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Infineon Technologies AG (IFX)

Q1 2006 Earnings Conference Call

January 24th 2006, 4:00 AM.

Executives:

Ulrich Pelzer, VP IR

Dr. Wolfgang Ziebart, President & Chief Executive Officer

Peter J. Fischl, EVP & Chief Financial Officer

Peter Bauer, EVP

Kin Wah Loh, EVP

Prof Dr. Hermann Eul, EVP

Analysts:

Nicolas Gaudois, Deutsche Bank

Janardan Menon, Dresdner Kleinwort Wasserstein

Matthew Gehl, Goldman Sachs

Nav Sheera, Citigroup

Uche Orji, JP Morgan

Jonathan Dutton, UBS

Francois Meunier, Cazenove Group

Andrew Griffin, Merrill Lynch

Stuart Adrian, Morgan Stanley Dean Witter

Mark Power, Redburn Partners

Karsten Iltgen, WestLB Panmure

Antoine Badel, Credit Suisse First Boston,

Gunther Hollfelder, HVB Bank

Johannes Ries, Cominvest

Ulrich Pelzer, VP IR

Thank you. Good morning ladies and gentlemen. And welcome to our Fiscal First Quarter 2006 Financial Call.

With us today we’ve got the entire management board of Infineon, that is our CEO, Wolfgang Ziebart, our CFO, Peter Fischl, and our board members responsible for Automotive, Industrial and Multimarkets, for Communications and for Memory Products, Peter Bauer, Hermann Eul and Kin Wah Loh.

The conference call will follow the usual pattern. We have got some introductory remarks by Dr. Ziebart, and then we will open up the call for your questions and we will answer them.

With that, over to you Dr. Ziebart.

Dr. Wolfgang Ziebart, President & Chief Executive Officer

Yeah, thank you Ulrich. Good morning ladies and gentlemen. I would like to welcome you to our telephone conference today.

Having announced the first quarter key figures already last Friday, and with the full press release and detailed figures out this morning, I would like to take this opportunity to touch upon what we think were key points during the last quarter. After that I will open the call and we will answer your questions together with my colleagues from the Board.

Last quarter was characterized by a positive development in our Logic segment on one hand, and by a difficult operating environment in our Memory Product segment on the other hand.

All in all, the better-than-expected development in Logic could unfortunately not offset a significant deterioration of the EBIT in Memory Products, mainly due to the strong decrease in average selling prices, in particular in DDR2 memory.

Overall, Group revenues were €1.67 billion, and this is a decrease of 3% sequentially. And this was primarily driven by the strong decrease in average selling prices of DDR2 memory, as mentioned.

I am very pleased that revenues in the Automotive, Industrial and Multimarkets segments, as has in the Communications segment, increased sequentially and were ahead of average analyst expectations.

Quarterly loss of the Group was €122 million, an increase from EBIT loss of €43 million in the previous quarter.

Again, we are very pleased with the Logic segment, which together posted a positive EBIT, ahead of analysts’ consensus estimate for the first quarter.

The Group EBIT loss primarily reflects an EBIT decrease in the Memory Product segment, as I will elaborate in a minute.

Net loss in the first quarter was €183 million, compared to a net loss of €100 million in the prior quarter. The difference between EBIT and net loss has two primary reasons. First, we have unbalanced and net interest expense, mainly as interest payments on our convertible debt exceed interest income on our cash balances.

Second, under U.S. GAAP accounting, we have to write down deferred tax assets in certain subsidiaries when we incur additional pre-tax losses. Coupled with tax payments in certain jurisdictions, without double taxation agreements, this then leads to a tax expense at Group level.

Loss per share amounted to €0.25, compared to a loss per share of €0.14 last quarter.

I will now shortly comment on the segments’ performance during the first quarter. Starting with Automotive, Industrial and Multimarkets segment. Here the revenues were €652 million, which was an increase of 4% compared to the previous quarter.

The main drivers were higher sales in the Automotive business, in particular in the Automotive power products, where Infineon is market leader, with a market share of roughly 16%.

In addition, high seasonal sales in power management semiconductors and in ASIC and Design Solutions, contributed to the revenue increase. In the Security and Chip-card business, revenues decreased, as anticipated, mainly due to continued strong price decline.

We could increase EBIT in this segment, however, to €51 million, mainly because of the good performance in the Automotive business and because of cost management measures. Despite continued price declines, we were able to reduce the EBIT loss in the security and chip card business due to a reduction in fixed costs, improved cost structure in the products and product mix.

In the Communications segment, revenues increased slightly to €334 million, primarily due to a strengthening demand for radio frequency transceivers and broadband access solutions.

We were able to lower the EBIT loss compared to the previous quarter to €21 million. On the one hand, this was due to impairment charges occurring in the previous quarter that did not recur in the first quarter. On the other hand, however, operating improvements, such as slightly higher sales and the further optimization of research and development expenditures, contributed to the performance.

Our Wired Communications business continued to operate profitably in the first quarter.

As stated before, revenues in the Memory Products segment decreased sequentially by 12% to €687 million.

EBIT in the first quarter decreased to a loss of €118 million. In particular, the severe price decline for DDR2 memory affected our performance.

Reacting to pricing, we have deliberately limited shipments, especially of DDR2 products. Also we have made focus in diversifying into specialty DRAM shipments relative to last year. We continue to have a relatively a high exposure to the DDR2 market within the industry. As you recall, DDR2 was the segment of the DRAM market experiencing the most severe price decline during the quarter.

