Infineon Technologies AGF3Q08 (Qtr. End 06/30/08) Earnings Call Transcript

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Infineon Technologies AG (IFX) Q3 FY08 Earnings Call July 25, 2008 4:00 AM ET

Executives

Ulrich Pelzer - IR

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

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

Dr. Marco Schröter - CFO and Labor Director

Dr. Reinhard Ploss - EVP, Head of Operations

Analysts

Janardan Menon - Dresdner Kleinwort

Nicolas Gaudois - UBS Securities

Didier Scemama - ABN AMRO

Lee Simpson - Jefferies

François Meunier - Cazenove

Sandeep Deshpande - JPMorgan

Simon Schafer - Goldman Sachs

Glen Yeung - Citigroup

Andrew Gardiner - Lehman Brothers

Brett Simpson - Arete Research

Jérôme Ramel - Exane BNP Paribas

Kai Korschelt - Deutsche Bank

Ulrich Pelzer - Investor Relations

Yes, thank you very much. Hello, and welcome to everyone on this call for our Fiscal Q3 Results. We have published these results in a press release this morning, hope you had a chance to look at it. All the material is available on our website in case you didn't.

Happy to have here with me as per usual the entire Infineon management board; Peter Bauer, our CEO; Marco Schröter, our CFO; Hermann Eul, responsible for Communications; and Reinhard Ploss, responsible for Operations.

Set up as per usual, couple of introductory remarks from Peter Bauer, and then over to Q&A. Over to you, sir.

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

Thanks, Ulrich, and hello everybody. I'm pleased to have you on the conference.

Well the few introductory remarks will be a little longer this time. So I hope you stay with me because we have two things to do. On the one hand the usual quarterly results of the third fiscal quarter. And then secondly, I will talk about the Infineon 10+ program, which I have announced to you in our Analyst Meeting a couple of weeks ago. And then obviously as Ulrich said we are open for any questions.

So what happened in the third quarter? Infineon came in at €1,029 million that was 2% up year-on-year. It's a solid progress, if you had taken in mind that's the dollar weakened during that period about $0.21 against the Euro.

Infineon's EBIT for that quarter was €71 million and included in that was an extraordinary gain of €41 million mainly from the sale of our Hard Disk Drive business, I've talked about that. We sold it to LSI. As a good progress compared to the EBIT, we reached a year ago, which was €13 million and which included a charges of €3 million.

On the net income level though, we are pleased to report third quarter net income from continuing operations of €45 million. This is an increase from a net loss. We had the year ago from continuing operations that was €10 million.

Also we reduced our gross debt by over €100 million, during the last quarter, and we did this largely out of the free cash flow. This move is inline with our target to having a gross debt at two times EBITDA. The gross cash position remained broadly unchanged from the end of the second quarter, and that is €860 million, as of June 30, 2008. We feel comfortable with that level, we feel that we have enough cash, we need in this business.

Our performance in the third quarter, let's go through the segments. The revenues in Automotive, Industrial & Multimarket where €712 million, that is 5% decrease year-on-year.

We have already indicated that the decrease is going to be on now it was mainly due to the impact of weakening U.S dollar. And it also has some impact that we deconsolidated our Hard Disk Drive business and our Bipolar activities.

The segment EBIT was €106 million that is up from €77 million a year ago. This includes the before mentioned €43 million the Hard Disk Drive business and other things. The year ago EBIT included a gain of €17 million from the sale of the past [ph] activities, so we were up.

Country charge expectations though the results in the Automotive business unit decreased a bit quarter-over-quarter. The ongoing weakness in the demand from the U.S and the auto manufacturers there could not be offset by the solid demand, we're still seeing from Europe and the Asian markets. As you, I think pretty well know, in the U.S, the demand for light trucks and SUVs, which is by definition higher in the semiconductor bond deceased compared to the prior quarter, and the smaller cars now increasing, but they have unfortunately a lower semi-content.

A good message on the automotive side though is that in 2007, Infineon climbed up the ladder again with market share. It's a study of strategy analytics. Infineon held 9.4% market share of the automotive semiconductor market. And that's again a number two worldwide. However, the gap to the market leader could be reduced from the former 1.6% to 0.9%, admittedly this doesn't give us so much more scale, but it's just nice to report, I would say.

The revenues in our Industrial & Multimarket business were about flat. That is despite a more moderate environment in the consumer, computing, and telecom markets, you have seen also from other quarterly calls.

Over the course of the quarter, we saw some price pressure especially in the low voltage MOSFET market mostly probably resulting from the U.S dollar, which added to the normal price declines.

Demand for a high voltage MOSFETs, though and the discretes remained pretty strong in though pricing is aggressive there as well, and a very high power components for electrical infrastructure and traction the industrial drives we still remains on a very strong level.

In April 2008, you remember we acquired Primarion. Primarion is one of the market leaders in digital power ICs, and we are now proud to participate actively in the growth of the digital power segment that is building a new solid customer base in that segment for ICs for analog ICs. This investment complements are power management activities, in total we've so far are mainly based on discrete components.

For the industrial semis overall, we are proud to have achieved market leadership in 2007, calendar year, according to Semicast it's another analyst, we held 7.5% market share in the industrial market in this fast growing market and that is a number one.

The results in our Security & ASIC business decreased compared to the last quarter, but that was anticipated, you remember, I was talking about a moderation of demand. It's somewhat happened together with a normalized business in the passport solutions. We saw some decline also in the MobCom and the SIM card related business. After the sale of the HDD business to LSI and the ASIC segment, we deconsolidated this business, so this led to an overall decrease of that sector.

