Infineon Chips Away

Infineon Technologies AG's (NYSE/Frankfurt: IFX) restructuring plans have gone well so far, with the divestiture of money-losing optical networking units, but an exit from optical doesn't guarantee happiness.

This week, Infineon sold most of its optical-networking semiconductors -- a division based in San Jose, Calif. -- to chip firm Exar Corp. (Nasdaq: EXAR). Infineon kept some of its Ethernet-over-Sonet chips and will continue supporting customers for those parts, although a spokesman says the company won't be developing any new devices in that family. The merger details are still being negotiated, and representatives on both sides wouldn't comment on how many Infineon employees might move to Exar. (See Exar Buys Infineon ON Unit.)

Analysts say they wouldn't be surprised to see Infineon cut more product lines as the company's restructuring continues.

That's because its wireline division is small, relative to the rest of the company, but it's accounting for a larger share of losses. The unit contributed €179 million (US$231.5 million) in losses in 2004, more than any other business unit, while at the same time representing just 6 percent of the year's revenues, or €434 million ($561.2 million). Trimming wireline is a start, but Infineon has to address some of its bigger business units, too.

The restructuring is being spearheaded by new CEO Wolfgang Ziebart, who replaced Ulrich Schumacher in September (see Ziebart Takes Over at Infineon). Analysts have given him good marks for the restructuring efforts so far.

"They've got a very good new CEO who's doing the right things. It's just that Infineon is a 30,000-person company. It's not going to change overnight," says Andrew Griffin, analyst with Merrill Lynch & Co. Inc.

Infineon spun off from Siemens AG (NYSE: SI; Frankfurt: SIE) in 1999 but quickly hit the brick wall of losses that affected most of the tech sector. Losses mounted during the past few years, although the company did enjoy profitability in 2004, thanks in part to an upward blip in DRAM earnings.

Table 1: Infineon's Financial History

	1999	2000	2001	2002	2003	2004
Revenues (�M)	3,992	6,989	5,347	4,890	6,152	7,195
Net Income (�M)	61	1,126	(591)	(1,021)	(435)	61
Income per share (�)	0.10	1.83	(0.92)	(1.47)	(0.60)	(0.08)
Source: SEC Documents

In the light of the recovery, it appears Infineon added more breadth than it could handle. Infineon needs to locate the product areas where its expertise and relationships can garner the best margins, says Titus Menzies, analyst with Jefferies & Co. Inc.

"It's sometimes difficult to focus properly on the products that are going to deliver the best margins. Too much breadth leads to thinning of the sales and marketing force in particular, making it difficult to compete against specialty firms that have lower overhead, Menzies says.

Infineon has closed some manufacturing sites, sold its optical components unit to Finisar Corp. (Nasdaq: FNSR), and is reportedly in the process of discontinuing some of the parts Finisar didn't pick up. (See Infineon Cuts Back Manufacturing, Finisar Buys a Bit of Infineon, and Infineon: 'Just One Word... Plastics!'.) Then came this week's deal with Exar.

But what about the other product areas? The division called "Secure Mobile Solutions," which includes chips for cellular handsets and Bluetooth, has seen profit margins fall "to at least negative 10 percent" from 10 percent two quarters ago, Griffin says. Reasons include inventory buildup and a rumored loss of market share at Siemens, he notes.

Then there's the DRAM business, where prices move downward but bubble with volatility along the way. Some analysts like the idea of Infineon exiting this business, but that probably won't happen, Griffin says. For one, the industry isn't in a period of DRAM-vendor consolidation, making likely buyers difficult to find. More important, Infineon's new fabs are built for DRAMs and shift to other products only after years have passed. "Their DRAM business is not easiy separable from the rest of the business," Griffin says.

— Craig Matsumoto, Senior Editor, Light Reading