Overall, bit shipments declined relative to the last quarter. Cost per bit also therefore increased because of planned increase in R&D expenses for the opening of our product portfolio, and because of costs associated with the ramp-up of the production facility in Richmond.

Despite all these difficulties, we have seen good progress during the quarter as well in the Memory business. The conversion to 90 nanometer DRAM technology on 300mm wafers, we have reached the revenue cross-over at the end of the first quarter as well.

The development of 70 nanometer technology is well on track.

In our 300mm facility in Richmond, we are on schedule in ramping up volume production. As such, our manufacturing performance is on track.

Finally, also in line with our plans, we have booked initial revenues from volume shipments of our 110 nanometer 1G TwinFlash product.

Ladies and gentlemen, as you can see in our segment Communication and Security Chip-card business, we are on track with our production measures. An encouraging development is the combined profitability of the Logic segment.

In the security and chip-card business we continue to expect a turnaround from the end of 2006 calendar year onwards.

Also in our Wireless platform business, we are confident to reach positive EBIT results in four to six quarters.

Now allow me to comment on the outlook for the second quarter of 2006 financial year. In our Automotive, Industrial and Multimarkets segment, we anticipate slightly increased revenues and a sequential decline in EBIT compared to the first quarter.

Further detail, we see a seasonal decline in the industrial semiconductors, which will be offset by increases in the other segments.

We expect EBIT to decline slightly before stabilization. First, the yearly price negotiations in the Automotive area usually becomes effective January 1, and cannot be offset by productivity gains within this quarter.

Second, we plan to increase research and development expenses for our Automotive businesses where we have good profitability.

Finally, the segment’s EBIT will continue to be impacted by planned expenses for the phase-out of production at the Munich-Perlach facility and by increasing start-up costs for the new production site in Kulim, Malaysia. Especially for the security and chip-card business, we will likely see revenue growth, as planned, in the current quarter. And we remain confident to reach break-even at the end of the 2006 calendar year.

In the Communications segment, we expect revenues to decline compared to the first quarter due to seasonal weakness in the Wireless industry. As we have implemented improvements of cost structures in the prior quarters already, operating results are likely to be driven predominantly by the revenue development. We therefore expect the segment’s EBIT loss to increase in the second quarter.

Especially with regards to our baseband and mobile telephone business, we reaffirm our objectives, however, to achieve profitable operations before the next quarters.

Being already the market number one in RF transceivers, we continue to experience strong design momentum. In our Wireline business, we have continuously extended our customer base in VDSL2, ADSL2 and ADSL2+ during the last quarters and have reached designs with several major customers.

All in all, in the second quarter of the ’06 financial year, we expect combined revenues in the two logic segments to remain broadly stable compared to the first quarter. However, we expect a decline in our Logic EBIT due to the details given before.

In our Memory Product segment, we expect to increase our bit production by more than 20% based on additional capacities at our 300 millimeter production facility in Richmond and from silicon foundries. We expect our shipment growth to keep pace with the production, with positive effects also for our fully-loaded costs.

So far in the current quarter we have seen an encouraging pricing environment for DDR2 products, and improved momentum in specialty DRAM.

Regarding one-time charges on Group level, also we cannot be more specific at this time, we expect charges in the order of €20 million to €40 million.

And please allow me one remark beyond the results I just outlined. I suspect some of you may be wondering about this anyhow. In the Memory Products group, DRAM pricing is outside of our control and shows significant volatility. However, factors within our control, such as the manufacturing performance, are in line with our plans.

As such, despite the first quarter loss in the Memory Product group, our internal efforts to carve out this segment into a separate legal entity are progressing well and according to schedule. All statements made on November 17 and 18 last year regarding the rationale for the implementation of our new strategic set up remains valid.

In closing, I want to point out one more time that we look into the future quite optimistically. We are well on track with our restructuring efforts in the loss-making business areas, and experienced strong growth in those areas where we are successful already and hold a strong market position.

This concludes my introduction. Now my colleagues and myself are more than happy to address any questions you might have.

Ulrich Pelzer, VP IR

Duncan, could you please take over now and poll for questions?

Question-and-Answer Session

Operator

Operator Instruction. We will take our first question from Nicolas Gaudois of Deutsche Bank. Please go ahead.

Q - Nicolas Gaudois

Good morning. Could you first of all give us some clarity on some of the key operating matrices for Memory in the last quarter? By how much did you grow production, I think you were planning for 13% q-over-q initially. And how much did shipments grow or decline by bit-terms? By how much as well your inventories varied in the quarter, in terms of inventory weeks for DRAM? And also, on the back of that, could you confirm or not whether fully-loaded costs did moderately decrease as you initially said in the quarter or rather, as we suspect, essentially were flat to up? Thank you.

A - Wolfgang Ziebart

Yes, Nicolas, thank you very much. I would hand over this question to Loh.

