.

Business with the government ID applications, however, increased slightly. The segment result was flat at €1 million due to a shift in the segment’s product mix towards higher margin business. This more than offset the decrease in revenues and the adverse effects of the currency development, and the termination of the temporary labor cost production measures.

One highlight in November, Infineon and ARM announced a long-term strategic collaboration in the field of security controllers for chip card and security applications. With our own specialized ARM architecture-compliant CPU cores, we will address the current and future needs of the security markets in terms of hardware-based security. Combined with the advantages of the industry's most widely used and widely licensed 32-bit CPU. This is a unique setup in the security world.

We are the only ones here. We are working together ARM modifying the core towards security features. Another highlight in the first quarter was the confirmation as the world's first semiconductor provider of trusted platform module security chips that successfully pass the most stringent security tests currently defined for PC security. Our TPM has reached the international security standard common criteria effectiveness level of 4 plus, the assurance level of 4 plus.

This level is according to the common criteria and to the Trusted Computing Group’s own compliance test considered to be essential for continued success as a chip supplier for the PC security applications, and demonstrates the market’s trust in our security expertise. And last but not least, revenues in the wireless segment were €270 million, a slight sequential increase from the 265 million in the previous quarter.

The growth came in mainly from strong demand from major customers, especially for smart phone solutions. The segment result was almost flat compared to the fourth quarter. The modest revenue increase could not entirely offset the negative effects from the termination of temporary labor cost, and especially the impact of the weak US dollar, which hits the wireless in our business the most as it has the most exposure to US dollar.

We have begun shipments of the third generation of our ultra low-cost platform X-GOLD110, which is based on 65 nm to tier 1 customers. We expect volumes to increase slowly but steadily. Please keep in mind that at the same time our RF transceiver shipments are replaced by such complete platform shipments in the ULC segment, and therefore likely to decrease.

In general, we see continued good orders for our single-chip ultra-low cost, and the entry phone solutions, as well as for HSDPA platform and the radio-frequency transceivers. In the ULC arena, we are at some of our key customers in the transition phase from the 130 nm platform, X-GOLD101, to the 65 nm platform now, X-GOLD110, which is being received very well.

And over the course of the 2010 fiscal year, we will be ramping production of the second 65 nm single chip platform, the X-GOLD213. Both our 65 nm platforms, the X-GOLD213 and the X-GOLD110 make use of our innovative new eWLB package. This package enables superior power consumption, and will also lead to superior manufacturing costs over the medium term as well. But at present, however, the production ramp demanded by our customers is so steep that we may incur initial ramp up cost that will only decrease over time.

We will give you a detailed update on the segment at the Mobile World Congress in Barcelona, where we will be represented at the fair and will host a presentation for investors and analysts on February 16th. Let me now hand over to Marco, who will comment in more detail on the first quarter financials.

Marco Schröter

Thank you Peter. As you have heard already, with the 10% increase in revenues, €941 million with strongly combined segment results of €88 million and the segment results margin of 9.4%, we are satisfied with the operating performance during the first quarter.

Our net income increased by almost 5 times compared to the last quarter’s levels to €66 million. There were two non-recurring effects impacting net income during the first quarter. On the one hand, we deconsolidated ALTIS in December 2009 after our option to acquire further shares in ALTIS from IBM was waived in December. In connection with the deconsolidation, we recorded a non-recurring operating charge of €81 million, which is part of our operating income.

As of December 31, 2009, we recorded investment in ALTIS that is fair value of zero. On the other hand, we closed the sale of our wireline communication business and received the first installment of the purchase price amounting to €223 million. We recorded an after-tax gain of €106 million in income from discontinued operations in the first quarter.

As you know, we now report the business with Lantiq relating to wafer supply, as well as assembly and test agreements and service level agreements as operating segments. The remaining purchase price installment of €20 million is payable in nine months after closing. Within the P&L gross margin rose to 33% from 29% in the prior quarter. This sequential increase was driven by the top line and higher factory loading. As we terminated short-term work and unpaid leave in the first quarter, R&D and SG&A expenses increased by 10 million compared to the prior quarter, but please recall that the fourth quarter of the 2009 fiscal year contained a non-recurring positive effect within general and administrative expenses.