For those who have watched the German news, we met the German Federal Minister of the Interior and they talks were very positive in the field of identity documents, we now thinking that our target is that we expand our business there and the Government in ID business and security business to passports not only in EU and Germany, but across the world.

For our Communication Solution segment, that means COM, segment revenues came in at €313 million that is exceeding the level we anticipated when we updated the segment guidance to you at the end of May. So compared to the same quarter in the prior year the segment revenues increased by 21%.

The segment EBIT was negative €30 million, up from negative €37 million a year ago. Compared to the updated segment guidance, we gave to you for the third quarter EBIT results, we exceeded the level as I said. Although the segment EBIT was a bit held back somewhat by customization expenses, we had related to the first-time RAM of the HSDPA 3G platforms.

In the access business, we saw a light increase quarter-over-quarter mainly driven by the infrastructure business. And the revenues in the wireless business, increased compared to the second quarter. This was mainly due to the ramp of the famous HSDPA platform at Samsung and other customers.

From our product point-of-view the third quarter was successful deploy [ph] some signs a weaker demand in the wireless market, which you have probably also heard from other sources.

We started shipping the so called XMM 6080 HSDPA platform to our two customers with Samsung already having launched two models based on this platform. We have also started shipments of the XMM 2060 Single-Chip EDGE platform to LG.

We introduced the XMM 61 product family. That is our new generation 3G platform. The family includes a single-die 65 nanometer HSUPA EDGE based brand, and power management unit the single-die HSUPA EDGE RF transceiver, SMARTi UE and a 3G protocol stack, a very complete and very innovative. We also started ramping our GPS single-chip solution Hammerhead II and several customers for example the Sony Ericsson.

In the other operating segments incorporate in eliminations, combined EBIT was negative €5 million in the third quarter.

Finally, allow me a short comment on Qimonda. You have seen in our financial table, published today that we continued to treat Qimonda has held for disposal. In the P&L statement, you will find in the line the item income loss from discontinued operations net of tax.

Infineon share of Qimonda's reported net loss and additionally €411 million for a write-down, we have recorded to reduce Qimonda to its estimated fair value less cost to sale.

We continue and you can be sure of that, our activities to divest our best Qimonda, and we are evaluating different alternatives to our IVA the minority precision of the latest around the AGM in February. This is still high on our agenda.

Infineon's outlook for the fourth quarter of the fiscal year 2008.

For Infineon's continuing operations we anticipate fourth quarter revenues to increase by a middle... mid single-digit percentage quarter-over-quarter driven by seasonal strengths in both the AIM business and the COM business.

However, with a last couple of weeks there have been some signs of weakening in demand in a number of our target markets. So it's a mix bag somehow. The persistent weakness of the U.S dollar might add to that until the normal price declines in the market. Infineon's EBIT, including net gains and charges, therefore is expected to be flat or down slightly.

However, within that there is also an impact in cost from our 200 millimeter facility in Dresden, where we ship... where the shipments of DRAM wafers to Qimonda have come to an end in the third quarter. So that is included in the guidance here. In connection with our IFX10+ cost reduction program, we expect to record our average significant net charges in the fourth quarter. I'll come to that later on again.

For the Automotive, Industrial & Multimarket segment, we expect revenues to increase by mid single-digit percentage compared to the last quarter, despite ongoing weakness in the automotive market. The increase will be driven largely by normal seasonality in the Industrial Multimarket business. We expect the segment EBIT margin to come in at 9% to 10% excluding net gains and charges.

In our Automotive business, we believe that production cuts at the Big Three U.S car manufacturers can be compensated though by the growth we have in Europe and Asia. As such we believe that sales in our Automotive business will remain broadly unchanged from the last quarter.

Revenues in our Industrial & Multimarket business should increase compared to the prior quarter, as we entered typically strong seasonal quarter. However, we expect the weak U.S dollar to add to price declines for power MOSFETs mentioned this. The activity levels in the high power industrial segment remain to be high.

And finally, the Security & ASIC business with regards to AIM is likely to increase as well, slightly in the fourth quarter, when compared to the prior quarter. This increase will be driven by the Chipcard business, whereas the ASIC business is expected to be pretty much flat.

Now to COM, given the volatility in the wireless volume forecast that we have experienced in the recent past, and that is related to the many RAMs we have there. We have given guidance for segment revenues in the broader range this quarter. I hope you accept this -- can accept this. In the seasonally strong fourth quarter, we expect segment revenues to come in between €330 million and €350 million. The segment EBIT loss, excluding net gains and charges should improve driven by the revenue increase. And we believe that results in our access business will be broadly comparable to the third quarter.

So our wireless business should grow quarter-over-quarter. We'll see a full quarter of shipments of our newly ramped 90 nanometer HSDPA platform, and our single-chip EDGE platform. We continue to expect the start of shipments of our single chip GSM/GPRS platform to Nokia in September as we have already said in the past.

In the other operating segments, we expect revenues to decline further compared to the prior quarter. As the mentioned shipments of DRAM wafers out of our Dresden facility came to an end in the third quarter. I mentioned that just before.

Even in other operating segments in Corporate and Eliminations should be approximately negative 20 million excluding net gains and charges. This is higher EBIT loss than normal due to the temporary higher costs associated with the right sizing of Dresden. As mentioned before in connection with our 10+ program, we expect to record significant net charges in the fourth quarter.