A - Kin Wah Loh

So, for your first question, the bit production. We have increased quarter-to-quarter sequentially by 8%, as compared to our guidance greater than 10% stated, mainly because in view of the dynamics of the DDR1 and DDR2 environment, we have consciously balanced the line, the manufacturing line, and therefore increased our cycle time, and looking for that during this activities. In terms of bit shipments, we do not normally disclose the bit shipments that we have done. But we have to say that quarter to quarter we have slightly decreased our bit shipments from our fourth quarter compared to the first quarter. As regards to the fully-loaded costs of this last quarter, we have a couple of effects which relate -- relation to our fully-loaded costs for last quarter because of the three effects there. One is that there is a depreciation of inventory due to the low price levels at the end of the last quarter, especially on DDR2, due to the erosion of price end of September -- end of December. Second, our manufacturing cost is higher due to the ramp-up costs of the front end in Richmond, ramp-up of our 300-millimeter factories in Richmond, as well as our back-end facilities in Suzhou. And, of course, last but not least, we have an increase in expenditure in our product R&D because of a product specification, of course, in relation to the lower bit shipments, which effectively increase our fully-loaded costs.

Q - Nicolas Gaudois

Okay. So with that -- by how much did inventories go up by in week terms, Kin?

A - Kin Wah Loh

Yes, the inventory level increases from a normal four to eight weeks to versus -- no, has increased to four to eight weeks versus our normal three to five weeks in our previous quarter.

Q - Nicolas Gaudois

Okay. And have you actually passed a charge for inventories, I mean any write-down on the value terms? Is that what you are suggesting?

A - Kin Wah Loh

Yeah, yeah, yes, we have a write-down accordingly.

Q - Nicolas Gaudois

Could you tell us by how much, please?

A - Kin Wah Loh

Yes, a small charge.

Q - Nicolas Gaudois

It’s a small charge. Okay, great. And just as a follow-up on that, we’ve -- you having higher inventories, production going up in the current quarter, you are lucky enough to have part of your Korean competition we think not really increasing capacity in the quarter. Should we model shipment growth higher than the production growth you basically stated as you release inventories? And, if so, could we expect an improvement in fully-loaded costs as well in the current quarter please?

A - Kin Wah Loh

I mean, by and large we have stated in the last quarter we will deliver bit shipments according to the dynamics of the market. But in what you say, is that yes, I can say that this coming quarter as our bit production is increasing and we have a very healthy inventory mix now there. We expect a higher bit shipment this quarter.

Q - Nicolas Gaudois

And therefore fully-loaded costs decreasing?

A - Kin Wah Loh

Yes, of course. Of course, with that the fully-loaded costs reduced accordingly now.

Q - Nicolas Gaudois

And last very, very short clarification on your Wireless side. You mentioned in the press release that you have a new important win for your ultra-low-cost solution. Is this incremental to the slide you presented in November, where I think you had BenQ one OEM non top-six and one ODM as wins for the E-GOLDradio and ultra-low-cost solutions so far, or not?

A - Hermann Eul

Yes, this is on top.

A - Nicolas Gaudois

Okay. Thank you.

Operator

Thank you. Our next question comes from Janardan Menon from DRKW. Please go ahead.

Q - Janardan Menon

Hi. The first question starting from your Automotive, you have guided down effectively your margin in Automotive into your physical Q2 because you are guiding revenue slightly higher and saying EBIT is being hit by the new pricing structure, etc. How do you expect the margins in Automotive to behave from Q3 onwards? Can we come back to see the Q1 level of margin or is this going to be a new level of margin for you?

A - Peter Bauer

No. No. Not a new level of margin. You have to understand that in AIM we have a couple of businesses, and Automotive being one part in there. The Automotive margins we see basically, we are recovering the price declines which typically come in a bulk at the beginning of the fiscal year and we are recovering through the fiscal year for AIM in total. I am expecting anyway, in this fiscal year, an up-tick in margin as compared to last fiscal year. So we will improve margin over the fiscal year as compared to last fiscal year. The reason for the decline, the slight decline in Q2, is multi-fold. As I said first, there is a bulk of the customer contracts -- new customer contracts become effective in the second quarter. Those contracts are from January 1. And there are some other effects as well, some seasonality in our consumer computing business with regard to power management and ADS, which is a lower seasonality, but also increased R&D, especially in power. So all in all, this comes into the second quarter. But again, Automotive margins, we will even digest the charges from Kulim and Perlach, which are pretty significant this year, and come up with a better margin.

Q - Janardan Menon

And you will see that improvement from your fiscal Q3?

A - Peter Bauer

Yes.

Q - Janardan Menon

And moving on, can you give us what you expect the DDR2 percentage to be into your Q2? Do you have any plans at this point, whether reducing the percentage or keeping it flat or increasing it? And what exactly was the percentage in fiscal Q1?

A - Kin Wah Loh

This is -- we are keeping the DDR1, DDR2 percentage flat for this quarter. And it is almost 50% at the moment.

Q - Janardan Menon

And the last question is on your Wireline side. You’ve said that there is seasonality affecting your Wireless shipments into Q2. What’s happening in Wireline in the Q2? Is that continuing to grow, or is that also being affected by seasonality?

A - Hermann Eul

This is Hermann Eul speaking. In general, we do not detail these numbers to this level. But you can assume that the Wireline business is fairly stable and continues to be profitable.

Q - Janardan Menon

Yes, that’s it for me. Thank you very much.

Operator

Thank you. Matthew Gehl of Goldman Sachs has our next question. Please go ahead.

Q - Matthew Gehl

Yes, thank you. First question on the DRAM business. You mentioned that you expect the fully-loaded costs to move down in the March quarter. But just interested with the continuation of ramp-up costs for Richmond and continued push for product diversification, is there a chance you can get the fully-loaded costs back down to September levels? Or is that not going to be achievable until we get to the June quarter?

A - Kin Wah Loh

We will go down below -- much below the September quarter figures.

