Infineon Technologies F3Q07 (6/30/07) Earnings Call Transcript

Jul.27.07 | About: Infineon Technologies (IFNNY)
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Infineon Technologies AG (IFX)

F3Q07 Earnings Call

July 27, 2007 4:00 am ET

Executives

Ulrich Pelzer - Corporate VP IR

Dr. Wolfgang Ziebart - President & CEO

Dr. Hermann Eul – EVP, COM

Rudiger Gunther - CFO

Peter Bauer - EVP, AIM

Analysts

Janardan Menon - Dresdner

Didier Scemama - ABN Amro

Sandeep Deshpande - JP Morgan

Simon Schafer - Goldman Sachs

Andrew Gardiner - Lehman Brothers

Jonathan Crossfield - Merrill Lynch

Jim Fontanelli - Arete Research

Gunther Hollfelder - UniCredit

Clara van der Elst - Standard & Poor

Tobias Loskamp - BHF Bank

Jerome Ramel - Exane BNP Paribas

Presentation

Operator

Good morning, everyone. Welcome to the Infineon Technologies financial third quarter 2007 conference call for analysts and investors. Today's call will be hosted by Mr. Ulrich Pelzer, corporate vice president investor relations of Infineon Technologies. As a reminder, please note that this call is being recorded.

Statements made on this conference call may contain forward-looking statements based on current expectations or beliefs, as well as a number of assumptions about future investments. We caution you that these statements and other statements are not historical facts, are subject to factors and uncertainties, many of which are outside Infineon's control, that could cause actual results to differ materially from those described in the forward-looking statements. Listeners are cautioned that Infineon's actual results could differ materially from the results anticipated or projected in any of these forward-looking 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 Infineon's most recent annual report on Form 20-F available on our website, and that of the Securities and Exchange Commission under the headings, Forward Looking Statements on page iii at Risk Factors beginning on page 42.

At this time, I'd like to turn the conference over to Infineon. Please go ahead.

Ulrich Pelzer

Yes, thank you. Welcome everyone on behalf of Infineon Technologies to our fiscal third quarter results conference call. I hope you all had a chance to look at the figures we published this morning. They are available on our website, as is this call. Here today is the entire Infineon management board, Dr. Ziebart, our CEO, Mr. Gunther, our CFO, Dr. Ploss, our board member responsible for operations. Mr. Bauer, board member responsible for AIM and Professor Eul, board member responsible for COM.

We have as usual prepared a couple of introductory remarks by Dr. Ziebart, and after that the entire board will be happy to answer your questions. Over to you, Dr. Ziebart.

Dr. Wolfgang Ziebart

Yes, thank you, Ulrich. Ladies and gentlemen, welcome to all of you to our conference call this morning. I will briefly comment on the results from Infineon excluding Qimonda, with some details on our segments. I will then turn to the outlook for Infineon always excluding Qimonda. And after my short remarks, my colleagues and I will be happy to answer your questions.

We are pleased to report positive EBIT for Infineon, excluding Qimonda, for the third quarter of the '07 fiscal year. Sales and EBIT, prior to inclusion of net charges and excluding Qimonda again, has risen each quarter this fiscal year reflecting progress for sustainable growth, and we are clearly on the right track here.

The third quarter revenues for Infineon, excluding Qimonda, were 1.01 billion euros, and this is up 3% from previous quarter and is up 2% from the same quarter of the previous year. The EBIT was positive in the third quarter for Infineon, excluding Qimonda, EBIT stood at 13 million euros and included negligible net charges of 3 million euros. The last quarter, as you may remember, we were roughly around zero with EBIT before charges, EBIT was negative 28 million euros but included charges of 29 million euros. We are pleased with this EBIT improvement and we want to continue on this track.

Now let me turn to our segments. In Automotive, Industrial and Multimarket, sales came in at 752 million euros, up from 741 million euros in the previous quarter. EBIT was 81 million euros, included in this EBIT figure is a gain of 70 million euros from the sale of our POF business. Automotive revenues increased again, compared to the March quarter, in what is normally a seasonally good quarter for our Automotive business. EBIT in the Automotive business improved, driven mainly by the revenue cause. According to strategy analytics, Infineon extends it market share to 9.5% of the global automotive semiconductor market in 2006, up from 9.3% in '05.