And to finish on the near term outlook, let me remind you that we will introduce IFRS as a primary GAAP for Infineon effective October 1st in the current year. While we will report fourth quarter results under U.S GAAP, we'll give guidance for the first quarter of 2009 fiscal year and the overall 2009 fiscal year under IFRS only. With the publication of the results for the first quarter of 2009 fiscal year onwards, so we will report to IFRS.

Let me turn to the longer term outlook and to the IFX10+ program and the announced reorganization IOU, a lot more explanation there, as I have just introduced that in the analyst call, and the analyst meeting we had couple a weeks ago. So let me comment on the year to come. Having a look at the third quarter earnings and margins, we are clearly not where we want to be. Even though we made a lot of progress, we need to do more, not only relative to our competitors, but also against the back drop of the signs of weakening demand. Even though it's not really clear, where the market is going, I'm not expecting a recession to come in the U.S or in the world market, but certainly we see the economies in the established country is going to go down, which might have an impact on our business. So we have to take care of that.

Finally, our EBIT margin is too low to earn our cost of capital, which is our objective. And Qimonda's results anyway are obscuring the view on the improvements we're driving our core business.

As we can't do anything about the currency development, and we don't want to take them as an excuse or the uncertainties in the market segment, in the market demand, we can optimize our business and our organizational setup to bid a hedge against the risks and to increase our profitability. To that end we've taken decisive action now, and we're really worked very busily in the next last six weeks, started a cost reduction program called IFX10+ in the third quarter.

The analysis phase now is finalized. All the targets have been defined. Many measures already are defined and decided. And we will concentrate on the following four areas of implements, and of implementations, while we are going through the program.

First our product portfolio. We will focus on business, which is attractive to us and we will diminish and shed smaller product families that are non-core, are unprofitable, or insufficiently profitable, or don't show the right outlook. As a result, you should be able to also reduce our R&D capacities in those segments and either reduce them in general or reallocate them.

Secondly, we are looking to further reduce our manufacturing costs significantly. An approximate 15% reduction should come from the measures defined on the IFX10+. In the midterm and even higher percentage should be reached than longer term. We will cooperate more closely with our suppliers. We will, for example, adapt designs from our cost efficient solutions material or go through the whole value chain and really optimize where we can. According to our fab-light strategy, automatically also the business we have in foundries will increase and that is also in the dollar range.

Third, we will improve the efficiency in our company; we'll improve the efficiency of organization. We have to further optimize the processes and tasks in the fields of general administration, R&D, and marketing and sales. We will decrease our cost basis there significantly and implement the range of measures large and small to help to ensure annual savings in the OpEx of at least €50 million. So that relates to the OpEx, the R&D, SG&A, 50 million annualized savings we are expecting here. In line with the drive towards increased efficiency, we are also reorganizing the company's organizational structure.

This leads to the fourth area. Effective October 1, 2008, Infineon will be organized in five divisions. Automotive, Chipcard & Security, Industrial & Multimarket, Wireline Communications, and Wireless Communication... Wireless Solutions. In this structure, the company will gain flexibility. The market segments are homogenous, and more defined. We can concentrate more on the specific customer needs. We can react more agile and adapt quickly to business changes.

We will also optimize our internal structures and look at the outside factor such as increasing risks in the market environment and with regard to exchange rate development. We come to the conclusion that our current headcount does not adequately reflect those internal and external realities and risks at the moment.

As we introduce our new organization, and as we adapt to our climate conditions, headcount reductions unfortunately becomes inevitable. So we must reduced headcount across Infineon worldwide by a gross figure of approximately 3,000 jobs. This figure refers to all sites, functions, levels throughout the company. We have set-up fast and consistent process for the headcount reductions, as we would like to act, as fairly as transparently as possible.

As we implement all of these majors, savings of more than €50 million, fourth quarter next year as compared to the third quarter this fiscal year are to be expected. So that will add up to an annualized demand of more than €200 million realized by the fourth quarter of 2009 in the run rate of this company. Of these savings more than a quarter will be saved in operating expenses.

With all the consequences I mentioned before, the reduction of personnel cost, the productivity increases in manufacturing, the portfolio measures, and the organization efficiency. We anticipate EBIT margin to improve in 2009, towards our target to the term reach capital cost.

IFX10+ also forms the basis from which we aim to realize continued margin improvements, as I said beyond the next year. Together with this new efficient and agile organization, which supports the strategy of the divisions will faster our leadership in RF three focus areas, energy efficiency, security and communications in the market segments, I was talking before.

Ladies and gentlemen, thanks for listening. This brings me to the end of my introductory remarks, and my colleagues and I will be more than happy to answer your questions now. Thanks, again.

Question And Answer

Operator

Thank you. Our question-and-answer session will be conducted electronically today. [Operator Instructions]. And will take our first question from Janardan Menon from Dresdner Kleinwort. Please go ahead.

Janardan Menon - Dresdner Kleinwort

Thanks for taking the question. Just to go to your, the IFX10+ program as above. The 3,000 employees that you are planning to reduce your headcount by. Would that also be achieved on the same time scale, which is by the end of next year by the fourth quarter of next year? And there is €200 million, the cost reduction target include the cost that you will reduce through reducing headcount by 3,000 employees?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

Yes, thanks for the question. The timeframe is of course, the next year. We will start immediately and utilize all the options to make it as quickly as possible, but as you perfectly know, we have in some countries like Germany regulations to follow and a process of discussions and negotiations to follow. So depending on how much we can do on a volatility basis, will be as fast as possible. But, that will be doing the course of the year, yes. The 3,000 jobs also include, for example, temporary workers and other personnel cost in their, which obviously can be handled more quickly. And with regard to the €200 millions annualized savings against run rate, against cost in the third quarter of the current fiscal. Yes, the savings and personnel costs are included there. But, also more than that obviously, as I mentioned in the OpEx, we'll get more than €50 million on an annualized basis, so let say roughly €50 million per quarter and that is mainly a reduction of headcount.