Q - Matthew Gehl

In the March quarter?

A - Kin Wah Loh

Yes.

Q - Matthew Gehl

Okay. Second one on DRAM. Can you give us a sense, right now, percentage of graphics and mobile RAM that you’re doing -- or cellular RAM you’re doing in the business and where you expect that to go over the next few quarters?

A - Kin Wah Loh

Our specialty DRAM is approximately -- or slightly below 10%, and we expect it to go up to more than 10% in the coming quarter.

Q - Matthew Gehl

And the final question on Communications, just with the commentary that you need to see revenue growth now to drive margins higher, I’m just interested if you could give us a sense of what the break-even rate in the Communications business is now. The last time you made money in the business I think the run rate was about 465 million per quarter. Do you need to get to that level? Or could you give us a sense of how much you’ve lowered the break-even rate with these cost cuts?

A - Wolfgang Ziebart

Yes, well we have publicly stated that to return to a healthy profitability, a market share of 10% in the Baseband business is required. And currently I think we are around 5% to 6%. So I would say break-even is slightly above that. But at 10% we think that we have a healthy profitability.

Q - Matthew Gehl

But you can’t put anything, for the entire division, including Wireline, can you put any range in terms of total revenue that would give you?

A - Wolfgang Ziebart

Yeah Peter.

A - Peter J. Fischl

Let’s put it this way, without becoming too specific, you mentioned 400 something. The break-even level in the meantime is clearly below 400 million. But I don’t want to specify further.

Q - Matthew Gehl

Okay. Great. Thank you for that.

A - Wolfgang Ziebart

Yes, thanks Matthew.

Operator

Thank you. Our next question comes from Nav Sheera of Citigroup. Please go ahead.

Q - Nav Sheera

Thank you. Good morning gentlemen. Just two top-level questions please. Could you just give us some more detail about your 70 nanometer manufacturing because I’ve seen some press statements that now the belief is that your lead is only three months now behind the market leader. Is there any chance of that lead being reduced further as you go forward? And the second question is again there’s been a lot of talk with regards to the launch of Windows Vista. Have you seen this being reflected in your customers’ specifications for average memory per box now compared to, say, three or six months ago? Thank you.

A - Kin Wah Loh

So, the first question, the 70 nanometer, we are still on track and functional samples are available. As you have stated, we are three months behind -- we are three months behind our competitor. We say that yes, we are in this ballpark. And lastly, as regards to Microsoft Vista, we expect it to drive the mega bit per box this year. And it is due, according to the market research, I think this we expect to bring the DRAM per box in the future.

Q - Nav Sheera

Do you have any figure as to what the end of 2005 DRAM per box was on average? Obviously we can have forecasts for going forwards.

A - Wolfgang Ziebart

Let me add something. To answer your question precisely, so far we have not seen a direct impact of Vista in the bit per box equipment. That would then probably go to 1 gigabit per box, and we haven’t seen that so far. What we have seen, and this, I think, is one of the reasons why the bit per box has been stable in the recent quarters is a growing demand in, I would say, in emerging countries who are lower equipped in PCs, which actually drive, or influence also the Vista box. Also we haven’t seen that much of the growth as we would have expected, especially in the forefront of the Vista operating system to come by the end of the year.

Q - Nav Sheera

Thank you. Last question. You’ve had a target long term of reaching, say, 20% of your Memory sales as specialty DRAM. Would you still say that’s feasible say by the end of fiscal ’06?

A - Wolfgang Ziebart

Loh?

A - Kin Wah Loh

We stick to the statement that we have greater than 10% going forward. And your 20%, of course, is finally our goal.

Q - Nav Sheera

Thank you.

Operator

Thank you. We now have our next question from Uche Orji of JP Morgan. Please go ahead.

Q - Uche Orji

Good morning gentlemen.

A - Wolfgang Ziebart

Good morning.

Q - Uche Orji

A couple of questions. First on DRAM inventory. You are above your normal level by two to three weeks. Do you have a sense of how the overall industry inventory levels are? The reason I ask this is this is the week ahead of Chinese New Year and we have not seen much of an increase in contract price. And second question on that front is from the last few weeks we have seen a disconnect between contract and spot prices, with spot prices rising but contract not following through. Do you have any possible explanation why this is happening?

A - Wolfgang Ziebart

Loh, please?

A - Kin Wah Loh

First of all, for inventories, we have, as I say, consciously increased the prices. And I would say that in the first couple of weeks of January we got seen that the price of the DDR2 has stabilized and in some cases the spot prices have actually increased. So you can see that this is a good sign that we are coming back to normal. So we cannot comment on how the inventory status of our other friendly competitors. So I have no idea what they are doing. And last but not least, with response to the Chinese New Year, this I was not very clear about your question.

Q - Uche Orji

My question is, usually the weeks before Chinese New Year we tend to see a little bit of an increase in pricing as well as in contracts, but we haven’t seen that in the last two to three weeks. And Chinese New Year starts this week, I understand. So my view is this symptomatic of a wider inventory issue in the DRAM segment as to why we’re not seeing any run up?

A - Wolfgang Ziebart

No. I don’t think so. And the contract prices usually follow the spot prices with a certain delay. So the spot price only recovered recently. So we think that in the upcoming weeks then also the contract prices will follow the spot prices.

Q - Uche Orji

Right. Can I ask a question on the mix of your 90 nanometer and 110. What is the mix of that in the shipments so far? And also 512 against 256, please, can you just give me that detail?