In our Industrial & Multimarket business, business levels were broadly unchanged relative to the last quarter. While the high-power business continues to operate at maximum capacity, we saw some weakness in low-power devices, in particular in the motherboard sales that I already talked about last quarter. In addition there were some soft spots also in AC/DC converters for consumer applications.

Our security and ASIC activities saw another good quarter in our chip card unit. Sales and EBIT in chip cards are up versus net quarter and EBIT was once again positive. Nonetheless, our ASIC design and security business continues to be impacted by big demand for hard-disk products coming from at least in part from difficulties experienced by our main customer tier.

In our Communication Solutions segment, revenues rose to 259 million euros from 238 million euros last quarter. Following the sales trend, EBIT improved significantly to negative 34 million euros versus negative 53 million euros in the previous quarter. And there it is, with the execution in our wireless business as planned, we saw long increased sales and the business remained on track to achieve its breakeven EBIT target.

Shipment increased dramatically in both the single-chip devices for the TS and TPRS markets as well as in our EDGE platform. Shipments in the ULC1 and ULC2 devices, so far at a low cost, more than trebled versus last quarter as deliveries for LG, SAF-TE, and other customers moved into high volumes.

Shipment of EDGE platforms also were up strongly, as we shipped more to LG and executed on the ramp of one new EDGE customer. Unfortunately however, we did experience weakness in our access business. In our infrastructure business we experienced a temporary low-down in some infrastructure deployment relating to 3G base stations and IP DSLAM, for instance during the first quarter. In addition, one of our customers experienced inventory issues in DSL gateways which impacted our CPE business. Overall access results therefore were noticeably down versus last quarter.

Reported EBITs from other operating segments and Corporate & Eliminations combined was negative 34 million euros. EBIT in Corporate & Eliminations contained total charges of 20 million euros for restructuring measures, manufacturing facilities and for the further streamlining of our R&D locations.

Now let me turn to the outlook for this fourth quarter of the '07 period. For Infineon, excluding Qimonda, we expect a further increase in revenue and EBIT. Automotive, Industrial & Multimarket, we expect a low, mid single digit revenue increase quarter-over-quarter. EBIT margin should be close to 10%. Within that, Automotive business sales should be flat to up compared to the third quarter level.

In our Industrial & Multimarket business, sales should increase. We continue to grow our capacity through this (inaudible). Demand for high-power products remains strong. And we also expect sales to pick up in the low-power consumer and computing business as we have for the Christmas business. We also expect some growth in our Security & ASIC business. Demand for chip card products remains healthy. The ASIC and design security activities continue to experience weakness in the hard-disk area but we will see seasonal strengths in the consumer parts of the business.

In the fourth quarter of the '07 fiscal year, we expect revenues in EBIT in the Communication Solutions to again improve strongly versus last quarter. In our wireless business, we continue to execute on our shipment climb to mobile telephone customers. We again anticipate shipments of our single-chip devices, our EDGE platform, to be up strongly compared to the June quarter. In line with the revenues development, EBIT in our wireless business should also improve considerably. As I said before, the wireless business remains on track for its breakeven EBIT target in the fourth quarter of the calendar year.

In our access activities, our access activities should stabilize, if we are including the DSL modem activities which we are in the process of acquiring from Texas Instruments. Some of the issues I've talked about before will be likely to continue, and we will work with them. However, we also anticipate starting to ramp new design wins in our broadband CPE business during the current quarter, and that demand for IP-DSLAM's will resume.

Finally, we expect the closing of the TI transactions to occur during the current quarter. After the closing of the deal, we will also begin to recognize revenues from this acquisition within our excess segment. I would like to stress once again that these revenues will contribute positively to our bottom line right from the start. In Corporate & Eliminations, and other operating segments, we expect sales and EBIT before charges to remain broadly flat compared with the third quarter. We expect the net charges, for example, for restructuring measures and gains from asset disposals, to be insignificant for the quarter.

Another point I would like to draw your attention to, with the Corporate Tax Reform Act 2008, it's likely to be enacted in Germany in the fourth quarter of the current fiscal year, we will have to revalue the deferred acquisitions on our balance sheet relating to these German regulations. The resulting devaluation of deferred tax assets will lead to an income tax charge in the fourth quarter.

Overall, we continue to pursue one primary goal. We want to further improve our EBIT margin and achieve profitability in all of our activities. We have made good progress here over the last quarters, and we will make progress again in this fourth quarter. Our new German targets are unchanged. They are in -- should be in the area of 10% EBIT margin in the current quarter, with comp we will reach breakeven, EBIT in wireless in the December '07 quarter.