Let us now look at free cash flow components. Capital expenditures, including capitalized intangible assets were €48 million in the first quarter compared to €40 million in the fourth quarter. Depreciation and amortization was €106 million compared to €140 million in the prior quarter. At the end of the first quarter, and including the effects of the deconsolidation of ALTIS, net working capital was negative €39 million during the first quarter.

Given strong operating results, continued tight working capital management and modest capital expenditures, the first quarter yielded strong free cash flow. For the first quarter, free cash flow from continuing operations before recording any one-off items, would have been €102 million. However, with the deconsolidation of the ALTIS joint venture, the gross cash of €88 million on the ALTIS balance sheet, which was fully consolidated within our gross cash position, was deconsolidated as well.

First quarter free cash flow from continuing operations of €40 million contains this accounting effect. Let us have a look at our cash position, at the end of the first quarter Infineon’s gross cash position was €1,678 million compared to €1,507 million at the end of the prior quarter.

The increase of €171 million included the negative effects from the ALTIS deconsolidation and the cash inflow from the sale of the wireline communication business. In addition, there were cash outflows related to debt repayments as we repurchased a total book value of €46 million of our 2010 convertible notes, and repaid our debts of €10 million during the first quarter.

The company's net cash position increased to €874 million as of December 31, 2009, compared to €657 million as of September 30, 2009. With this I pass back to Peter, who will elaborate on the outlook for the second quarter and the increase in guidance for 2010 fiscal year.

Peter Bauer

For the second quarter, we expect group revenues to show almost no seasonality and to be approximately on the same level or down only slightly compared to the first quarter. This should result in another quarter with a combined segment result margin of a high single-digit percentage. We anticipate revenues in our Automotive, Industrial & Multimarket and Chip Card & Security to grow.

Only our Wireless Solutions segment should see the normal seasonal decline. We do not anticipate further market improvements in capacity loading, given our high utilization levels. That said, we also now adjusted [ph] increases in expenses due to the end of the temporary labor cost reduction measures, and at least for the time being adverse foreign exchange trends.

In light of the strong first-quarter results and the second quarter outlook, we are raising our outlook for the full 2010 fiscal year. Applying a degree of conservatism to how sustainable the current growth patterns might be in the second half of this fiscal year, we now expect revenue growth in excess of 20% at an assumed US dollar-euro exchange rate of 150. We still anticipate the year-over-year increase to be driven by all operating segments with the biggest contribution from our Automotive and Industrial & Multimarket segments, and with smaller contributions from Wireless Solutions and the Chip Card & Security segment.

We anticipate revenue in the other operating segments, mainly from product supply agreements with Lantiq, I mentioned that before, and now total at a low triple digit million euro amount. For the 2010 fiscal year, we anticipate that for a combined segment result to improve considerably from the 2009 fiscal year with combined segment result margin now expected to be a high single-digit percentage.

In light of this dynamic growth in revenue and production levels, we now expect CapEx, including capitalized intangible assets for 2010 to come in at the higher end of our guidance range of 220 to 250. So, more around the 250. As announced earlier, and already last quarter, depreciation and amortization should be approximately €400 million.

So, ladies and gentlemen that brings me to the end of our introductory remarks. To quickly summarize, first-quarter performance was very strong, second quarter momentum remains good. Note that our run rate for the segment result now clearly exceeds the levels of the 2008 fiscal year, although sales are still below the run rate of the 2008 fiscal year.

Even with a degree of conservatism for the second half, we are raising our guidance for the 2010 fiscal year significantly. Having previously expected year-over-year revenue growth of 10% or more with mid single-digit combined segment results margin, we are now looking for revenue growth in excess of 20% with a high single-digit combined segment result margin.

This speaks to our continued market traction, our confidence in our operating business and our strong financial control. We're aiming for continued margin improvement also beyond the current fiscal year. As you know, our target is also to exceed the 10%. My colleagues and I will now be very happy to answer your questions. Thank you very much.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We will now take our first question from Didier Scemama from RBS. Please go ahead.