A - Kin Wah Loh

At the end of September, we are about 10% of overall production. And coming -- going forward this quarter we expect close to 20%. On the DDR 512M at the moment, we are about -- the 512M we will increase to 65% average in this quarter.

Q - Uche Orji

Right.

A - Kin Wah Loh

That’s for instance wafer into our recent facilities. They are already above 50%.

A - Wolfgang Ziebart

Yes. And that was wafer out, which usually has a delay of, say, two months or so between wafer in and out.

Q - Uche Orji

Right. That’s helpful. And last question please. Flash, you talked about shipping out 1 gigabit products. Can you update us on your ramp plans for Flash, and at what point do we expect this to materially contribute to revenues?

A - Wolfgang Ziebart

Actually, there is no intention to ramp up the Flash production now, in the upcoming months. We still are in the phase of technology development. We think that we are not yet fully competitive as the current 110 nanometer node. We will be fully competitive at the 70 nanometer node. And as we have said in the past already, we will skip the 90 nanometer node and directly move into the 70. And this will then happen by at the end of the year, beginning of next year.

Q - Uche Orji

So for fiscal 2007 we should expect material contribution from Flash then?

A - Wolfgang Ziebart

Oh, that is correct.

Q - Uche Orji

All right. And sorry, I know I said lastly, but one more question from me on the inventory, let me go back to the inventory. If I look at the 15% increase, how much of that was from non-DRAM sources? Is it possible for me to split that? Is it possible for you to give us an idea?

A - Wolfgang Ziebart

No, that eventually we mentioned about DRAM related only.

Q - Uche Orji

Only DRAM related?

A - Wolfgang Ziebart

Yes.

A - Peter J. Fischl

No, no, no, we were talking about the entire increase in inventory correct. Okay, so we have and when you look at the balance sheet it’s about €150 million increase of which €50 million -- around €50 million comes from the consolidation of Altis. You have to keep in mind that we have extended the contract between us and IBM to 2009 and since we are the major beneficiary of this capacity according to the U.S. GAAP rules we have to, for the first time, consolidate those assets, so therefore the majority of this increase pertains to this consolidation.

Q - Uche Orji

Right. That’s helpful. Thank you very much.

A - Peter J. Fischl

You’re welcome.

Operator

Thank you. James Tickering of UBS has our next question. Please go ahead.

Q - Jonathan Dutton

Hi, I’m sorry, it’s actually Jonathan Dutton from UBS. Just in line with your guidance that shipments could increase anywhere north of 20%, and that production costs could be well below the September levels, based on the pricing environment that you’re seeing, what’s the sort of outlook for DRAM profitability in the March quarter? I know it’s difficult to forecast these things but is there any chance that you might see the division returning to profitability?

A - Wolfgang Ziebart

I would rather make no comment at the moment.

Q - Jonathan Dutton

Okay, and a follow-up question, just on your CapEx plans for 2006. I wonder if you could just highlight what they are, and also what the ramp schedule is for your Richmond, Virginia fab in terms of 300millimeter wafer output?

A - Wolfgang Ziebart

Now, Peter?

A - Peter J. Fischl

So the total -- the overall figure we anticipate for this fiscal year is around the level of depreciation which is €1.3 billion. As far as Richmond is concerned, Loh, you want to comment on that?

A - Kin Wah Loh

Yes, our ramp-up schedule is that we are now at the level of -- give me a minute for this -- we are at the moment 10,000 wafers plus per month, and it’s according to our plans.

Q - Jonathan Dutton

I’m sorry, what would it be by the end of calendar year ’06?

A - Kin Wah Loh

That will be 20,000 wafers starts per month.

Q - Jonathan Dutton

Great, okay, thank you.

Operator

Thank you. Francois Meunier of Cazenove has our next question. Please go ahead.

Q - Francois Meunier

Hello, I’ve got actually two or three questions. The first one is about the corporate cost guidance for Q2, if you could be more specific if you expect the losses to remain around €34 million. My second question regards headcount. Your headcount has increased quite significantly from 36.5 to 41. That’s more than 10%. Is this related to Altis and Richmond or is there something else? And also, if you could give a guidance for the tax element in Q2, because it looks quite big in Q1. Thank you.

A - Wolfgang Ziebart

Yes, Peter Fischl will answer those two questions.

A - Peter J. Fischl

Well, I’m trying to understand both questions.

A - Wolfgang Ziebart

Inaudible

A - Peter J. Fischl

You might have to help me. On the corporate reconciliation, the first statement I’d like to make is that in the Q1 and also in the Q2 we will have additional costs because of the move here in our new campus, so there is of course for a few months an additional burden because the old contract for leasing the buildings still generates some cost to us. That is the major deviation compared to the previous months, so this was also the major contributor to the €35 million which you see in Q1. In Q2 you should expect that those continue to go up for Q2 before they come down then in Q3 and in Q4. So I would say that there will be a significant increase in Q2.

A - Wolfgang Ziebart

And people – people…

A - Peter J. Fischl

What was the second question?

A - Wolfgang Ziebart

The second question was why are we now above 40,000 people, and this is related to two -- mainly to two effects, isn’t it, Peter?

A - Peter J. Fischl

Yes, one was the effect of consolidating Altis, so that is close to 2,000 people which we added, and the other one is a technicality in Asia which I think we have already alluded to last time where the temporary workers in our fab in Malaysia, those guys which we lease, so to speak, they have to be counted for legal reasons as full employees. These are the two special effects which we had to take into consideration.