Beyond the near term goal, the significant weakening of the US dollar against the euro is an issue beyond our control that we have to deal with. Nonetheless, all operational metrics point into the right direction. Despite the current headwind, we therefore continue to target an EBIT margin of roughly 10% for the '09 fiscal year. We should be on our way towards this goal in the '08 fiscal year.

Now let me make one final remark on our positioning for the Qimonda stake. We remain committed to move into a minority position. Longer term, we do not intend to own any Qimonda shares. In line with this strategy, I can assure you that we are actively growing ways to reduce our stake. We will use any potential cash inflow for M&A activities where it makes both strategic and financial sense. Although I cannot and will not, be more specific here, you can be sure that we are actively exploring opportunities in this area. We consider share buyback to be an equally important use of any potential cash flows from the sale of the Qimonda shares too.

Ladies and gentlemen, this concludes the introductory remarks, and I open up the call for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We'll take our first question now from Janardan Menon from Dresdner. Please go ahead.

Janardan Menon - Dresdner

Yes, good morning. Could you just confirm whether your wire line business was profitable in fiscal Q3?

Dr. Hermann Eul

Actually, as you know, we do not report in this detail, but I think you want to dig into the market -- this is Hermann Eul speaking, sorry. You want to dig into the market behavior and the revenue behavior here. The guidance I can give you is that we had in the wire line area a revenue drop in two digit percentage.

Janardan Menon - Dresdner

Okay. Now what I was trying to get at is the extent of improvement in your wireless profitability which, if you assume that the wire line business

became more unprofitable, or less profitable, then it would suggest some improvement in wireless profitability. Any color on that?

Dr. Hermann Eul

Not more than I've already given. I beg your pardon for this, but as you can see from what we have stated, our wireless business is ramping up very nicely. We had it all back in the wire line area, which is in the two digit area, so that means it's significant on the other hand. And on top of this of course, we are blocking also against the exchange rate.

Janardan Menon - Dresdner

Okay. And just a follow-up if I may, Dr. Ziebart. Given your comments on the Qimonda stake, can we assume that following August 9, we can see a reasonably rapid move towards reducing your stake in that company?

Dr. Wolfgang Ziebart

Well, we cannot be more specific than we have been. We always have stated that we want into a minority position. August 9 is a certain date which is important to us, as after that, it facilitates strongly to reduce the stake. Nevertheless, we cannot do any announcement at that very date now.

Janardan Menon - Dresdner

Actually, what I was trying to get at was, you have earlier made comments that you will not want to sell at or below a certain price, or below a certain valuation, etc. Does all that still hold, or is that changing as we speak?

Dr. Wolfgang Ziebart

No, we haven't said that we don't want to sell below a certain valuation. We have always stated that, of course, this depends on the question; at which speed we divest depends on certain factors. But nevertheless, we are not going to speculate with that, and will divest the Qimonda stake in the very best interests of our shareholders.

Rudiger Gunther

Maybe -- excuse me, Rudiger Gunther speaking. I can add, we will make it our priority to reduce the stake, and we examine all options as we did in the past, and we will continue so in the future.

Janardan Menon - Dresdner

Okay. Thank you very much.

Operator

Thank you. We have our next question from Didier Scemama from ABN Amro. Please go ahead.

Didier Scemama - ABN Amro

Yes, good morning, guys. I would just like to dwell on a couple of points. First of all, it seems like the fall through to EBIT in the comms business is 90%, so as I think Janardan tried to get to you to. It seems like your margins in wireless are substantially higher. Is that a function of the EDGE platform, or the ULC2, ULC1 ramp? Or is it also a function of the restructuring program, which I guess had an impact?

And my second question is, with the EMP win announced today for EDGE/HSDPA transceiver, and maybe another one later on, I think is it fair to assume that next year you will be shipping baseband at ORS or both to all top five handsets OEMs?

Dr. Hermann Eul

This was -- Hermann Eul speaking. This was a bunch of questions, so I try to find all the answers for you. So you are right, we are well on track on getting more or less everybody onboard for our 3G transceivers. You are also right that our customer base, our base spend is also completing more and more.