Didier Scemama – RBS

First of all, looking at automotive, clearly very strong margin performance despite being quite a bit lower in your preview speak. It is my understanding that the fab in Malaysia at Kulim is the third ramp-up, and assuming that your other fabs in Europe are fully ramped and fully utilized, I was wondering what the impact on your operating margins would be once Kulim is fully ramped up, and if so when that would happen? Thank you. I've got a follow-up after that.

Reinhard Ploss

This is Reinhard speaking. The – your assumption about Kulim being ramped roughly a third is correct. I think the outlook for how it would look like if Kulim would be fully ramped is very difficult today to estimate. I think we have a strategy since quite some time in order to improve on our overall operating cost by having an increasing proportion of Kulim at the end of the day, considering our today's footprint in power semiconductors and sensors, Kulim would more or less be 50% to 60% of the total capacity if so installed. So I think here we see a – there is a potential, but I think we cannot make any prediction on how it will look like in total as of today.

Didier Scemama – RBS

Any views as to when you would fully ramp Kulim?

Reinhard Ploss

Well, this depends strongly on the first the market development there. I think it continues like this then I think there is from 2 to 3 years still out there until Kulim is fully ramped.

Didier Scemama – RBS

Great.

Peter Bauer

But you're right Didier. The gross margin, as you know, we don't give a gross margin guidance, but I can say that the gross margin in the automotive segment due to this would further improve during the course of the next year.

Didier Scemama – RBS

That's great.

Reinhard Ploss

The same is due to the Industrial & Multimarket business, which both are serviced out of these fab clusters.

Didier Scemama – RBS

Got you. Just a quick follow-up on the wireless division, it seems like one of your competitor is suffering from ASP pressures in both handsets and in the chipset business, and it feels like from my checks that there has been a bit of, you know, moving away from the customers, the OEM customers from fat modems into slim modems. Certainly one of your largest customers are already doing that. I was wondering if you see that as a sort of early trend in 2010, maybe at some of your additional customers and if you're expecting, you know, to benefit from that trend.

Peter Bauer

Yes, Hermann is going to take that question.

Hermann Eul

Yes, thank you. Actually this is the trend that we have been expecting for years that the slim modem, strategic wise is the right thing to do, and we see that trend currently being confirmed. So your observation is right. This is taking more and more ground.

Didier Scemama – RBS

Great. Okay. Thanks very much.

Peter Bauer

By the way, just that you're not surprised, Hermann is not with us here physically. He is in a telephone conference as he is traveling in Asia right now. So sometimes we have to distribute the questions a little bit publicly.

Operator

We will now take our next question from Sandeep Deshpande from JP Morgan. Please go ahead.

Sandeep Deshpande – JP Morgan

Thanks for taking my question. I have three quick questions. Firstly, Peter in your statement you made, you said that the 20% plus guidance is based on an exchange rate of euro is equal to $1.50. Can you clarify that is the correct figure that your guidance is based on? Secondly with regard to your change in guidance from 10% plus year-on-year growth to 20% plus year-on-year growth, can you clarify that, I mean, your previous guidance also included you know, the sales to Lantiq through the Foundry Agreement and thirdly, I mean given historic seasonality, I mean the second-half revenue is normally better than the first half and if that sort of seasonality does exist, I mean it should be able to take your margin above the 10% level in the second half of this year. So why are you being so much more conservative on just saying mid single-digit, high single-digit margin rather than the same 10% for the full year. Thank you.

Peter Bauer

Thanks Sandeep for the question. So you're right. The $1.50 is the exchange rate we have taken into account for the 20% or more guidance on the revenue. We haven't changed – also, we haven't changed anything with regard to Lantiq from our previous guidance to our guidance now. The guidance always included only the wafer sale business to Lantiq, which will remain to be a business of Infineon over a long time. So, it hasn't changed. We have always done our calculations comparably also into the past.

So, Lantiq is not in our numbers, and other than just what we ship to Lantiq, we will continue to ship to Lantiq. And yes, your questions with regard to the margins in the second half of the year, I think there, you need a differentiated view on that one. Wireless as I mentioned in my intro, we'll see a weaker second quarter as also the handset manufacturers will see a weaker second quarter. And as I mentioned also we are ramping a backend line here, (inaudible) to the backend line, which was also somewhat going to the gross margin a little bit, and then secondly we do not know, maybe we are conservative, yes, how the second quarter really, second half really developed.

