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Infineon Technologies AG (IFX)

Q2 2006 Earnings Conference Call

April 26th 2006, 4.00 AM

Executives:

Ulrich Pelzer, Corporate Vice President, Investor Relations

Dr. Wolfgang Ziebart, Chairman of the Management Board, President, Chief Executive Officer

Peter Fischl, Chief Financial Officer, Executive Vice President

Peter Bauer, Executive Vice President and Chief Sales and Marketing Officer

Professor Hermann Eul, Deputy Executive Vice President

Kin W Loh, Executive Vice President

Analysts:

Nicolas Gaudois, Deutsche Bank

Matthew Gehl, Goldman Sachs

Nav Sheera, Lehman Brothers

Janardan Menon, Dresdner Kleinwort Wasserstein

Andrew Griffin, Merrill Lynch

Didier Scemama, ABN AMRO

Jonathan Dutton, UBS Warburg

Günther Hollfelder, HVB Group

Karsten Iltgen, West LB Panmure

Johannes Ries, Cominvest

(Jermonet Ramma with IXA Securities?)

Presentation

Operator

Welcome to the Infineon Technologies financial Q2 and financial H1 2006 conference call for analysts and investors. Today’s call will be hosted by Mr. Ulrich Pelzer, Corporate Vice President, Investor Relations, of Infineon Technologies. Operator instructions. Statements made on this conference call may contain forward-looking statements based on current expectations or beliefs as well as a number of assumptions about future events. We caution you that these statements and other statements that are not historical facts are subject to factors and uncertainties, many of which are outside Infineon’s control, that could cause actual results to differ materially from those described in forward-looking statements. Listeners are cautioned that Infineon’s actual results could differ materially from the results anticipated or projected in any of these forward-looking statements and they should not put undue reliance on them. For a detailed discussion of important factors that could cause actual results to differ materially from the statements made on this conference call, please refer to Infineon’s most recent annual report on form 20-F, available on our website and that of the SEC under the headings ‘forward-looking statements’ on page 3, and ‘risk factors’ on page 36. At this time, I would like to turn the call over to Infineon. Please go ahead.

Ulrich Pelzer, Corporate Vice President, Investor Relations

Yes, thank you. Welcome everyone and good morning, to the Infineon fiscal Q2 2006 conference call. Hopefully everyone has had a chance to look into our quarterly figures release that we published this morning. If not, you can find all the detail on the investor relations section of our web page. With me on the call today is the entire Infineon management board: our CEO Dr. Wolfgang Ziebart; our CFO Mr. Peter Fischl and the three board members responsible for the AIM com(?) and memory groups, Mr Peter Bauer, Professor Hermann Eul and Loh Kin Wah. We’ll kick off with an introductory statement by Dr. Ziebart, and then we’ll open up the call to Q&A. With that, over to you.

Dr. Wolfgang Ziebart, Chairman of the Management Board, President, Chief Executive Officer

Good morning, ladies and gentlemen. Also from my side, I would like to welcome you to our telephone conference concerning Q2 2006. Having announced key figures in our press release this morning, I would now like to talk about the most important outcomes of the last quarter, and then comment briefly on the outlook for Q3. After that, I will open the call and we will answer your questions, together with my colleagues from the board. Overall, we have improved our performance very much in the last quarter. After four quarters of EBIT losses, we have achieved positive EBIT again, that swung to Euro 28 million from a loss of Euro 122 million a quarter ago. This increase was primarily due to the return of the memory product segment to positive EBIT an improved EBIT in the Automotive, Industrial and Multimarket segment.

Now, the results in a little bit more detail. Overall group revenues were Euro 1.99 billion, a 19% increase from Euro 1.67 billion sequentially, primarily reflecting higher sales in the Memory Products and the Automotive, Industrial and Multimarket segments. In the Communications Solutions segment, revenue decreased moderately compared to Q1 as expected. Revenues of the other operating segments increased in Q2 primarily as a result of the first consolidation of ALTIS, our joint venture with IBM in France. As mentioned before, we achieved significantly higher quarterly EBIT of Euro 28 million. This improvement was primarily driven by positive EBIT in the memory segment, up from a loss in Q1. We recorded a very strong EBIT increase in the Automotive, Industrial and Multimarket segment that more than offset the small increase in the EBIT loss in the Communications Solutions segment.

The EBIT loss in the Corporate and Reconciliation segment also increased in Q2, primarily due to costs in current in connection with the carve out of the Memory Products segment, and the move to Campeon, our new headquarters in Neubiberg here near Munich. In Q2, we recorded no significant restructuring charges. Net loss in Q2 was Euro 26 million, or Euro 0.03 per share compared to a net loss of Euro 183 million, or Euro 0.25 per share, in the prior quarter. As already mentioned in the last quarter, the difference between EBIT and net loss has two primary reasons: first we have on balance and at interest expense, mainly as interest payments on our convertible debt exceed interest income on our cash balances, and secondly, under US GAAP accounting, we have to write down deferred tax assets in certain subsidiaries when we incur additional pre-tax losses. I now will shortly comment on the segments performance during Q2.