And commenting on the margins, I beg your pardon, I will not continue, but you touched the right topic. And in this quarter, of course, we had some relief from our spending to the BenQ restructuring which we have announced some quarters ago, so this contributes to the bottom line, and may give you also some explanation for your guesses on what the margins in the different segments might be. Beyond that, I do not comment on this.

Did I miss a question?

Didier Scemama - ABN Amro

Okay, my second question if I may, I have a follow-up, is can you just confirm that you're on track to shape your single chip EDGE in the fourth calendar quarter to a tier one, and you have multiple tier one, single chip EDGE in calendar '08?

Dr. Hermann Eul

So, yes I can confirm this. I do not have so deep inside in when the customers do rent the phones, but I can confirm that there is multiple customers on the single chip EDGE and that it will be certainly in volume in 2008.

Didier Scemama - ABN Amro

Fantastic, and my follow up. Just on the single chip GSM ULC2 and ULC1, Dr. Ziebart indicated that volumes had tripled sequentially, is that basically 10 million to 15 million units in the June quarter then?

Dr. Hermann Eul

It is in the double digits area, this is true and you have seen that we have a multiplicity of customers here. You might have realized that also ZTE has settled on this solution, and that ZTE is shaping the solution to one of the major operators in the world. So I think we have a very, very good traction with this device.

Didier Scemama - ABN Amro

Is it fair to assume that the TID is not in your guidance for the wireline business being flat and we should add about 20 million for comms in that respect for the September quarter?

Dr. Hermann Eul

Yes, that is fair. We have not yet closed, we are in the process of closing and so we haven't included these numbers in any of the guidance.

Didier Scemama - ABN Amro

Brilliant, thank you very much.

Operator

Thank you. We've got a question now from Sandeep Deshpande from JP Morgan, please go ahead.

Dr. Hermann Eul

Sandeep? You're very quiet.

Sandeep Deshpande - JP Morgan

Can you hear me now?

Dr. Hermann Eul

It's getting better.

Sandeep Deshpande - JP Morgan

Okay, just a quick -- some follow-ups on the guidance for comms into the next quarter. The first question is -- is the mix of your ULC and EDGE going into the next quarter much more EDGE dominated or ULC dominated? Then I have a couple of follow-ups.

Dr. Hermann Eul

Actually, the two platforms are ramping both very nicely, so we have very, very nice development in terms of pieces in the ULC, while on the other hand the EDGE segment is also very stable. So I do not dig into more of these details, just enjoy the situation that both of them are developing nicely.

Sandeep Deshpande - JP Morgan

The other thing on margin is that you saw strong improvement in your gross margin, almost 3, 4 percentage points of improvement in your gross margin in the just reported quarter. Is this all related to associated with this flow through which we have seen on the EBIT line, which is why the EBIT line flow through is very strong and does -- how do you see the gross margin in your core business progressing going into the following quarter?

Dr. Hermann Eul

That's what you can see in our EBIT line. It's not only affected by gross margin, it's also affected by savings which now come into execution following the restructuring which we did after the BenQ insolvency, so it is not so easy to figure from the revenue versus EBIT development, the gross margin number. It's also too complicated to give you guidance on how you can do your excel sheets in that way. Perhaps you'll come back to our investor relations later on in more detail to guide you through what you should do. It's more complicated than just to say.

Sandeep Deshpande - JP Morgan

And finally regarding HSDPA, you've said before that you have multiple customers for your HSDPA chips. Do you start shipping, in volume, your HSDPA chips in the second half of this year and is it to multiple customers or does this -- the volume ramp off of your HSDPA chips happen in 2008?

Dr. Hermann Eul

So, the big volumes will be the 2008, we are still working towards the ramp of the customer in this calendar year. We will see how that works, and customers decide on when they go to market with the product, but we are on track with our technology to support this deal in this year, and the volume here will be 2008.

Sandeep Deshpande - JP Morgan

Thank you.

Operator

Thank you. We've got a question now from Simon Schafer from Goldman Sachs, please go ahead.

Simon Schafer - Goldman Sachs

Thank you very much, actually following up on the questions on the wireless business. I wanted to ask you on the announcement to extend your license agreements for a platform with ARM Holdings, was wondering what the drivers were for this decision, and specifically how this may impact your positioning with Nokia where you hoped to ramp in 2008?