Q - Francois Meunier

And tax in Q2?

A - Peter J. Fischl

I’m sorry?

A - Wolfgang Ziebart

Tax in Q2.

A - Peter J. Fischl

Yeah, let me elaborate a little bit on the tax situation because apparently we have a significant difference between the guidance and the – or the estimates, I should say, and the real developments. Let me explain this again. The key point is as soon as you project a loss for Infineon, you have to take into account that we have to make a valuation allowance on the tax carry-forward on the assets, so to speak. That really means that in Q1, for instance, on normal -- in a normalized situation, we would have had a tax receivable in the range of €60 million but at the same time, we had to make a loss of this valuation allowance on the tax assets which amounted to around €70 million and on top, we had to make an adjustment, also valuation allowance on tax strategies which were related to MP and now with the carve-out we had to make an adjustment here. So if you go forward and look at the tax estimates and calculations, in a loss situation, you should really anticipate that there is an additional charge which is in the range, I would say, for calculatory purposes, of 30% to 40%, and if we anticipate a profit situation, you should calculate a 35% tax rate.

Q - Francois Meunier

Thank you very much.

Operator

Thank you. Andrew Griffin of Merrill Lynch has our next question. Please go ahead.

Q - Andrew Griffin

Hi, the first question was just for Peter Bauer. I just wondered how long you think the Kulim and Perlach costs are going to continue to impinge the AIM division profitability? And I wondered if, whether now or maybe in the future conference call you’d be able to give us some idea of what the total cost plan is, and what the spending plan is, just so we can some quantitative idea of how that’s going, just to get an idea of what the clean profitability of that division will be in years to come?

A - Peter Bauer

Okay, to the first question, the transfer cost for the Perlach and the ramp-up costs in Kulim will remain for the full calendar year and so we said already it’s a high double digit number for the current fiscal year at the break of a three-digit number now, €70 million-€80 million I guess we already indicated. Secondly, you said the second question -- can you repeat, because I just…

Q - Andrew Griffin

Yes, I just wondered if you’d be able to quantify how far into that €70 million-€80 million you’re spending during the current fiscal year?

A - Peter Bauer

That is the number for the fiscal year.

Q - Andrew Griffin

I mean, but by quarter, so how much of that has been spent so far in the December quarter and how we might model over the rest of the fiscal year?

A - Peter Bauer

We did not specify that in detail, but it’s pretty equally distributed.

Q - Andrew Griffin

It is?

A - Peter Bauer

Yes, yes.

Q - Andrew Griffin

And if I may, I have another question for Mr. Loh on Memory. One of your competitors is currently roadshowing in the U.S. and has been talking publicly about manufacturing issues at Infineon with 90 nanometer. Just because that is a question that I suspect we’re going to get asked in the next few days from U.S. investors, is that something you’d be able to respond to right now?

A - Kin Wah Loh

Very interesting. I don’t know what they are talking about.

Q - Andrew Griffin

So no – basically, the answer is no problems at all?

A - Kin Wah Loh

For me, there is no problem.

Q - Andrew Griffin

Okay, thank you very much.

A - Kin Wah Loh

But nice to know! I haven’t heard so far, but interesting.

Q - Andrew Griffin

Give me a call!

A - Kin Wah Loh

Yes, thank you!

Operator

Thank you. Our next question comes from Stuart Adrian of Morgan Stanley. Please go ahead.

Q - Stuart Adrian

Yes, hi there. You talked about bit shipments, bit production in the current quarter. Could you give us an idea for the full fiscal ’06, what bit production growth is likely to be? And could you give us an idea about how much of that is coming from the ramp of Richmond and how much of that is coming from your external partners?

A - Kin Wah Loh

First of all, the current quarter, our bit production increased to 20%, and then from the remaining of the year, we’re growing according to the market, and hence, we do not give details of how much of it is coming from our in-house, the ramp-up of Richmond and then from our external partners.

Q - Stuart Adrian

How much do you think the market is – what is your market forecast for this year, then, for fiscal ’06?

A - Kin Wah Loh

You mean the whole year?

Q - Stuart Adrian

Yes, if you’re going to grow your production, fiscal ’06 in line with the market, what?

A - Kin Wah Loh

In the whole year we expect a bit growth of 50%, for the full year, for the market.

Q - Stuart Adrian

Okay, thanks and then just a question on the Comm business, when do you – once you’ve got this period of lower seasonal demand, when do you think we’re going to see some of these new design wins actually become visible on the top-line? Is that going to be a June quarter phenomenon or is it going to be a second half of the calendar ’06 year?

A - Wolfgang Ziebart

No, this is going to happen in the second half of the calendar year on the top-line.

Q - Stuart Adrian

And any views on whether it’s going to be third calendar quarter, fourth calendar quarter?

A - Wolfgang Ziebart

This depends in part on the third calendar quarter and of course we expect growth than in the first quarter -- in the fourth quarter.

Q - Stuart Adrian

Okay, thank you.

Operator

Thank you. Our next question comes from Mark Power of Redburn Partners. Please go ahead.

Q - Mark Power

Hi, good morning. Just a quick question in your Memory Products division, would you guys help us to model the level of EBIT losses attributable to your NAND Flash business through this year? For example, did NAND Flash cause more than single digit million EBIT losses in the December quarter? That would be very helpful.