Revenues in the Automotive, Industrial and Multimarket segment were Euro 733 million, an increase of 12% compared to the previous quarter. We could increased EBIT in this segment to Euro 74 million for an EBIT margin of 10%, despite ongoing expenses for the closure of our Munich-Perlach facility and the ramp up of our production facility in Kulim, Malaysia. We are very pleased with this result, which exceeded our own expectations. Underlying this performance was strong demand for power semiconductors and products from our ASIC & Design Solutions business, used in computer peripherals. In addition, we have strong demand as well as improved product mix in our security and chip-card business resulting in a marked improvement in an EBIT loss here.

In the Communications Solutions segment, revenues decreased to Euro 308 million, primarily due to lower demand for baseband products. This impact was not fully offset by significantly higher revenues in our Broadband Access business. EBIT loss of the Communications Solutions segment increased sequentially to Euro 29 million, due to this sales decline. In our Broadband Access business, however, we are happy to report another increase in EBIT in Q2. This was primarily driven by the decision of Deutsche Telekom to base the initial rollout of its VDSL2 network entirely on the Broadband Access systems using our VINAX chipset. I would also like to highlight our recent announcement of a design win for EDGE RF transceivers with Samsung. The announcement illustrates our leadership. As you know, we have number one position worldwide in this area, leadership in RF CMOS transceivers and constitutes an important addition to our customer base for these products.

Finally, we are pleased to report another OEM design win with our mobile platform business for our EDGE platform. Coupling this with the various leading-edge products we announced at the 3GSM fair in February, we are well on track in the restructuring of our segments Wireless Platform business. I think the current level of EBIT loss between minus Euro 20-30 million per quarter is what can be achieved in this segment by cutting and restructuring. To achieve break even, it is necessary to gain new customers and that’s the reason why we stick to our plans that we will reach positive EBIT results here in 3-5 quarters.

Now let me come to the Memory Products segment. Revenues here jumped to Euro 928 million, up from Euro 678 million in the previous quarter. This is the second highest turnover level in this segment since Infineon’s foundation. The increase was due to strong growth in bit shipments and a slight increase in average selling price. While the DDR2 price recovery and the higher shipments of these memories added to improved average sales prices, we also had a higher share of specialty products within the bit shipments compared to the previous quarter. We are very pleased that we have achieved an EBIT turnaround in this segment in Q2 from negative Euro 118 million to positive Euro 30 million. This turnaround resulted from lower cost per bit and slightly higher average sales prices. While we managed solid production growth, our shipments grew even more aggressively. This resulted in the reduction of our inventory range by two weeks.

We have made further good progress in the development of our 75 nanometer technology, where we continue to be fully on schedule. In our 300mm facility in Richmond, we are on schedule in ramping up volume production. Here we have reached more than 20,000 wafer starts per month already in Q2. Last but not least, Inotera, our joint venture with Nunya in Taiwan, has successfully completed an IPO with a price of NT dollar 33 per share on March 17th this year. The book was six times oversubscribed, together with a closing share price of NT dollar 37.2 yesterday evening. The share price performance at least in line with the peers(?), this illustrates the success of this IPO. Our ownership interest now stands at 41.4%.

Now let me come to the outlook for Q3. My comments on the outlook for the Q3 2006: in our Automotive, Industrial and Multimarket segment, we anticipate revenues to normalize in 3Q after a Q2 that was both ahead of our own expectation and normal seasonality, meaning we expect it to stay within the range of Q2. Or, to say it more positively, we expect the revenues to reach the Q2 high level. Growth is likely to be driven by continued high demand for power MOSFET and IBGT products for consumer applications. Sales in the security and chip-card business are anticipated to decline slightly to more normal levels compared to Q2. We expect to have expenses related to the closure of the Perlach facility until the end of Q2 2007. The Kulim facility is expected to start volume production in Q1 2007. We foresee EBIT for the current quarter more or less at the same level as in the last quarter. The EBIT guidance is before taking into account the effect from corporate overheads expenses, which will remain with our two logic segments following the legal separation of the Memory Products segment. At this stage, however, we cannot quantify the exact amounts.

In the Communications Solutions segment, we expect Q3 revenues to decline compared to Q2. On one hand, we will not longer have the benefit of the revenues for Fiber Optics products after the divestiture – the Fiber Optics business has been closed. On the other hand, we expect a return to more normalized revenue levels in the broadband access business. With operating income driven predominantly by the top line, we anticipate the segment’s EBIT loss to increase in Q3. Again the EBIT guidance is before taking into account the effect from corporate overhead expenses that will remain with our two logic segments following the legal separation of the Memory Products segment. Again, at this stage, we cannot quantify the exact amount. Nevertheless, we have seen Market Research Institutes raising expected worldwide growth of mobile handsets to over 900 million, and taking into account our continued success in gaining new customers in RF transceivers in mobile platforms, we remain confident about the future.