So, as we don’t want to have any negative surprises, I think it was more the conservatism on the more consumer related target markets we are serving, especially now wireless, and some uncertainty about the world's economy in the second half, which led us to that guidance.

Sandeep Deshpande – JP Morgan

Just, I mean one thing on this exchange rate thing, when you say it is at $1.50, it means that given that the current exchange rate is $1.40, I mean if it remains $1.40 through the rest of the year that there would be upside to the 20% revenue guidance, correct?

Peter Bauer

That's correct, yes.

Sandeep Deshpande – JP Morgan

Thank you.

Peter Bauer

We are hedged, I mean, maybe Marco should comment, because we are to a certain degree hedged.

Marco Schröter

Exactly. Hi Sandeep, it is Marco. We are partly hedged in between $1.40 and $1.50 and nearly 90% for actual quarter and then going down 70%, 50%, or 20%. Yes, it's going down over the quarter though we are partly hedged you will not whole effects in the currency exchange rate because we have protected ourselves.

Sandeep Deshpande – JP Morgan

But you don't hedge the sales, correct?

Marco Schröter

Yes. That's right.

Sandeep Deshpande – JP Morgan

All right. Thank you.

Peter Bauer

Next question please, operator.

Operator

We'll now take our next question from Janardan Menon from Liberum Capital. Please go ahead.

Janardan Menon – Liberum Capital

Hi. Thanks for the question. Just a comment on the longer term trends in your wireless business from a margin perspective, given that you've – you know, you've planned to get to a 10% margin, and you've also made a comment that in the longer term you can get to a 15% margin. How do you see margins evolving in the wireless business, given that it is a fairly competitive business where, you know, there is quite a lot of price pressure and you could even see market share swings at various customers over the years. Do you see this as a business where you can be at a 10% or higher margin on the long run, or would it be at a lower level and you would compensate for that in other businesses.

And a follow up question is, given that your chip card business has now seen a bit of a downtown because of increased competitive pressures in the passport area et cetera, do you need to take any further action in terms of cost reduction et cetera, to get that back to sort of a, you know, high single-digit margin level or do you think the revenues will gradually come back and you'll get the leverage on the business?

Peter Bauer

Thanks for the question, I think very clear questions. I have already mentioned a couple of times the overall expectation is the mix of Infineon in total obviously. I do see a stronger potential towards high margins in the range of 15%, around 15% in the automotive industrial ones, but I do see that – it has to be that wireless also exceeds the 10%.

So we always said we want to have all our businesses beyond 10% in the double-digit margin range. Bit of an uncertainty is the dollar exchange rate as you know, as wireless is very exposed to the dollar, and I'm assuming now that the dollar remains around $1.40 here. With regard to chip card, you're right, chip card at the market here, it's not on our business, we are the market leader with nearly 30%. So they are very much coupled to the market.

The market was not too good in chip card before Christmas and the Christmas quarter typically is very low. We do see now an improvement first in the mix that the government ID business and the payment related business, and the Pay TV [ph] business shows an up-tick as compared to the low margin SIM card business, and we also do see that supply becomes tighter in the overall chip card market, which in some of the commodity segments might improve the situation. Long run, so that's short term, long run, yes, clearly a chip card with the higher mix of the more value driving businesses in government and payment has a clear double-digit margin expectation.

Janardan Menon – Liberum Capital

Okay, thank you very much.

Operator

We'll now take our next question from Simon Schafer from Goldman Sachs. Please go ahead.

Simon Schafer – Goldman Sachs

Yes, thank you very much. I wanted to ask a couple of questions. One is on cost savings and the other one again is on wireless. The first one, maybe could you just give us an update as to how far down the line you are with IFX10+, and how much further cost may be to go and coming out of the system, or in fact are we in a situation where some of the variable cost, which got taken out in the downturn is still coming back online. I guess I'm just trying to get a sense as to whether your cost run rate is improving on here, if you take this view of improving revenues. Thank you.