A - Kin Wah Loh

So it is a low double digit.

Q - Mark Power

Is that pretty much going to stay for the rest of this year, or will it increase?

A - Kin Wah Loh

I mean to say in this low double digit figure per quarter – per quarter.

Q - Mark Power

Great, and could you update us on the level of capacity utilization in your Logics facilities please?

A - Wolfgang Ziebart

Well, that depends very much on the technology. It is currently in between 70% and 100%.

A - Peter Bauer

In power we are pretty much fully loaded. There are some technologies on the Advanced Logic side where there is still some headroom but pretty good load.

Q - Mark Power

In your Dresden Logic facilities could you be more specific in that?

A - Wolfgang Ziebart

No, that’s currently fully loaded too as we add the 130 nanometer technology there, which is currently loaded. And what is less loaded is the C10 so the 180 nanometer technology.

Q - Mark Power

That’s very helpful. Thanks very much.

A - Wolfgang Ziebart

Yes.

Operator

Thank you. We have our next question from Karsten Iltgen of WestLB. Please go ahead.

Q - Karsten Iltgen

Yes, hello, thanks. I have two questions, the first one again on wireless customer wins. You’re mentioning two major customer wins in the quarter. Is it -- would you consider major to be top six, or what does major mean?

A - Hermann Eul

Yes, this means top six.

Q - Karsten Iltgen

And is that in addition to your existing well known customer base, or is it one of those or maybe both?

A - Hermann Eul

Additional, in general, we do not give you those details actually, but some of them are new and some of them are already existing, and all of them are out of the six, seven big players in the industry.

Q - Karsten Iltgen

Okay, and this one which is new, is it also new when compared to what you told us in November, so what is a December customer win?

A - Hermann Eul

Yes.

Q - Karsten Iltgen

Okay. And the other question is on memories, it seems that the share of graphics DRAM, I think, remains stable or at least the specialty DRAM you mentioned was stable in the quarter. Why could you not increase the share of graphics DRAM as you had planned at the beginning of the quarter? What was the problem there?

A - Kin Wah Loh

We have no problem but some issues -- which we are not addressing in this quarter.

Q - Karsten Iltgen

Was it just the wrong customer mix, or?

A - Kin Wah Loh

Just some specific applications.

Q - Karsten Iltgen

Okay, thank you. Thanks a lot.

Operator

Thank you. Antoine Badel of Credit Suisse has our next question. Please go ahead.

Q - Antoine Badel

Yes, good morning. I’d like to ask you for some qualitative comments about logic demand in the March quarter. You mentioned seasonal inflexions for Automotive, Wireless and Industrial, up or down, depending on the segment. I’m wondering if in any of those segments you are seeing a deviation from typical seasonality, whether positive or negative? We’ve heard from some of your competitors that they expected better than seasonal sequential growth in Industrial or Wireless. I’m wondering if you’re seeing the same sort of thing?

A - Peter Bauer

Yes, and I would tend to agree to that. The first quarter was very high. Typically we have a seasonality in Automotive, Industrial is that – at least in Automotive is that the first quarter, our first quarter fiscal, the fourth quarter calendar, is pretty low, and for the first time ever, actually, we saw an increase in revenues in that fourth quarter calendar, first quarter fiscal. So that was pretty unusual. Going forward, we also expect Automotive to be stable to up. With regard to the Industrial business we saw a nice Christmas business for consumer and computing, and we also got some bigger share in Asia. For those businesses sold to there we tend to see a strong market development during the year for this business, and also our business performing well. Again, our guidance on the Q2 is a cumulative effect of a number of factors, but not that I’m concerned about the market development right now.

Q - Antoine Badel

And lastly, you’re increasing R&D spending for Automotive this quarter. What is the driver for that? Are you expanding the portfolio or are you just handling more development work for existing customers?

A - Peter Bauer

Well, it’s two-fold. On the one hand, our development pipeline is 100% full, actually, I would say 120% full, so we need to increase really on R&D resources for ASIC development, and that is product development related, and the second is technology development, as the road map moves ahead for smaller geometries, we’re also investing there. There are two major effects which we think is useful and because this is a profitable business in the double digit range, and I think it makes much sense to invest here.

Q - Antoine Badel

Thank you.

Operator

Thank you. Our next question comes from Gunther Hollfelder of HVB. Please go ahead.

Q - Gunther Hollfelder

Actually, just one question left. I was wondering whether you could comment on the progress of your VDSL2 project with Siemens, ECI and Deutsche Telecom? Is there already now -- do we have a design win, and how is the ramp-up going to look like?

A - Wolfgang Ziebart

Inaudible the answer.

A - Hermann Eul

So this is Hermann Eul speaking, so actually, we do not comment on customers in detail but I can confirm that we have already delivered first orders for the VDSL2 market for deployment.

Q - Gunther Hollfelder

Okay, thanks.

Operator

Thank you. Our next question comes from Johannes Ries of Cominvest. Please go ahead.

Q - Johannes Ries

Yes, good morning, maybe first regarding a question regarding your Communications business. You mentioned just in the 6 quarters maybe to get where possibly to. You also mentioned you need 10% of market share which is based on you are around 5% to 6%, and you are expecting the design wins you already got in the last two quarters to really go in production and help you in the second half of the year. Therefore, maybe first question, do you need further design wins to come to the 10% or how much of the 10% is already secured by the design wins you’ve got up to date? And on the road, could it maybe be different in the next quarter because maybe your major customer has – for you maybe your own customer is under some pressure, especially in Germany? nd secondly, on the shipped card business, you mentioned in Q4 of the business here, you expect to reach the break-even and you already saw some improvement during last quarter. Would that be a permanent improvement, or was there maybe a big jump because of a new chip card design in the last quarter?