In our Memory Products segment, we expect to grow out bit production by approximately 10% in Q3. As you all know, we continue to pursue preferably an IPO after completion of our carve-out process of the new memory company Qimonda on May 1st, so actually next week. In the corporate and reconciliation segment, we expect the EBIT loss to increase compared to Q2 due to the costs incurred in connection with the carve-out of the company’s memory product segment. One final remark regarding the outlook: Q3 will also include the dilution gain of approximately Euro 30 million resulting from the Inotera IPO in March 2006. This gain will be reflected in the non-operating income within the Memory Products segment EBIT. In addition to the dilution gain, we anticipate charges in 3Q, mainly coming from the restructuring of ALTIS, as already announced. This restructuring is necessary to strongly improve our cost position here in advanced logic products. However, overall we do not expect the net balance of gains and expenses to have a major impact on the group results.

In closing, I note that Q2 results clearly illustrate that both the Memory Products as well as the logic businesses are well positioned to operate successfully as separate companies in the future. Our restructuring measures in the loss-making business areas are consistently driving performance improvements. We hold a strong market position in a large number of businesses already today, and anticipate continued strong growth in those areas. Taking all this together, and having created two companies after May 1st, we are very confident for the future. This concludes my introduction, now my colleagues and myself are more than happy to address all the questions you might have. Thank you.

Questions and Answers

Operator

Thank you. Operator instructions. Your first question is from Nicolas Gaudois of Deutsche Bank. Please go ahead.

Q – Nicolas Gaudois, Deutsche Bank

Hi there. First question on smart cards. You’re mentioning that you’re now losses are significant. Would you care to give us a bit more color on the magnitude, and where will we see it actually changing your guidance for smart cards to break even by the end of the year? Also, whether the reduction in losses comes purely from revenue leverage or any changes in the competitive environment, i.e. for instance Satmel(?) somewhat withdrawing partly from the market, or yourselves altering your exposure to sim cards, which is where certain of the losses are coming from? And I’ve got a follow-up. Thank you.

A - Peter Fischl, Chief Financial Officer, Executive Vice President

Thanks, Nicolas. I think you covered already a couple of topics here. It’s a multitude of topics. On the one hand, we had quite good demand in the market, especially coming from higher end products. We ramped successfully our 32 bit high security product and got more revenue from that, so it’s market performance together with performance of new products coming into the market. We could also increase the share and contact list which is higher margin. That’s the one aspect. The second aspect is that we saw in the mid-range products and the sim card market indeed a competitive situation where demand was relatively high compared to what the operators are sourcing. That might indicate that other competitors had a weakness there. I can’t comment on it any further. Thirdly, we do execute very well on our restructuring program. That includes that we are now over 70% with our very small sell, the UCP sell, we have also reached levels of 80% with our molded package, the so-called flip chip on on-substrate package. Additionally we are executing well on the reduction of central cost on chip cards, so it’s a multitude of aspects which led us to nearly break even in 2Q, which is very nice. Looking forward, the uncertainty comes always from the market here. I’m not concerned at all about our restructuring measures and about hitting the targets from our internal milestones. There is only the visibility into the market and the projects we are targeting, and the banking and contact arena. If that goes well, there should be no problem with our guidance, so I’m actually at the moment positive, but here I would always add a slight uncertainty because this market is very volatile.

Q – Nicolas Gaudois, Deutsche Bank

So as you see things now, all things being equal, you could break even before the end of the year? Since you’re nearly there already?

A - Peter Fischl

Actually, I wouldn’t make a comment now. I would stick to the guidance we had and say if the market is extremely positive, yes, but it could be adverse as well. This is absolutely unpredictable. We have some large infrastructural projects in the pipeline and they need to come.

Q – Nicolas Gaudois, Deutsche Bank

OK thanks, Peter. And on the wireless side, could you give us a bit more clarity on what happened in wireless within CBG(?) in the previous quarter? And what is embedded in your guidance for Q3 where you have CBG revenues down, would you actually expect wireless up or flat within that? And also comment a bit more on when we can expect some meaningful revenue leverage coming from new design wins? I think within (inaudible) commented this morning whether (the 113 micron ULC ramp?) is looking pretty strong in the second half of this year?

A – Wolfgang Ziebart

Thank you for the questions. This is quite a number of questions, I will try to go through them backwards. The EGOLD radio device is in fact in ramp, so this is sitting at the market now. Your second question was addressing the perspective, what the new designs are, and we have already stated that they are going into revenue in the second half of this calendar year and we stick to this guidance, so you will see also revenues here in Q3 and Q4 of the calendar year. I think your next question was about the revenue development in the last quarter, here we have decline in the baseband run rate which is, I think, pretty consistent with the other market developments and we also have been able to compensate this, at least partially, with our good results in the acquisition of broadband business in our wire line. Perhaps I got them all, if not which did I miss out?

Q – Nicolas Gaudois, Deutsche Bank

Just one point, the element for the guidance for the June quarter with CBGs guiding down – what would wireless do, do you think, within that?

A – Wolfgang Ziebart

We are very conservative in our statements due to our learnings out of the past. The decline in the next quarter we expect to be line with what it was in the last quarter. We have baseband customers not doing so well in the markets so we stay conservative on the revenues here. However, we would be prepared to participate in announced more positive statements.

Nicolas Gaudois, Deutsche Bank

OK. Thank you.