Janardan Menon - Dresdner Kleinwort

And you said that should take your EBIT margin to a level, which will cover a cost of capital. Can that, we assumed... can we assumed is that suggest that you will be heading towards the double-digit range within a year or thereabout?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

Whether thereabouts, I think is the good comment, you made. I said before and I don't want to always work against premises like dollar or like market et cetera. So clearly our objective is getting into the double-digits and earning our capital cost. And with this annualized... with this quarterly improvements also we will do that by next fiscal year, but I would say 10% thereabouts.

Janardan Menon - Dresdner Kleinwort

And just a small follow-up. In fiscal Q4, would you still have the customization of the HSDPA platforms or would that be completed, and good result in a bigger jump in your margin structure?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

Hermann do you want?

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

So, for the fiscal '04, we expect that the HSDPA platform continues to run. We will now have three months of complete sales for this platform, and I think this will be the majority of that what we see in terms of growth.

Janardan Menon - Dresdner Kleinwort

And the customization, the additional cost which you're incurring for customization of platforms, will that be finished or is that still continuing in the current quarter?

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

We will take this slightly out, without hurting the customer, so that we do not bump I mean too difficulties, while on the other hand, of course, once the platforms are out now, we are in the position that we can reduce this effort.

Janardan Menon - Dresdner Kleinwort

Thank you very much.

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

Thanks.

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

You're welcome.

Operator

We will take our next question from Nick Gaudois from UBS. Please go ahead.

Nicolas Gaudois - UBS Securities

Yes. Hi. First question is on your quarter of guidance for communications for the September quarter. Is it quite to read about the high end of the HSDPA RAM sort of one of your customer is going according to current base band and the market is in line we what you've heard so far from the cell phone OEMs and the low end is they will plan for a specific customers could come down a little bit in the short-term and the market could be softer?

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

Yes.It's very little to that what you had described. So I cannot at anything anymore to this. We expect the HSDPA to continue to be strong and we are also cautious on some other parts of the markets, as we see also the signs you described.

Nicolas Gaudois - UBS Securities

Okay, fine, perfect. And just saying was come a little bit, I mean Hermann, do you see any implications for your tool of Qualcomm Nokia settlement I mean that we know you're not supplying any 3G solution into Nokia usually, but more broadly, what is your take on that with the Infineon position if the long-term?

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

I think having a piece in that market is certainly good for this market in the long run, and I think this is the most safe statement, we can do to this without going into too much of a details in customers and competitors.

Nicolas Gaudois - UBS Securities

Okay, fine. And last question from me. Chipcards margin, I mean I think Peter you said that revenues were down a bit in the last quarter. For the last three quarters you had a high single-digit EBIT margins in Chipcard, could you tell us where it was last quarter and where do you see that into the current quarter?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

Well Nicolas, if you ask me now, here from now we probably more be more transparent for the new divisions, but as you know we are not really going into details with regard to Chipcard, I can't just say that they're doing fine with regard to margin is just a little bit with less revenue and the margin, decline is according to revenue... not any more, so we don't see any issue there.

Nicolas Gaudois - UBS Securities

That means, revenues up, margins up again in the current quarter or it's partially increasing?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

Yes. It's a little bit of mixture change as well, with regard to government business versus banking and telecom business. So we might see a period where the strong government business really dampens the margin a little bit, but again this is not significant in the context of AIM.

Nicolas Gaudois - UBS Securities

Okay, great. Thank you very much.

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

Thanks. Thanks, Nicolas.

Operator

And then the next question comes from Didier Scemama from ABN AMRO. Please go ahead.

Didier Scemama - ABN AMRO

Good morning, gentlemen, and thanks for taking my question. Lot's of good questions so far, so I'll try my best to match that. On the Nokia ramp, I'm pleased to hear that this is concerned for September. How much visibility have you got now in terms of maybe volumes for the fiscal year '09 maybe to start within, I've got a follow-up?

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

Actually, we do not have so much of visibility and on top of this I must beg your pardon, we have agreements with our customers, and I have to stay on a fairground with our customers. So what I can tell you is that the project is continuing as planned and is makes good focus, while on the other hand we have clear agreement that we are not allowed to reveal any information that might, if the real information how the customer goes to markets and what the plan of this is. So I beg your pardon for this, you have also your contacts into this customer. And at least I would ask you to put the question towards the customer. We feel quite safe here and this is I think what we should take from this.

Didier Scemama - ABN AMRO

Great. And on Samsung, just I mean you've got about three handset models now design with your HSDPA solution, two of them as you said are now available. We saw next years [ph] one of our two or three EDGE models and obviously Qualcomm remains a dominant solution. I mean with the settlement Nokia Qualcomm yesterday. How do you feel about your position within Samsung in HSDPA over the next say 12 to 18 months? And second, in EDGE, obviously a gear performance has been pretty weak, since you bought the company, but the mix that Samsung is clearly moving towards 3G. So how do you feel about your market share in EDGE, also at Samsung and therefore HSDPA as well?

