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Executives

Ulrich Pelzer - IR

Dr. Wolfgang Ziebart - President and CEO

Prof. Dr. Hermann Eul - EVP and Head of Communication Solutions Business Group

Peter Bauer - EVP and Head of Automotive, Industrial and Multimarket Business Group

Dr. Marco Schröter - EVP and CFO

Dr. Reinhard Ploss - EVP and Head of Operations

Analysts

Nicolas Gaudois - UBS

Janardan Menon - Dresdner Kleinwort

Sandeep Deshpande - JPMorgan

Kai Korschelt - Deutsche Bank

Jonathan Crossfield - Merrill Lynch

Simon Schafer - Goldman Sachs

François Meunier - Cazenove

Andrew Gardiner - Lehman Brothers

Didier Scemama - ABN Amro

Günther Hollfelder - UniCredit

Adrien Bommelaer - Crédit Suisse

Jérôme Ramel - Exane BNP Paribas

Infineon Technologies AG (IFX) Q2 FY08 Earnings Call April 23, 2008 4:00 AM ET

Ulrich Pelzer - Investor Relations

Thank you very much and thank you also for reading the introduction. Welcome everyone on behalf of Infineon to our Fiscal Second Quarter Conference Call. We have published the results, financial statements this morning. You've hopefully had a chance to read them, they are available on our website. With you on the call as per usual is the entire Infineon Management Board; Wolfgang Ziebart, our CEO; Hermann Eul, responsible for our Business Group Communication; Peter Bauer, AIM; Reinhard Ploss, for operations and first time on the conference call with Infineon is Marco Schröter, our CFO since beginning of April.

The proceedings as usual will be a couple of introductory remarks by Wolfgang Ziebart and then we will move onto Q&A. With that over to you.

Dr. Wolfgang Ziebart - President and Chief Executive Officer

Thank you Ulrich, good morning ladies and gentlemen. Welcome to our fiscal Q2 results conference call.

Before I comment on our performance during the last quarter and the outlook for the next quarter, let me make a couple of remarks regarding Qimonda and the announcement we made two days ago. Qimonda has demonstrated good cash management and its ability to tap capital markets as well as other financing means in recent quarters. Qimonda's quarterly results announced on Monday showed solid cost cash position and we continue to have no intention to fund Qimonda. In fact during the second quarter we initiated a plan for disposal to arrive at a minority position at the latest around of our next general assembly in February '09 and we are currently evaluating our different alternatives. As a result we have reclassified our interest in Qimonda as assets held for sale, in consolidated balance sheet of Infineon as of March 31, 2008 and we've recorded a write-down of 1.004 billion euro reducing our investment to it's estimated fair value less cost to sale.

Going forward, we now will report the P&L with individual line items reflecting only our results from continuing operations meaning for Infineon without Qimonda. Our P&L going forward will therefore give you a much clearer picture of the performance of our core businesses.

An increase in clarity will also be achieved for the balance sheet which will show only assets and liabilities relating to our core businesses, in all but two line items, assets and liabilities held for sale. The treatment of our interest in Qimonda as assets held for sale requires that we recognize gains and losses in future periods for changes in its fair value less estimated costs to sell.

All results relating to Qimonda including potential gains and losses from changes in fair value will be contained in an additional lined item called income or loss from discontinued operations. The write down as well as our share in Qimonda's net loss for the quarter is included in the loss from discontinued operations of €1.3 billion that we have announced today. I would like to stress that this write down was a non cash charge that did not affect our liquidity position. As of March 31, 2008 we had a cost cash of €850 million and we feel very comfortable with this cash position.

With that let me come to the events of the last quarter. Revenues came in at €1.049 billion, up 7% from the same quarter in the prior year. The year-on-year cost was driven largely by organic growth as well as the integration of the mobile phone activities acquired from LSI within our communication solutions segment. Also the bulk of the cash flow impact of the weakening exchange rate of the U.S. dollar against euro has been hedged for the '08 fiscal year. The exchange rate development is still negatively impacting the top line. Slipping out the impact of exchange rate fluctuations and also of acquisitions and divestitures our like-for-like constant currency revenue growth rate in the last quarter was 10% year-over-year. This illustrates that cost potential that we can realize in our three focused areas energy, efficiency, communications, and security.

Infineon's EBIT was positive €36 million for the second quarter of the '08 fiscal year, up from negative €29 million a year ago. Included in Infineon's EBIT for the fiscal second quarter '08 the net charges of €8 million mainly in connection with restructuring. Including in Infineon's EBIT for the same quarter in the '07 fiscal year the net charges of €29 million. When you adjust for those items you will see that we have made good progress on the earnings front year-on-year despite the negative currency impact.

In addition to the net charges, Infineon's EBIT for the second quarter included €5 million for amortization of the acquisition related intangibles on the two businesses we acquired from TI and LSI. On a net income level we are pleased to report income from continuing operations of €19 million or $0.03 per share versus a loss of €25 million or a loss of $0.04 per share the same quarter last year.

Now let me turn to the second quarter performance of our segments. Reported AIM revenue for the second quarter fiscal year '08 came in at €741 million which was flat year-over-year and broadly flat quarter-over-quarter. Excluding the effects of divestitures and adjusting for the weakening U.S. dollar against the euro our year-over-year growth rate was 9% while our growth quarter-on-quarter was 1% on a constant currency basis. EBIT was €69 million up from €59 million a year ago. Net gains or charges included on both quarters... included in both quarters were negligible. Results in our automotive business improved quarter-on-quarter and year-over-year and the increase occurred despite ongoing weakness in demand from U.S. auto OEMs due to largely seasonal improvement across all our businesses with ongoing solid demand in the European and Asian markets.

