Infineon Ahead in ULC Handset Chips

Produced by: ABN AMRO
Bank NV

Thursday 3 May 2007

Infineon Buy
Absolute performance

Trading Buy
A comparison of ULC handset chips Short term (0-60 days)

Overweight
A teardown comparison of ultra low cost (ULC) handset models Sector relative to market

from Nokia, Motorola, Sony Ericsson and LG, confirms our view that Germany
Infineon's ULC2 is ahead of TI's LoCosto in terms of integration and Information Technology
cost of ownership. We maintain our Buy rating. Hardware

Price

€11.47
Key forecasts
Target price
FY05A FY06A FY07F FY08F €14.50
Revenue (€m) 6631 7929 8318 10136 Market capitalisation
EBITDA (€m) 1138 1521 1661 2008
€8.58bn
Reported net profit (€m) -328.0 -280.0 149.9 539.6
Avg (12mth) daily turnover
Normalised net profit (€m) -308.0 -138.0 183.9 539.6
Normalised EPS (€) -0.41 -0.18 0.25 0.72 €96.32m
Dividend per share (€) n/a n/a n/a n/a Reuters Bloomberg
Dividend yield (%) n/a n/a n/a n/a IFXGn.DE IFX GR
Normalised PE (x) n/m n/m 46.6 15.9
EV/EBITDA (x) 7.24 5.21 4.90 3.87 Asset allocation
EV/invested capital (x) 0.90 0.83 0.81 0.74 Equities Overweight
ROIC - WACC (%) -0.24 1.30 2.07 3.51 Cash Neutral
Accounting Standard: IFRS year to Sep, fully diluted Bonds Underweight
Source: Company data, ABN AMRO forecasts

Price performance (1M) (3M) (12M)
Price (€) 11.7 11.2 9.6
Infineon beats Texas Instruments in ULC handset solutions
Absolute % -1.6 2.7 18.9
We had argued that Infineon's ULC2 solution for low cost handsets appeared to be Rel market % -5.0 0.1 4.4
more integrated than Texas Instruments' LoCosto, but reserved our final conclusion Rel sector % -5.3 -1.7 14.3
until we actually had a real phone in the market using ULC2. Infineon's ULC2
May 04 May 05 May 06
integrates on a single chip a GSM/GPRS baseband, power management, SRAM and RF 16

transceiver while Texas Instruments' LoCosto does not integrate the power 14
management die. We also thought that LoCosto was not as good as ULC2 at
12
integrating external components. The combination of both factors could facilitate
10
substantial cost savings in terms of bill-of-materials but also in simplifying further the
handset production process. 8

6
Teardown analysis of tier-1 ULCH models confirms this view
IFXGn.DE Europe IT Hardware
After performing a teardown analysis of the LG MG160A, the first handset on the
Stock borrowing: Easy
market to use Infineon's ULC2, we are incrementally more bullish on the prospects
Volatility (30-day): 21.12%
for this product. Comparing this phone with the Nokia 1112 and Motorola's Motofone, Volatility (6-month trend): ↓
both of which are based on Texas Instruments' LoCosto, leaves no room for 52-week range: 12.42-7.96
scepticism. Not only is Infineon's solution more integrated than TI's but also the size FTSE Eurotop 300 Index: 1568.99

of the chip appears to be smaller despite integrating more components and being Europe IT Hardware: 159.05
Source: ABN AMRO, Bloomberg
manufactured on a 130nm node vs TI's 90nm.

Nokia and LG use Infineon's ULC2; Samsung could be next; Buy
Infineon has already announced wins at LG and Nokia for ULC handsets. We continue
to believe that Infineon's ULC2 will capture c50% of Nokia's low-end handset volumes
by the end of 2008, growing its revenues with Nokia in this space from €220m in
FY07F to €314m in FY08F, despite shrinking GSM RF revenues. This success with
Nokia and LG could be followed by design wins at Samsung in our view, should
Samsung opt to enter the low-cost handset market. We stay at Buy with a target
price of €14.50.
Analyst
Didier Scemama
United Kingdom
+44 20 7678 0772
didier.scemama@uk.abnamro.com
Important disclosures and analyst certifications regarding
companies can be found in the Disclosures Appendix. www.abnamroresearch.com
Priced at close of business 30 April 2007.

250 Bishopsgate, London, EC2M 4AA, United Kingdom

I N V E S T M E N T V I E W

Infineon ahead in low-cost handsets

A teardown analysis of four ultra low-cost handsets from Nokia, Motorola,
Sony Ericsson and LG confirms our view that Infineons’s ULC2 is ahead of
TI’s LoCosto in terms of integration, which reduces handset costs.

