* Sees Q2 sales flat to slight lower from Q1
* Sees Q2 operating margin down 1 pct point
* Q1 opg result, ex-items 141 mln eur vs 130 mln f'cast
* Shares up 5 pct, outperforming main market
FRANKFURT, Feb 1 German chipmaker Infineon AG expects sales to key automotive customers to pick up in the second quarter and said its important chipcard market looks like it's stablizing after a fall-off in the first quarter.
Overall sales in the current quarter should be flat to slightly lower than in the previous three months, the company said on Wednesday after reporting a smaller than expected fall in first quarter earnings.
Infineon said its automotive clients, which account for 41 percent of revenue, have continued to show confidence, while there have been "some early signs of stabilization" in the chipcard market which provides about 10 pct of sales.
"Our strategy to focus on less volatile and more profitable businesses is paying off demonstrated by a stronger top-line as compared to our peers", said Chief Executive Peter Bauer.
Infineon in 2010 sold its wireless chip unit to Intel , reducing its exposure to the volatile phone market, though it still provides a cheap chip to Apple's iPhone.
Infineon shares were up 5 percent at 1220 GMT, outperforming the STOXX Europe 600 Technology index, which was up 1.2 percent.
"Guidance for the second quarter is better than expected," said UBS analyst Gareth Jenkins, keeping his 'buy' recommendation on the shares.
The semiconductor industry hit a slump last year as demand for consumer gadgets slowed in Europe and elsewhere due to economic uncertainties at a time when vendors had invested heavily in the new production gear.
Peer STMicroelectronics, which has a high exposure to the wireless market, last week warned that revenues could drop up to 10 percent the current quarter as Nokia, a key client for its mobile arm, is struggling.
INDUSTRIAL STILL WEAK
Infineon, whose customers include Japanese carmaker Hyundai , software maker Microsoft and the U.S. Government Printing Office, said its automotive sales should be up in the second quarter while chip card & security turnover should be about flat. Sales at the power management and industrial power control businesses are expected to be down on seasonal and late-cyclical weakness.
Infineon stopped short of updating is full-year outlook but analysts said they now saw room for outlook hikes.
"We need more visibility on our sales, but we are slightly more positive on our sales than we were 3 months ago," Infineon Chief Executive Peter Bauer said.
Infineon said in November its fiscal full-year revenue would likely fall, hit by a slowing economy and growing caution among customers in industrial and chip card markets.
Analysts on average see Infineon's 2011/2012 revenue declining 5.2 percent.
Infineon, which was spun off from engineering group Siemens more than a decade ago, said its financial first-quarter business segment result, a measure of operating profit, fell 28 percent from the previous quarter to 141 million euros ($184.6 million).
That was above a consensus forecast of 130 million in a Reuters poll.
The company expects the margin on its operating result, excluding special items, to be down broadly by 1 percentage point in the second quarter.