As sales in our industrial and multi market business they are down compared to last quarter due to the usual seasonal pattern in the consumer computing and telecom markets. Over the course of the quarter we saw ongoing weakness in the low voltage MOSFETs, for high voltage MOSFETs and discretes we saw the typical seasonal weakness early in the quarter and the typical seasonal pickup in demand towards the end of the quarter.

Demand for high power components for electrical infrastructural correction in industrial has moderated somewhat but overall remained strong. Results in our security and ASIC business remained basically unchanged compared to the last quarter but improved significantly year-over-year. Once again chip cards made a solid contribution driven both by demand for SIM cards and passport solutions. Our ASIC business by contrast declined quarter-over-quarter due to the normal seasonality in our hard-disk, game console, and transit platform module businesses.

Income, revenues for the second quarter of the '08 fiscal year came in at €302 million down 15% quarter-over-quarter but up 27% year-over-year. Excluding the effects of acquisitions and changes in the U.S. dollar exchange rate against the euro, sales declined 15% versus the first quarter of the '08 fiscal year but grew 10% year-over-year. Segment EBIT income was negative €29 million up from negative €56 million a year ago.

Segment EBIT contained no significant net gains or charges in either quarter. Included in the segment EBIT for the second quarter of fiscal '08 are €5 million for the amortization of acquisition-related intangibles relating to the businesses acquired from TI and LSI. Then looking at the individual businesses with income, we are pleased to report that results in our access business have stabilized but at a low level. By contrast, revenues in our wireless business fell strongly compared to last quarter as expected. As outlined in the last quarter's outlook, a large portion of that decline was due to seasonal effects and other portion of the decline related to lower than expected volumes in certain mobile phone projects in particular reduced demand for an EDGE product, slightly lower market share with our LSI products, and somewhat weaker demand in China.

Looking at the quarter from a product point of view, we extended our leadership in single chip cost effective solution and sampled first GSM, GPRS and EDGE Single Chip solutions produced in 65 nanometer. The X-GOLD 113 and X-GOLD 213, both integrate the base bend, the RF transceiver, power management unit, and FM Radio in a single tie. We also achieved design wins for our HSDPA and our high end EDGE platform, our HSUPA RF transceiver SMARTi UE Plus and our GPS Single Chip solution Ham-merhead 2.

In other operating segments and corporate eliminations combined segment EBIT was negative €4 million in the second quarter, included in this figure, the charges of €8 million, mainly in connection with various restructuring measures.

Now let me turn to the outlook for Infineon for the third quarter '08 financial year. Overall demand trends are mixed in line with the global economics climate. In addition, our top line is impacted by the U.S. dollar exchange rates against the euro development. Translating this into figures, we anticipate Infineon fiscal third quarter sales to be flat-to-down slightly quarter-over-quarter with low single digit positive Infineon EBIT margin excluding net gains or charges.

In addition, we expect to record a gain of approximately €40 million from the sale of our hard disk drive IC business to LSI. Especially for AIM, we believe that sales should decline by low single digit percentage compared to the last quarter. The decline will be driven basically by the exchange rate development and the deconsolidation of our hard disk drive business. We expect the AIM segment EBIT margin to come in at 8.5% to 9.5% prior to gains or charges. In addition, we expect to record the €40 million on one time gain that I just mentioned.

In our automotive business, we believe that production cuts in the big three U.S. common interests [ph], can be compensated by demand growth in Europe and Asia. As such, we believe that sales in our automotive business will remain totally unchanged from last quarter. Sales in our industrial and multi market business should be about flat compared to the prior quarter. As I said earlier, demand for high voltage MOSFETs and discretes has improved moderately from the seasonal low points of last quarter and activity levels in high power industrial components remain high. Demand for low voltage MOSFETs for consumer and computing products however, remains weak.

Finally, results in our Security and ASIC business are likely to be lower in the fiscal third quarter than they were last quarter. This decline will be driven in part by the sale and therefore deconsolidation of the hard disk drive business that we expect to occur in the first half of the quarter. In addition, after a number of very strong quarters in demand for chip card products we now expect some normalization.

Let me now turn to the COM outlook, we expect sales for the third quarter of '08 fiscal year to increase by a mid to high single-digit percentage quarter-over-quarter despite an expected negative effect from currency fluctuations. The EBIT loss should narrow to approximately negative €25 million excluding any net gains or charges. We believe that results in our access business will be broadly comparable to the second quarter. Our wireless business however, should return to quarter-over-quarter growth. As we announced earlier today, we have started shipments of our new HSDPA platform to Samsung in the current quarter. This is an important extension of our relationship to this customer and it marks the entry into a high growth market segment with significant U.S. dollar content per phone.

In reporting the start of shipments of our HSDPA platform to Samsung we are delivering on our outlook to ramp HSDPA in the first half of '08 calendar year. More precisely we guided that we expect shipments to two customers in that timeframe and we remain confident that this will also be able to ramp... we'll also be able to ramp the second customer in this quarter. In addition to that we expect to see initial shipments of our single chip EDGE platform and the continued ramp into meaningful volume of our high-end 90 nanometer based Edge chip set in the current quarter. We remain confident that we will begin shipments of our single chip GSM, GPRS phone to Nokia in the summer with meaningful volume expected in the fourth quarter of '08 calendar year.

