Infineon Technologies AG F3Q06 (Qtr Ending June 30, 2006) Earnings Conference Call Transcript (IFX)

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Infineon Technologies AG (IFX)

Q3 2006 Earnings Conference Call

July 21, 2006 9:30 am ET

Executives

Ulrich Pelzer - VP, IR

Dr. Wolfgang Ziebart - Chairman, President, CEO

Hermann Eul - Deputy EVP

Peter Bauer - EVP

Analysts

Janardan Menon - Dresdner Kleinwort Wasserstein

Nav Sheera – Lehman Brothers

Simon Schafer – Goldman Sachs

Andrew Griffin – Merrill Lynch

Thomas Brenier – Societe Generale

Karsten Iltgen - West LB Panmure

Didier Scemama - ABN AMRO

Jermonet Ramma - IXA Securities

Matt Gehl - Vise Partners

Roland Josier – Credit Suisse

Varney Vuncock - XAN D&P

Nels Disvacht - Revel Securities

Operator

Good morning, everyone. Welcome to the Infineon Technologies financial third quarter 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. As a reminder, today’s call is being recorded.

Statements made on this conference call may contain forward-looking statements based on current expectations or beliefs, as well as a number of assumptions about future 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. Investors are cautioned that Infineon’s actual results could differ materially from results anticipated or projected in any of these forward-looking statements and there should not be 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 Form 20 F, available on our web site and that of the Securities and Exchange Commission under the headings Forward-Looking Statements on Page iii and Risk Factors on Page 36.

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

Ulrich Pelzer

Yes, thank you for your introduction. Welcome, everyone, on behalf of Infineon Technologies to our fiscal Q3 conference call.

With me today is Dr. Wolfgang Ziebart, our CEO; Mr. Peter Fischl, our CFO; Mr. Peter Bauer, for our Business Group Automotive, Industrial and Multimarket, and Professor Hermann Eul for our Communications Solutions Group.

The Board members later on will be more than happy to answer your questions after a couple of introductory remarks by Dr. Ziebart. So with that, over to you.

Wolfgang Ziebart

Ladies and gentlemen, I would like to welcome all of you to our 2006 third financial quarter conference call.

First of all, thank you very much for your patience today and having announced third quarter key figures already this morning, it was somewhat unusual to wait until the afternoon with this call. As you may have observed, we did this as we were waiting for the finding of the Qimonda legislation statement with the SEC in the United States.

Nevertheless with respect to [it’s now filed] we are pleased to announce, sooner than originally planned, the next consequent step in our [inaudible] to two separate companies, the proposed initial public offering of Qimonda. About 63 million American depositary receipts representing an equal number of ordinary shares in Qimonda’s common stock will be offered for sale with an additional [inaudible] of 9.5 million shares. The price range for the offering is US$16.00 to US$18.00 per American depositary receipt. Of the $36 million ADRs, approximately 33%, or $21 million ADRs, will be offered for sale by Infineon and approximately 67%, or $42 million ADRs, will come from a capital increase by Qimonda.

As we still have to observe legal restrictions, we hope for your understanding that we have to limit our disclosure with regards to Qimonda. Later on this call, my colleagues and I will be happy to answer your questions. Before that, however, allow me to make a couple of introductory remarks.

Well, after the second quarter being exceptionally strong, we are pleased especially with the EBIT development in the third quarter, which increased to Euro 49 million, up from Euro 28 million a quarter ago.

EBIT included a dilution gain of Euro 30 million in connection with the IPO of Inotera, which was mostly offset by impairment in structuring charges during the third quarter.

Revenues in the third quarter were Euro 1.97 billion, broadly stable compared to the second quarter, as lower revenues in the two logic segments could not be entirely offset by the increased sales at Qimonda.

Net [loss] included low double-digit Euro 1 million of tax charges in connection with Qimonda carve-out and evaluation allowances of tax assets. It improved slightly to a loss of Euro 23 million, up from a loss of Euro 26 million in the second quarter. Third quarter loss per share was Euro 0.03.

Let me now briefly comment on third quarter division performance and our outlook for the fourth financial quarter.

Let me begin with Qimonda. Revenues increased by 5% to Euro 977 million in the third quarter. EBIT improved strongly, up to Euro 100 million compared to Euro 21 million in the quarter before. Please bear in mind that the third quarter EBIT included a Euro 30 million dilution gain of the Inotera IPO on the Taiwan Stock Exchange.

Both big shipments and average selling prices increased in comparison to the second quarter. Fully loaded costs declined compared to the prior quarter, given the increase in shipments.