Dr. Hermann Eul

Actually, I need to make up my mind what the connection between the two questions is. So, our advanced platforms in EDGE and HSDPA as well as UMTS are all ARM based, so we continue the road map of our products to be ARM based, that is the statement which we have in that press release. This does not mean that we do not continue selling the products which are based on the 16-bit core, so the E-GOLD’s family as it is today, so it does not exclude E-GOLD’s on the market. So I think this is a straightforward announcement that all the future products will be ARM based all the EDGE and UMTS are today already.

Simon Schafer - Goldman Sachs

Right, no, I was more specifically just wondering as to whether this decision was -- may have been driven by a customers request, or what was it that specifically drove you to make this decision now, the change of the platform processor design a little bit?

Dr. Hermann Eul

We do not change the platform process, the S-GOLD family had ARM processors for years in as the protocol processor or an application processor, so that is not a change, this is a confirmation that we continue with this architecture also into the future and so, that's it.

Simon Schafer - Goldman Sachs

Understood. And then a question on the capital structure. I was wondering how you looked at potential options for the €700 million convertible note and the 2010 note if it was really callable? Thank you.

Dr. Hermann Eul

Well as you know it is not yet callable because it has not closed for 15 -- more than 15 days in the last 30 trading days above € 12.79. We continue to pay interest on this, so we treat it still as that.

Simon Schafer - Goldman Sachs

Understood.

Dr. Hermann Eul

Thank you.

Simon Schafer - Goldman Sachs

Wondering if that was the change, how you'd look at the potential options for this instrument?

Dr. Hermann Eul

No, not for the time being.

Simon Schafer - Goldman Sachs

Thank you.

Operator

Thank you. We have a question now from Andrew Gardiner from Lehman Brothers. Please go ahead.

Andrew Gardiner - Lehman Brothers

Good morning, thank you. Just another follow-up on the trends you're seeing in wireless. On the last conference call you'd indicated that revenue growth would be above the kind of ranges quoted by your peers, and certainly given the performance you've put up today, it seems as though that was the case. You'd even implied that it would be low double digit growth Infineon in a prior quarter, and obviously the comms revenue reported was a bit below that given the underperformance in wire line. I'm just wondering looking forward to the fiscal fourth quarter you've made similar statements in terms of improving strongly, I was just wondering if you can give us a bit more detail around the kind of growth you're expecting similar to what you provided regarding the prior quarter? I suppose put another way, what -- does the strong growth you're calling for again equate to double digit growth, certainly that seems to be the expectation given the platform ramps you're discussing.

Dr. Hermann Eul

Yes, so you are right. My expectation was that we have a double digit growth in this -- in the completed quarter, which was then depressed by the wire line happenings which we had in that quarter, so finally we came out at 9%, so it's likely below 10%. What the guidance is concerned for the next quarter, I can confirm again a double digit growth, and I expect this growth to be also north of the entry point of the double digit. So in the mid teens perhaps would be a good guidance from today's perspective.

Andrew Gardiner - Lehman Brothers

Okay, thanks very much.

Operator

Thank you. We've got a follow up question from Jonathan Crossfield for Merrill Lynch, please go ahead.

Jonathan Crossfield - Merrill Lynch

Yes, thank you. You've seen strong performance in AIM, and particularly in the industrial and power business and shifting production to cooling. What does that potentially do to the margins in AIM in the next fiscal year, do you think?

Dr. Hermann Eul

Well we have even in the last quarters given you a guidance towards 10%, the fourth quarter this fiscal year and also that we are expecting that range in next fiscal year in the summer of the next fiscal year and we are still standing behind this with the only little disclaimer, Dr. Ziebart has mentioned in his introductory note that we can't predict the currency exchange dollar to the euro, but in operational terms we're still standing behind 10% figure there.

Jonathan Crossfield - Merrill Lynch

Okay, and then just as follow up, can you quantify the likely tax impact from the change in the corporate tax rate in the September quarter.

Rudiger Gunther

Rudiger Gunther speaking. The tax impact will be in the middle two digit numbers, but as the tax rule is not even signed by our president and the details are not clear it, can vary but our estimation is as I said.

Jonathan Crossfield - Merrill Lynch

Thank you very much.

Operator

(Operator Instructions) We have another question from Didier Scemama from ABN Amro, please go ahead.

Didier Scemama - ABN Amro

Yes, just going back to comms again, I'm sorry, do we still expect the ramp of the VDSL2 contract with Hyundai in the December '07 quarter, and therefore sequential growth in the broadband business in the December quarter?