In other operating segments we expect revenues to decline compared to the prior quarter as shipments of DRAM wafer out of Infineon's 200 millimeter wafer facility to Qimonda will come to an end during the quarter. EBIT in other operating segments and corporate and eliminations combined should be approximately negative €20 million excluding net gains or charges. This is slightly higher than in a normal quarter due to some temporarily idle cost associated with the ramp down of production of 200 millimeter wafers for Qimonda at our Dresden facility.

Infineon's outlook for fiscal year '08 and '09. The outlook for '08 remains unchanged. For Infineon we expect high single-digit revenue growth with low-to-mid single digit positive Infineon EBIT margin excluding change, gains, or charges. We expect AIM sales to be down slightly year-over-year with a slight year-over-year decline in EBIT excluding gains and charges. In Com we anticipate revenue growth of 25% to 30% year-over-year with a low-to-mid single digit, negative EBIT margin excluding net gains or charges. Included in this expected negative EBIT will be an amortization of acquisition-related intangible assets of approximately €25 million. With regards to the '09 fiscal year we maintained our 10% Infineon EBIT margin target when we reported our results last quarter, even so the fall of the U.S. dollar against the euro by that point to 1.45 already presented at serious headwind.

However, during the last quarter alone, the U.S. dollar exchange rate against the euro has again deteriorated in a very severe way dropping from about 1.45 to the current level of about 1.60. Should an exchange rate of 1.60 is sustained throughout the entire '09 fiscal year this 15% deterioration would lead to a reduction in Infineon's EBIT of about €120 million compared with the '08 fiscal year based on our current revenue projections. Achieving 10% EBIT margin after an additional hit implied by this exchange rate would not be possible. Against this account, we have strongly accelerated all margin improvement measures that we are implementing across the company. We therefore see the potential despite the significant currency hit to maintain EBIT margins in our AIM segment at a high level and to achieve positive EBIT income next year excluding net gains or charges.

Before turning to Q&A, let me now make a final remark on IFRS. Effective October 1, 2008, we will introduce IFRS as primary gap for Infineon. We will show the bridge from U.S. GAAP to IFRS at the publication of our fourth quarter figures in December '08 starting with the accounts for the first quarter of the '09 fiscal year, we will not apply U.S. GAAP any longer and work with IFRS instead.

Ladies and gentlemen this brings me to the end of my introductory remarks. My colleagues and I will now be happy to answer your questions.

Question And Answer

Operator

Thank you. [Operator Instructions]. We will take our first question from Nicolas Gaudois from UBS. Please go ahead.

Nicolas Gaudois - UBS

Yes, hi good morning. Just wanted to ask a question on RAMs we could expect some of the communications happened [indiscernible] in the second half of the calendar year end and potentially 2009, could we see additional HSDPA customers starting to ramp in this timeframe, so in addition to some that they are disclosing today? And secondly in addition to EDGE for single chip EDGE which is ramping this quarter, could we see another customer coming in, in the next 12 months, what you can see? Thank you and I have got a follow-up.

Dr. Wolfgang Ziebart - President and Chief Executive Officer

Thank you Nicolas, Hermann Eul will answer that question.

Prof. Dr. Hermann Eul - Executive Vice President and Head of Communication Solutions Business Group

Yes, good morning and thank you for the question concerning the RAMs, you already mentioned the design win for the HSDPA which we have announced now and I expect that this customer goes to volume also in this calendar year. So this would then be the third one and of course we continue working on further design wins as well for HSDPA as well as for the H-single chip.

Nicolas Gaudois - UBS

Okay, and this first customer would you qualify him as tier 1?

Prof. Dr. Hermann Eul - Executive Vice President and Head of Communication Solutions Business Group

For us this is an important customer, however, it's not amongst the lets say, the traditional tier 1's.

Nicolas Gaudois - UBS

Okay, great and a question on Qimonda. I mean, how should we read the fact that you decided to place the assets on the sale now. I mean has there been an acceleration of your plans which were or you intent already to go below 50% ownership which was already known. And I understand you may not be able to give us too many details but should we assume that you are working on several options including placing dividend in shares or M&A.

Prof. Dr. Hermann Eul - Executive Vice President and Head of Communication Solutions Business Group

Well Nicolas we announced quite some time ago that we want to go in shareholding in Qimonda below 50% at the AGM 2009 and the next AGM. And this deconsolidation we have announced and I have taken end of March quarter, it is just one step to consequently put this into practice.

Nicolas Gaudois - UBS

Great and in terms of options, I mean are you looking at M&A placing dividend?

Prof. Dr. Hermann Eul - Executive Vice President and Head of Communication Solutions Business Group

We are looking at any different options. We have cleared the way for also dividend in kind in the last AGM so we have now all means available for us to reduce and to achieve that target.

Nicolas Gaudois - UBS

Okay. Thank you very much.

Operator

We now have a question from Janardan Menon from Dresdner. Please go ahead.