A - Hermann Eul

So I start, this is Hermann Eul speaking. You referred to the seasonality of the revenues or the next quarter. Actually, from our history we know that fourth quarter in the calendar year has already occurred and it’s not one – it did not happen this time, but we for sure expect that the first quarter in the calendar year, the seasonality driven, will be weaker than the quarter before. Then you refer to the 10% of market share. In the meantime, we have secured very good inroads into new customers to that we see that we are on a good track towards our market share which we need.

Q - Johannes Ries

Regarding to this, sorry to disrupt you, does it mean you are already half the way between the 5% to 6% to the 10%, or something like this, secured by…

A - Hermann Eul

Not in actual revenues, but in what is going to come.

A - Peter J. Fischl

Yes, that’s positive.

A - Hermann Eul

Yes, I think it is up to you to make up your mind to which extent. Other customers can make it a percentage of market share, so I think the customer base is on a good path, and then we will see how successful these customers are and it’s a good customer base which we are designed in two, so we are fairly confident that we are on the right track here.

A - Wolfgang Ziebart

Let me be a little bit more specific regarding your question, and on your question directly. Of course, we are very happy and every new customer is welcome, but to reach the target I mentioned, those customers we have gained, will lead us to that target.

Q - Johannes Ries

Okay.

A - Peter Bauer

With regard to chip cards, your question to chip cards, it is Peter Bauer. There will be another jump. And the improvement is very much according to the guidance I gave last quarter. I said last quarter we probably see the bottom reached of this in Q1 and have a turn in Q2 for break-even in the fourth calendar quarter. That was the guidance we gave, and I very much would like to stick to that because we are in -- absolutely in plan with our restructuring measures, and so far it did not have adverse surprises any more in the market, even though visibility is low. And this is a -- the reason for that is a multitude of improvements we are currently driving. We have lower front-end costs. We have less inventory write-offs. We have much reduced on the R&D expenses. We have a better mix in product as we won some ID businesses and payment businesses versus the lower margin Communication and SIM business. We have increases in our TPM business and finally, we have a better costs structure because of the introduction of smaller Flash cell and the FCOS modules. So it’s a multitude of programs we are running there, and even though visibility again is low in this market, at the moment we act a little bit irrationally from a pricing side. I can stick to the guidance.

Q - Johannes Ries

Okay, and it will be a steady improvement over…?

A - Peter Bauer

Yes, hopefully so. If we don’t get any adverse surprises from the pricing side, which I’m not seeing right now, it would be a steady development, I would think.

A - Ulrich Pelzer

Excuse me, Duncan, I think we’ve got time for one more question please.

Operator

Thank you. Our last question then comes from Janardan Menon of DrKW. Please go

ahead.

Q - Janardan Menon

Yes. Thanks for that. Just a follow-up on the Flash part. We’ve been hearing from you for I think, well over two years now that we are not yet ramping yet but we are continuing. The question I have is, what are we waiting for? You’re saying you’re losing a double digit Euro loss every quarter, so you’re running at €40 million or €50 million of loss every quarter. It’s been going on for years right now. What is your level of confidence that within a year or so you can get to an acceptable level of -- competitive level of technology and can move this into more sort of aggressive production and profitability? And the second very small question, there’s a €20 million-€40 million charge. Can you tell us where it is coming from? Is that Perlach, and will that go into Comms, effectively, in Q2?

A - Wolfgang Ziebart

Yes, well, I’ll answer the first question about Flash. First, the level of losses you were mentioning is much lower. We have much less of a loss per quarter. I have indicated a low double digit and this is not what you mentioned €40 million or so. Second, we are absolutely in plan regarding our technology development in the Flash business. There has been no deviation. There has been no disappointment, nothing. We even have increased the speed and the recent 110 nanometer conversion, for instance, took place ahead of time and the upcoming events in 70 nanometer also are absolutely in line with our plans, so there is no deviation so far from the original plan, neither in timing nor in cost. Second, then, is the one-time charges of €20 million-€40 million and Peter Fischl wants to comment on that.

A - Peter J. Fischl

Yes, first of all, this is not related to Perlach because those costs which we incur with the Perlach transition to the other sides are subject to the cost of sales of the business segment. So this is not included then in special charges, for instance, for restructuring. So there are two items that I’d like to name without being too specific. One is some restructuring in some areas, and also some legal costs, so we just give you a range because we know we will incur some costs without being able, at this point in time, to really specify this, so just for your projections we thought that this is the appropriate indication.

Q - Ulrich Pelzer

That, I think, brings us to the end of the conference call. Thanks to all participants for your attention and for your questions. If there are any questions that have remained unanswered, please do not hesitate to contact the Investor Relations team of Infineon, both in Munich and in San Jose. Thanks again for your attention and we’ll speak to you again next quarter. Bye-bye.

Operator

Thank you. Ladies and gentlemen, that will conclude today’s conference call. Thank you for joining us. You may now disconnect.

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Source: Infineon Technologies AG F1Q06 (Qtr Ending Dec 31, 2005) Earnings Conference Call Transcript (IFX)
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