Incrementally more positive on Infineon’s ULC2
Until now we had been optimistic about the prospects for Infineon’s ULC2 solution as Our analysis leaves no room
for confusion. Infineon's
it appeared to offer a higher level of integration vs Texas Instruments LoCosto
ULC2 seems to be well
solution. We had reserved our final conclusion till we actually saw a real phone ahead of TI's LoCosto
shipping in the market based on Infineon’s ULC2.

The results of a teardown analysis we publish in this note simply leave no room for
scepticism or doubt. Infineon’s ULC2 is simply much better than Texas Instruments’
LoCosto, based on our observations.

While competition between the two companies is likely to remain intense, we believe
that this product is likely to help Infineon become profitable in the wireless IC market
and, more importantly, become a viable top-3 wireless IC vendor over the next 18
months.

The technical prowess demonstrated by Infineon with the ULC2 makes us
incrementally more positive on the potential design wins for this product with other
tier-1 OEMs (Samsung most likely in our view) but also about the future success of
Infineon’s single chip EDGE vs TI and Broadcom’s equivalent products.

Technical difference and what it means to handset
manufacturers
There are currently on the market two solutions for low-cost handsets, the ULC2 from
Infineon also called E-GOLDvoice and LoCosto from Texas Instruments. In addition,
Silicon Labs recently sold its equivalent product called Aerofone to NXP. The product
is not yet shipping so we have not been able to include it in our analysis.

Table 1 : A comparison of the main single-chip GSM/GPRS solutions

TXN’s LoCosto IFX’s ULC2 SLAB/NXP’s Aerofone
Digital Baseband x x x
SRAM x x x
RF transceiver x x x
Power management unit Separate chip x x
Protocol stack x x Third party
Geometry 90nm 130nm 130nm
Source: Company data

Technically, Infineon’s ULC2 differs from Texas Instruments’ LoCosto on the following
parameters:

■ ‘Real’ single-chip solution for GSM handsets: While Texas Instruments claims
LoCosto is a single-chip solution, the reality is that it is not. LoCosto is made up of
two chips: one that integrates the digital baseband, SRAM and RF transceiver and
another for power management and battery charging. Infineon’s ULC2 is, on the
other hand, a ‘real’ single chip. It integrates monolithically, ie on one single die,
the digital baseband, SRAM, RF transceiver and power management function.

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I N VE S T M E NT V IE W

Integrating the power management function eliminates cUS$1 from the bill of
materials and additional cents due to the simpler manufacturing process. Note
that both solutions require two additional chips to make the phone work, a NOR
flash memory chip that store data and code and a power amplifier chip that helps
boost signals and reduce power consumption.

■ Fewer external components: Infineon claims that its ULC2 chip requires no
more than 50 external components while TI has not commented on this issue,
other than saying that the number of external components would vary per OEM.

■ Ability to ‘shrink’ the design to lower geometries: This is probably where
LoCosto is potentially better positioned than ULC2. As Texas Instruments’
baseband+RF chip is all digital (the RF processing is made through the use of a
DSP), it is relatively easy to ‘shrink’ ie to transition to lower geometries (ie for
instance from 90nm currently to 65nm next year). Infineon should find it more
difficult to shrink its ULC2 solution from 130nm (currently shipping) down to
65nm next year. The main reason for this is that Infineon’s solution integrates a
CMOS RF chip, which is a mixed signal chip. The lower the geometry the more
difficult it is design to high performance RF chips (due to the high level of ‘noise’
at these nodes). In addition, as the solution also integrates the power
management function, Infineon may encounter difficulties with the higher voltage
of this chip. Infineon has managed to address all these problems in the first
iteration of the ULC2 by staying at 130nm. Infineon claimed at its analyst day that
it is confident the transition to 65nm will be smooth.

Cost comparison shows Infineon’s platform offers lowest cost
We established in the note ‘A comparison of EDGE platforms’ published on 22 We have compared four
low-end handset models
November 2006 that Infineon had the best GPRS/EDGE platform in the market,
offering the highest level of integration and the lowest cost of ownership with no
compromise on performance.

In this note we have compared the cost of four ultra low-cost handset models from
Nokia (1112), Motorola (Motofone), Sony Ericsson (J110) and LG (MG160a). All four
models are very similar. They are dual-band GSM-only candy-bar models with SMS
capability. The LG and Sony Ericsson phones differ from the Nokia and Motorola
models in the sense that they have a colour display. All four phones are the most
entry-level models offered by each company.