Operator

Thank you. We’ll take our next question from Matthew Gehl with Goldman Sachs. Please go ahead.

Q - Matthew Gehl, Goldman Sachs

Yes. First a question on communications, then I’ve a follow-up question on memory. In the communications with your guidance to be break even within three to five quarters. Could you give us some sense of what’s driving such a wide range? Are you going to be able to do it in three quarters based on one customer ramp, and you have confidence in five quarters because you’ve got a substantial further number of customers coming? What’s causing the delta between and three and five quarter profit?

A – Wolfgang Ziebart

This is depending on market developments. First of all, to give you an indication on how many customers are behind, it is more than the speculated one you referred to. It’s a number of customers, and the range where we expect to reach the break even comes from some kind of positive or more conservative estimations when those customers are to ramp and also what their market success is about. There’s a lot of influencing factors, so it can run well to the more aggressive side, but also a customer might not be successful with one or the other model in the market, as we also have experienced in the past and then it may turn to the longer end.

Q - Matthew Gehl, Goldman Sachs

This is increased cost in the communications business, as you take on the Memory costs, the corporate costs that are assigned to that. Can you still break even in three quarters with that incremental cost on comps?

A – Wolfgang Ziebart

We are working on this cost. However, as was said already before, we cannot quantify it at this point in time.

Q - Matthew Gehl, Goldman Sachs

A question on memory. Based on a back of an envelope calculation, we have your costs going down by slightly more than 15% on a 256mb equivalent basis, in Q2 on extremely strong shipment growth. Could you comment on what type of cost reduction you think you could do on a 10% shipment growth in Q3?

A – Wolfgang Ziebart

We do not comment on this looking forward.

A - Peter Fischl

Let me make a generic statement. This is Peter Fischl. In the pre-phase of preparing ourselves for the IPO I would like to ask you today to understand that we have to be very restrictive in terms of any kind of (MP that came under guidance?). We cannot be as specific as we have been in the previous calls today.

Q - Matthew Gehl, Goldman Sachs

But could you just confirm what the shipment growth was, then, in the Q2 period?

A – Wolfgang Ziebart

Yes. We confirmed shipments in the last quarter, which was 36%, and shipments for the next quarter and bit production next quarter is an increase of 10%.

Q - Matthew Gehl, Goldman Sachs

And are you able to confirm what the cost reduction was in the March quarter?

A – Wolfgang Ziebart

No. As Mr. Fischl has said, I’m quite restricted with my forward-looking statement.

Q - Matthew Gehl, Goldman Sachs

I’m referring to the March quarter which is finished?

A – Wolfgang Ziebart

We’ll make no comments. Sorry.

Matthew Gehl, Goldman Sachs

OK. Thank you.

Operator

Thank you. We’ll now take a question from Nav Sheera with Lehman Brothers. Please go ahead.

Q - Nav Sheera, Lehman Brothers

Thank you very much. Good morning, gentlemen. Just one top level question, and then perhaps one on the PC marketplace. Are you seeing a trend of increased memory content for (brown box?) going forward, which is an overlay on the strong growth in the PC market? That’s the first question. Secondly, on wireless, could you give us just a bit more detail in terms of your low cost chipset and the rollout plans for your customer base for the balance of this year? Thank you.

A - Kin Wah Loh, Executive Vice President

Yes. Loh speaking. On the PC market, maybe to answer you on a higher level, is that first the memory market is now really not only alone in the PC market, because the D-RAM into the PC market is now about 50% and now less goes to the PC side on the PC growth. I think at the moment, the PCs are more or less in the last two quarters, has been constant. In fact, there seems to be according to market research, a seasonal reduction in the first quarter of about 2%. But the bit per box has increased quarter to quarter by approximately 7-8% and we are seeing this especially in the commercial PCs, that the bit per box will increase.

A – Wolfgang Ziebart

Is that enough?

Q - Nav Sheera, Lehman Brothers

Sorry, would you expect that trend to continue toward the end of calendar year, especially with the launch of Vista?

A – Wolfgang Ziebart(?)

I think there are two factors in that. One is that you know the first two quarters is normally the weak quarter in the PCs. The second half of the year, there’s a seasonal growth of the PC, which is very normal in our industry. Now the introduction of Vista, which has been announced by Microsoft, especially the first units should be coming out for the commercial PCs as expected in November. We foresee that the effect will count in only maybe perhaps Q2 and Q3 of next year. I mean, there is a trend that is increasing, but how does it increase? Now there are two factors. One is the second half of the year. It is increased because of seasonal effect, and the introduction of Vista for instance definitely the megabit per box for Vista is much higher. But it is only introduced for the commercial PC in Q1 of next year. So we think that this increased will be gradual in the next year.

Q - Nav Sheera, Lehman Brothers

Thank you. And also on the single-chip chipset rollout plans?

A – Wolfgang Ziebart(?)

OK, thank you. As we have one customer (inaudible) device, I think this is what you are asking for. This is an OEM. We expect that the second OEM will then be in the second half of this calendar year. And on top of this, we have also two ODM designs ready, which however I cannot comment on when they do ramp because of the visibility of their end customer.