Dr. Hermann Eul

We expect customers to ramp on the VDSL, that is true, but I cannot confirm on any customers, so I beg your pardon for this.

Didier Scemama - ABN Amro

I thought that was announced already, okay. And on the wireless side, December should we continue to see, basically, growth sequentially strongly on the back of all the customers that have been announced in the previous quarters?

And in particular, I was wondering if the Tier 1 EDGE RF customer you have announced a couple of quarters ago will be in the December '07 or September '07 quarter?

Dr. Hermann Eul

Actually this was more a statement than a question, only at the EDGE ramp at the end was a question. But I do not really understand which customer you are referring to.

Didier Scemama - ABN Amro

The one you are currently supplying single, sorry, GSM RF.

Dr. Hermann Eul

This particular customer I do not expect to ramp the EDGE RF in this calendar year.

Didier Scemama - ABN Amro

Okay, thanks.

Operator

Thank you. We've a question now from Yogis Yardis (ph) from Arete. Please go ahead.

Jim Fontanelli - Arete Research

Jim Fontanelli, just a quick question on the EDGE market, I wondered how quick you see the overall EDGE market moving to single chip over the next 18 months?

Dr. Hermann Eul

The tendency will be that the EDGE market becomes a single chip market. This is certainly something which does not completely happen over the next 18 months, but will be a process, let's say two years. Certainly I expect most of you know how fast customers change platforms, and platforms' lifetime is about two years. So that, I think, is a good guidance that the change may happen over the next two to three years.

We like to see it that way because our EDGE single chip solution is there, we are ahead of competition here, and we can also address for the customer a very effective and good cost performance point and so we believe that the trend goes there, and will be tailored into our business.

Jim Fontanelli - Arete Research

Given what you can see of your customer product roadmap, do you think a run rate of say over 50%, leaving calendar '08, is a realistic number?

Dr. Hermann Eul

I think that is certainly too high of a guess. As you know, there is no EDGE single chip device out in the market despite ours. This simple calculation would mean that Infineon then has 50% of the total handset markets in EDGE because there is no alternative, and I think that is a little bit overstated.

Jim Fontanelli - Arete Research

Great, thanks.

Operator

Thank you. We've got a question now from Gunther Hollfelder from UniCredit. Please go ahead.

Gunther Hollfelder - UniCredit

Hi, could you elaborate a little bit on the recent Texas Instruments acquisition. I think you said that you were expected to close this transaction during the summer. Also, the impact going forward or also whether there is a similar impact on this business compared to what you had in your own DSL business.

Dr. Hermann Eul

Yes, I can comment, so we stated that we expect closure within this quarter. I know that Texas's statement in the call was that they expect closure by the end of July. We do not comment on this, it is still not closed, so we can also go back to the numbers were given by TI that the volume was roughly 50 million a quarter. I can also not comment on this because I'm legally bound not doing so before close, and on top of this we make the statement that once it is closed then goes to our top and bottom line, it will come with a positive impact to the bottom line right from the start.

Gunther Hollfelder - UniCredit

Okay, great, thanks.

Operator

Thank you. We'll take our next question from Clara van der Elst from Standard & Poor. Please go ahead.

Clara van der Elst - Standard & Poor

Hi, good morning. I was wondering if you provide a bit more coloring on the dollar impacts on the different groups as compared to your Q2 outlook?

Rudiger Gunther

Rudiger Gunther speaking here. Every cent change in the dollar/euro impacts our EBIT by roughly €0.02 per quarter -- €20,000 per quarter.

Clara van der Elst - Standard & Poor

Okay, and if you look at the individual groups in AIM and COM?

Rudiger Gunther

Well, the majority of the effect is in AIM naturally, but it's changing of course in the next year slightly due to the ramp up of business. But currently it's basically in business.

Clara van der Elst - Standard & Poor

Okay, thank you.

Rudiger Gunther

Also important to know is that for the first three quarters we were pretty much hedged by the US dollar/euro currency.

Clara van der Elst - Standard & Poor

Okay.

Rudiger Gunther

Thank you.

Clara van der Elst - Standard & Poor

Okay, thank you.

Operator

Thank you. We have a question now from Tobias Loskamp from BHF Bank. Please go ahead.