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

So let me go through the many questions step by step. So we see the EDGE part in Samsung recovering. So they... we are getting more and more models onto the new vision platforms. So this looks recovering. The next question you put was the HSDPA, in Samsung we know how this customer behaves, They always take the best what is in the market, and currently we are the only besides Qualcomm EDGE platform, HSDPA platform in Samsung, and away from the EDGE phone to what's we are functioning HSDPA phone is a rather long way that's takes a lot of engineering resources as we know and auto needs a lot of expertise to really make it work. So we feel also we are in a good positioned with that what we have to take, and we wait for the competition to manage, to catch up or if not than not.

Didier Scemama - ABN AMRO

Okay, great. Many thanks.

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

Thank you.

Operator

Your next question come comes from Lee Simpson from Jefferies. Please go ahead.

Lee Simpson - Jefferies

Hi. Good morning, gentlemen. I just want to try and get some signs for the significant net charges you'd expected to take in 4Q. I... looking back I think in 2Q '07 you took some, if I get this right, restructuring charges for 54 million. Is it going to be of that sort of order and magnitude or do you expect it to be even higher?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

I really beg your pardon, we haven't yet defined those. And I think for understandable reasons from a process perspective with regard to the... and to the job reduction we have, so we can't give you a number here today. You'll have to be little bit patient here. We'll let you know. Because we are in the midst of the process here of this guessing the reduction of jobs and that is related to that.

Lee Simpson - Jefferies

And just in relation to... it's a lot of this perhaps, being obviously redundancy packages and given the, maybe the slow nature of that in Germany, could we expect higher net charges in subsequent quarters perhaps early '09?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

No, not to be expected. We would like to do as much as we can in Q4.

Lee Simpson - Jefferies

So it means that you are going to come in Q4?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

And we are able to do so. We are able to do so. I think the timing of the IFX10+ program is the way that we can, that we can take the charges from those packages as you say and the restructuring cost we have to do in the manufacturing sites. We can take them in Q4.

Lee Simpson - Jefferies

Okay. And subsequent to the further write-down you've done in Qimonda, could you give me a steer on what this net book value is per share that you are currently holding?

Dr. Marco Schröter - Chief Financial Officer and Labor Director

This is Marco to I am sorry [ph], Marco Schröter here, well actually it's around $2.80 in all books per share.

Lee Simpson - Jefferies

Right. still it got the higher than this year share price at $2.80. you said, yes?

Dr. Marco Schröter - Chief Financial Officer and Labor Director

Yes. That's right.

Lee Simpson - Jefferies

And then maybe just another question on the Qualcomm Nokia agreement or settlement rather, I mean at this point are you saying that you don't anticipate any direct design wins well not via OEMs for HSDPA given some mention of collaboration on the call yesterday that Qualcomm mentioned within the next 18 months to two years, and that's with Nokia and Qualcomm?

Dr. Marco Schröter - Chief Financial Officer and Labor Director

So... actually I would like to refrain from speculating about design wins over the next 18 months. You know how volatile this market is and how trick in and outs at these designs wins are. I think we should concentrate on where we really can make a progress and a success. I beg your pardon for this defensive statement.

Lee Simpson - Jefferies

Okay. No problem. Thanks very much. Thank you.

Dr. Marco Schröter - Chief Financial Officer and Labor Director

You're welcome.

Operator

We will now move to François Meunier from Cazenove. Please go ahead.

François Meunier - Cazenove

Hello. Good morning. First question regarding the headcounts reduction of 3,000. Where are those steps mainly taking place? Is it mostly Europe and U.S or outside?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

It's across the world, that's... the majority is going to be in Germany. about two-thirds of the reductions of jobs is going to be Germany. So in the high salary countries.

François Meunier - Cazenove

Okay.

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

I can't give you now an exact breakdown by site here, on the call here, but as we are just in the process of discussing this what the sites, but you can rely on the fact that we are reducing Northern Asia so much, where we have a good efficiency.

François Meunier - Cazenove

Okay. And in terms of the financial improvement I mean for '09, from now to Q4, this was in line you are going to straight line or will it be more waited to Q3, Q4 next year?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

Well that really depends on the way we can do the job reduction together with the work councils parties here. It is a process which for... which is not a 100% predictable here. Again it will be some, well you can see even pretty quickly in Q1, because that's the voluntary part where you can packaging, and the rest of world. And then the as the majority of the jobs we have to reduces in Germany, that's a little bit of a longer process, which will probably took... reach into the second half of the fiscal year. And the... by the way to the last question again, there is also obviously, as much as we can do on the back-end side in Asia throughout there, the most inexpensive side until the transfers that we have product transfers that we have much over there and get the best efficiency out there.

François Meunier - Cazenove

And you feel confident about, if you are moving a site to Asia, but the qualification with some of your, with a more difficult customers like automotive or industrial?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

No, no, you took that too far. We don't move a site to Asia. We move... we do the normal product transfers, we have here and we are confident we can do that because we have operations in Asia, in Malacca and Kulim in Singapore and other places, which are absolutely qualified and just achieved the highest audit requirements for automotive customers, there is absolutely no problem.

François Meunier - Cazenove

And just on that precision, Q4 of fiscal year '09 or Q4 '09? When you think it's going to be ended--

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

I am always talking about fiscal year when I'm talking.

François Meunier - Cazenove

Okay. Okay thank you very much.

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

Thanks.

Operator

We'll take our next question from Sandeep Deshpande from JPMorgan. Please go ahead.

Sandeep Deshpande - JPMorgan

Thank you for taking my question. Couple of questions regarding the COM business. I mean clearly you seem to be seeing some momentum in COMs in the current quarter. Are there... has there been any development on design win activity, on your HSDPA platform further to what you have talked about in your analyst day as well as in the past?