Table 2 : Cost comparison of ultra low cost GSM models

Nokia 1112 US$ Motorola Motofone US$ Sony Ericsson J110 US$ LG MG160a US$
Digital baseband/SRAM TXN 3.00
TXN/NOK 3 TXN 3.5
RF transceiver SLAB/NXP 1.00 IFX 3.5
Power management unit TXN/NOK 1.00 TXN 1.00 TXN 1.00
Power amplifier module Renesas 1.20 ?? 1.20 ?? 1.20 SWKS 1.00
Flash memory STM 1.50 STM 1.50 INTC 1.50 INTC 1.50
# of other analog ICs 2 0.20 2 0.20 5 0.50 1 0.10
# of external components 69 0.35 174 0.87 105 0.53 49 0.25
Total GSM cost 7.25 8.27 8.73 6.35
% difference with LG phone 14% 30% 38% 0%
# of other analog ICs 2 0.20 1 0.10 3 0.30 3 0.30
Other external components 44 0.22 77 0.39 81 0.41 35 0.18
Total non-cellular IC cost 0.42 0.49 0.71 0.48
Total BOM 7.67 8.76 9.43 6.82
% difference with LG phone 12% 28% 38% 0%
Total # of ICs 8 7 13 7
Total # of external components 113 251 186 84
Dual-sided PCB? No Yes No No
Source: ABN AMRO, company data

On the basis of our cost estimate, we conclude that Infineon’s ULC2 GSM platform is The LG model based on
Infineon's chip comes out
the most competitive from an integration and cost point of view, beating even Nokia,
on top
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while offering better features such as a colour display. The total cost of the GSM
subsystem of the LG model (including the PA module, flash memory, other analog ICs
and external components) came out at US$6.35, 14% cheaper than our estimate of
the equivalent platform on the Nokia 1112 model, 30% cheaper than Motorola’s
Motofone and 38% cheaper than the Sony Ericsson J110.

If one includes other non-GSM related IC costs such as other analog ICs and external
components that we identified around the SIM area, we found similar results with the
LG model, 12% cheaper than Nokia, 28% cheaper than Motorola and 38% cheaper
than Sony Ericsson.

■ We are somewhat amazed that the LG phone outperforms the Nokia phone in
terms of costs. Nokia is well known for making low-cost handsets. In addition,
given that this Nokia phone has been in the making for the last two years (TI and
Nokia issued a joint press release back in January 2005), we are surprised to find
that the Nokia model does not perform better. Like in the Motofone, we observed
the use of a relatively large Renesas PA module which is twice as big as the
Skyworks PA module used in the LG model. This could indicate that the RF
performance of Infineon’s ULC2 is better than that of TI’s LoCosto.

■ The difference in cost with the Motofone is more significant and has to do with the
use of a two-chip solution vs a single chip. We note also the use of a substantially
larger power amplifier module in the Motofone, which may be related to a poorer
performance of the radio in TI’s LoCosto. Here we believe that the very high
number of external components can be explained by the fact that the phone was
manufactured by an ODM. We also note the use of a dual-sided PCB vs a single-
sided PCB for all other phones, which is inherently more costly (this is not
reflected in our calculation though).

■ The substantial difference in cost between the LG model and the Sony Ericsson
model is not surprising as the latter uses a multi-chip solution, which is inherently
more costly than a single-chip solution. The high level of external components can
also be explained by the fact that this phone was manufactured by an ODM,
whose PCB design capability may not be as good as that of tier-1 OEMs.

Teardown of Nokia 1112
The Nokia 1112 is the most low end Nokia model. This GSM handset has a The Nokia 1112 is the first
Nokia phone to transition to
monochrome display and is the successor of the hugely successful 11xx model, which
a 'single chip' architecture
has shipped in tens of millions of units over the last few years.

This phone is the first Nokia model to have transitioned to a ‘single chip’ architecture.
We believe this platform has been in the making for the last two years based on a
joint press release published by Texas Instruments and Nokia in January 2005. The
phone is about to be launched globally by Nokia.

This phone, just like every other GSM/WCDMA Nokia phone, uses custom silicon, ie a
proprietary solution designed by Nokia and manufactured by Texas Instruments. It is
however very similar from a hardware point of view to a standard LoCosto solution
shipping at Motorola and Sagem. However we assume it uses Nokia’s protocol stack.