Janardan Menon - Dresdner Kleinwort

Hi, good morning. Two questions. One Dr. Ziebart you said that because of the currency going against you, you have strongly accelerated margin improvement measures. Can you give us a little bit more clarity on what exactly these margin improvement measures are and to what extent they can bring down your cost structure and what kind of margin improvement we can expect a little out that?

Dr. Wolfgang Ziebart - President and Chief Executive Officer

Yeah, Janardan, while the initial measures we have taken to compensate for the decline of the U.S. dollars, measures like for instance switching contracts for euro based suppliers to U.S. dollars and things like this. What we have now started is also to quite some extent shift value creation from euro based operations into either dollar based operations or to Asia. I would like to give you one example for instance, we have outsourced quite some activities in IT in the past and we have changed this to in-sourcing, but in-sourcing here to Germany but we have founded a new IT site in Melaka in low cost area where we already have built up 150 IT people to take over the work which we have outsourced regionally here in Germany so far.

So that is just one example of the type of measures we are now taking, shifting value creation over to low cost areas or to U.S. dollar based countries. And regarding the effect, we have so far been able to compensate quite a lot of the strong headwind we have experienced coming from 135 exchange rate going to 145. And what we see now in the last quarter that this has even accelerated and within one quarter now the exchange rate has changed from 145 to 160. So, that's the biggest change ever we are doing compared with what we experienced in the last years. So we again are strongly working against this, but I cannot be more precise about what we are going to achieve then what I just said.

Janardan Menon - Dresdner Kleinwort

Okay. And just a follow up on the handset side, you said that the new design win on the HSDPA platform is not a top tier customer, as we sort of know them. What about the EDGE design win, is that with the top tier customer, would that also be a similar kind of customer with whom you've got that HSDPA design win?

Dr. Wolfgang Ziebart - President and Chief Executive Officer

The second portion, yes the EDGE design win is with the top tier and the other one, the HSDPA is with the customer, we have very stable relationship to and which is doing very well in his respective markets.

Janardan Menon - Dresdner Kleinwort

So with the EDGE design, top tier design win be with a customer with whom you don't have a current relationship or is it someone you have an existing relationship?

Dr. Wolfgang Ziebart - President and Chief Executive Officer

In the meantime, we have relationships to all the top five handset manufacturers either by having running business or at least having significant design win. So this is not additional information. It is a top five customer.

Janardan Menon - Dresdner Kleinwort

Got it. Thank you very much.

Dr. Wolfgang Ziebart - President and Chief Executive Officer

Thank you. You are welcome.

Operator

We will now take your question from Sandeep Deshpande from JPMorgan. Please go ahead.

Sandeep Deshpande - JPMorgan

Hi, good morning. A couple of questions from me. Firstly, on the automotive business, I mean there have been a lot of changes with the Siemens VDO being acquired by Conti, does that change the strategic position of your business into Conti at this point and does that change any of your revenues over a one or two period and I have a follow up on this.

Dr. Wolfgang Ziebart - President and Chief Executive Officer

Okay, Peter.

Peter Bauer - Executive Vice President and Head of Automotive, Industrial and Multimarket Business Group

Thanks for the question. There is no big change, actually I said couple of quarters ago when this was on the horizon that there is opportunities as well as there is obviously pressure. And today I would say it's rather more on the opportunity side for us than on the pressure side. The customer relationship has worked out extremely nice. We have just won the best supplier award in the last supplier conference with Conti and we are in the process of finalizing our works with the joint entity of Siemens VDO and Conti and I would say we are going forward. On the long run very many opportunities in the field of power and micro controls.

Sandeep Deshpande - JPMorgan

So there is no change on the near-term.

Peter Bauer - Executive Vice President and Head of Automotive, Industrial and Multimarket Business Group

No, I mean as usual in the merger, there is price harmonization etc. but that's all factored into our guidance.

Sandeep Deshpande - JPMorgan

And following on the comp side, couple of things, I mean there has been some consolidation in the overall comps business, wireless comps business, I mean within ST and XC, etc. So... I mean how does... I mean you are mainly a modem supplier. I mean, how do you see yourselves progressing in this market, I mean do you see there being pricing pressure particularly with another major player having single chip solution given that you are a major player in the single chip market, do you see competitive landscapes changing significantly in this market?

Peter Bauer - Executive Vice President and Head of Automotive, Industrial and Multimarket Business Group

I think the situation remains more or less unchanged. We have good products in the market, we were the first company GPS, GSM, single chips. In the meantime I have sold much more north than 50 million out of this. We are the first pumping an EDGE single chip as well. And we have a 65 nanometer EDGE single chip on the table. So I think this is a clear leadership position and this is complemented, we have 3G platform in the market one and half years which is much more mature than anything else from this competitor and HSDPA is already ramping now. So we are not really concerned, we bank on our assets and I think they will carry us further in the good future.

Sandeep Deshpande - JPMorgan

Thank you.

Operator

We now have a question from Kai Korschelt from Deutsche Bank. Please go ahead.

Kai Korschelt - Deutsche Bank

Yes good morning. My first question would be post your cost cutting measures roughly what exchange rate would you need in order to achieve the original 10% margin targets and the second question is could you just remind us please on your hedging beyond September of this year? Thank you

Dr. Wolfgang Ziebart - President and Chief Executive Officer

Well, I thought I would be precise enough on the outlook here was the current 1.60. We cannot achieve the original target, that is clear. We have said a quarter ago that at 1.45 achieving that target becomes very challenging. We have to put measures in place to even improve at that currency level. I would like to remind you that when we announced that target the euro dollar exchange rate was 1.22 and you know that each cent has an impact on our EBIT of close to between €8 million and €10 million. So we have strongly already worked against this trend but at 1.60 we really see no chance.