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

Thank you for that question. I think the current situation is that I cannot reveal any more design wins that I have given indication in the last... in our last session when we had face to face. I think in the long run you may see additional one, but currently I am not in the position to reveal any information about that.

Sandeep Deshpande - JPMorgan

So are you saying that there are more design wins, but you can't name the design win or are you saying that that you are in progress of negotiating at this point?

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

I think this, this is not so far apart from each other. So I think currently I would say I cannot name the further work we are doing. And I think and you know our strategy and our way we communicate that and you know how to take this.

Sandeep Deshpande - JPMorgan

Okay. Then regarding this GPS, you talked a little about the Hammerhead, I mean I think some of that technology comes from company which now is own by a competitor. What is your future strategy on GPS?

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

We have, with this company developed together this device, and we have the full right to work with this device and we can even take out additional design wins for this device. So this for the near and mid-term future, looks pretty good here. And of course you can see in the long run that we will also make up for another road map [ph] that relies on an alternative IP source than the current device.

Sandeep Deshpande - JPMorgan

Okay. And then overall when you talk about the cost cutting plan, in terms of moving towards the 10% EBIT margin, I mean have you not defined where which products are going to see a you are going to move out of those products because they are less comp... your prices are less competitive or is that being defined as they had fit in the organization and that's I mean the whole process might take a long time to be clear to the market?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

No, that's undeviate [ph] it's a top down process. And you can't be sure. We have really reviewed it's a mixture of top down bottom up. We have reviewed all those products in the Board of Infineon, and we have obviously have the organization prepared the data and give the outlook and perspective on those products. So it's a combination of both, but we have taken decisions in the Board, which ones will be watched very much... very closely. And where we have divestitures, and where we have basically reduce the R&D and sales and marketing efforts and cash it out. And where we just put them under scrutiny and see over the course of the year whether they fulfill their milestone. So that's very individually already defined. And we have them in our monthly operations review. So it's already transferred to the operational process.

Sandeep Deshpande - JPMorgan

And then one, final one about this cost structure. I mean have you benched marked yourselves, again I mean clearly you are doing a great deal in terms of cost cutting now, but versus your competitors globally, because I mean this fact has always come up against European companies that they often are not cost competitive with their U.S competitors for instance, so have you benched marked yourself versus your competitors at all?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

Yes, yes it was absolutely the way we went by it, we bench marked. We had our EBIT targets as a target to be achieved. And we even bench marked the functional cost within the business units. And by the way the functional costs if you look them a percentage to sales are pretty good.

Sandeep Deshpande - JPMorgan

Thanks a lot

Operator

Your next question comes from Simon Schafer from Goldman Sachs. Please go ahead.

Simon Schafer - Goldman Sachs

Yes, thank you very much. So given that the wireless business seems to be on track then with your previous expectations, and there is some incremental cost cutting are coming through. Any expectation is to when that should be returning to profitability on a quarter basis?

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

We did not comment on this so far yet. I think I see some estimations outside on... in the street, and these estimations are not so bad.

Simon Schafer - Goldman Sachs

Understood. And as it relates to, I understand that I think you mentioned the quarter of the amount [ph] annual savings then will be an OpEx. When I look... when I think about the businesses gross margin structure then you are doing about 35 percentage now, all other things being equaled in terms of the expected revenue growth that's kind of coming through that you expected, or do you expect today, what type of reasonable gross margin that we should we expect in on one or two year view?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

Yes. There will be a couple of percentage points on the gross margin as well, the savings I was talking about the majority is coming from operations will be well over $300 millions in savings on the operational side, which will end up in the gross margin of the products.

Simon Schafer - Goldman Sachs

Understood, thank you. And then my last question is more related to Qimonda--

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

By the way just to get it right. The overall productivity gains obviously work against the price decline, that's well understood, so therefore we'll see a net increase in gross margin and through those savings. When we put something on top of our roadmap through the cost cutting in manufacturing the extra efforts on the purchasing side, so it comes on top of our productivity, we had already in our plans for the last forecast in the last analyst meeting.

Simon Schafer - Goldman Sachs

I am sorry, in other words kind of a 200 basis point improvement then provided of course that the revenue growth continues as you see it today?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

Yes.

Simon Schafer - Goldman Sachs

Okay.And my final question. I know you kind of alluded a little bit in your introductory remarks, and I see that you have of course again written-down the carrying value for Qimonda, but any update you could give us with respect to what do you think is happening in Inotera situation, Qimonda got off this question last night in their earnings call. Not much of an update, but is that prime as their main shareholder any update as with respect to the Inotera situation would be very helpful?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

Well I think I cannot tell you more than Qimonda, told you already tonight on the same.

Simon Schafer - Goldman Sachs

Not even given the majority persistence, majority share on this?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

No, no.

Simon Schafer - Goldman Sachs

Okay. Thank you.

Operator

We now take a question from Glen Yeung from Citigroup. Please go ahead.

Glen Yeung - Citigroup

Thanks very much for taking my question. Can we just start looking at your inventories in the reported quarter up I think close to 9%. Recognizing that you are giving pretty aggressive guidance for Q3 just to overall level of comfort with where inventories are today? And maybe in refining can you also address your thoughts on distributing inventory stand and the relative half of that?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

We mention this why inventory increases right, well I got it right.

Glen Yeung - Citigroup

Yes and whether or not you are comfortable with that level of increase and also you are talking where... you're comfort with distributor inventory?

