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Infineon Shares Tumble on Poor Phone Chip Outlook

Infineon said its phone-chip unit would be unprofitable over the full fiscal year as orders dipped more than usual, hitting hopes of a recovery and sending its shares to their lowest level since late 2002.

Infineon shares fell 13.6 percent in a market already unnerved by reports of weak demand from Cisco's chief executive and dropped further after Infineon said there was a risk it would have to write down the value of its stake in memory-chip company Qimonda.

Unlike rivals Texas Instruments and STMicroelectronics, which have given more optimistic forecasts, Infineon said on Thursday it had seen a more than a seasonal drop in wireless orders from all its customers.

Infineon posted slightly better results than expected at its automotive, industrial and multimarket unit, its other core business, but said operating losses at the Com phone-chip unit would widen and sales would fall this quarter.

The German company said the drop was not due to any problems with its technology. "It's just the fact that there's very little new stuff coming up this quarter," Chief Executive Wolfgang Ziebart told analysts on a conference call.

Infineon shares were trading down 16.7 percent at 5.58 euros, by far the biggest decliner in both the European technology index and the German DAX. The tech index was down 2.8 percent.

Asked on a news conference call whether Infineon might have to write down the value of loss-making memory chip subsidiary Qimonda, which Infineon listed in 2006, Chief Financial Officer Peter Fischl said: "There is a fundamental risk."

Infineon spun off its memory-chip operations to distance itself from the extreme volatility of the market for commoditized DRAM chips used in personal computers. It says it wants to reduce its 77 percent stake to a minority by 2009.

Qimonda shares last traded at $5.17, less than half their initial public offering price of $13 and the level of roughly $12 per share at which they are valued in Infineon's books.

Ziebart reiterated the company's ambition to reach an operating profit margin of 10 percent by fiscal 2009 but emphasized it was "a goal, not a forecast."

"Uncertain prospects for the global economy, the adverse currency development, and the revised outlook are headwinds that make reaching this goal more challenging," Infineon said.

Not Very Pretty

Analysts and traders expressed disappointment in the outlook although results for the fiscal first quarter to end-December were broadly in line with consensus.

"Bad numbers, bad outlook," said a Frankfurt-based trader. "It's not very pretty."

"It derails the Com turnaround story," said analyst Scott Geels of Sanford Bernstein.

For the first quarter, the Com unit posted a loss before interest and tax (EBIT loss) of 11 million euros ($16 million), weighed down by acquisition-related write-downs of 23 million euros and weak broadband demand.

The company said it expected the loss, which compared with a loss of 14 million euros the previous quarter and an average loss estimate of 12 million euros in a Reuters poll of analysts, to widen to 30 million euros before one-offs this quarter.

Sales are expected to fall by a percentage in the mid-teens from last quarter's level, when they declined 12 percent from the previous quarter to 356 million euros.

At Infineon's Automotive, Industrial and Multimarket unit (AIM), EBIT fell to 93 million euros but still beat consensus.

Sales fell to 743 million euros, in line with expectations.

Infineon said the declining sales and EBIT at AIM were due to seasonal factors, currency effects from the falling dollar, weak demand from U.S. carmakers and annual price cuts for major customers.

The company said it saw sales on roughly the same level this quarter with an EBIT margin of 8 to 9 percent at the unit.

It said a reasonable performance at AIM should enable it to reach an EBIT margin in the low to mid single digits over the fiscal year at its core businesses, which exclude Qimonda.

Including results from Qimonda, which last month reported its quarterly EBIT loss doubled to 590 million euros, Infineon made an EBIT loss of 368 million euros, compared with a loss of 241 million euros a quarter earlier.

Sales including Qimonda fell 13 percent quarter on quarter to 1.6 billion euros.