Due to the legal restrictions and regulations, we cannot make forward-looking statements for Qimonda at this stage. The only thing I can point out here is that we expect to record a dilution gain in the fourth quarter from Inotera’s offering of 40 million global depositary shares, representing 400 million common shares, at the Luxemburg Stock Exchange. The dilution gain will be Euro 42 million. Our ownership interest after this capital increase now stands at 36%.

Now let me turn to the Automotive, Industrial and Multimarket segment. Revenues in the third quarter decreased by 3% to Euro 740 million. EBIT declined to Euro 57 million from Euro 74 million in the prior quarter. After a second quarter ahead of expectations and ahead of normal seasonality, third quarter revenues and EBIT in the Automotive and Industrial businesses were broadly flat relative to the last quarter. We take this as a very good sign for our performance in these businesses. In the third quarter we saw particularly strong demand for discrete and Power Management products for our Industrial business.

As expected results in the security and also in the ASIC business normalized in the third quarter and drove the slight reduction in the overall segment’s results.

As far as the segment’s outlook is concerned, we expect revenues and EBIT to increase slightly compared to the third quarter.

In our Automotive business, we are likely to see a seasonally weaker quarter, given the summer breaks at a number of car manufacturers.

In our Industrial business, we anticipate continued growth also in the fourth quarter as this is a seasonally stronger one.

The [inaudible] is supported also by the beginning of volume production in our Kulim facility in Malaysia. After very strong second and a weaker third financial quarter, sales in the security and also in our ASIC business should re-accelerate in the fourth quarter, driven mainly by the security and the chip card businesses.

Finally, let me turn to the Communications Solutions segment. Revenues here were down to Euro 266 million from Euro 308 million in the prior quarter. Mainly because of a revenue decline, the EBIT loss [inaudible] to Euro 61 million after a loss of Euro 29 million in the second quarter. However, EBIT included charges of Euro 16 million, mostly in connection with impairments of investments.

Both the revenue and the EBIT decline was driven by weak demand for our baseband products, so widening our customer base is of utmost importance.

As we have announced last Monday, LG Electronics has selected our MP E platform for a series of their EDGE mobile handsets. We provide the [inaudible] baseband, the RF transceiver, the power management, the Bluetooth ICs as well as the protocol stacks and our APOXI middleware.

Sales for a number of phone models will ramp in the next quarters.

Also in the last quarter we have started shipments of our EDGE RF transceivers SMARTi PM to Samsung.

Finally, we successfully conducted the first call on a cell phone using a [inaudible] built on our 65 nanometer seamless process in May. We are pleased that the phone worked perfectly right from the start.

Given the above, we reaffirm our target to reach breakeven for our wireless business in what are now two to four quarters. In broadband access, design momentum remains strong with a number of design wins for our ADSL2+. IP DSLAM line counts as well as for VDSL2 and [inaudible] solutions at major customers.

Let me now turn to the segment’s outlook.

For the current quarter, we expect revenues and EBIT to improve compared to the third quarter. This is driven by the ramp up of shipments to new wireless customers, both in baseband and in [other].

I now come to a couple of final comments.

As we completed the Qimonda carve out during last quarter and are now readying the business for an IPO, we have aggregated our figures to allow a clear distinction between logic performance on the one hand and Qimonda performance on the other.

In our segment reporting, the line items AIM, Com, Other Operating Segments and Corporate Eliminations now show revenues and EBIT relating only to our logic businesses.

As you may know, Dresden 200mm facility produces wafers for Qimonda under a foundry agreement. Those revenues are shown under Other Operating Segments. For as long as we fully consolidate Qimonda, we eliminate those intragroup sales in corporate and eliminations. This explains the change you see in those line items for the third quarter when compared to previous quarters.

Overall, we expect sales and EBIT for our non memory businesses to improve in the fourth quarter compared to the third quarter levels. The Communications Solutions segment will be the main driver behind this, but AIM will contribute as well.

Prior to the inclusion of potential impairment and restructuring charges, we expect EBIT in Other Operating Segments and Corporate and Eliminations to remain broadly unchanged relative to third quarter levels, and the Corporate and Eliminations segments will continue to reflect the intragroup elimination of sales between Infineon and Qimonda.

Ladies and gentlemen, this concludes my introductory remarks. We open the call now for questions and answers.

Ulrich Pelzer

Thank you. Before we do this, I’d like to make one remark which is, I ask everyone on this call to understand that there are certain legal restrictions which we have to observe when questions are being asked about Qimonda. So please bear that in mind and just let that guide you when you think about what questions to ask. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We will now take our first question from Janardan Menon from Dresdner Bank. Please go ahead.

Janardan Menon - Dresdner Kleinwort Wasserstein

Yeah. I just have a few questions actually. One is on your wireless business. I’m just wondering your feeling about some feel for the growth in communications into your fiscal fourth quarter and if, you seem to be guiding at a reasonable level of growth into the fiscal fourth quarter, so is that being driven primarily by LG Electronics or is it other customers as well involved in that, and what is your degree of confidence that you may achieve your target in two quarters rather than in four quarters?