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

Of the many reasons as a increase in inventories and many out of COM business due to a let's say ramp up with some new customer.

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

And then distribute--

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

Distribute better, they will come better.

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

Yes. And then the distributor side I am not aware of any increased inventory for our products.

Glen Yeung - Citigroup

Okay. And then, in the prepared comments there is some discussion about times that are weakening in the last few weeks, and it seems like a pretty broad comment. I wonder if you can just give more specific about where you think some of that weakening maybe occurred?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

Well certainly in the automotive market in the U.S, we are seeing a weakening, that comes as I mentioned in my introduction remarks from the SUVs and light trucks decreasing. That also goes through Europe as some of the suppliers in Europe are also there. The other markets segments well... then the second one we see in the wireless handsets and more in the lower cost we see some, softening as we said before. The other segments are more that we see a more aggressive price decline, but we see demand. So I would call it mix bag, let's see where it goes.

Glen Yeung - Citigroup

Okay, fair enough. And then just with respect to the 10+ program I mean if I just look at your divisions by a profitability it would suggest that the cuts are more likely to come in the COM business than the AIM business just want to clarify, that their right interpretation?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

No it's really going across the boards. And we went by a benchmark for functions proportionally your to the business you are right. Then it is more in the COMs business. But, on the other hand as Hermann was pointing out before we are not going to take out any of the vital programs and customization efforts for our customers here. And therefore there is limits there as well. Now it's across the Board it's really an efficiency increase in the reorganization will combine functions from an administrational perspective. We... Reinhard Ploss is going to integrating the logistic sides and pushing on a purchasing side. So as it goes across the Board and also affects the AIM margin.

Glen Yeung - Citigroup

And is there any chance that when the program is towards completion that your R&D budget in COMs actually is up on a dollar or on a dollar basis or euro basis?

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

So I think what we currently do is that we stay on our innovative trick. You might have to recognize that we have launched the next-generation EDGE HSDPA device single-chip as well other innovative products our echoed radio program. So we do not lose out and slowdown in our innovation power, rather we work on at adding another hound of efficiency, and how we collaborate in a company, and how we can make also going to the customer as smother and more cost efficient.

Dr. Marco Schröter - Chief Financial Officer and Labor Director

But on a inferior level I can tell you the R&D run rates will in absolute terms go down. In the third quarter or fourth quarter next year.

Ulrich Pelzer - Investor Relations

Can we please say more questions offline because there is a couple of other people in the queue that are waiting. Please move to the next person in the queue, operator?

Operator

Your next question is from Andrew Gardiner from Lehman Brothers.

Andrew Gardiner - Lehman Brothers

Morning. My first question is on the COM margins, you have highlighted the customization cost related to the HSDPA platform. And how that was high in the third quarter, but you can see some lightening of that in the fourth quarter. I was also wondering about elevated expenses related to the Nokia single-chip RAM that are starting to come trough. And whether that can, in times whether that can help margins going forward and what the potential magnitude maybe on that front? And then also as just a second question quickly on an FX update and where you are hedged at the moment for the fiscal year '09? Thank you.

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

So coming to the COM first, I can completely confirm what you are expecting. So once the products in the market we can be more lean on customer engagement. This holds true for all the products that we are currently ramping. HSDPA is in the process of becoming behind us, and also the ramp of the Nokia platform should soon be completed and then we will see slightly, but steadily going down these efforts.

Dr. Marco Schröter - Chief Financial Officer and Labor Director

Okay and on the EDGE question, we only hedge for the first quarter of fiscal year '09 around $155 to the euro.

Andrew Gardiner - Lehman Brothers

Thank you very much.

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

You're welcome.

Operator

And now a question from Brett Simpson from Arete. Please go ahead.

Brett Simpson - Arete Research

Thanks very much. A couple of questions. First up on gross margins, can you maybe give us an indication of where your gross margins came in last quarter on a constant currency basis? And secondly on wireless, can you tell, maybe talk about the progress you are making with good customers or design wins from new... from new 65 nanometer single-chip 2G products you've got coming out? And maybe give us an update on when that's going to ramp and whether it will average up your gross margins as you start to see that become inflowing [ph] in the P&L? Thanks very much.

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

We take a call conference [ph].

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

Than take this question first, this is an HSUPA platform. We expect this platform ready to run for mass production in roughly one year from now. So usually in that status we do not have design wins to announce. But you can be sure that's all our major customers for today's HSDPA platform are already looking into this very carefully.

Brett Simpson - Arete Research

Sorry.Just to be clear I was -- I was more referring to the 2G is on the 11, 65 nanometer 2G products you've got, so the EDGE and the GPRS and the further one from the ELC 2?

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

I see, so sorry for the confusion. We expect this product to run to the, into the mass production accounts the spring next year and here we also have significant customer interest in. But none of the customer so far has given us any indication that we can review officially their bought into this product.

Brett Simpson - Arete Research

And does the average job, your gross margins when you look at the fact that is 65 rather than 130, is that is going to be a leveraging that your gross margins?

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

Yes, certainly this improving our position. This is a 65 nanometer product and is fully single-chip integrated and also delivers a significant amount of customer value in terms of integrating your way additional functionality from which we are so far additional chips on the on the Board.

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

Well with regards of like-for-like gross margin it's, it's not something we have just under the finger tips here. So we would like to take that offline. You know, that we have an impact on the very bottom line of about 2 million per cent deviation on the dollar per quarter. So that's typically what we reported, let's take that offline that question and Ulrich is going to answer that.

