Infineon Announces Third Quarter Results

• Third quarter revenues reached Euro 1.28 billion, down 30 percent year-on-year and 23 percent sequentially due to sharp decline in demand reflecting the difficult market environment

• Quarterly loss before interest and taxes of Euro 598 million caused by significant price erosion and charges related to inventory write-downs

• Further portfolio optimization in communications through acquisition of Catamaran Communications and divestiture of the infrared components business

Munich, Germany – July 23, 2001 -- Infineon Technologies AG (FSE/NYSE: IFX), one of the world's leading semiconductor manufacturers, today announced results for its third quarter ended June 30, 2001, with revenues of Euro 1.28 billion, a decrease of 30 percent year-on-year and of 23 percent from the previous quarter of this fiscal year. Revenues declined in the Wireline and Wireless Communications, Security & Chip Card ICs and Memory Products businesses compared to the previous quarter. Weaker demand, lower product prices and order cancellations affected each of these segments, while Infineon’s Automotive and Industrial electronics business remained strong.

EBIT (earnings before interest and tax) decreased to a loss of Euro 598 million, down from a positive EBIT of Euro 366 million in the same quarter last year and down from a positive EBIT of Euro 10 million in the second quarter of this year. Infineon’s loss was caused by strong price erosion, especially for memory products, and costs of carrying currently unused capacity in most segments. The loss also reflects charges of Euro 209 million in connection with inventory write-downs in all segments other than Automotive & Industrial, Euro 30 million of acquisition related expenses, and Euro 21 million related to investments in a research and development venture. Without these charges and expenses, EBIT amounted to a loss of Euro 338 million.

Net income in the third quarter decreased to a loss of Euro 371 million, down Euro 637 million from the same quarter of the last fiscal year and down Euro 394 million from the previous quarter of this year. Loss per share for the third quarter was Euro 0.59 as compared with earnings per share of Euro 0.43 in the third quarter of the last fiscal year and earnings per share of Euro 0.04 in the second quarter of this year.

“Infineon has managed to grow faster than the market in the first half of the fiscal year with a 37 percent revenues growth in our non-memory businesses based on our strong position in system solutions despite an increasingly difficult market environment. However, market conditions significantly deteriorated in the third quarter and finally had a negative impact on Infineon’s overall business”, commented Dr. Ulrich Schumacher, President and CEO of Infineon Technologies AG. “Our balanced product portfolio did not help to ease the current weakness in the memory market any longer. This dynamic development and the magnitude of the current downturn, especially in communications, was not expected.”

Excluding the effect of the inventory write-downs Infineon achieved a gross margin of 16 percent. Including this effect Infineon reached a negative gross margin of 1 percent, down from 28 percent in the second quarter of this year and 41 percent in the third quarter of fiscal year 2000. SG&A expenses reached 17 percent of total revenues, up from 9 percent in the third quarter of fiscal year 2000 and up from 13 percent in the previous quarter of this year but were kept flat in absolute terms at Euro 212 million in the previous quarter and in the third quarter of fiscal year 2001. Higher SG&A expenses as a percentage of total revenues primarily reflects the reduced revenues in the quarter.

R&D expenditures in the third quarter totaled Euro 318 million. R&D expenditures were 25 percent of total revenues, an increase from 16 percent in the previous quarter and from 13 percent year-on-year due in part to the significant decline in revenues. In absolute terms, R&D expenditures were up 34 percent year-on-year and up 18 percent from the previous quarter of this year reflecting the continued investment in future technologies such as 3G mobile communications and 10- to 40-Gigabit optical networking.

Revenues outside Europe constituted 46 percent of total revenues, reflecting a slight decrease from 48 percent in the previous quarter. As of June 30, 2001, Infineon had more than 34,600 employees worldwide, with research and development staff accounting for more than 5,400 of this total.

First Nine Months Results

Revenues for the first nine months of fiscal year 2001 amounted to Euro 4.59 billion, down 6 percent from Euro 4.90 billion in the same period last year. EBIT for the first nine months of this year decreased to a loss of Euro 142 million, down from positive earnings of Euro 863 million for the same period last year. Net loss was Euro 68 million, down from a net income of Euro 545 million for the same period last year.

Business Group Performance

The Wireline Communications group’s revenues reached Euro 188 million in the third quarter of fiscal year 2001, up 7 percent from the same quarter last year but down 17 percent from the previous quarter of this year. Sequential revenue decline was mainly due to weaker demand in the Wide Area Networks and fiber optics business segments. The group’s EBIT decreased to a loss of Euro 26 million, down Euro 51 million from last year’s third quarter and down Euro 63 million from the previous quarter of this year. The EBIT decline was due mainly to reduced revenues and to inventory write-downs in the amount of Euro 16 million. The EBIT also includes a charge of Euro 13 million for in-process research and development associated with the completed acquisition of Ardent Technologies, Inc. and other acquisition related expenses of Euro 12 million.