Wolfgang Ziebart

I would like to hand this question over to Professor Eul.

Hermann Eul

Thank you very much for handing this over to me. We have currently in [inaudible] two major customers as announced last quarter, Samsung for the RF transceivers and now we are ramping up the deliveries to LG for the complete platforms, so I think this is the major driver behind the announced increase of revenues.

The next question was concerning the two to four quarters and I think we are not going to precise this anymore, so we stick to our announcement and this is now two to four quarters towards the breakeven point.

Janardan Menon - Dresdner Kleinwort Wasserstein

And just any flavor for how much the revenue [inaudible] about 10% quarter on quarter or something like that?

Hermann Eul

This is a little bit difficult to predict. You know, when the customers introduce phones into the market it is very, very difficult to do any kind of perception how successful they are, how fast their customers [inaudible] it, how the product is received by the market and, of course, you know we have running underlying business with existing customership which is also going into our estimations about the next quarter.

Janardan Menon - Dresdner Kleinwort Wasserstein

And will the DSL business also grow in Q4?

Hermann Eul

The DSL business is a rather stable business. We had a peak in the second quarter. This was mainly driven by the high installation peak in front of the soccer championship and now we are running on a significantly satisfying level of continuing installations of ADSL2+ as well as VDSL2 lines.

Janardan Menon - Dresdner Kleinwort Wasserstein

And a last question to Dr. Ziebart, if I may? Once you’ve finished with the Qimonda IPO, with the money you’ll get, can you give us any idea whether there will be any change in strategy on the Automotive Industrial area in terms of acquisitions and things like that or will it be more sort of trying to consolidate the business and make it more profitable in the short term?

Wolfgang Ziebart

Yeah. Well, we have already indicated what we are going to do in those businesses this year. There will be no change in strategy. I think we have enough potential to grow in those areas organically and actually what we experience is that in those areas, where we are strong already, we see that we even have the highest potential for growth.

So, just to give an indication this year, we are on purpose lowering the target for the Automotive Power division in terms of EBIT to achieve higher goals. So we will have enough opportunity for organic growth.

Nevertheless, there are also opportunities around for acquisitions however there is nothing to be announced. As for acquisitions, you always need two to partner and that is not something you can decide on your own.

Anyway, if we think about acquisitions we will be very, very clear about what the potential synergies are and not go for an acquisition just to spend the money we have gained, but only do that in case that we really see that the acquisition really creates additional value.

Janardan Menon - Dresdner Kleinwort Wasserstein

Thank you very much.

Operator

We will now take our next question from Nav Sheera from Lehman Brothers. Please go ahead.

Nav Sheera – Lehman Brothers

Thank you very much. Good afternoon, gentlemen. Just wanted to ask you, just coming back to margins again, it looks like the margins for your AIM Division [returned] to about, just about 8% while last quarter they were around the 10% mark and I believe last quarter you were saying that 10% was a margin level that was sustainable going forward.

Would you suggest to have the next coming quarter that, part of that decline in margin is something that you are doing of your own accord as you are gaining market share, or do you think that you would get to revert back to the 10% margin level again in the near term?

Thank you.

Wolfgang Ziebart

Okay, Nav. We will pass this question to Peter Bauer.

Peter Bauer

Thanks for the question. Let me just recap a little bit the guidance we gave last quarter. We said we had a very strong second quarter and actually the expectation was that we could not reach, we would not be able to reach the revenues and the EBIT of the second quarter because we also had a very exceptional chip card business in the second quarter which we thought we could not keep on. We were coming from 5% and originally were giving an indication of about 8%, so a second quarter with a 10% was a bit of a peak upwards.

Having said this, we are actually glad that we could keep the Industrial and the Automotive business at the high level but as we expected, the other two businesses went down a little bit and then, as you also might know, we have still significant charges from the closure of our plant in Perlach and from the ramp of Kulim and the transfer costs which we are in the midst, actually, of doing this right now, which causes charges on a quarterly basis of around about Euro 20 million and so there’s some other internal aspects which are only on a quarterly operational basis. So this had - as a result, the margin declined.

So I’m not at all concerned about the business. It was more structural effects and a little bit chip card and ASIC and Design Solutions.

Having said this, going forward our guidance is slightly up as we expect the chip card business again to increase and we have a couple of nice design wins there.

Nav Sheera – Lehman Brothers

Thank you for that. Just one quick follow up. What would you say would be the capital spending level for the logic business going forward from here? Once Qimonda has happened and gone away? Thank you.