The main components in the phone are as follows:

■ GSM baseband/RF single chip: While the chip does not have any TI marking on
it, it looks very similar to a standard LoCosto chip. We assume it is manufactured
on TI’s high performance logic 90nm process technology.

■ Power management chip: The chip is only slightly smaller than the
baseband+RF chip, which is quite surprising and disappointing. It appears to be a
custom chip that Nokia developed with Texas Instruments. The chip does not
appear to have any TI marking on it either.

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■ Power amplifier module: The module comes from Renesas, one of the two
power amplifier module suppliers to Nokia with RFMD. We note the relatively large
size of the PA module.

■ Flash memory: This is a low-density NOR flash memory chip, which appears to
come from STM.

■ External components: Thanks to the customised nature of this product, we
believe that Nokia has been able to reduce the number of external components to
a bare minimum, further reducing the bill-of-material of the phone. We counted
69 external components around the GSM sub-systems. In addition we counted
two small analog ICs and 44 external components around the SIM card area.

Teardown of Motorola Motofone
The Motofone from Motorola was launched late last year. It is a GSM handset with an The Motofone was the first
phone on the market using
alphanumeric display. The phone offers SMS, clock and a speakerphone. It is a very
LoCosto
slim handset model (9mm). Our channel checks indicate that this phone is made by
Taiwanese ODM Foxconn as well as Flextronics. This phone was the first handset in
the market to leverage TI’s LoCosto solution.


■ GSM baseband/RF single chip: This chip is TI’s LoCosto, a single chip that
integrates a GSM digital baseband, SRAM and RF transceiver, and has TI’s
marking on it. We assume it is manufactured on TI’s high performance logic 90nm
process technology. The chip is on the top side of the PCB.

■ Power management chip: The chip is the same size as the baseband+RF chip,
which is surprising to us and is on the other side of the PCB. It appears to be a
standard power management chip and has TI’s marking.

■ Power amplifier module: We could not identify the name of the supplier for the
PA module, although it looks similar to that used in the Nokia 1112. Just as in the
Nokia phone, we note the relatively large size of the PA module, which could
indicate that LoCosto’s RF performance is poor.

■ Flash memory: This is a low-density NOR flash memory chip, which comes from
STM.

■ External components: We were quite disappointed by the low level of
integration for such a basic phone. We counted 251 external components in total,
77 of which were in the GSM subsystem. We also counted a total of three analog
ICs.

Teardown of LG MG160a
The LG MG160a has just started to ship in Mexico. It is to our best knowledge the The LG MG160a is the first
phone to ship with
most basic phone made by LG. It is also the first phone in the market to use a ‘single
Infineon's single chip
chip’ that combines baseband, RF, power management and SRAM. The phone is a
dual-band GSM handset with SMS, T9, calculator, alarm, currency converter,
calendar, polyphonic ringtone and wallpapers. It also has a 65,000 pixel colour
display.


■ GSM baseband/RF/PMU single chip: The main chip in the phone is Infineon’s
ULC2, a single chip that combines a GSM digital baseband, SRAM, RF transceiver
and power management unit (PMU). Note that our observation indicates that this
chip is smaller than TI’s LoCosto despite integrating more components and is
manufactured at the 130nm node (vs TI’s 90nm).

■ Power amplifier module: Next to Infineon’s ULC2 we found a power amplifier
module that comes from Skyworks. This chip appeared to us to be smaller than

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the PA module found in the Motofone and the Nokia 1112. We believe the smaller
size of the PA module may indicate that the RF performance of the ULC2 solution
is better than that of LoCosto.

■ A flash memory chip: Intel provides a low-density NOR flash memory in the
phone.

■ External components: The level of integration offered by Infineon’s ULC2 is best
demonstrated when one compares the number of external components left on the
PCB besides the main ICs described above. We counted a total of 84 external
components, of which 49 are attributable to the GSM subsystem. We believe this
phone offers the highest integration level despite offering more features than the
one we analyses including a colour display.

Teardown of Sony Ericsson J110
Sony Ericsson’s J110 was announced during 3GSM in February this year. It is a GSM The J110 model is the most
basic phone sold by Sony
handset with a colour display. The phone offers SMS, T9, calculator and a hands-free
Ericsson
speaking capability. As has been customary for Sony Ericsson, this phone’s design
and production have been outsourced to ODMs (Arima and Flextronics, according to
our channel checks) and leverages Texas Instruments’ GSM chipset. It is relatively
surprising that this phone does not use LoCosto, given that the technical
specifications of the phone do not strike us as particularly high end.