Q - Nav Sheera, Lehman Brothers

Thank you very much.

Operator

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

Q – Janardan Menon, Dresdner Kleinwort Wasserstein

Thanks. A couple of questions. One at the new OEM customer that you announced just now for the EDGE. Is that a top-six customer, can we assume?

A – Wolfgang Ziebart(?)

I would say this is a good question to dice into what we currently cannot really reveal, so we are here under NDA. We think that this customer has a good potential – perhaps I can state it this way and leave the rest up to the time when we have agreement from the customer that we can reveal things.

Q – Janardan Menon, Dresdner Kleinwort Wasserstein

And when will this customer start shipping?

A – Wolfgang Ziebart(?)

The new one, I expect to start shipping in Q1 of the next calendar year, so that we will see revenue also already this calendar year.

Q – Janardan Menon, Dresdner Kleinwort Wasserstein

OK. And just on the DSL side, can you give us a flavor for what kind of percentage revenue decline you will see and is there a danger that Deutsche Telekom is going to slowly phase out this ramp altogether and you will see some pressure on the revenues in the coming quarters?

A – Wolfgang Ziebart(?)

The Deutsche Telekom, I would prefer not to comment on their plans. As we can see, from outside view, they continue to do their rollout throughout Germany with the pace they have already announced, so from here we do not expect any slowdown. For the next quarter, compared to last quarter, of course we expect that the VDSL shipments will go to a normalized level after having had a peak, because of the early installations in order to bring the net up for being ready for the soccer championship. So this is not a decline, so to speak, this is the end of a hot face of early installations and going to a normal installation rate.

Q – Janardan Menon, Dresdner Kleinwort Wasserstein

So you would expect your FYQ4 revenue to be up in wire line?

A – Wolfgang Ziebart(?)

We continue to be on a good path in wire line with our normal development and normal revenue paths, which we have announced in our plan. So we do not expect any decline from this, it’s just going to our normal run rate in the installation of the VDSL2.

Q – Janardan Menon, Dresdner Kleinwort Wasserstein

And how much is the Fiber Optic revenue that will drop off in the current quarter?

A – Wolfgang Ziebart(?)

This is a smaller amount, however we do not go into details here.

Q – Janardan Menon, Dresdner Kleinwort Wasserstein

OK. And on the basement, your key customer, BenQ, has guided to a massive 30%+ volume growth at the current quarter. Just wondering why that is not reflecting in your guidance?

A – Wolfgang Ziebart(?)

Yes. I already indicated this before, perhaps not precisely enough commenting on this one. We do the guidance according to our past experience, and we stay cautious and on the conservative side. Any more commenting would lead me into commenting our customer statements, which I beg your pardon, but I would prefer not to do.

A - Kin Wah Loh

Anyway, to comment from my side, we are always very conservative in our forecasts, but of course we very much like any upside coming from the customer’s side.

Q – Janardan Menon, Dresdner Kleinwort Wasserstein

Just a last question, your D-RAM ASP was very strong and your product mix seems to have improved with higher graphics percentage. Do you see that as a continuing trend or do you think, instead of peaking off in graphics chips?

A - Kin Wah Loh

First of all, yes, the ASP has increased over 6% in the last quarter and of course our specialty D-RAM (in respect of graphic D-RAM is classified?) but is also increased. In fact, the last quarter, we have increased from quarter to quarter from 8% to 16% and looking forward we expect this to continue.

Q – Janardan Menon, Dresdner Kleinwort Wasserstein

Continue more than 16%? Or flat at 16%?

A - Kin Wah Loh

More than 16%.

Janardan Menon, Dresdner Kleinwort Wasserstein

OK. Thank you very much.

Operator

Thank you. We’ll now take a question from Andrew Griffin with Merrill Lynch. Please go ahead.

Q – Andrew Griffin, Merrill Lynch

Hi, good morning. Just to clarify on the corporate charges, I know you’re not able to say what they’ll be in the next quarter, but in terms of the structure of what you’ll report, will there no longer be a corporate line? Are you going to load all of those into the two remaining logic divisions? I just wanted you to clarify what you meant by that.

A – Wolfgang Ziebart

No, Andrew. I mean, the point is very simple, that when you do a carve-out then you have increased cost. There is the need of costs on the Qimondo side to build up specialists. In the meantime, you help yourself with the service level agreements, but as soon as they have, in the next few weeks and months, those people in place, then of course you have to make adjustments to the cost structure. And this is the simple indication. Now to define this and quantify it in terms of what is one time and what is not one time, would really stretch it too far, so we just wanted to give you an indication and bear with us, we are addressing this issue.

Q – Andrew Griffin, Merrill Lynch

OK, thanks. Then I’ve a quick question on memory. Sorry, I didn’t quite catch the comments on 75 nanometer ramp. I wonder if you could just repeat where that is and if you’re able to, given the Qimondo issue, just talk about what the roadmap is for 75 nanometer ramp?

A - Kin Wah Loh

Like I said, the 75 nanometer we have already functional units available, and we are now continuing their development.