Peter Bauer

Yeah, well capital spending we, of course, have not finalized our planning for next year yet but in general on medium to long-term when we have finished the ramp up of Kulim, we think that in the logic business we can end up in a share of say 10% to 12% on revenue of Capex, of investments. Keeping also in mind our Fab Lite strategy we have in advanced logic.

Nav Sheera – Lehman Brothers

Thank you very much.

Operator

We will now take our next question from Simon Schafer from Goldman Sachs. Please go ahead.

Simon Schafer – Goldman Sachs

Good afternoon. Thank you for taking my question. I was wondering whether you could shed some or give some color on the [GRM] business. I know you can’t give much guidance, but what happened this quarter, could you give us an indication of how big your volume growth was and how you did in terms of cost per bit? It seems to me maybe your cost per bit only decreased marginally on a sequential basis. Maybe you could give us something deeper on that. Thank you.

Wolfgang Ziebart

As far as production bit growth is concerned, we gave guidance of 10% at the time and this is what we also achieved. The shipments also grew, but slightly below 10% and the cost development was positive. As you know, we are not giving precise numbers on this.

Overall, I can say that the progress we make in terms of driving our production towards newer technologies like 90 and also 70, you know that we always stated that this will be introduced towards the end of the calendar year. This is all still valid, but beyond that I cannot make any statements.

Simon Schafer – Goldman Sachs

Would it be fair to say that your bit costs came down at a lower rate than your bit shipment increase?

Wolfgang Ziebart

I cannot comment on this specifically. Please bear with us.

Simon Schafer – Goldman Sachs

Understood. Then maybe on a structural, more high-level question, as we look into 2007, you’ve now obviously announced the design wins on the wireless business and I understand the expectation to get back to breakeven within two to four quarters but beyond that, as we look in 2007 to 2008, what would be your range for profitability margins in that business as we go throughout the cycle?

Wolfgang Ziebart

Well we have said, and this refers to any business, that the business has to earn its cost of capital and this also applies to the wireless business and we understand that. Our starting point here to achieve this is rather low so it will take more time here. Nevertheless, we stick to that target.

Simon Schafer – Goldman Sachs

So it would be difficult to quantify a range for 2007/2008?

Wolfgang Ziebart

Yes. That would be too difficult. Our major target now is to achieve the breakeven for the business and here we have indicated that we need another two to four quarters. The reason why we have given that spread is that it’s not fully under our control so we depend on sales of our customers, we depend on how those models [inaudible] appeal, so this is really not full under our control.

Simon Schafer – Goldman Sachs

Understood. So in that process, are you pushing for more design wins in the current phase or are you quite content in the design wins that you’ve gained that you’re now building on for the next 12 months or so?

Wolfgang Ziebart

Currently we have still in the queue a few other design wins which will come up to light within the next quarters.

Simon Schafer – Goldman Sachs

Thanks very much.

Operator

We now have our next question from Andrew Griffin from Merrill Lynch. Please go ahead.

Andrew Griffin – Merrill Lynch

Hi, thanks very much. Good afternoon, everyone. I wonder if you could just go back to the Kulim and Perlach costs and the $20 million a quarter rough cost figure. How should we model that? I believe it’s declining over the next few quarters. Roughly, what sort of timing should we assume there?

Peter Bauer

No, it’s actually not really declining over the next quarters. It will run into the next fiscal year with around that level, sometimes Euro 2 million up and Euro 2 million down at the quarter.

The reason for that is that, first of all, the timeline for the closure of Perlach is 2007 and as long as we haven’t closed we have to transfer the products and we have still [inaudible]. And the Kulim ramp is still going fair in 2007. We have been able to pull in the production ready time, which is nice because of the current market demands, but still we’re ramping that consistently throughout the next couple of quarters. So you can expect that number to continue for a couple of quarters.

Andrew Griffin – Merrill Lynch

Okay. So is the effect of that coming off [inaudible] fiscal 08? Or will it go into fiscal 09?

Peter Bauer

Yes. Yes, yes, yes, yes. Yes.

Andrew Griffin – Merrill Lynch

Okay. Thank you very much.

Operator

We will now take our next question from Thomas [Brenier from Societe Generale]. Please go ahead.

Thomas Brenier – Societe Generale

Yes, good afternoon. I’d like to have a bit more detail on the market environments you’re living in the AIM and com business. I understand that your guidance, which are maybe less precise than some of your competitors, are mostly based on seasonality, on normal seasonality, and your design wins in com. I’d like to understand do you think that the next quarter will be better than the usual seasonality? Is that what you get from your market environment? Or not, or worse than normal seasonality?

Wolfgang Ziebart

Peter.