Major developments in the Wireline Communications group in the third quarter included:

• successful build-up of the long-range Ethernet market based on 10BaseS in Asia/Pacific and Japan with increasing design-win activities at major customers (e.g. PCCW, Singtel and NTT)

• introduction of the first OC-768 Silicon Germanium-based MUX/DEMUX chipset to take the lead in the 40Gbit/s SONET/SDH market

• continued demand for analog line cards for traditional telecom infrastructure development in emerging markets.

The Wireless Communications group’s third quarter revenues were Euro 176 million, down 41 percent compared with the third quarter of the last fiscal year and down 36 percent from the previous quarter of this year. The decrease in revenues was mainly due to the further deterioration of the mobile handset market with order cancellations and delays from major customers and rising inventories at customers. EBIT in the third quarter dropped to a loss of Euro 176 million, down Euro 240 million year-on-year and down Euro 180 million from the previous quarter, due to inventory write-downs of Euro 84 million, lower sales volumes and costs of carrying currently unused capacity.

Major developments in the Wireless Communications group in the third quarter included:

• expanded leadership in short-range wireless applications with the introduction of four new BlueMoon™ Bluetooth solutions, including first samples of the world’s smallest single-chip Bluetooth solution, as well as the certification of Infineon’s BlueMoon I solution according to the new Bluetooth 1.1 specification

• reorganization of the Infineon Wireless Group, including the optimization of R&D activities to further improve focus on important target markets as well as new business segments.

In the Security & Chip Card ICs group, which is reported in Other Operating Segments, quarterly revenues reached Euro 144 million, an increase of 67 percent over the third quarter of the last fiscal year, but a decline of 24 percent over the previous quarter of this fiscal year. Revenues were affected by the continued downturn in the mobile phone market leading to significant order cancellations for security controllers used in SIM-cards. EBIT declined to a loss of Euro 35 million, down Euro 47 million from the third quarter of fiscal year 2000 and Euro 71 million from the previous quarter of this year. The loss reflects strong pricing pressure, decreased sales volume and the write-down of Euro 28 million in inventory.

Major developments for the Security & Chip Card ICs group in the third quarter included:

• strengthened market position in Asia after leading credit card supplier’s decision to use Infineon crypto-controllers for banking applications

• establishment of the Ingentix joint venture with Saifun Semiconductors Ltd. to jointly develop and manufacture flash memory products based on Saifun’s patented NROM (Nitrided Read Only Memory) and Infineon’s leading know-how for smart card applications; Ingentix is initially focusing on MultiMediaCard™ storage products.

The Automotive & Industrial group’s quarterly revenues rose to Euro 288 million, up 24 percent from the third quarter of last year and slightly outperforming the record level of the previous quarter. Revenue growth was driven by the continued demand for Infineon’s automotive and industrial power solutions as well as power management and supply solutions despite a slightly weaker market environment. In particular, Infineon’s automotive business benefited from the strong market performance of leading German car manufacturers, especially in Europe and the United States. EBIT amounted to Euro 38 million, up Euro 20 million from the third quarter of last year and down Euro 2 million from the second quarter of this year.

Major developments in the Automotive & Industrial electronics segment in the third quarter included:

• a major design win at Delphi Automotive Systems with Infineon’s AUDO engine management micro-controller

• receipt of the “Innovation of the Year Award 2001” from EDN magazine for Infineon’s AUDO 32-bit TriCore™ solution in the micro-controller category.

Revenues for the Memory Products group amounted to Euro 332 million, a decrease of 62 percent from the third quarter of last year and a decrease of 36 percent from the previous quarter of this year due to the continued weakening of the market for memory products and a further 30 percent drop in average selling prices. EBIT decreased to a loss of Euro 340 million, down Euro 625 million from the third quarter of fiscal year 2000 and down Euro 206 million from the previous quarter of this year. EBIT decline reflects the further sharp erosion in sales prices for DRAMs and inventory write-downs in the amount of Euro 81 million.

Major developments in the Memory Products segment for the third quarter included:

• the validation by Intel of Infineon’s 288Mb RDRAM in 0.17 micron technology, currently the smallest 288 RDRAM on the world market

• successful pilot production of memory products in the next generation 0.14 micron technology, this next generation technology has also successfully been implemented on 300mm wafers

• based on design wins at strategic customers, development of new specialty memory products such as RLDRAM, Mobile-RAM and SGRAM for high-performance applications.

In the Other Operating Segments, which includes the Security & Chip Card ICs group, the Opto Joint Venture with Osram and other smaller business groups, quarterly revenues amounted to Euro 277 million, an increase of 20 percent from the third quarter of last year but a decrease of 20 percent compared with the previous quarter. EBIT amounted to a loss of Euro 68 million, down Euro 89 million from the third quarter of last year and down Euro 114 million from the previous quarter.