Peter Bauer

Yes, the IFX10+, you can differentiate between the OpEx side and the production side and the productivity side. Maybe Reinhard comments on the latter one. From an OpEx perspective, as I mentioned in – Marco mentioned in the intro, we are basically already through the temporary measures we have. They are already included now, the absence of the temporary measures if I may say so. So, therefore IFX10+ is fully in the numbers.

We do not increase our SG&A figures proportional to the revenue. That's not our plan, but we do increase a little bit on the R&D side. Nothing in overhead, it's just purely an investment in R&D, and for example activities like smart grid, in wireless, LTE, 3G business, as well as an automotive electrification drivetrain business. So, we do have a little bit of an increase on the R&D side to keep somewhat proportional to the revenues, but the rest we keep flat, but there is no further cutting, cost cutting coming out of IFX10+ now into the OpEx numbers.

Reinhard Ploss

So from the productivity side, we are driving towards the further increase of the volume in Kulim as a proportional share of the total manufacturing footprint. This will drive down cost first the dominant IFX currently are to go to cheaper material as we see that the gold price is still peaking, and for strategies here for instance to replace gold by copper wires. So, there is continuous set of measures, which we have put in to place in operations in order to drive down the cost and increase the productivity, and we are continuing with the program in order to improve our gross margin base, but it is a – I would say a huge number of several smaller activities leading to the total result here.

Peter Bauer

The further improvements in general for the whole Infineon will come mainly from product margin, which is what Reinhard just said, the productivity increases in manufacturing as well as product structure and further improvement of activities like in test or in yield management and also measures with regard to new products coming online. So, the relative reduction of OpEx versus sales will still be there, 1% or 2%, but the main contribution to our increased margin expectation comes from the product margin.

Simon Schafer – Goldman Sachs

Got it. Thank you. My follow up question again is on wireless profitability. I think you said, you clearly need to exceed a double-digit margin in order to keep the business. Just from a high-level perspective then, if you are to find yourself in a situation of that business not being able to get to that sort of margin run rate, you know, for reasons of pricing pressure or design win volatility and so on, are there any other strategic alternatives for this business?

Peter Bauer

Well, we had this question very often in the past already, and it's a very tricky question. First, we take measures. I would say we take action and measures to get it there, and allow me not to comment any further.

Simon Schafer – Goldman Sachs

Okay, thank you.

Operator

We'll now take our next question from Gareth Jenkins from UBS. Please go ahead.

Gareth Jenkins – UBS

Yes, thanks. Couple of quick ones if I could, just firstly, I wonder if you're seeing any double ordering across your segments given the strength in utilization, and then just secondly on the X-GOLD213, I just wondered what the relative cost savings are versus the prior platform post the ramp up cost, and also whether you could actually quantify the ramp up cost impact on gross margin, thanks.

Peter Bauer

Well, the second question. Can you repeat the second question, I just acoustically didn’t understand it.

Gareth Jenkins – UBS

Yes, so the new X-GOLD213 that you talked about the relative cost savings versus the prior platform post the ramp up cost that you have involved with it. So, A, what the ramp up costs are in terms of gross margins and B, what the actual platform cost savings are on a going forward basis post the ramp up cost?

Peter Bauer

Hermann, can you answer that latter question right away?

Hermann Eul

Yes, actually this is something that needs to be seen while we are ramping it up. So there is [ph] statements what we expect can happen and what we have to do in order to fight against this, but this would be forward-looking. So maybe we can give more details on this in the next conference call, when we end up [ph] seeing the difficulties.

Peter Bauer

Excuse me.

Gareth Jenkins – UBS

And the first one was double ordering.

Peter Bauer

Yes, the double ordering – it feels good actually at the moment still, I can say. Obviously, we are surprised about very high loading even into the third quarter fiscal, which is unusual at this point in time. So that's a very positive signal, but I still can say that in automotive, the inventories are very lean and the whole supply chain. I've checked distribution also there still very lean inventories, and also in the industrial customers are chasing parts. So due to these chasing parts, we might see here and there some orders in order to just improve priority for some customer versus the other, but nothing really what I say, what I would like to, what I see is material at this point in time. So, still a good development and lean supply chain.