Peter Bauer

Well, I think we should work through that sequentially for a couple of market segments and I will [handle] them as a second [stage]. We see the strongest demand in the running quarters, fourth quarter fiscal in the Industrial and Power Management environment, even though you hear from some market analysts that they’re expecting the peak behind those are speculating where there might be some inventories, I can’t confirm this.

And [on our side], we really have a strong and a very good order book and we are [inaudible] location for some products and have a tremendous demand there. Basically, we are capacity limited in this segment for further growth.

So I’m not concerned there and there’s no indicators at the moment for the Power business.

For Automotive, however, I would say absolutely normal seasonality, which we are expecting. There’s a good solid market with the typical seasonality.

Remains the chip card business and the security and ASIC business. That has more volatility and here it’s a bit more difficult to give a clear quantative guidance. So therefore on our side the guidance, yes, you can say is, with the seasonality, based on the 8.1% today, which is slightly up.

Wolfgang Ziebart

[Inaudible] coming to the seasonality in the communication business for the ViaLine area, we do not see so much of a seasonality in front of us coming to the wireless area. One could expect a third quarter in the calendar year to be a little stronger than the quarters before. On the other hand, we have heard some analysts also reporting about some material in the channel. So I would say better not to be too optimistic about the seasonality helping us here but, on the other hand, I think the major driver will be the ramp ups of the new deliveries rather than the seasonality.

Thomas Brenier – Societe Generale

Thank you. That’s very helpful. If I may, just a very quick follow up on the wireless business. You commented earlier on in your press conference about the fact that your [inaudible] business has been weak due to the [inaudible] of your number one customer. I just wanted to understand how your own position with this customer’s business has held during the quarter.

Wolfgang Ziebart

What we can conclude from our numbers, we still have a very significant delivery share. There is not yet any handset sales of this customer, [and] also we cannot do a precise analysis of how big the percentage of our deliveries was. My assumption is that in the last quarter it was still in the range as we had it before. We have to wait for the numbers.

Thomas Brenier – Societe Generale

Thank you very much.

Operator

We now have our next question from Karsten Iltgen from West LB. Please go ahead.

Karsten Iltgen - West LB Panmure

Hello. Thanks. Concerning your guidance in the wireless, you’re saying that EBIT will be up over the previous quarter. Is that comparing to the Euro 61 million numbers or to the adjusted numbers of Euro 45?

Wolfgang Ziebart

No, no. To the adjusted numbers.

This extraordinary [inaudible] you should deduct from the losses, anyway.

Karsten Iltgen - West LB Panmure

And then I know you’re sticking to your breakeven guidance in wireless. You have given that in previous quarters. Are you just sticking to that guidance or do you really see a realistic chance to breakeven in two quarters time?

Wolfgang Ziebart

Oh, no. We have – no, no. We stick to our guidance which we have given, I think nearly a year ago. A year ago, yes.

So this is now and we have deducted from that guidance one quarter each quarter. So now we are at two to four and the reason why we have this [stand] I already explained, is that it’s not fully in our control when to reach that.

Karsten Iltgen - West LB Panmure

But there’s a realistic chance to breakeven in two quarters as well? If these [models ramp] pretty well it could have –

Wolfgang Ziebart

No, really that is not something we would like to add some further comment. We have said two to four quarters, and that’s it.

Karsten Iltgen - West LB Panmure

Sure enough and then, one other question. How much corporate costs have you added to logic in com and [other]? You said last quarter you might add some corporate overhead cost to those divisions.

Peter Bauer - EVP

Yeah, we mentioned last time that we have a short-term overhang here because of the separation but we also said that we are addressing this in our company and we are on a very good way to do so.

There is an impact on com and on AIM, but we would not want to specify this because this is changing pretty rapidly.

Karsten Iltgen - West LB Panmure

Was in the $10 million range this quarter, or was it below that?

Peter Bauer - EVP

You mean overall, or what?

Karsten Iltgen - West LB Panmure

For com and [other], each.

Peter Bauer - EVP

Yeah, you’re in the ballpark. Let’s put it this way.

Karsten Iltgen - West LB Panmure

Okey doke. Thank you. Thanks a lot.

Peter Bauer - EVP

You’re welcome.

Operator

We now have our next question from Didier Scemama from ABN AMRO. Please go ahead.

Didier Scemama - ABN AMRO

Hi. Good afternoon, gentlemen and thanks for taking my question. I’d just like to ask you a few questions on the win at LG. Could you maybe give us a sense of the geography for which those handsets are in that, please?

Wolfgang Ziebart

I would be happy to do so, but this is certainly beyond our [NDA] so I beg your pardon. This cannot be answered.

Didier Scemama - ABN AMRO

Okay. I mean, I think the fact that it’s EDGE, is that –

Wolfgang Ziebart

It’s EDGE, yeah.