■ GSM baseband: The core of the phone is based on a Texas Instruments GSM
digital baseband, which integrates some SRAM too.

■ Power management: Next to the GSM baseband, we found the power
management unit, which also comes from Texas Instruments.

■ RF transceiver: The GSM RF transceiver chip comes from Silicon Labs, which is
now part of NXP. It is a low-cost CMOS RF chip.

■ Power amplifier module: A Skyworks power amplifier completes the GSM sub-
system, as is customary across Sony Ericsson models. The size of the PA module
seems to be similar to that found in the LG model described above.

■ A flash memory chip: Intel provides a low density NOR flash memory in the
phone.

■ External components: Perhaps the most disappointing finding in this phone
teardown is the incredible number of external components. Despite the maturity
of the GSM standard, let alone of Texas Instruments/Silicon Labs/Skyworks’
solution for low-end GSM handsets, we counted as many as 186 external
components, of which 105 form part of the GSM subsystem.

Conclusion – Infineon leading in ULCH; EDGE next?
The teardown analysis we have performed and detailed above confirms our view that Infineon's ULC2
outperforms TI's LoCosto
Infineon has the best solution on the market for ultra low cost handsets. Our analysis
easily
has shown that it outperforms easily a traditional GSM multi-chip solution (as the one
used in the Sony Ericsson model) but also TI’s LoCosto solution, even after it has
been improved by Nokia (as seen in the Nokia 1112), in terms of integration and cost
of ownership.

We believe the main reason for this higher level of integration of external
components may be attributable to the use of a ‘real’ CMOS RF transceiver in the
single chip as opposed to a digital, DSP-based RF transceiver as the one used in TI’s
LoCosto. We believe Infineon’s approach is better at capturing external components
and appears to require a simpler power amplifier module, further reducing the total
bill-of-materials. The real test for Infineon’s ULC2 will be whether they are able to
‘shrink’ the design of the chip down to 65nm.

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The entry-level handset market is dominated by Nokia, who shipped c106m
GSM/GPRS units last year according to our estimates. We define entry level handsets
as essentially GSM/GPRS that do not have a camera and do not run an open
operating system. These phones may have a colour screen and some basic features
such as an FM radio.

Nokia’s recent announcement that it will use Infineon together with Texas
Instruments in the low-cost handset market confirms our positive view of Infineon’s
wireless business and its technical leadership.

While Motorola and Sony Ericsson have so far only used Texas Instruments for low- Samsung has yet to enter
the low end handset market
end models, LG has now started to use Infineon. The only top-tier handset OEM that
has not yet embarked into the low end market is Samsung. NXP (ex Philips
Semiconductors) bought Silicon Labs’s RF transceiver, power amplifier and single chip
GSM Aerofone product to address this opportunity as it is one of the two incumbents
at Samsung for GPRS/EDGE handsets. Given the cost advantage of Infineon’s
solution we believe that it would be likely to win this business should Samsung decide
to enter this segment.

Obviously beyond low-cost GSM/GPRS handsets, the battle is likely to move quickly
to the mid-tier GPRS/EDGE cameraphone market. Infineon appears to be ahead of
the game here as well. Infineon has already announced it will ship its single-chip
EDGE by the end of the year and has won other customers for shipments next year.
We believe Infineon is at least six months ahead of TI’s eCosto EDGE solution.
Broadcom has also announced an impressive 65nm-based single-chip EDGE solution
but has yet to announce customers for this product.

TI announced a landmark design win with Motorola in January 2007, which includes Infineon appears well
positioned in the single chip
its single-chip EDGE, for initial deliveries in the second half of 2008. We believe this
EDGE market
is likely to put pressure on other tier-1 OEMs to accelerate the transition to single-
chip EDGE. We believe this puts Infineon in an ideal position to convert its ULC2 wins
at Nokia and LG in single chip EDGE wins as early as next year. If we are correct in
assuming that Infineon also wins Samsung for its ULC2 solution (should it enter this
space), we believe that one of the reasons for this would be its single chip roadmap
extending into EDGE and, over time, 3G.

Buy maintained with a target price of €14.50
We maintain our Buy rating on Infineon with a DCF-based price target of €14.50. At
our target price Infineon stock would trade on 20x FY08F P/E, implying a valuation of
1.5x FY08F EV/sales for Infineon’s logic business (ie excluding its stake in Qimonda).
We believe that the operating margin improvement we expect for the Logic business
(ie 8% in FY08 and 10.6% in 4Q08) warrants this multiple. Note also that the value
of the Qimonda stake remains depressed in our sum-of-the parts as the stock
currently trades at 88% of trailing book value. With improving DRAM pricing, we
believe Infineon’s share price should benefit as it would lower the implicit value of its
logic business and help it reduce its stake in Qimonda.

