Infineon Reports Results of Second Quarter and First Half of Financial Year 2005


Outlook for the third quarter of financial year 2005

Infineon anticipates no major improvement in demand in the third quarter of financial year 2005. The company expects continued pricing pressure, especially for chip-card ICs, memory, and mobile phone products. However, growth in shipments, primarily in Memory Products, should partially offset the impact of pricing pressure on revenues and operating results. Results of operations are expected to be negatively affected by further charges related to the planned phase-out of production at Munich Perlach, which the company cannot currently quantify due to the early stage of discussions with the workers' council.

"As there are no near-term catalysts for growth in demand, especially in the memory and mobile phone businesses, in the third quarter we will continue to focus on cost-cutting measures and on restructuring non-profitable businesses," commented Dr. Ziebart. "While this is a very difficult transition period, we believe that our pipeline of innovative products and the steps we have taken to further strengthen the company will put us into an improved competitive position next year."

Business groups' 2005 second quarter performance and outlook

In the second quarter of financial year 2005, Infineon reports for the first time its financial position and results of operations under its new organizational structure, which became effective on January 1, 2005. The Mobile and Wireline Communication segments have been combined into the new Communication segment to align the company's structure with market developments. At the same time, the security and chip-card activities and the ASIC & Design Solutions business have been integrated into the extended Automotive, Industrial and Multimarket segment. The results of prior periods have been reclassified to conform to the current period presentation.
Automotive, Industrial and Multimarket

                  3 months   3 months  + /- in %  3 months   +/- in %
                     ended     ended   sequential   ended    year-on-
                   Mar 31,   Dec 31,              Mar 31,      year
  In Euro million    2005       2004                 2004
----------------- ---------- --------- ---------- --------- ----------
Revenues                634       631         +1%      606         +5%
----------------- ---------- --------- ---------- --------- ----------
EBIT                     36        48        -25%       49        -27%
----------------- ---------- --------- ---------- --------- ----------


Despite the overall slow-down in the segment's end market, revenues in the Automotive, Industrial and Multimarket segment remained flat when compared to the previous quarter, primarily due to higher sales volumes in the automotive and industrial business. Revenues and earnings of the Automotive, Industrial and Multimarket segment were negatively impacted by strong pricing pressure in the company's security and chip-card business, which could not be entirely offset by productivity gains. Margins in the automotive and industrial business were in line with the outlook provided last quarter.

Automotive, Industrial and Multimarket's outlook for the third quarter of financial year 2005

As the third quarter of the financial year typically shows seasonally strong demand in the automotive industry, Infineon expects further growth in its automotive business in the third quarter of 2005. On the other hand, the company anticipates continuing pricing pressure in its industrial business and therefore expects earnings to decrease slightly in the upcoming quarter. In its security and chip-card business, Infineon anticipates continued weakness in the third quarter of financial year 2005, in line with the world- wide chip-card market. While the price decline for chip-card ICs is very hard to predict, Infineon anticipates that productivity improvements would be sufficient to offset the pressure on revenues and EBIT caused by falling prices. All in all, the company expects revenues and earnings of the segment to remain stable.
Communication

                   3 months   3 months   + /- in %  3 months  +/- in %
                      ended      ended   sequential    ended  year-on-
                     Mar 31,    Dec 31,               Mar 31,    year
   In Euro million    2005       2004                   2004
------------------ ---------- ---------- ---------- --------- --------
Revenues                 332        414        -20%      390      -15%
------------------ ---------- ---------- ---------- --------- --------
EBIT                    (142)       (19)     - - -        15    - - -
------------------ ---------- ---------- ---------- --------- --------


While revenues in the wireline business were stable in the second quarter of financial year 2005, Infineon suffered a sharp revenue decline in its wireless communication business. This revenue decrease was primarily caused by a seasonal slow-down of the worldwide market for mobile phones in the second quarter of the financial year in combination with a greater than seasonal decline in demand from some customers.

Due to the reduced sales volume, a continued high level of idle capacity costs, and a net charge of Euro 44 million resulting primarily from the sale or reorganization of the fiber optics and certain other communications businesses, the sequential EBIT loss increased significantly.

Effective January 31, 2005, Infineon and Finisar Corporation closed an agreement in which Finisar acquired Infineon's fiber optics transceiver business in exchange for 34 million shares of Finisar's common stock. In April 2005, Infineon sold the 34 million shares of Finisar's common stock to VantagePoint Venture Partners. As a result of the sale of the fiber optics transceiver business and the subsequent sale of the shares of Finisar's common stock, EBIT in the second quarter was positively impacted by Euro 13 million. Operating losses from the fiber optics business are not expected to materially impact EBIT after the end of the 2005 financial year.

In April 2005, Infineon and Exar entered into a definitive agreement under which Exar has acquired a significant portion of Infineon's optical networking business. The existing MetroMapper family of Ethernet-over-SONET products will remain part of Infineon's product portfolio. The optical networking business unit will be dissolved effective July 1, 2005. Revenue and earnings contributions from residual products after that date are expected to be negligible.

With these initiatives, Infineon has a clearly defined path to focus its wireline communications activities on access applications and to bring this business back to profitability.

In the second quarter of financial year 2005, the product portfolio of Infineon's wireless activities was strengthened by the introduction of the CMOS single-chip E-GOLDradio that integrates baseband and the RF transceiver on one chip.

Communication's outlook for the third quarter of financial year 2005

In the third quarter of financial year 2005, the company expects revenues of its Communication segment to remain flat or to decrease slightly compared to the previous quarter, mainly due to continued weak demand from some customers for mobile phone components. Because of an anticipated continuation of pricing pressure in the overall Communication segment, and lower sales volumes, the company anticipates significant negative EBIT results for the third quarter of financial year 2005. However, Infineon expects the company's recently initiated efficiency programs to start impacting financial results positively in the third quarter of the financial year. Accordingly, the company expects the segment's losses to decrease compared to the second quarter of the financial year.

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