Tobias Loskamp - BHF Bank

Yes, good morning. I just have a quick question if you could comment on some regional trends you see for COM and AIM. We see America down percentagewise from 25% to 22% of sales, is that just because of Qimonda, or maybe can you give us an idea if you see some strengthening or weakening in certain areas?

Dr. Hermann Eul

Well, I think there are no specific regional trends except for those we have talked about previously already. There's the weakening of the automotive business in the US, is continuing. But nevertheless, there is nothing specific to report during this quarter. On the AIM side, we still have a relatively weak automotive business in the US, but it's somewhat compensated in Europe and stronger protection in exports from Europe but indeed there is a slight shift but you wouldn't see that and by far not in that extent you're reporting here.

Tobias Loskamp - BHF Bank

Alright, thank you. And maybe a just a quick follow-up on the US dollar effect, so are you hedged the same way you have been in the past for the next quarters, or has anything changed there?

Dr. Hermann Eul

We are basically hedged for the next quarter. Of course for the new fiscal year the game is starting anew, and we have to adjust our hedging, of course, to the current market.

Tobias Loskamp - BHF Bank

Alright. Thank you.

Operator

Thank you. We've got another question from Jerome Ramel from Exane Paribas. Please go ahead.

Jerome Ramel - Exane BNP Paribas

Good morning, just to come back to the GRF devaluing going on this morning, my understanding is that you're going to be two suppliers and I just wanted to have an idea of what part of the business you're going to have there?

Dr. Hermann Eul

Actually, I haven't understood your question from the acoustical point of view so could you perhaps repeat it?

Peter Bauer

The connection was rather poor.

Jerome Ramel - Exane BNP Paribas

Yes. For the 3G RFs with the EMP that was announced this morning, my understanding that you're going to be two suppliers. So I just wanted to understand what kind of, what do you expect, what parts of the business you expect to get here?

Dr. Hermann Eul

This is a good question which I cannot answer. Of course, if we have a good solution, we always bet on having a good share in this. I can give you another piece of information perhaps as an exchange for not being able to do guesses on the share. I expect that this goes into volume still in this calendar year, so it is a very near time happening.

Jerome Ramel - Exane BNP Paribas

Okay, thank you, Hermann.

Operator

Thank you. We've got a question from Didier Scemama from ABM Amro, please go ahead.

Didier Scemama - ABN Amro

Right, I was just trying to understand about the leverage on comms in the fourth quarter, I mean in the September quarter. I mean, if I basically reconcile all the pieces of the puzzle, it seems like you are going to basically, including TI, you're going to become at around 320, which is incremental revenues versus the third quarter of about 61 million euros. So I'm just wondering how much of that falls through to the bottom line, and if in fact we shouldn't be expecting a break-even level already for comms in the September quarter basically given the fall through of 90% we had in June?

Dr. Hermann Eul

So, actually I've already commented on the fall through for the June quarter. I would recommend that you do not do your straight ahead calculation on the cost margin harder rather than consult. Only pays up for more detailed understanding how the mechanisms are. So this is my recommendation for auto for the next quarter, all our guidance what revenue increase, as well as auto EBIT increase is concerned, are all without any inclusion of the TI bought business and so I think then you are on the right track.

Didier Scemama - ABN Amro

That's fantastic, thank you very much.

Operator

Thank you. We've got a follow up question from Gunther Hollfelder from UniCredit, go ahead.

Gunther Hollfelder - UniCredit

Hi, I have two or three related questions regarding the acquisition. First with the comms business, with the Nokia Siemens joint venture, was there any change in your business activities after this joint venture started? And on the other hand the same question for Conti (ph) and BDO (ph)? I mean given your strong position also at Conti, so I don't think there is any impact what you should expect given the BDO's sale to Conti.

Dr. Hermann Eul

Okay I start with the comms one, so we didn't have any major changes. They are working through the reorganization and through the alignment, and so far everything is on track.

Peter Bauer

And regarding the acquisition of the BDO by Conti, which has been announced, you just gave the answer already, and so we are very, very connected to both those customers, and so we don't expect any major impact from that.

Gunther Hollfelder - UniCredit

Okay, great, thank you.

Operator

Thank you. We've got another follow up question from Sandeep Deshpande, from JP Morgan. Please go ahead.