Risks
We believe the downside risks to our recommendation and target price include: 1) a
further fall in DRAM ASP, which would cut our operating profit forecast significantly,
2) a slowdown in the automotive and smart card IC markets, which would reduce the
profitability of the AIM division, 3) failure to ramp up of new wireless solutions, 4)
aggressive price competition in the broadband chip market, 5) the negative impact of
a weakening EUR/USD.

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Table 3 : Wireless revenue model

€m FY06 1Q07 2Q07 3Q07F 4Q07F FY07F 1Q08F 2Q08F 3Q08F 4Q08F FY08F
Wireless 778.0 131.0 132.0 170.0 222.0 655.0 241.3 231.2 278.9 333.6 1,085.0
% Change yoy -20% -42% -33% 4% 15% -16% 84% 75% 64% 50% 66%

S T AT E M E NT S
% Change sequential -32% 1% 29% 31% 9% -4% 21% 20%
BenQ-Siemens-related business 248.8
% Change yoy -24%
Nokia-related business 234.5 68.0 49.9 49.8 52.4 220.2 76.3 103.0 124.4 137.1 440.7
% Change yoy 8% -1% -4% -8% -13% -6% 12% 106% 150% 161% 100%
% Change sequential 13% -27% 0% 5% 45% 35% 21% 10%
I NF I NE O N

GSM RF ASP (€) 1.19 1.15 1.05 1.05 1.05 1.08 1.05 0.89 0.89 0.89 0.96
GSM RF units (m) 197.0 59.1 47.6 47.4 39.0 193.1 31.7 17.8 13.6 8.3 71.4
Revenues 234.46 68.0 49.9 49.8 40.9 208.66 33.3 15.8 12.1 7.4 68.63
ULC2 ASP (€) 4.00 3.85 3.85 3.85 3.86
ULC2 units (m) 5.0 15.0 20.0 23.5 63.50
Revenues 20.0 57.8 77.0 90.5 245.23
EDGE RF ASP (€) 2.30 2.30 2.30 1.96 1.96 1.96 2.01
EDGE RF units 5.0 5.0 10.0 15.0 18.0 20.0 63.00
Revenues 11.5 11.50 23.0 29.4 35.3 39.2 126.88
Apple-related business 25.0 30.0 55.0 30.0 21.3 25.5 42.5 119.3
% Change yoy 2% 42% 117%
% Change sequential 20% 0% -29% 20% 67%
Apple handset shipments (m of units) 2.5 3.0 5.5 3.0 2.5 3.0 5.0 13.5
ASP (€) 10.00 10.00 10.00 10.00 8.50 8.50 8.50 8.83
LG-related business 21.0 21.0 30.0 36.0 60.0 147.0 60.0 40.0 50.0 60.0 210.0
% Change yoy 186% 186% 33% 39% 0% 43%
% Change sequential 43% 20% 67% 0% -33% 25% 20%
LG GPRS/EDGE handset shipments (m of units) 1.5 2.5 3.0 5.0 12.0 5.0 4.0 5.0 6.0 20.0
ASP (€) 14.00 12.00 12.00 12.00 12.25 12.00 10.00 10.00 10.00 10.50
Other wireless customers (Samsung, Panasonic, …) 273.8 42.0 52.1 59.2 79.6 232.8 75.0 67.0 79.0 94.0 315.0
% Change yoy -36% -41% -43% 30% 23% -15% 79% 29% 33% 18% 35%
% Change sequential -35% 24% 14% 34% -6% -11% 18% 19%
Source: ABN AMRO forecasts, company data
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Table 4 : Revenue by division

Automotive, Industrial and Multimarket 2,839.0 710.0 741.0 750.0 774.3 2,975.3 740.0 775.0 800.0 809.0 3,124.0
% Change yoy 13% 9% 1% 5% 5% 5% 4% 5% 7% 4% 5%

S T AT E M E NT S
% Change sequential -4% 4% 1% 3% -4% 5% 3% 1%
Wireless 778.0 131.0 132.0 170.0 222.0 655.0 241.3 231.2 278.9 333.6 1,085.0
% Change yoy -20% -42% -33% 4% 15% -16% 84% 75% 64% 50% 66%
Wireline 427.0 105.0 106.0 110.0 111.0 432.0 115.0 117.0 120.0 123.0 475.0
% Change yoy 2% -5% -4% 7% 7% 1% 10% 10% 9% 11% 10%
I NF I NE O N