Didier Scemama - ABN AMRO

So is that North America, more likely?

Wolfgang Ziebart

There are more EDGE markets coming up currently and EDGE is getting more and more traction but again, I beg your pardon. This would be too much going into our customer’s businesses and their internal planning which we cannot reveal.

Didier Scemama - ABN AMRO

Okay. All right. My [inaudible] question would be about the EDGE transceiver win you had at Samsung. We had a bit of a discussion last quarter on the conference call. Since then, Skyworks has confirmed they have won approximately 20 models for their EDGE transceiver and PA. Could you maybe give us a bit of a sense of the penetration you have yourself at Samsung?

Wolfgang Ziebart

The penetration we have in Samsung is more or less up to the customer and the success of their models. Samsung traditionally has for all the solutions multiple suppliers and so I think the penetration strongly depends on the different models and how successful they run in the market. We have significant number of models on our platform so we are confident that we can get a decent good share in this customer.

Didier Scemama - ABN AMRO

Okay and sorry to dwell on that, but last night [inaudible] said that they won one of Samsung for their [HGH F220 3G]. Would it fair to assume that you supplied the transceiver part for that?

Wolfgang Ziebart

Yes.

Didier Scemama - ABN AMRO

Okay. That was brilliant. And finally, on the Bluetooth market, you have this quarter a nice win with LG supplying the whole platform. How do you show position which used to be pretty prominent a couple of years ago and has, I think, come down just recently, where do you see yourself in the next 12 to 18 months in that market?

Wolfgang Ziebart

We will be continuing to introduce this is further platforms and this gives us strong back tailwind for these Bluetooth sales because they are on our platform so when they come to ramp up there is always a significant penetration of Bluetooth on the platform as well.

Didier Scemama - ABN AMRO

Okay and lastly, on the low cost GSM solution, I think you’ve talked about winning [Englebert]. Are there any other OEMs among the Tier Is that potentially could use this [so called] low cost handset beyond [Bank Q] which I think you’ve already disclosed?

Wolfgang Ziebart

There is still interest in this platform and as you know, we already have introduced the second generation of the [inaudible] low-cost platform so the single chip is now also including power management and [SCOM] and this solution so far seems to be so outstandingly interesting, so we speak to more or less everybody being active in the field.

Didier Scemama - ABN AMRO

Could you talk about maybe the pricing in that sort of market?

Wolfgang Ziebart

There is certainly [interest] around what the price in the market is, but we do not want to heat this discussion up.

Didier Scemama - ABN AMRO

All right. Thank you. Thank you very much and congratulations on LG.

Wolfgang Ziebart

Yeah, but we can disclose that those ICs [interest] in market of mobile phone was a bit [immaterial], less than $20.

Didier Scemama - ABN AMRO

Okay.

Wolfgang Ziebart

The next generation, that figure of, let’s say the buzzword is $16, of course, for the next generation after and we can meet this target. That is what I can confirm.

Didier Scemama - ABN AMRO

Yeah. Okay. Thank you.

Operator

We now have our next question from [Jermonet Ramma] from IXA Investment. Please go ahead.

Jermonet Ramma - IXA Securities

Hi, good afternoon. Could you please update us on what is going in [ITIS] and maybe if you could explain us the charge you had in the Communication division [inaudible] to what it’s related?

Wolfgang Ziebart

In ITIS we have already communicated some weeks ago that we intend to reduce the workforce by 320 people and this is going to be negotiated with the worker’s counsel and the local authorities. Those discussions are on the way and we hope that we will be able to finish those discussions within the upcoming time. So that’s all I can comment on that.

Please go ahead.

Jermonet Ramma - IXA Securities

Yeah, for the Euro 16 million charge?

Peter Bauer - EVP

Yeah on the Euro 16 million the major portion, Euro 14 million, is related to a write-off of an investment in a joint venture which we have with a few partners. Unfortunately at this point I cannot disclose the name since we are still under [NDA] and negotiating certain changes going forward so this will be public probably over the next few weeks.

Jermonet Ramma - IXA Securities

Okay, thank you.

Wolfgang Ziebart

You’re welcome.

Operator

We now have our next question from Matt [Gehl from Vise Partners]. Please go ahead.

Matt Gehl - Vise Partners

Thanks. I don’t want to beat a dead horse here but on the two to four quarters, is that a timeline for profitability or for reaching breakeven?

Wolfgang Ziebart

For reaching breakeven.

Matt Gehl - Vise Partners

Okay. You said that, I heard you mention something about some inventory in the channel. Was that regarding the wireless business?

Wolfgang Ziebart

No, no. What I was mentioning is that we heard in the last month, actually, mainly in the financial community that they were afraid of an inventory build-up in the channel and what we wanted to point out is that we do not recognize this inventory build-up really to happen.