Sandeep Deshpande - JP Morgan

Yes, hi. In the supply chain in China we seem to be hearing that you are dealing share with many Chinese suppliers. I mean, you had disengaged with many Chinese suppliers in the past few years. I mean, what is going to be your strategy in China, particularly given that you have a leading ULC solution? I mean, there are so many customers there, so will you be looking only at the lead Chinese handset vendors to be selling your chips to, or is it a broad based China strategy?

Dr. Hermann Eul

So the strategy is already summarized as you said, so we are now with many of the leading companies in China. Of course, China you know, is a quick in, quick out behavior so that means they went quickly out some years ago, and they come now come quickly in as we have a convincing outstanding solution, but we also worked with the smaller companies in China. There's plenty of design houses that we are engaged, and so actually it would not be a good strategy to go for either, or rather we do both strategies, work with the big guys as well as with the design houses.

Sandeep Deshpande - JP Morgan

Given that the smaller customers require more hand-holding and much more probably, application engineer support. Would that have a cost impact?

Dr. Hermann Eul

The design houses usually have quite a good knowledge how to do this kind of model, so they do not really suck so much of the resources from us. Others, they are experienced in taking the platform and they have recognized that our platform is well designed for low effort customization. So, it is more or less an easy game for them to take the platform, modify it to according to their customer needs or modify it to the different regions where they want to sell it, and I think this was also one of the convincing factors, not only that the solution is ultra compact and ultra efficient also, the software which will deliver to this is easy to handle, no quibble software.

Sandeep Deshpande - JP Morgan

And then finally again on the HSDPA platform, I mean you've all this while I mean have sold none wideband CDMA UMTS chips, but now you'll be selling the Core Protocol chips yourself. Do you see any potential that you will have any problems with the key patent holders in this area, given that still now most of the key vendors in this handset market have been essentially the patent holders? So, how do you see that situation progressing, particularly given that you have multiple customers, or just okay?

Dr. Hermann Eul

So for the essential patents, usually the customers take care, and we are fully covered for the silicon which we deliver, as it also was in the past, so there is no change.

Sandeep Deshpande - JP Morgan

Okay, thank you.

Operator

(Operator Instructions). We'll take a follow up question from Janardan Menon from Dresdner Kleinwort, please go ahead.

Janardan Menon - Dresdner

Yes, I just had a question on how you actually present your information, so the WCDMA design win on RF that you are announcing publicly today, when did it go into your presentations like, I mean, in the last six months you've been having three tier one OEMs on WCDMA RF in your presentation, and the second half of last year you had one, and then it went to two. So when did EMP go into that presentation information?

Dr. Hermann Eul

I cannot help with this one off the top of my hand. So I have to refer to Ulrich Pelzer, and we'll go though the charts and then you get that information.

Janardan Menon - Dresdner

But you would have put it a few months ago, I mean when you got, I mean presumably you got design win about a year ago or something like that, and that you're shipping in the second half of this year.

Dr. Hermann Eul

Yes, certainly we are working towards this customer already for a while and so this is not an overnight happening.

Janardan Menon - Dresdner

Okay, thank you very much.

Operator

Thank you. We have another question from Gunther Hollfelder from UniCredit, please go ahead.

Gunther Hollfelder - UniCredit

Maybe just one follow-up on the low power issue, the motherboard weakness there. Is this something that will improve with seasonally stronger demand now in the coming weeks or the current quarter. On the other hand, we are also hearing, or continue to hear from one of your competitors design wins in this area, so if you could comment on?

Dr. Hermann Eul

Yes.

Peter Bauer

That's Peter Bauer speaking, we are seeing already a little bit of a pick up which is typical for this time in the year for the Christmas build in the low voltage MOSFET business. The strategy with regard to motherboard is unchanged, we don't call for any price there, we just protect our margins and therefore share fluctuates always a little bit from quarter to quarter, but as we indicated, we're seeing strengthening in the low voltage MOSFET market going into the current quarter, the Q4 as compared to last quarter.

Gunther Hollfelder - UniCredit

Okay, thank you.

Operator

Thank you. There appears to be no further questions at this time.

Ulrich Pelzer

Thank you, operator, thank you everyone for dialing in, thanks for your interest and your questions. If anything has remained open, or on any of the subjects that Hermann mentioned, please feel free to be in touch with the IR team, and we look forward to speaking to all of you again in November when we will report the Q4 results. Thanks everyone, bye bye.

Operator

That concludes today's conference. Thank you everyone for joining us. You may now disconnect.

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