% Change sequential 1% 1% 4% 1% 4% 2% 3% 2%
Communications 1,205.0 236.0 238.0 280.0 333.0 1,087.0 356.3 348.2 398.9 456.6 1,560.0
% Change yoy -13% -29% -23% 5% 12% -10% 51% 46% 42% 37% 44%
Qimonda 3,815.0 1,173.0 984.0 885.4 1,204.2 4,246.7 1,204.2 1,250.6 1,351.0 1,649.9 5,455.8
% Change yoy 41% 73% 6% -9% -2% 11% 3% 27% 53% 37% 28%

% Change sequential -5% -16% -10% 36% 0% 4% 8% 22%
Other 175.0 70.0 50.0 50.0 50.0 220.0 50.0 50.0 50.0 50.0 200.0
Corporate reconciliation -105.0 -58.0 -51.0 -51.0 -51.0 -211.0 -51.0 -51.0 -51.0 -51.0 -204.0
Consolidated Sales 7,929.0 2,131.0 1,962.0 1,914.4 2,310.5 8,317.9 2,299.5 2,372.8 2,548.9 2,914.6 10,135.8
% Change yoy 19.6% 27.3% -1.6% -2.9% 0.9% 4.9% 7.9% 20.9% 33.1% 26.1% 21.9%
% Change yoy -6.9% -7.9% -2.4% 20.7% -0.5% 3.2% 7.4% 14.3%

Table 5 : EBIT by division

Automotive, industrial and Multimarket 246.0 55.0 66.0 70.0 75.0 266.0 70.0 75.0 81.4 86.0 312.4
Operating margin (%) 8.7% 7.7% 8.9% 9.3% 9.7% 8.9% 9.5% 9.7% 10.2% 10.6% 10.0%
Qimonda 186.0 225.0 77.0 -38.8 35.4 298.7 85.0 113.7 104.6 143.0 446.3
Operating margin (%) 4.9% 19.2% 7.8% -4.4% 2.9% 7.0% 7.1% 9.1% 7.7% 8.7% 8.2%
Communications -156.0 -57.0 -53.0 -25.0 0.0 -135.0 11.5 7.0 31.0 60.0 109.5
Operating margin (%) -12.9% -24.2% -22.3% -8.9% 0.0% -12.4% 3.2% 2.0% 7.8% 13.1% 7.0%
Other -1.0 -3.0 -5.0 -5.0 -5.0 -18.0 -5.0 -5.0 -5.0 -5.0 -20.0
3

Operating margin (%) -0.6% -4.3% -10.0% -10.0% -10.0% -8.2% -10.0% -10.0% -10.0% -10.0% -10.0%
M A Y

Corporate Rec -159.0 -4.0 -4.0 -8.0 -8.0 -24.0 -7.0 -7.0 -7.0 -7.0 -28.0
Operating margin (%) 1.5% 0.1% 0.1% 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%
2 0 0 7

Consolidated EBIT 116.0 216.0 81.0 -6.8 97.4 387.7 154.5 183.7 205.0 277.0 820.2
EBIT Margin 1.5% 10.1% 4.1% -0.4% 4.2% 4.7% 6.7% 7.7% 8.0% 9.5% 8.1%
910

FI N A N C I AL
Table 6 : P&L

Consolidated sales 7,929.0 2,131.0 1,962.0 1,914.4 2,310.5 8,317.9 2,299.5 2,372.8 2,548.9 2,914.6 10,135.8
% Change yoy 19.6% 27.3% -1.6% -2.9% 0.9% 4.9% 7.9% 20.9% 33.1% 26.1% 21.9%

S T AT E M E NT S
% Change sequential -6.9% -7.9% -2.4% 20.7% -0.5% 3.2% 7.4% 14.3%
Cost of good sold 5,854.0 1,465.0 1,471.0 1,472.2 1,690.5 6,098.7 1,664.8 1,687.1 1,804.6 2,046.0 7,202.6
Gross profit 2,075.0 666.0 491.0 442.2 620.0 2,219.2 634.7 685.7 744.3 868.5 2,933.2
Gross margin (%) 26.2% 31.3% 25.0% 23.1% 26.8% 26.7% 27.6% 28.9% 29.2% 29.8% 28.9%
R&D 1,249.0 292.0 259.0 293.0 320.5 1,164.5 300.0 310.0 335.0 372.7 1,317.7
% Sales 15.8% 13.7% 13.2% 15.3% 13.9% 14.0% 13.0% 13.1% 13.1% 12.8% 13.0%
I NF I NE O N