Q – Andrew Griffin, Merrill Lynch

You mentioned a 20,000 wafer per month number? I’m sorry, I didn’t catch what that…

A – Wolfgang Ziebart

No, that was the current Richmond output in 300mm.

Q – Andrew Griffin, Merrill Lynch

OK. Sorry about that. Thanks very much.

Operator

Thank you. We now have Didier Scemama with ABN AMRO. Please go ahead.

Q – Didier Scemama, ABN AMRO

Good morning, gentlemen. A few questions on the wireless side. I’m actually surprised nobody has asked the question yet. As has been commented already, BenQ is guiding for 30%+ growth in volumes. And you don’t seem to benefit from that. Would it be fair to say that in fact the BenQ design phone are now using the Siemens channels and therefore they use the TI platform, and therefore you know, your revenue opportunity for the next 12 months is extremely limited with BenQ? And second, can you talk about the RF business? Because one, at Samsung you talk about design wins in EDGE and there seems to be at least four other suppliers, so if you could maybe give a bit more details on the revenue opportunity for that client? And related to the RF business is that Nokia, where you still have a big share on the low end – given that this business is going to be integrated in a single chip, it seems like all of your big clients are going away? So could you be a bit more specific on the new customer wins and the EDGE opportunity and the BenQ story?

A – Wolfgang Ziebart

OK. I’ll try to be a little bit more precise. So from that, what we can take from our books, the last quarter’s shipments from BenQ have a very, very large portion of our solutions. Of course, there is no public data available, but that is the backward math which we can do. So from this, I would expect if the +30% is really going to happen that we would participate from this in the same amount, or this will drive of course a positive impact on us. As they already said before, we stay cautious about this and we would like to see this happening that way. I think they have very good products in the channel. However, following our tradition from the past, here we stay a little bit more cautious and do not give you a guidance which is over emphasized. You can do your own math on what this then would mean for us, based on the statements I have done. We have a good share in this customer and I’ll leave the rest up to you. The next one was on Samsung. We have done a design win here and we are going to ship here. So let’s see how successful we are. Our products are cutting edge products and we are still, after having many suppliers for others who were able to gain this customer for our solution I think this underlines very, very strongly the capability of the solutions. So we trust in this customer bringing the products based on our solution to the market successfully, so that we can have a common success together. Speculation on the percentages inside Samsung I think is beyond the depths that I can go. The third one was on Nokia. So far, this integrated product is in the press, I think for roughly more than 1.5 years. As long as it’s in the press it doesn’t worry me so much. We do not see it in production, yet so you can see from our revenues that our success in Nokia is very, very stable. This is what I think is the more tangible side of the business. You can also expect that we do not work on the EDGE part of Nokia business.

Q – Didier Scemama, ABN AMRO

OK. So BenQ I’ll make up my own mind, on Samsung, can you maybe talk about the basement partner? Would it be fair to say that you have Philips, since AGEA(?) works with SLAB and Skyworks? And Renesas?

A – Wolfgang Ziebart

To be very honest, this is beyond my NDA, so I beg your pardon.

Q – Didier Scemama, ABN AMRO

Skyworks and SLAB were able to talk about it during their conference call, so why can’t you?

A – Wolfgang Ziebart

This is usually not what we do, so we’ll stick to what we agreed upon, and this is confidentiality. That’s it. Sorry.

A - Peter Fischl

Didier, in the interests of giving everyone a chance to ask a question, we’re more than happy to take your questions offline, OK?

Q – Didier Scemama, ABN AMRO

OK. Did you have any gain from inventory in your memory line?

A – Wolfgang Ziebart

In the line? No.

Didier Scemama, ABN AMRO

OK. Thank you.

Operator

Thank you. Your next question: Jonathan Dutton with UBS. Please go ahead.

Q - Jonathan Dutton, UBS Warburg

Good morning. I have a quick question. I just wondered what the D-RAM bit production was in the last quarter, and looking at the…

A - Peter Fischl(?)

You’re breaking up.

Q - Jonathan Dutton, UBS Warburg

I just wondered what the bit production was in Q2?

A - Peter Fischl(?)

You’re breaking up. Was that bit production growth in Q2?

Jonathan Dutton, UBS Warburg

It was.

A – Wolfgang Ziebart(?)

The bit production growth in Q2 is expected to be 10%.

A - Peter Fischl(?)

No, the second quarter.

A – Wolfgang Ziebart(?)

Oh, the last quarter? The last quarter is 20% in line with our earlier statement.

Q - Jonathan Dutton, UBS Warburg

Bearing in mind the disparity between the production of the shipment growth in the March quarter, do you think we should model a similar sort of disparity for the June quarter?

A - Peter Fischl(?)

Could you repeat the question? We can hardly understand what you’re saying.

A - Jonathan Dutton, UBS Warburg

Should we be modeling a similar level of disparity between chips and production growth for the June quarter, as you reported during the March quarter?

A - Peter Fischl(?)

As we’ve said before, please understand, we cannot give guidance beyond what we’ve indicated already.

Jonathan Dutton, UBS Warburg

Right. OK, thanks.

