MUNICH, Germany After publishing its deep-red figures for Q4/2007 and for the entire FY 2007, Infineon's stock price jumped up to 8 percent. There are reasons for the euphoria at the markets.
The main reason for the losses at Germany's biggest chip manufacturer is known: It is its former memory division, now spun off as Qimonda. Since Infineon still holds almost 80 percent of the Qimonda shares, it must include them into its reports. However, Infineon claims its operative business has become quite different from the memory market.
"The factors for profitability in the semiconductor business have changed significantly," Infineon CEO Wolfgang Ziebart explained. "The size of a vendor is no longer the decisive factor, but its relative strength within a very focused target market." Over the past years, he has changed and reoriented the company according to this principle, and perhaps the result shows that there is some truth in his axiom.
"One needs to regard the Infineon figures separately from Qimonda's", says Guenther Hollfelder, semiconductor analyst for Unicredit. "We believe Infineon has made significant progress."
Indeed, a closer look to the figures shows that Infineon's two business segments, communications (COM) as well as automotive and multimarket (AIM), do fare much better than an elusive glimpse to the group figures makes one believe. The COM segment seems to have digested the bankruptcy of its largest customer, BenQ mobile. In this context, the acquisition of LSI Logic's mobile business proves to be a smart move since it gave Infineon quickly access to several major handset manufacturers, first of all Samsung. Infineon points out that now it sells its chips to all five major handset manufacturers with a combined share of 85 percent of the world's mobile phone market. Insiders believe that for instance the additional demand generated by Nokia will become visible in Infineon's figures only next quarter.
In the fixed-line business, the company benefits from the takeover of Texas Instrument's ADSL CPE business. Again, the full impact of this move to Infineon's business is still some quarters away, which creates headroom for growth fantasy.
In its automotive electronics business, the company steadily gains market share and the distance to the number one vendor Freescale is decreasing. In addition, Infineon could use its power components business to generate synergies in the automotive market where energy efficiency and power management become increasingly important. Infineon's main automotive rival Freescale can mobilize similar synergies to a much smaller extent.
The focus on application fields instead of technology is another leitmotiv in Infineon's strategy. "We see a significant consolidation in many consumer markets. For instance, instead of a 'handset market', we today face only five very powerful customers," explained Ziebart. The automotive and government businesses probably sport similar characteristics. The consequence is to align the company on the needs of that few customers. Ziebart's strategy provides for future growth 'topics' such as the people's need to communicate independently from location, power efficiency, or security. This strategy anticipates a solution-orientated view instead of a technology-driven perspective.
During the presentation of the figures, Ziebart reiterated his credo to prefer organic growth but also to acquire companies where they fit into the portfolio, but he announced that every takeover will undergo a critical review. "We only will buy a company if it absolutely makes sense under financial and business aspects," he said, "We won't buy just for the sake of size." So far, it looks like Infineon's takeovers complied with this rule.
Also, analysts agree that despite special effects that potentially obstruct the view, the company's operational performance is not so bad. In the AIM segment, the EBIT margin was 12 percent, already now besting Ziebart's target mark of 10 percent for the entire company.
But what counts at the end of the day is the bottom line. Even an otherwise elegant and beautiful financial report is worthless if the figures in it are written in red. "It is essential for Infineon to continue decreasing the stake in Qimonda", explained analyst Hollfelder.
At the annual general meeting in 2009 at latest, Ziebart plans to have reduced the Qimonda stake below 50 percent. When this is the case, the company is no longer obliged to consolidate the figures of the memory maker. In order to reduce its stake, Infineon is even considering taking radical measures. One measure presently prepared is to pay the Qimonda shares as a property dividend to the shareholders.