UPDATE 4-Infineon warns on profit as Nokia project delayed

Thu May 29, 2008 7:18am EDT

(Adds analyst comments on iPhone, updates shares)

By Georgina Prodhan, European Technology Correspondent

FRANKFURT May 29 (Reuters) - Chipmaker Infineon (IFXGn.DE) warned on wireless profits and sales, saying a project to supply Nokia (NOK1V.HE) had been delayed, casting further uncertainty over the handset sector and sending Infineon shares lower.

A spokesman said Infineon had also received lower orders than expected for an unnamed project to supply HSDPA chips for high-speed Internet phones, leading analysts to speculate Apple's (AAPL.O) new iPhone would launch at lower volumes.

Infineon, whose chief executive said this week he would step down early over differences on strategy, said on Thursday it now expected a bigger operating loss and flat sales at its communications unit this quarter compared with last quarter.

The world's fourth-biggest wireless chipmaker had previously forecast a narrower operating loss and higher sales at the unit, which brings in about a third of sales at Infineon's core businesses, excluding memory-chip subsidiary Qimonda QI.N.

The warning follows a cautious outlook from chipmaker Texas Instruments TXN.N last month, which cited caution among a broad customer base and weak demand for high-end cellphones.

It also comes a day after research firm Gartner said cellphone sales in western Europe fell sharply in January-March.

Infineon's delayed supply deal with Nokia is for single chips for ultra-low-cost phones aimed at developing markets.

Nokia said its development of these phones was on target and it would not be affected by Infineon's announcement because it had multiple suppliers for the project.

Shares in Infineon tumbled 10.1 percent to 5.62 euros by 1058 GMT, by far the leading decliner in a flat German DAX index .GDAXI.

"This was actually already foreseeable after Texas Instruments' results," said analyst Heino Ruland of FrankfurtFinanz. "Now they don't want to throw any dirt at the new CEO and so they're getting the news out beforehand."

Pohjola Bank analyst Hannu Rauhala said: "This does not increase at all confidence in cellphone market development."

IPHONE LAUNCH

Analysts speculated that the unnamed HSDPA customer that had placed lower orders was Apple, which is expected to announce its new 3G iPhone early next month, since that would have been Infineon's most significant ramp-up of HSDPA chips this quarter.

"In our view the profit warning has been caused by ramp changes of next generation iPhone," UBS analyst Nicolas Gaudouis wrote, saying he expected an impact of 20 million euros on Infineon's sales from supplying 1.5 million fewer chipsets.

JPMorgan analyst Sandeep Deshpande wrote: "It could be possible that the lower volumes in the certain platform ramp cited could be Apple reducing the initial launch volume."

Infineon, which has not confirmed it will supply chips for the new iPhone, said last month it had won Samsung (005930.KS) as a customer for HSDPA (high-speed downlink packet access) chips. Samsung declined to comment on Thursday.

MANAGEMENT TURMOIL

Infineon Chief Executive Wolfgang Ziebart said on Monday he would step down on June 1, after increasingly public criticism from Chairman Max Dietrich Kley of his failure to improve profitability more quickly.

He will be replaced by Peter Bauer, who will also continue to run Infineon's Automotive, Industrial and Multi-market division, the most consistently profitable part of the company.

Infineon's communications chips unit has repeatedly disappointed, briefly turning profitable in the last quarter of 2007, as promised, but then returning to losses.

Infineon had said as recently as last month that the Nokia single-chip project for ultra low-cost phones was on track.

Excluding gains and charges, Infineon said it now expected earnings before interest and tax (EBIT) and sales at its communications unit to pick up again in the fourth quarter to end-September, compared with the third.

The wireless chip landscape is in flux, with STMicroelectronics (STM.PA) buying NXP's wireless chip business for $1.6 billion to form a $3 billion joint venture last month.

German media reports have said Infineon Chairman Kley has been talking to private equity firm KKR [KKR.UL], one of NXP's main owners, about merging the remaining businesses of Infineon and NXP. (Additional reporting by Tarmo Virki in Helsinki and Kirsti Knolle in Frankfurt; Editing by Paul Bolding)

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