Operator

Thank you. We now take a question from Günther Hollfelder with HVB. Please go ahead.

Q - Günther Hollfelder, HVB Group

Thanks. I have two questions. One is concerning your precision at the Motorola Automotive business, which was sold to Continental. Do you see there are any opportunities for Infineon and for which products going into the future now at Continental? And on the other hand, regarding your impressive increase for the special D-RAM share, could you comment on any opportunities in the game console business, except for the X-Box 360? Are there already any negotiations or agreements?

A - Peter Fischl

Günther, with regard to Motorola and Continental, both are good customers of our. Actually, Motorola ACES, we made very good progress especially on the power side but also micro controllers and with Continental, you know for many years a strong supplier also for the former 10Mb(?) division which got acquired by Continental. Moving that together, will first have a neutral effect and then create opportunity as those customers grow in the market and gain market share. This will mean opportunity for us I’m sure. But so far, it’s too early to predict anything. At least it doesn’t mean anything negative.

Günther Hollfelder, HVB Group

OK.

A - Kin Wah Loh

It’s Loh. On the specialty side, I’ve to say that there are three game console players in the market. One is Microsoft, then you have Sony and then you have Nintendo. I cannot really make any statement to whether we have any additional design wins in these three players. But as I stated earlier, our graphic share within our revenue is increasing.

Günther Hollfelder, HVB Group

OK. Fair enough. Thanks.

Operator

We now take a question from Karsten Iltgen with West LB. Please go ahead.

Q - Karsten Iltgen, West LB Panmure

Yes, hello, thanks. Good morning. Again on these corporate overhead costs which are moving from D-RAM to logic. I know you don’t want to give us any specific numbers, but any ballpark numbers on what kind of costs you’re looking at?

A – Wolfgang Ziebart(?)

No, we don’t quantify. Let us work on this. We are just in the process of the carve out, and please accept that there are certain issues which have to be addressed. So it’s just not possible to give you any kind of estimates at this time.

A - Peter Fischl

It was only for the guidance for next quarter, you can be sure that we will address those issues and those costs will not stay.

Q - Karsten Iltgen, West LB Panmure

Then on memory again, a few numbers for Q2? What was the share for 90 nanometer?

A – Wolfgang Ziebart(?)

The 90 nanometer we closed in the last quarter, about 20% of our volume and we do not disclose, for obvious reasons, going forward.

Q - Karsten Iltgen, West LB Panmure

And what was the difference between shipments and production in the quarter?

A – Wolfgang Ziebart(?)

Actually I commented that the inventory went down by two weeks and then you can calculate from that the difference between those two.

Q - Karsten Iltgen, West LB Panmure

OK. 20%, this causes a shipment number right?

A - Peter Fischl

No, 20% is the production bit increase.

Q - Karsten Iltgen, West LB Panmure

Then any comment on NAND, how that is doing?

A – Wolfgang Ziebart(?)

Yes, as we have always said, before in the main site we are still in the development stage and we are still learning the technology. We remain in the learning stage.

Q - Karsten Iltgen, West LB Panmure

And I guess no outlook, because it’s part of memory?

A – Wolfgang Ziebart(?)

Yes.

Karsten Iltgen, West LB Panmure

OK. Fair enough. Thank you.

Operator

Thank you. Next we have a question from Thomas Brenier with Societe Generale. Please go ahead.

Q - Thomas Brenier, Societe Generale

Good morning. Could you maybe spend a bit of time explaining as to how the guidance for AIM could be so different from that actual results? I understand the smart cards have been probably different than what you were expecting, but the AIM was probably supposed to be one of the main businesses, so I was wondering if you could maybe give us (inaudible)? I also would like to know if the margins that you reached in this division which is quite high in the last quarter is a good indication of what you can achieve for the whole year?

A - Peter Fischl

With regard to the changes in our expectation versus the real results, it was not only smart cards but also the Industrial business was very strong, driven mainly by two sub sectors there: the high voltage MOSFETs which are going in adaptors, AC/DC, and I believe a lot is coming through consumer demand – LCD screens, plasma screens. The higher efficiency of the CMOS plays a big role in those devices because the power dissipation is much less from the power supply. So we saw a strong increase there. But also the industrial business, the general industrial business, the high power going into drives process automation was very strong. Actually also stronger on the customer side as they expected, so it was difficult to put that into our guidance earlier. On the smart side, I already commented, it was actually growth in the new segments as well, good growth also in the SIM card market combined with restructuring measures and cost reductive versions. We also had an affect in the ASIC design solutions business unit, where our storage customers in the computer peripherals arena had a good quarter and we saw our product platforms there with a high performance. So this all together was creating this upside I was indicating. Automotives is running absolutely in line with the forecast but with good growth. Nearly double-digit growth as well. So here we just show a strong performance in growth, but that was in line with our expectations. On the full year, that is certainly again a subject of the central cost effect we have been discussing. From the operation EBIT situation, we foresee a slight decline into next quarter, mainly driven by – we can foresee this peak to be continued but from the EBITs, they will operationally follow in line the revenue. So notwithstanding the impact of the corporate charges, we can foresee a high single-digit number for the full year.