Kai Korschelt - Deutsche Bank

Thank you and the --

Dr. Wolfgang Ziebart - President and Chief Executive Officer

Marco, just a second there, Marco, do you want to add something?

Dr. Marco Schröter - Executive Vice President and Chief Financial Officer

We have hedged the U.S. dollar exposure until end of September up to 1.45 and we have not taken any decision for the coming year which we will probably be taking in the next week how to arrange or say for hedge for the coming year.

Kai Korschelt - Deutsche Bank

Thank you.

Operator

Jonathan Crossfield from Merrill Lynch, ask the next question. Please go ahead.

Jonathan Crossfield - Merrill Lynch

Yes, thank you, good morning. We saw quite a sharp decline in your R&D spending quarter-on-quarter and is that going to be sustainable or should we expect R&D to change normal seasonality and ramp through the year.

Dr. Wolfgang Ziebart - President and Chief Executive Officer

Who wants to comment on R&D spending, Peter or Hermann? Marco, okay.

Dr. Marco Schröter - Executive Vice President and Chief Financial Officer

Last quarter we had ideal write-down from our LSI business which was acquired which explains the biggest gap between the decline there.

Prof. Dr. Hermann Eul - Executive Vice President and Head of Communication Solutions Business Group

There is a steady run rate of R&D, we are not increasing but we are not also declining from the factual personnel cost and R&D cost.

Jonathan Crossfield - Merrill Lynch

Okay, so that's one-time effect which causes that decline.

Prof. Dr. Hermann Eul - Executive Vice President and Head of Communication Solutions Business Group

We do have slight declines in Com quarter-over-quarter.

Jonathan Crossfield - Merrill Lynch

Okay and then just as a follow-up, you have done several designs you haven't had the GPS products. Can you update us on your roadmap in GPS given [indiscernible]?

Dr. Marco Schröter - Executive Vice President and Chief Financial Officer

Actually nothing more to add to this one compared to that what I said in the last Barcelona conference. So we are working on getting a successor to the market and we are not yet ready to announce how that will be. We are working in getting this to the market you can rely on.

Jonathan Crossfield - Merrill Lynch

Okay, thanks.

Operator

Simon Schafer from Goldman Sachs has the next question. Please go ahead.

Simon Schafer - Goldman Sachs

Hi there, thanks so much. I wanted to ask about the debt obligation or the maturity of your convertible next year. How is the company looking at potential options to refinance that? And I guess adjacent to that how do you square that with potential M&A that you may have to pursue especially given that there is some consolidation going on elsewhere?

Dr. Wolfgang Ziebart - President and Chief Executive Officer

Marco, could you answer that.

Dr. Marco Schröter - Executive Vice President and Chief Financial Officer

Okay. Convertible will mature in 2010 up to now we have taken no decision but we will think about that in due course. Though I think we have enough time to think about that.

Simon Schafer - Goldman Sachs

And how does that tie-in with potential M&A that you still may have to do especially if there seems to be some acceleration in the competitive landscape in terms of M&A?

Dr. Marco Schröter - Executive Vice President and Chief Financial Officer

Yeah, well we don't have to do some acquisitions but there are opportunities around and we would like to strongly consider those and we feel ourselves strong enough to do that in spite of the upcoming repayment of that convertible in '10.

Simon Schafer - Goldman Sachs

Understood, thanks. My second question would be on the automotive and industrial business. Can you guys give an update on... just where wafer starts are now, is that kind of similar profitability levels to your fully ramped facilities, or in other words when are we beginning to see some of the real upside there in terms of margin accretion?

Dr. Wolfgang Ziebart - President and Chief Executive Officer

Reinhard Ploss will answer that question.

Dr. Reinhard Ploss - Executive Vice President and Head of Operations

So as we have slowed down in the revenue growth a little bit the built up of the cooling factory also slowed down. But in extra measures to reduce the cost and to bring up the productivity we were very successful in qualification and yield improvement on new technologies or the transferred technologies. So basically even on lower run rates in Cool we are on the cost target and we expect that in the next quarters we will see the gross margin improvement due to the better improved cost phase in Cool will materialize.

Simon Schafer - Goldman Sachs

Is there any type on wafer start level that you need to get through in order to reach margin accretion versus your existing fabs in Europe?

Dr. Reinhard Ploss - Executive Vice President and Head of Operations

I would say from the overall productivity level we still have to grow a bit and I think at the end of the fiscal year we are on that level. So this is something which is pretty much in line. It is due to the good progress we made there. I would say 20% less for the total productivity level or the economy of scale than we expected, so Cool [ph] comes in very nicely.

Dr. Marco Schröter - Executive Vice President and Chief Financial Officer

Let me add to that regarding cash cost, the [indiscernible] will be out there soon and we will add it to full cost. Of course this will take some time as Reinhard just explained.

Simon Schafer - Goldman Sachs

Great. Thanks so much. Thank you.

Operator

Our next question comes from Carrie Pitski [ph] from Credit Agrical [ph]. Please go ahead.