Strategic Highlights

Infineon maintained world market leadership for chip card ICs for the third consecutive year, with a 34 percent market share in calendar year 2000 according to data recently published by Gartner Dataquest. The company also dominated the market for secure memories for chip card applications with a 60 percent market share in units. According to Dataquest, Infineon also improved to fourth rank in the DRAM market with a 9,4 percent world wide market share in calendar year 2000.

With the acquisition of Catamaran Communications Inc., Infineon will further strengthen its leadership in fiber optical communications. Infineon will issue US$ 250 million in ordinary shares to the Catamaran shareholders in connection with the acquisition. Catamaran is an emerging leader in integrated circuits for the next generation 40 Gbps and fast growing 10 Gbps segments of the optical networking market. Combining Infineon’s communications expertise with that of Catamaran will give the company an important competitive advantage in the fast growing optical networking market as well as a leading position in the high speed line card segment at speeds of 40 Gbps and beyond.

In addition, Infineon will further streamline its wireline communications portfolio with the sale of its infrared components business to Vishay Intertechnology Inc. in a two stage transaction for approximately US$ 120 million. With this divestiture Infineon will have implemented the restructuring of its Wireline Communications business. Infineon intends to continue to expand its strategic core wireline communications activities in the field of local area networks (LAN), wide area networks (WAN) as well as in access solutions.

The acquisition of Catamaran and the sale of Infineon’s infrared components business are both subject to regulatory approvals and closing conditions and are expected to be finalized in the fourth quarter of fiscal year 2001.

Outlook for 2001

During the third quarter market conditions in the semiconductor industry further deteriorated. Most leading market analysts currently predict a negative growth rate of 20 to 30 percent for calendar year 2001. Visibility for the market development in the second half of calendar year 2001 remains low and there are no clear signs of a market recovery in the coming months. Due to the current negative market conditions Infineon expects to incur a net loss in the fourth quarter as well as a loss for its fiscal year 2001.

Market conditions for memory products remain difficult. Weak demand, especially in the PC market, has led to significantly higher inventory levels at memory producers. Even though Infineon’s inventory levels have stabilized towards the end of the quarter, the company expects a continued low price level for memory products during the next quarter.

The mobile handset market further deteriorated during the third quarter of fiscal year 2001. Although Infineon expects a reduction of the high inventory levels with regard to the Christmas business the company currently sees no clear signs of recovery in mobile phone demand. Infineon also expects that the current downturn of the semiconductor market, coupled with the slowdown of the global economy, especially in the United States, will continue to negatively affect Infineon’s Wireline Communications and Security & Chip Card IC businesses. However, Infineon expects its Automotive & Industrial components business to continue to benefit from a strong customer base as well as from the ongoing industry trend towards more advanced automotive electronics.

Infineon has already implemented a range of measures to mitigate the financial impact of the current downturn of the market, such as the reduction of capital expenditures by Euro 500 million to Euro 2.3 billion for the current fiscal year and by more than one billion Euro for fiscal year 2002, as well as implementing cost reduction programs including a hiring freeze.

Infineon intends to use the proceeds of approximately Euro 1.5 billion from its recent public offering to fund future capital expenditures and potential acquisitions as well as for working capital and other corporate purposes. “Our public offering, in combination with our reduction of planned capital expenditures for the current and next fiscal year and the cost cutting measures we have implemented, will enable us to continue to fund cutting edge research and development as well as to implement our aggressive productivity roadmap, especially our leadership in 300mm technology”, concluded Dr. Schumacher. “With these measures, we will be in a strong competitive position to benefit from any upturn in the semiconductor industry.”

Telephone Conference Information

The Management Board of Infineon Technologies will conduct a telephone conference with analysts and investors on July 23, 2001 at 9:00 a.m. Eastern Standard Time (U.S. EST), 3:00 p.m. Central Europe Time (CET), to discuss operating performance for the second quarter of 2001. A broadcast of the telephone conference will be available live and for download on Infineon‘s web site at: www.infineon.com


D I S C L A I M E R

This discussion includes forward-looking statements about our future business. These forward-looking statements include statements relating to future developments of the world semiconductor market, especially the market for memory products, Infineon’s future growth, the benefits of research and development alliances and activities, our planned levels of future investment in the expansion and modernization of our production capacity, the introduction of new technology at our facilities, the transitioning of our production processes to smaller structures, cost savings related to such transitioning and other initiatives, our successful development of technology based on industry standards, our ability to offer commercially viable products based on our technology, our ability to achieve our growth targets, and the continuation of current developments in our financial results in the current and future financial periods. These forward-looking statements are subject to a number of uncertainties, including trends in demand and prices for semiconductors generally and for our products in particular, the success of our development efforts, both alone and with our partners, the success of our efforts to introduce new production processes at our facilities and the actions of our competitors, the availability of funds for planned expansion efforts, as well as the other factors mentioned herein. As a result, our actual results could differ materially from those contained in the forward-looking statements.

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