WSJE: Investors Like Infineon's Lower Profits
By Alfred Kueppers
Staff Reporter
In today's dicey technology market, bad news has become the norm, but in
Infineon Technology AG's case, the bad news is sounding good to a lot of
people.
In the fiscal second quarter ended March 31, Germany's largest semiconductor
maker said net income plunged 84% to 23 million euros from 146 million euros a
year earlier. Normally, that isn't cause for celebration. But analysts were
expecting Infineon to post a loss because of a sharp drop in memory-chip prices
and slowing growth in the mobile-phone industry, a big buyer of Infineon
products.
Infineon's fiscal second quarter revenue rose 8% to 1.65 billion euros from
1.53 billion euros in the year-earlier period.
Shares of Infineon initially jumped more than 4% on the better-than-expected
results, but then fell back on profit-taking and broader skepticism over the
tech sector. Midafternoon in Frankfurt, Infineon's shares were down slightly,
trading at 43.70 euros per share.
The company isn't feeling particularly optimistic. It aims to reduce capital
expenditure this fiscal year by 18% to 2.3 billion euros from a planned 2.8
billion euros because of the uncertain outlook in memory and wireless chips.
The company also said lower industrywide growth this year has darkened its
earnings outlook.
In particular, Infineon is pessimistic about its mobile-phone chip division.
"You can't rule out that next quarter will be worse than this one," said Ulrich
Schumacher, Infineon's chief executive.
Infineon posted a loss in its memory chip, or DRAM, division and revenue
shrank at its wireless communications subsidiary. Infineon turned a profit
because of strong growth in its chip-card and other subsidiaries, suggesting it
is having some success with its diversification strategy.
Last year, more than 80% of the company's profit came from memory-chip sales.
This subsidiary is posting losses currently because memory-chip prices have
fallen by more than 66% since September, due to a sharp drop in consumer demand
for personal computers.
"The importance of DRAMs is declining in their portfolio," said Ingo Queiser
an analyst at Bank Julius Baer & Co. "They are outperforming the market in
other areas. Its chip-card unit grew by 144%." Chip cards have imbedded
semiconductors that provide security in products such as credit cards.
In Europe, Infineon competes with Philips Electronics NV and
STMicroelectronics NV. The latter, Nokia Corp.'s major chip supplier, reported
strong first-quarter growth in its telecom-chip division.
The poor performance of Infineon's wireless chip unit doesn't bode well for
its major customer and parent company, Siemens AG. Siemens owns 71% of Infineon
and reports earnings Thursday.
Infineon's performance has caused all sorts of headaches for Siemens. Last
month Siemens issued a profit warning because of Infineon just as the company's
stock began trading in New York.
But Infineon never issued a profit warning. Why? Siemens said last year that
it would post double-digit revenue growth in all of its divisions in fiscal
year 2001. Siemens acknowledged that such growth wouldn't be possible after
including Infineon's earnings, which accounted for 34% of Siemens's net income
in the fiscal first quarter. However, Infineon's Mr. Schumacher has insisted
that he never said his company would post double-digit revenue growth, so he
didn't issue a warning.
Infineon also supplies chips to Nokia, Telefon AB L.M. Ericsson and other
mobile-phone makers.
"Siemens can't match Nokia's growth right now," said Boris Boehm a fund
manager at NordInvest. "It's another example of the fact that one dominant
company can increase its hold on the market in bad times."
Mr. Schumacher said he expected double-digit revenue growth for Infineon's
chip-card, wireline and automotive divisions this year. He declined to forecast
performance for the wireless-chip and memory-chip divisions.
"We can only speculate about the movement of DRAM prices," he said. "We think
we're near the bottom and that prices will rise in the second half." Infineon's
memory-chip profit margin would return to the black if prices rise above $3.50.
They are currently below $3 per chip.
The company has also tried to lower production costs for memory chips, while
also reducing their role within its product portfolio. "They've clearly
succeeded in cutting costs, or their loss in this division would have been
higher," said Mr. Queiser, the Bank Julius Baer analyst |