Matt Gehl - Vise Partners

Okay. Thank you very much.

Wolfgang Ziebart

You’re welcome.

Operator

We now have our next question from Roland [Josier] from Credit Suisse. Please go ahead.

Roland Josier – Credit Suisse

Hi. Good afternoon. Can you hear me?

Wolfgang Ziebart

Yes, of course, Roland.

Roland Josier – Credit Suisse

Can you quickly walk me through the cap structure of Qimonda and it’s my understanding that there’s going to be about Euro 450 million of intercompany loans?

Wolfgang Ziebart

Yes.

Roland Josier – Credit Suisse

Is that euros or dollars?

Wolfgang Ziebart

That is euros.

Roland Josier – Credit Suisse

Okay. What’s the maturity of those loans?

Peter Bauer - EVP

Two years.

Roland Josier – Credit Suisse

Two years. Okay. Is there any [other] that travels with Qimonda?

Wolfgang Ziebart

Let me put it this way. The structure we have set up is such that they will be in a net cash position which will be around Euro 500 million and that puts them in a position to really address their investment needs they have going forward. Of course, they also have to generate operating cash flow so that is a competitive position.

Roland Josier – Credit Suisse

Okay, and with regards to Infineon and the use of the proceeds that will be about Euro 350 million, what are the plans for that kind of money?

Wolfgang Ziebart

The way we have structured the whole thing, also for Infineon, is to also be able to get into a net cash position. Whether we achieve this immediately or whether it takes a few quarters is of course up to the success of the listing. But what we also have taken into consideration in this whole structure is that we have to pay back the convertible in February 07 which amounts to a little bit more than Euro 600 million, so that is included in the structure which we have planned for.

Roland Josier – Credit Suisse

Okay. And do you plan to make any additional investments in terms of research and development or, you know, projects that haven’t been disclosed yet?

Wolfgang Ziebart

No, we have indicated that in terms of what are we spending the money for that we see very good opportunities in organic growth.

Actually, those businesses where we have a leading position already are those areas where we also have the biggest potential in growing. I just would like to point out that, for instance, in power semiconductors we are number one in the market with a market share of 8%. We are number one. So there’s enough room for further growth.

And the same is true for most other segments. So this is one area. Actually organic growth is something I very much prefer as this is totally in your control, what is happening.

Nevertheless, we are open to acquisitions. If, however, in terms of acquisitions we will be very careful and only do something if it’s absolutely clear what the benefits of those acquisitions are. We will not allow pressure to be put on us just to spend the money. We only acquire something if it really makes sense.

Roland Josier – Credit Suisse

And how much cash do you think you will need comfortably around the logics business?

Wolfgang Ziebart

On the logic business, how much cash?

Roland Josier – Credit Suisse

How much cash would you like to have on the balance sheet?

Peter Bauer - EVP

I would say roughly in the range of about Euro 800 million.

Roland Josier – Credit Suisse

Okay. All right. Thanks a lot. Thank you. Bye, bye.

Wolfgang Ziebart

Thanks, Roland.

Operator

We now have our next question from [Varney Vuncock from XAN D&P]. Please go ahead.

Varney Vuncock - XAN D&P

Yes. Thanks. During the last conference call in chip card specifically you said that breakeven could be reached in the December quarter. Is that still valid?

Peter Bauer - EVP

Yeah, it’s good on the way. I’m pretty positive about the development of the chip card. All the restructuring measures are either in time or a little bit ahead of time and with the market development I still stick to that.

Varney Vuncock - XAN D&P

Okay, thanks and second question, on R&D, can you maybe be a little more specific on the – the R&D expense was higher than the previous quarter in the quarter [inaudible]. Can you comment on this please?

Wolfgang Ziebart

Yeah. The R&D has some fluctuation, not for the reason that we hire or layoff people but for the reason that quite some portion of R&D is really coming from [basis] and test [basis] we are doing which is extraordinarily high in times where we do conversions and currently we are ramping up at Kulim, for instance, and this requires some quite some high amount of test [basis] in that plan. That is one of the reasons why this R&D effort this quarter is higher than it has been the last one.

Varney Vuncock - XAN D&P

And so what can we model for the, say, two quarters to come?

Wolfgang Ziebart

Well, I think there is no – actually, there is no major increase in the number, in the R&D to come so I would model even – I hear from Peter Bauer that he even thinks about a decline in this area so I think that it will normalize.

Varney Vuncock - XAN D&P

Okay. Thank you.

Wolfgang Ziebart

Slightly lower, lower than this one.

Peter Bauer - EVP

I would go with about 17% of sales. I think that’s fairly stable.

Varney Vuncock - XAN D&P

All right. Thank you.