Unidentified Analyst

Hi, I had question, a couple of questions on Coms. First of all you've mentioned weakness in China. Could you maybe give a little bit ground reality in terms of what's happening in the market, is it specific financial or maybe it's the weakness in the market and if it is weakness in the market then is it replacement or is it new steps or may be link it to the general market?

Dr. Wolfgang Ziebart - President and Chief Executive Officer

Actually this is a very difficult question for me to answer. We don't have very much insight into the Chinese market. We see that we are selling lower number of pieces in the last quarter to China. We do have very, very little visibility whether they go into the China market, the claim market, or whether they are re-exported again. So I beg your pardon, I don't have any deeper insight into this.

Unidentified Analyst

Okay, well in that case what do you think generally happen into low end versus high end because many companies have spoken about slow down at the high end and other companies spoke simply about shift of the mix towards slow end. What is in your view happening?

Dr. Wolfgang Ziebart - President and Chief Executive Officer

This is very consistent all around information we can gather currently. It seems that the market is observing weakness in the high-end while turning towards let's say the entry level and the more cost conscious part of the market. So this is not so much a danger for us. We are very, very well positioned in this market and so we are quite confident that this plays into our favor.

Unidentified Analyst

And in terms of margins where do you make more margin, is it HSDPA or ULC?

Dr. Wolfgang Ziebart - President and Chief Executive Officer

Certainly the ULC per product margin is more under pressure than HSDPA one while on the other end the numbers are significantly higher in that area.

Unidentified Analyst

Thank you.

Operator

Francois Meunier from Cazenove asks the next question. Please go ahead.

François Meunier - Cazenove

François Meunier from Cazenove, sorry to ask questions again about the certain line guidance. I just would like to understand that all the downside is only related to the currency, could you please confirm with me that there is no margin pressure in any of your business at the moment especially in automotive and also that there is no head winds during the potentially on those businesses?

Dr. Wolfgang Ziebart - President and Chief Executive Officer

Well, there is margin pressure all over every business I think in the semiconductor industry and I was in the automotive industry before that's the same thing. So this we cannot confirm that there is no margin pressure.

Prof. Dr. Hermann Eul - Executive Vice President and Head of Communication Solutions Business Group

The point on AIM, François is what we meant is our guidance that we are few percentage points down in the sales side is not related to unexpected business situation or unusual pressure, it is only related to the currency... to the worsening currency from our perspective. So actually if you take that aside we would even grow in automotive as well as in the industrial multi market business, but if you abide the exchange rate change then it comes out what Dr. Ziebart reported in his introductory statement. But certainly we are always working against the pressure from the pricing side of the productivity increases, etcetera.

François Meunier - Cazenove

And income for next year, I mean, I imagine the margins may not be as high as what you expect it. Obviously you are talking about the dollar but also are there being some incremental pricing pressure as well or the prices you have negotiated are not low enough, are not high enough to reach the margins that we are expecting, or is it just a question of alluding which is not high enough?

Prof. Dr. Hermann Eul - Executive Vice President and Head of Communication Solutions Business Group

The situation for Com is that we have an extremely high dollar exposure. The majority of everything what we sell is quoted and finally build in dollar so we see this effect more or less one-to-one in our revenues. We have all the time margin pressure, I do not expect any margin pressure in for the next year which is higher than it was over the last year. There is also always competition fighting against us, you know, this market segment is a very competitive one and everybody wants to have a piece of the cake here. So that is what we have to defend, nothing extraordinary but also for the comp we cannot fully make up for the loss out of the currency. In general with going more towards foundries or wafers over the time, I think we have a natural hedging effect which is playing into our favor when we move to 65 nanometer full foundry production comes, first out of dollar area. So I think this will over the time help us to weaken that currency effect.

Peter Bauer - Executive Vice President and Head of Automotive, Industrial and Multimarket Business Group

Let me add Hermann to your comments with the IR foundry share we are going into the years to come, and also the pressure for loading and that was your question too. I think, Francois, the pressure for loading and filling in owned fabs is going down, so we can be more selective on good businesses rather than always caring for fab loading being 100%.

François Meunier - Cazenove

Okay. It is very helpful.

Operator

Andrew Gardiner from Lehman Brothers has the next question. Please go ahead.

Andrew Gardiner - Lehman Brothers

Good morning, thank you. I just had a few follow-up questions on the Com side. In particular on the Nokia ULC ramp that you mentioned, I think you were fairly clear on your comments that you still expect that to begin shipment in the fiscal fourth quarter with volumes in the calendar fourth quarter. But just wanted to confirm that because there had been a comment on one of your competitors calls earlier in the week, that perhaps those timelines had slipped again. So can you just confirm that, that isn't the case and everything still remains on track with the Nokia ramp?

Prof. Dr. Hermann Eul - Executive Vice President and Head of Communication Solutions Business Group

Thank you for the question. Of course we also found that statement in the public and yes, we see the project going on day by day according to the project milestones. So from this we can confirm everything is in place to half of them in summer. We also did some channel checks on our customer as well and also from this I can not see any sign that we should be under threat or something like that here. So I am confident on this.

Andrew Gardiner - Lehman Brothers

Okay, thank you and also just looking at one generation before that to the 65 nanometer products that you have begun to sample in the last quarter, the ramps, they are still expected in the first half of next year and perhaps when could we expect to hear more from a customer stand point? Thank you.