Gareth Jenkins – UBS

Great, thanks.

Reinhard Ploss

So the – okay, here is Reinhard. So there is no – especially in automotive and industry, not so much effect from catching up in the value chain. So also there should not be major overshadowing effects coming from there. So the run rate seems ready to go to the market in the current situation.

Operator

We'll now take our next question from Stéphane Houri from Natixis. Please go ahead.

Stéphane Houri – Natixis

Yes, good morning. I've got two questions actually. The first one would be on the gross margin, I understand that your loading rates are very high, and that you may have some room in other plans, where do you think long-term you can drive your gross margin. This is the first question and the second question would be on the wireless, because when we look at your side in wireless and the amount of R&D spend by some of your competitors for the next generation of products, it's sometimes hard to understand how you're going to understand that maybe your R&D is more efficient than some of your competitors that it's sometimes hard to understand. Can you give me some color on that? Thank you very much.

Peter Bauer

Yes, of course. So on the gross margin side, I think Infineon is very an homogeneous division with regard to gross margin, and it doesn't really makes so much sense to give a gross margin guidance at the average temperature of the hospitals across the whole Infineon. As you can see, for example, from the IMM business, here we are working with typically R&D figures and SG&A figures, R&D below 10%, SG&A also below that.

So even though the gross margin is in the lower 30s, the segment result typically is in the high teens. So – and the other situation with very high IP content businesses like in wireless is that we are increasingly sourcing from foundries, and our gross margins are clearly around the 40s and going in the excess of the 40s. So we have very different business. Overall, the gross margin will improve as I said before product margin is the source of further improvement in the overall Infineon result. And actually all segments are contributing to that.

Reinhard mentioned before, due to our manufacturing landscape and the shift towards more Asia, more productivity on the product side will increase the gross margin in both the power segments, automotive, and industrial, but we also are heavily working on the foundry side as well as in the packaging side for wireless. So it's a mixed bag, and I don't give a clear and precise gross margin guidance for that.

Second question was wireless R&D, well obviously we appreciate your comment that our R&D is more efficient. We do think that they have an efficient R&D, but there is one good physical reason as well as we do not invest in application process or development, which is a huge ticket in the wireless market and concentrate our activities on the smart phone, slim modem, as well as the highly integrated single chips for EDGE and low-cost GPRS. We don't have so much R&D efforts. We also don't invest so much in wireless LAN et cetera. So we have focused our wireless business towards this highly integrated modem RF business, and that requires less R&D as if you would be a one-stop shop.

Stéphane Houri – Natixis

Okay, thank you very much.

Operator

We'll now take our next question from Günther Hollfelder from UniCredit. Please go ahead.

Günther Hollfelder – UniCredit

Hi. First, I also will try my best here on the dollar guidance, given the volumes you are expecting going forward with the current US dollar rate, would you be able to make the 10% margin?

Peter Bauer

For the quarter?

Günther Hollfelder – UniCredit

For the full-year I mean, if you're talking with the 1.50 about high single-digits, based on the current rate of $1.39 or so with the volumes you're expecting right now in your sales guidance, whether a 10% could be possible despite you are – that you are partially hedged here?

Peter Bauer

I would say we can look at that towards the last quarter. Yes that sounds very reasonable, the full-year average very difficult.

Günther Hollfelder – UniCredit

Then maybe for, I think for (inaudible), could you give us an update on the situation at your Korean customers, I mean, where the market share losses in the past, what's the situation right now going forward these two customers, thanks.

Peter Bauer

So, first taking the bigger one that from the market share size that is Samsung. We have seen some market share loss over the last few years, which we think there would be a turnaround in this year and on the other customer, we have constantly been gaining market share during the last year.

Günther Hollfelder – UniCredit

Okay, thank you very much. Maybe a last one on the packaging situation here for your eWLB, what you mentioned with backend ramp up cost, are there still challenges or are you on track here with the learning curve, if you just comment on this?