Wolfgang Ziebart

You’re welcome.

Operator

We now have a follow up question from Janardan Menon, Dresdner Bank. Please go ahead.

Janardan Menon - Dresdner Kleinwort Wasserstein

Yeah, just two questions. One is, since you’re saying that your baseband business will be profitable in two to four quarters, [it is] going to be the Samsung RF transceiver business that is not contributing to that target so I’m just wondering if LG enough to do it, or is there a further customer that you will be ramping in the next few months also a critical part of that target meeting?

Wolfgang Ziebart

Actually we were not talking about the baseband business to be profitable at this point in time. We were talking about the communications.

Janardan Menon - Dresdner Kleinwort Wasserstein

Okay. But do you need any – is it counting on any other further customer ramping through the calendar third or fourth quarter, or you don’t need that?

Wolfgang Ziebart

There will be further customers ramping during the next quarters.

Janardan Menon - Dresdner Kleinwort Wasserstein

Okay, and the target is also dependent on those volumes?

Wolfgang Ziebart

Yes, of course. We have currently the programs running supporting those customers to build their devices and we also do have some indication when they plan their ramp up so of course this is underlying.

Janardan Menon - Dresdner Kleinwort Wasserstein

And I think you mentioned something about new products in chip card. Is that on the SIM card side or is that on the sort of security and financial kind of side?

Peter Bauer - EVP

No, it’s more on the higher security part of the chip card business.

Janardan Menon - Dresdner Kleinwort Wasserstein

And will that run for a few quarters?

Peter Bauer - EVP

Yes, hopefully even longer.

Janardan Menon - Dresdner Kleinwort Wasserstein

If you do a [back] calculation on your logic business, we find that your gross margin in logic is roughly running at about 30% just by backing out all the figures that you’ve given on the Qimonda IPO prospectus. Is that a fair number you think or are we making a mistake on that?

Peter Bauer - EVP

I think it’s a little bit – well, to model that on that level is probably not the best thing to do as we really combine businesses with quite some [gross] margin like, for instance, the Communication business which has quite some [gross] margin. On the other side we have [discretes] which usually have a lower [gross] margin. So of course we are working on an improvement but on average, the [gross] margin might be influenced more by changes in the share of the different pieces of the business rather than a general change in the [gross] margin.

Janardan Menon - Dresdner Kleinwort Wasserstein

Okay. All right. Thank you very much.

Wolfgang Ziebart

You’re welcome.

Operator

We will now take our next question from [Nels Disvacht from Revel Securities]. Please go ahead.

Nels Disvacht - Revel Securities

Good afternoon. I’ve actually got two questions. First one, looking at the Qimonda prospectus and your comments just now, is it fair to assume that excluding the proceeds from the IPO, you are basically backing out Qimonda with zero net debt on its balance sheet?

Peter Bauer - EVP

Yes.

Wolfgang Ziebart

That’s correct.

Nels Disvacht - Revel Securities

That’s correct. Okay. And you mentioned that your bit production growth was around 10%. If you look at your bit shipments growth since your Q2 shipments were [inaudible] quite large, am I right to assume that your shipment growth was below 5% this quarter?

Peter Bauer - EVP

It’s below 10%. Let’s put it this way.

Nels Disvacht - Revel Securities

Okay. Thank you.

Wolfgang Ziebart

You’re welcome.

Ulrich Pelzer

I think we have one final question.

Operator

Yes, we will take a follow up question from Karsten Iltgen from West LB. Please go ahead.

Karsten Iltgen - West LB Panmure

Yeah, great. Thanks. Just one follow up question on your capitalization of Qimonda. You mentioned that you would feel comfortable with the logic business having a net cash position of some Euro 800 million. If you’re [inaudible] Qimonda post the capital increases from some Euro 500 million to Euro 600 million, which usually is a more capital-absorbing business [inaudible] idea?

Peter Bauer - EVP

I was asked after the cash position. I was not asked after the – I was not asked for the net cash position and when I said Euro 800 million, then I meant gross cash.

Karsten Iltgen - West LB Panmure

Okay, and what kind of net cash would you be comfortable with in logic, then?

Peter Bauer - EVP

I mean, I would say everything beyond 100 is fine and below 200 is fine.

Karsten Iltgen - West LB Panmure

Okey doke. Great. Thank you.

Wolfgang Ziebart

You’re welcome.

Operator

As there are no further questions, I would like to turn the call back to Mr. Pelzer for any concluding remarks.

Ulrich Pelzer

Yes, thank you [inaudible]. Thanks to all the participants for dialing in, for devoting us your attention, asking the questions. Should there be any additional questions, please feel free to contact the IR team here in Munich and we look forward to speaking to you again next quarter. Thank you. Bye, bye.

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