Q - Thomas Brenier, Societe Generale

Thank you, that is very helpful. Maybe just a real quick additional question, I was wondering if you would be ready to share with us the percentage of T1 first and maybe top three customers during the first half of this year, with the names if possible?

A – Wolfgang Ziebart

You mean Automotive, or the company in general?

Q - Thomas Brenier, Societe Generale

For the whole group.

A – Wolfgang Ziebart

For the whole group? The three biggest customers…

A - Peter Fischl

The usual suspects. I mean it’s Siemens -

A – Wolfgang Ziebart

I get it – the biggest customers in terms of revenue are Dell, HP and Bosch and Siemens, of course.

A - Peter Fischl

If you take the non D-RAM side, it’s clearly Siemens with all its groups, including Automotive, it’s Bosch, it’s Nokia.

Q - Thomas Brenier, Societe Generale

Thank you. And how much of the revenues would these four customers represent?

A - Peter Fischl

Our top key accounts, if you now take the whole key accounts, our top ten customers cover typically in each of the large divisions, about 60-70% of the revenue.

Thomas Brenier, Societe Generale

Thank you very much.

Operator

Thank you. We now move to Johannes Ries with Cominvest. Please go ahead.

Q - Johannes Ries, Cominvest

Yes, good morning. Maybe some clarification questions. Is it right to (on the expense of the increase?) on the special D-RAM is maybe based on the gaming space? Secondly, you mentioned at the last conference call that the design wins you have already would be not full enough to reach your 10% market share target at the basement. Has anything changed on this topic? And finally, when will we learn more after the spin off of Qimonda will be legally finalized at May 1st, when will we learn more about the further roadmap?

A – Wolfgang Ziebart(?)

Maybe I’ll answer for that part on the special D-RAM classified specialty D-RAM, which includes graphic and mobile and consumer. So the increase expected is also design wins in other segments besides the game console.

A - Professor Hermann Eul, Deputy Executive Vice President

This is Hermann Eul speaking. So you were addressing the 10% target, and to this I can make the following comments. As you know, BenQ has publicly stated that they continued to have IFX as a strategic supplier, and we have already designed in our EGOLD radio design in this customer and are also working on higher segment platforms with that customer. For the win of the new customers, we are completely on track. We see us working very diligently and reliably toward our targets and we do not have any indication that we should step away from the execution and the achievement of our plans.

A – Wolfgang Ziebart(?)

Let me perhaps add that of course we don’t have a target for market share, we have a target for break even profitability, and this is our overruling target for that division.

Q - Johannes Ries, Cominvest

So maybe you even think you can reach the break even despite reaching the 10%? Because in the past you always connected those – you need a 10% market share to break even or maybe a longer term positive…

A – Wolfgang Ziebart(?)

It depends on the products you are selling. Anyway, the target really is not the market share, but it is the profitability.

A - Hermann Eul

This comment is a good step for me – actually we did not connect it, we were asked what our rule of thumb is, what is necessary for this, and so we commented on this. Then our rule of thumb is that a 10% market share might go in line with this, but definitely we did not connect it so thank you for this invitation to comment.

Johannes Ries, Cominvest

OK, thanks.

A – Wolfgang Ziebart(?)

Commenting on the roadmap going further, after the Qimonda set up next week, we have said that we cannot say anything before a decision in the supervisory board has been made. We indicated that the IPO is our preferred solution, but anyway this is subject to the decision of the supervisory board. Before this has not happened, we of course also cannot comment anything about going further.

Johannes Ries, Cominvest

And the timing of the next supervisory board meeting is not published yet.

A – Wolfgang Ziebart(?)

It is not published to the outside, you can assume however that we have one supervisory board every quarter.

A - Peter Fischl(?)

We’ve got time for one final question please, if there is one.

Operator

Our final question comes from (Jermonet Ramma with IXA Securities?). Please go ahead.

Q - (Jermonet Ramma with IXA Securities?)

Good morning. I’ve got a question on (inaudible), apparently you’re planning to lay off 300 people there. Have we any idea what’s going to be the impact and when are you agreeing to take the (inaudible)?

A – Participant

Actually, to tell you the truth, we cannot comment on that, because just in those days the negotiations with the workers council are taking place, and everything commenting on this would be very much too premature.

Q - (Jermonet Ramma with IXA Securities?)

OK, (but do you have a date of timing?)?

A – Participant

There is a possibility that restructuring charges might incur in the current quarter, in Q3, and this is also the reason why we have stated that when you take the special effects into consideration, like the gain at Inotera, and then this being offset by some negative aspects that on balance we don’t expect overall a material negative impact on the results.

Johannes Ries, Cominvest

OK, thanks.

A - Peter Fischl(?)

Great. So I think this concludes the fiscal Q2 conference call, I hope we were able to address all of your questions. If we were not able to answer individual questions or more have come up, please do contact the investor relations team here in Munich. You should also be able to find a replay on our investor relations section of the website shortly. Thanks a lot, everyone, and bye bye.

Operator

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

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Source: Infineon Technologies AG Q2 2006 Earnings Conference Call Transcript (IFX)
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