Reinhard Ploss

Basically, this is Reinhard speaking, the stability of technology has grown very well. So from the technology side, I would say we have a good situation. The ramping cost is that the extreme steep ramp and the success of our lead firms leads to substantial invest in all areas. So, we are driving several sub cons and all of these sub cons have to go through the learning curve, and I think here we see a potential that the yield will continue to increase, but that results out of our, I would say, low invest strategy, not to have all this capacity in-house, and I think that makes sense in our total, but here we pay a small price to that strategy. So I think here technology is such very positive, very stable with significant upside potential what we also recognize it. Many people are interested to team up on that platform.

Günther Hollfelder – UniCredit

And are your sub cons already running on this technology right now?

Reinhard Ploss

Two sub cons are running on that, and I think here the stabilization is to be seen.

Günther Hollfelder – UniCredit

Many thanks.

Reinhard Ploss

Maybe there is one comment to – okay, the situation on the foundry site, we are running very full. So I think we are in a good position to get our volume, but you may read it in the press. So, I think here is still quite some uncertainty on the total pricing of the foundry.

Operator

Our next question is from Gaurav Mehta from Credit Suisse. Please go ahead.

Gaurav Mehta – Credit Suisse

Hi, I just had one small follow-up question on the automotive side, can you speak a bit about the inventory position, like you mentioned that inventory does remain very lean, but in the last conference call you mentioned that you have been shipping to demand. Has it changed now, or do you see some inventory building up, happening in the supply chain?

Peter Bauer

No inventory buildup to be seen from our side between us and the electronic part manufacturers, even beyond that, I think the US is trying to build up some stock on the car side to be able to ship to a higher run rate. But on our side, we still ship to demand, and we still have in some instances escalation costs. So we are handling it, but it has improved but still no inventory buildup.

Gaurav Mehta – Credit Suisse

Great. Thank you very much.

Operator

The next question is from Jérôme Ramel from Exane BNP Paribas. Please go ahead.

Jérôme Ramel – Exane BNP Paribas

Yes, good morning. I just wanted to know if you have any intention to pay a dividend, because if you look at the net cash you are having and the free cash flow you were generating, it might seem a little bit premature compared to where you are just nine months ago, but I'm just wondering if at one point you will go for dividend pay?

Peter Bauer

As you just mentioned, it is a little bit premature to answer on that one now. You should finish the year, and then we can just – can have a look on that. Too early to answer that question.

Jérôme Ramel – Exane BNP Paribas

Okay, and second question on the wireless, when do you expect to show us LTE [ph]?

Peter Bauer

Okay, Hermann. LTE.

Hermann Eul

We will give some announcement to that in the Barcelona show.

Peter Bauer

We don’t to come too early. Now Barcelona is week after next. So, we will do something there.

Jérôme Ramel – Exane BNP Paribas

Okay, thank you.

Operator

Our next question is from Gunnar Plagge from Nomura. Please go ahead.

Gunnar Plagge – Nomura

Hello, could you maybe comment on the profitability of the Lantiq business, and then also maybe on the government subsidies, I think you had 62 million in 2008. What was the figure last year and what is the outlook actually for the current year?

Peter Bauer

Honestly, the funding. This is the usual run rates any semiconductor company gets. So I don't have the – Marco, do you have the number.

Marco Schröter

We have to do that off-line. Let us take that off-line please.

Peter Bauer

With regard to Lantiq, you mean, you probably mean our business with Lantiq, right?

Gunnar Plagge – Nomura

Yes.

Peter Bauer

Our wafer sale business. We don't report that business. It is not so substantial that we would report it. But it has a very low gross margin in general as it is wafer sale business, but we don't specify it.

Gunnar Plagge – Nomura

Okay, thank you.

Marco Schröter

If you haven't read that. You find the sales numbers in the information on the other operating segment. So you will find the Lantiq numbers under this line, if you're looking for that.

Operator

We will now take our next question from…

Peter Bauer

…the profitability is mixed for the (inaudible). I am sorry, yes.

Operator

We will now take our next question from Tobias Loskamp from Kepler Capital Markets. Please go ahead.

Tobias Loskamp – Kepler Capital Markets

Hi, yes, good morning. Actually two questions from my side. Firstly, there has been some confusion this morning on the impact of the Lantiq business on the guidance, can you give us an idea of where you are currently seeing the run rate for the full fiscal year in the Lantiq business, and what was the expected run rate previously, and also can you comment on the ramp up cost impact on wireless margins in Q2, what are you expecting there, and what you currently expect wireless to go to breakeven or just slight losses, maybe can you comment on it?