Brett Simpson - Arete Research

Okay. Can I just ask one other question around Dresden tuna mill [ph] fab and you mentioned there is temporary rising cost here. Can you maybe take a bit more about what utilization looks like today, and what you are doing in over the next couple quarters to improve, improve this?

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

This is Reinhard speaking. So basically we have cut down the overall capacity interest nearly by half and the target is around 7,000 to 8,000 wafers. We saw coming from 13,000 to 14,000 and we are now decreasing the capacity for the memory segment while the logic segment well loaded from... there are some adjustments in inventory but on a year's average the remaining volume is on an even loading basis. So the... we expect that we take another two quarters to bring down the capacity and adjust the personals we have in the fab, some weeks ago we had a achievement together with Qimonda to transfer part of the operators over there, because utilizing, as agreed theirs and our budget of temporary workers we have there, so we believe that the adjustment grow pretty quickly and the rest of the work force adjustment will be done soon. So we believe that the overall loading and target situation will be in the 80-90%

Brett Simpson - Arete Research

Okay. Thanks.

Ulrich Pelzer - Investor Relations

We will have time for two more people asking questions in the queue, please.

Operator

We will now move to Jérôme Ramel from Exane BNP Paribas. Please go ahead.

Jérôme Ramel - Exane BNP Paribas

Yes, good morning. Just a clarification, continuing your of target of 10% EBIT margin, that's going to be by when you will not competed the restructuring plan for, let's say by the end of '09, or at an average for '09?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

We didn't give an exact guidance here because it's always working against the dollar change and we cannot anticipate that exactly and also market is a little bit more unsecure. You know that from the past that it was always the fiscal year as a target. But at the moment the dollar and the overall market situation might modify that a little bit up and down

Jérôme Ramel - Exane BNP Paribas

Okay. And continuing with your break-even target for the wireless I am not sure, I understood correctly the answer. Do you proceed in second half of next year or does it include directors' joint plan or--

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

We said next year, and Hermann said there is information out which is pretty relevant.

Jérôme Ramel - Exane BNP Paribas

Yes, okay, but what are this information over there?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

This is the contiguous.

Jérôme Ramel - Exane BNP Paribas

Yes, but could you give that to us?

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

We will take that for the next set.

Jérôme Ramel - Exane BNP Paribas

Okay. And maybe a just a just a final question. Concerning your market share in the 3G RF, specially at EMP. Do you keep see some risk of market share loss there going forward?

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

So, there current assets to EMP or Sony Erickson in 3G is pretty stable. Of course we see the weakness in this market as well, and as you know we are in the meantime, and all of the top five with our 3G RF and not with our RF not with our 3G RF to be precise. And we continue to believe that this chip we currently offer is the most competitive found in the world. And we also have a diversity version out of this which also has significant tight tuning customer interest.

Jérôme Ramel - Exane BNP Paribas

Thank you.

Operator

The following question come from Kai Korschelt from Deutsche Bank. Please go ahead.

Kai Korschelt - Deutsche Bank

Yes, good morning. Just one question on CapEx, I think the run rate so far in the last couple of quarters has been €60 million to €70 million. Should we assume that as a normalized run rate, x scheme on the going forward? And my second question is on, can you give a bit more color on the split between common AIM in terms of the cost savings, in absolute terms i.e., is it 50-50, which would obviously mean, given the COMs smaller size, that it would be relatively overweight or is it slightly different? Thank you.

Dr. Marco Schröter - Chief Financial Officer and Labor Director

Okay, your question CapEx, for this year you can expect something slightly above 300 million for the full year.

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

And I would take the Com questions soon diplomatically answer it so that I would say the lift in EBIT margin is definitely higher, much higher on the COM side than on the AIM side. But I know, sure by though this is sufficient for you. So that means the measures have to be stronger there and definitely. But there is also increased business on the COM side, which helps to push the margin. We will give you in the next quarters and each quarter, we will track the performance and give you more data.

Kai Korschelt - Deutsche Bank

Yes.

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

I think I can give you some additional guidance, we are as you referring to we are sitting here between the hog and a hot place, on one end you would expect this portion to increase EBIT significantly in the near future as commented by Peter already, so you would expect some significant savings here and you can, while on the other hands we all are afraid that we loose out and in competitiveness and innovation so you can also be sure that we have looked very careful into competitive benchmarks so that we do not cut back on innovation too much.

Kai Korschelt - Deutsche Bank

Okay, that's great. And can I just ask one follow-up than, just a general question on the restructuring, I mean there has been, over a couple of press reports that the Board may have an issue or two with some of the proposals. Should we assume that what you have been telling us today on the IFX10+ is pretty much gone have has achieved Board approval or is there some uncertainty related to the restructuring? Thank you.

Peter Bauer - Chairman and Chief Executive Officer, Head of Automotive, Industrial and Multimarket Business Group

First of all, it doesn't require Board approval from a formal perspective because that's in totally in the hands of the management of the company. And secondly, it is so that it has Board approval as well because it's being discussed with the Board. So there is, I don't know where these rumors come from. The organization is in our hands, and we are right now deploying it and it will be just executed the way we set it.

Kai Korschelt - Deutsche Bank

Okay, got it that. Thank you.

Ulrich Pelzer - Investor Relations

Yes, I think this brings us to the end of the conference call. Thanks so much everyone for attending for your interest and your questions. I realized a couple of people didn't yet to ask all their questions, feel free to call, IR team here in Munich. You know how to reach us, we'll be happy to answer any questions, and we're looking forward to hopefully speaking to all of you again on our next quarterly conference call. Thank so much. Bye, bye.

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