Prof. Dr. Hermann Eul - Executive Vice President and Head of Communication Solutions Business Group

Yes, this is one of the master pieces having these devices already functioning. Yes, we continue believing that they will ramp in the first half year of the next year. On customer information I have to be still a little bit tied up until we have conformation what we can say and what we can't say. But we stay confident for ramping the first half of next year.

Andrew Gardiner - Lehman Brothers

Okay, thank you.

Prof. Dr. Hermann Eul - Executive Vice President and Head of Communication Solutions Business Group

You are welcome.

Operator: We will now take a question from Didier Scemama from ABN Amro, please go ahead.

Didier Scemama - ABN Amro

Good morning gentlemen, thanks for taking my question. Just like to start about comment that was made by one of your competitor last night. They had a target market shine hand sets of 10% to 15% in the second half of '09 and one would have assumed that that market share would be tied to a ramp at Nokia, so I was just wondering given that they have abandoned this market share target whether you saw that you could pick up some of the pieces that they are not going to get?

Dr. Wolfgang Ziebart - President and Chief Executive Officer

I think this is the most safe way for me not to comment on competitor statements. This is what we never did so far and I would like to let this thing run and I believe this will play in our favor.

Didier Scemama - ABN Amro

Good. On the NXP SGM [ph] joint venture also, I mean last year or lets say earlier this year, you've suffered a bit from the acquisition of AGEA NXP seems to have benefited in fact from you acquiring the business. Could we see perhaps a reversal of that situation now at Samsung given that perhaps Samsung will be more inclined to shift some business towards you guys?

Prof. Dr. Hermann Eul - Executive Vice President and Head of Communication Solutions Business Group

Actually I would be interested in your view, how the customer sees this. We saw a little but of weakening design win success during the selling period of the AGEA LSI business this is true. And you can believe us that we are working on now making the reverse for the next quarters.

Didier Scemama - ABN Amro

Okay and my final question is on the wireline side, I mean we've seen some of your competitors making some pretty upbeat comments in fact on demand may be not just on the broadband access business, may be on broader areas I guess may be you don't participate in. So, I am a bit surprised that you are seeing only muted growth into the next quarter, can you maybe give some colors?

Prof. Dr. Hermann Eul - Executive Vice President and Head of Communication Solutions Business Group

The color is that we expect wireline business to be flattish into the next quarter. We suffered significantly in the last quarters, we think that we have patent out here and the weakness of this market is in fact more attributed to the non-access parts where we are not participating so much.

Didier Scemama - ABN Amro

Okay, brilliant. Thanks very much.

Prof. Dr. Hermann Eul - Executive Vice President and Head of Communication Solutions Business Group

You are welcome.

Operator

We now have a question from Günther Hollfelder from UniCredit. Please go ahead.

Günther Hollfelder - UniCredit

I am sorry I missed some part of the questions but first would be a follow up with the EDGE opportunities single chip at Nokia. I don't know whether your announcement today is already the answer but based on the good performance you showed so far with this single chip at Nokia, do you think there is any opportunity or window now again open given what broadband is reporting with the RF problems for you or for other players to get into this EDGE single chip business very, very general I mean?

Prof. Dr. Hermann Eul - Executive Vice President and Head of Communication Solutions Business Group

Yes, of course so my generally advice would be of course we are always on the spot and always highly alerted when we can gain some business and our capabilities are strong in particular in the areas where others are lagging behind us. You have mentioned the RF part. Doing speculations you know this business was already shifted into 2009 and later in 2009 and I think this is too much of a speculation who may grab that chair and how the customer is going to fill this gap. You can believe us, we will work on this, but I do not want to dive too much into speculation on other competitor's shares.

Dr. Wolfgang Ziebart - President and Chief Executive Officer

To be open also I think sourcing decisions are up to our customers and what we can do is to execute mostly on our projects and that's what we are doing and we are also not disturbed here by merger activity. So we are rather confident for the time lying ahead of us.

Günther Hollfelder - UniCredit

Okay and for the comp business going forward in the next quarter, the 25 million guidance, is there other... are there any special impacts what we should not expect then in the September quarter just like special, I don't know, like ramp up charges or also maybe Dresden related charges that should be non-recurring in this number?

Dr. Wolfgang Ziebart - President and Chief Executive Officer

In the current quarter we do have some significant tape out cost which we do not expect reoccur all the quarters, we also expect some ramp-up cost, you know, this is new product so we have to first to learn also about how they are finally running the manufacturing and on top of this in the introduction quarter of the two platforms we also have significant customer engagement efforts underway to really safeguard this and which I also do not expect to continue or find to the future as well.

Günther Hollfelder - UniCredit

Okay. My last question would be the EBIT and the other operating segments and corporate eliminations. The EBIT you reported in Q2 and also the guidance with the 20 million for Q3 is a bit higher I think the 10 million to 15 million you have guided so far as an quarterly average, are there any specials or is it going to come down to the 10 million to 15 million level in Q4?

Dr. Wolfgang Ziebart - President and Chief Executive Officer

Marco, do you want to answer?

Dr. Marco Schröter - Executive Vice President and Chief Financial Officer

Okay, last quarter there were around 8 million extraordinary starts [ph].

Peter Bauer - Executive Vice President and Head of Automotive, Industrial and Multimarket Business Group

We should mention Dresden and Reinhard do you want to comment on that?