Peter Bauer

I will take the wireless question upfront. We don't – we expect wireless to go down on the revenue perspective slightly, as I said, due to seasonality, but still stay in the positives for the fiscal Q2.

Marco Schröter

We heard about this confusion this morning. Our guidance, 20 plus is in our Infineon numbers without Lantiq sales. And this was for the prior year around 3 billion as you know. Though if you want to build your model it is 20% on the 3 billion, sorry without Lantiq.

Tobias Loskamp – Kepler Capital Markets

The question is, in my model I had previously 88 million coming from Lantiq, and if you say now it is going to be low triple digit million, is it 120 or is it 180, or in what range would you see your business in this year?

Peter Bauer

Just over 100 million, a bit higher, between 100 and 150.

Operator

And we will take our next question from James Crawshaw from S&P. Please go ahead.

James Crawshaw – S&P

Hi, this is S&P Equity Research. Just to avoid any confusion. The question was on the patent settlement, and to what degree it boosted industrial sales in the quarter?

Peter Bauer

What degree the patent settlement boosted the industrial – it was 3 million. It was 3 million in the first quarter, $3 million.

James Crawshaw – S&P

Okay. Thank you. And…

Peter Bauer

So, not so material.

James Crawshaw – S&P

Okay, good. And then just a quick follow up, you talked a lot about the automotive market and the different trends in different parts of the world. What is the Infineon’s geographic mix in automotive, is it evenly spread globally or have you got a much higher market share in Europe?

Peter Bauer

Well, this is a very difficult to track number, because a lot of the business we're doing with international tier 1 automotive suppliers like the Boschs, Contis, Delphis, (inaudible) et cetera goes to various locations again in Europe, in the US, in China and Korea. So, the supply is global and therefore we can't track each part. As a rule of thumb, we have round about 20% of the business probably in the US, 20% probably in Asia, and the rest in Europe, the 60%, or about 50% in Europe.

Asia is growing very fast locally with some local suppliers. We are the market share leader in Korea by far, and we are very, I would say, head-to-head with the other number one in China with the local business. So, it cannot be equally spread as the businesses is differently developed in those regions.

James Crawshaw – S&P

Okay. Thanks very much.

Peter Bauer

Pleasure.

Operator

We now have a follow up question Didier Scemama from RBS. Please go ahead.

Didier Scemama – RBS

Yes, thanks for taking the follow up, just wanted to talk about your single-chip business in the wireless business, and you basically nailed Nokia, Samsung and LG. I just wanted – you know, if you had an idea of your market share in the local segments, you know overall for the market, exiting 2010 would be interesting?

Peter Bauer

Hermann.

Hermann Eul

I think I will take that. But I'm pretty much afraid that I cannot really satisfy your question, because that is too much forward-looking what you are asking for. But I can assure you about the sockets that you have mentioned. We have also traction in China with these devices. And so we expect them to become very popular, and there is not many single chips around that can compete with that. We would expect the single chip product to gain significant market share.

Didier Scemama – RBS

Any idea of the market share with the (inaudible) market, since you talk about it?

Hermann Eul

Actually, as this – the market which is always – we got into this on top of that, that is back in the Korean market, numbers are so vague I cannot give you such number right from the top. If you want to do a detailed model, we may perhaps can take that off-line so that you get more precise insight into this rather than just the top number, but nobody knows how many pieces in (inaudible) are figured in, and how many are not.

Didier Scemama – RBS

Okay, great. No problem. Thanks so much.

Peter Bauer

Sorry to jump in here, but we are running out of time right now. We have a tight schedule all day. I think this was the last question in the queue. To the extent that there might be additional questions, everyone please be in touch with the IFX investor relations team here in Munich. Thank you for your interest and your questions on this call. We look forward to speaking to all of you again after our next quarter. Thank you very much. Bye-bye.

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Source: Infineon Technologies AG F1Q10 (Qtr End 12/31/09) Earnings Call Transcript
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