Currency shifts cloud Infineon's outlook

The euro-dollar exchange rate is on a run-away roller coaster and taking German chip vendor Infineon Technologies AG along for a spin.

Just as the automotive and diversified semiconductor supplier was beginning to enjoy double-digit revenue growth and operational relief after dumping its profit-challenged DRAM unit, currency-related economic events beyond its control are piling on, adding to the problems the company must maneuver through in an expanding but still precarious market.

In the next several quarters and perhaps for the next few quarters, wide and unpredictable swings in exchange rates will force Infineon—and other technology companies whose financial results are reported in euro while portions of costs and sales are recorded in U.S. dollar—to engage in complex currency hedging while simultaneously managing through a tight demand and supply environment.

It’s easy to treat this as a minor irritant, after all, multinational businesses have for decades had to pay close attention to currency exchange rate swings and have developed numerous sophisticated hedging tools to manage the associated risks.

For companies like Infineon, however, the situation is getting even more complex because of deep unease and rising uncertainties about the direction of the global economy, debt crisis in several European countries and amid problems especially in the United States, the world’s biggest market for many electronic products.

The economic uncertainties are forcing wild swings in currency rates with the numbers varying widely even on a quarterly basis. With 45 percent of its sales recorded in dollars (45 percent in euro and 5 percent in Japanese yen) and about 60 percent of total costs in the American currency, Infineon must tightly manage the streams of benefits and disadvantages that can come from its currency exposure.

What that means for Infineon is that not only are its costs and sales difficult to predict, financial forecasts offered to investors are also increasingly problematic at best and erroneous at worst. For the recently ended June quarter, for instance, Infineon’s revenue forecast updated April 28 was based on an exchange rate that has completely missed the mark.

The company projected revenue for the quarter would increase in the "high single-digit percentage sequentially" while fiscal 2010 sales were seen rising “by a high 30’s percentage." The forecasts were predicated on one euro exchanging for $1.40.