Dr. Reinhard Ploss - Executive Vice President and Head of Operations

So, one major effect is the ramp down of the Dresden facility, at least the part where we manufactured the 200 millimeter DRAM wafers in the supply agreement Qimonda. Qimonda has stopped the agreement and now we have to ramp down and there is a substantial part of those costs in there.

Günther Hollfelder - UniCredit

Okay, so it should decline in Q4 than this other segment?

Dr. Reinhard Ploss - Executive Vice President and Head of Operations

As we move forward I think we have to come to an agreement based on the restructurings strategy of Qimonda and we have to wait to conclude on the social plans, what you mentioned in the plan.

Günther Hollfelder - UniCredit

Okay, thank you very much for taking my question.

Operator

We now have a question from Adrien Bommelaer from Crédit Suisse. Please go ahead.

Adrien Bommelaer - Crédit Suisse

Hi, thanks for taking my question. I just had a question on your wireless business. Its been weighing down on your margins and profitability for quite a few years and I guess given the outlook you have given so very uncertain as to what kind of profitability you can achieve next year. We have seen a bit of consolidation in SG and XPDO [ph] about ten days ago. So my question is why don't you show that business?

Prof. Dr. Hermann Eul - Executive Vice President and Head of Communication Solutions Business Group

I think I can simply come to back to that what I said before. We have a good position in this market. We have been extraordinarily successful to attract customers to our technology and our technologies in the areas where we are. The most leading technology who else in that space has HSDP platform ramping, who else has in the semiconductor space as UMTS already now in production for 1.5 year, we are single chip on the portfolio so I think this is a good asset where we can found on.

Peter Bauer - Executive Vice President and Head of Automotive, Industrial and Multimarket Business Group

Let me add Hermann to what you said. We are number one in DSL, we are number one in Access, we are number one in CPE so there is really no reason for us to abandon this market. The market is not very strong currently but this we are quite confident that this is going to change. So whenever our market is down you cannot instantly start thinking about selling that business.

Adrien Bommelaer - Crédit Suisse

But I'll just add on that. I mean what kind of margins, I understand the short term worries and but what kind of margins do you have in mind once we are past this, lets look at 2011-2012, what kind of margins do you think you can decently achieve for that business?

Prof. Dr. Hermann Eul - Executive Vice President and Head of Communication Solutions Business Group

I think this is quite a guess work question. Clearly our commitment is that we drive this business through the margins that are available among all our competitors and what kind of margins that business will have in 4 or 5 years. I don't think that all the competitors give guidance on this as well. It needs to earn that capital cost and I think this is the best guidance that we can give to you.

Adrien Bommelaer - Crédit Suisse

All right. Thank you very much.

Dr. Wolfgang Ziebart - President and Chief Executive Officer

We have time for one more question and then I think we've covered all the participants in the queue that had a first question.

Operator

Jérôme Ramel from Exane BNP Paribas has the next question.

Jérôme Ramel - Exane BNP Paribas

Good morning. There was a [indiscernible] private equity could be potentially on Infineon. I wanted to know what's your view on this and if you could confirm you have been approached by any private equity guys?

Prof. Dr. Hermann Eul - Executive Vice President and Head of Communication Solutions Business Group

Well, we haven't had discussions with the private equity guys in recent times, in previous times one or two years ago this was different. But we have seen a slow down in this activity so I don't see that plan to reverse.

Jérôme Ramel - Exane BNP Paribas

Okay. And the second question. Can you tell me HSDPA design win of Samsung, I just wanted to return to kind of where you see yourself in the 3G and 3G plus in the coming quarter of year because if we take that situation of Samsung we are talking about may be 20 million units. They officially have four suppliers so how can you cope with such a situation?

Prof. Dr. Hermann Eul - Executive Vice President and Head of Communication Solutions Business Group

Comparing the four suppliers, I think you can easily make up your minds who is first, who is second and who doesn't really have something which is playing and working and I think this is good confirmation of our position inside this customer. There is only two solutions that really work, everything else is paper work. And now I forgot the second part of your question.

Jérôme Ramel - Exane BNP Paribas

Yeah, going forward do you expect to become a major player in the 3G and HSDPA. If you look at your station today you got two design wins and one coming online, you got only one tier 1 so how confident are you that you will become a major player in 3G?

Prof. Dr. Hermann Eul - Executive Vice President and Head of Communication Solutions Business Group

We are very confident that we will be a major player in 3G and if you go through the competitive landscape then you will find out that there is one dominant player and there is only another one who really has this white design win basis and I think the 3G which is already running for one and half year which is very mature. The HSDPA, the announcements clearly shows that we believe and that we can hear, play a significant hold and in the end there is two capable suppliers for HSDPA and there is quite one in Infineon.

Jérôme Ramel - Exane BNP Paribas

Okay, thank you.

Dr. Wolfgang Ziebart - President and Chief Executive Officer

I am afraid we are gone have to leave it at that. I realize that there is couple of follow up questions in the queue. Please be in touch with the IR department here in Munich. You all have the numbers seeing who was still queuing. Thanks everyone for dialing in, look forward to speaking to you next time and at our 2nd and 3rd of June Analyst Day if you can make it would be great. Please see us in Munich. Thanks a lot bye, bye.

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Source: Infineon Technologies AG F2Q08 (Qtr. End 03/31/08) Earnings Call Transcript
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