SG&A 751.0 172.0 161.0 160.0 197.4 690.4 185.0 200.0 215.0 241.3 841.3
% Sales 9.5% 8.1% 8.2% 8.4% 8.5% 8.3% 8.0% 8.4% 8.4% 8.3% 8.3%
Other operating expenses -42.0 0.0 -7.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total expenses 1,958.0 464.0 413.0 453.0 524.9 1,854.9 485.0 510.0 550.0 613.9 2,158.9
% Sales 24.7% 21.8% 21.1% 23.7% 22.7% 22.3% 21.1% 21.5% 21.6% 21.1% 21.3%
Operating profit 117.0 202.0 78.0 -10.8 95.1 364.3 149.7 175.7 194.3 254.6 774.3
% Sales 1.5% 9.5% 4.0% -0.6% 4.1% 4.4% 6.5% 7.4% 7.6% 8.7% 7.6%
Restructuring charge -23.0 -2 -20 0 0 -22.0 0 0 0 0 0.0
Interest income (expense), net -92.0 -9 -12 -12 -12 -45.0 -10 -10 -10 -10 -40.0
Equity in earnings (losses) of associated companies 78.0 37.0 28.0 10.0 12.0 87.0 15.0 20.0 25.0 40.0 100.0
Other income -33.0 6.0 10.0 5.0 5.0 26.0 5.0 5.0 5.0 5.0 20.0
Minority interest -23.0 -27 -12 -11 -15 -65.0 -15 -18 -20 -23 -76.0
Exceptional items -142.0 0 -30 0 0 -30.0 0 0 0 0 0.0
Minority interests -1.0 0 0 0 0 0.0 0 0 0 0 0.0
Pre-tax profit -119.0 207.0 39.0 -18.8 85.4 312.7 144.5 173.7 195.0 267.0 780.2
Tax -161 -87 -50 2 -27 -161 -44 -54 -59 -82 -239
Tax rate % 117% -42% -128% -12% -31% -52% -30% -31% -30% -31% -31%
Net profit -280.0 120.0 -11.0 -16.5 58.8 151.3 100.6 119.6 136.0 185.3 541.5
Shares issued 748 748 748 748 748 748 748 748 748 748 748
Diluted EPS -0.37 0.16 -0.01 -0.02 0.08 0.20 0.13 0.16 0.18 0.25 0.72
‘Clean’ diluted EPS -0.18 0.16 0.03 -0.02 0.08 0.25 0.13 0.16 0.18 0.25 0.72
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FI N A N C I AL
Table 7 : Balance sheet

€m FY06 1Q07 2Q07 3Q07F 4Q07F FY07F FY08F
Cash and cash equivalents 2,040.0 2,047.0 1,500.0 1,459.9 1,327.5 1,327.5 2,653.9
Marketable Securities 615.0 635.0 505.0 505.0 505.0 505.0 505.0

S T AT E M E NT S
Accounts receivable, net 1,245.0 1,093.0 994.0 1,102.9 1,255.7 1,255.7 1,410.6
Inventories 1,202.0 1,310.0 1,372.0 1,360.2 1,286.3 1,286.3 1,519.1
Deferred income taxes 97.0 91.0 92.0 92.0 92.0 92.0 92.0
Other current assets 482.0 564.0 413.0 413.0 413.0 413.0 413.0
Total current assets 5,681.0 5,740.0 4,876.0 4,933.0 4,879.5 4,879.5 6,593.6
Property, plant and equipment, net 3,764.0 3,732.0 3,705.0 3,655.0 3,605.0 3,605.0 3,515.0
I NF I NE O N

Long-term investments, net 659.0 657.0 685.0 685.0 685.0 685.0 685.0
Restricted cash 78.0 78.0 78.0 78.0 78.0 78.0 78.0
Other assets 376.0 346.0 355.0 462.6 612.4 612.4 612.4
Total assets 11,185.0 11,162.0 10,325.0 10,409.6 10,425.9 10,425.9 11,930.0

Liabilities and shareholders' equity
Short-term debt and current maturities 797.0 800.0 251.0 251.0 251.0 251.0 1,201.2
Accounts payable 1,245.0 1,214.0 1,097.0 1,200.2 1,157.6 1,157.6 1,367.2
Accrued liabilities 562.0 535.0 481.0 481.0 481.0 481.0 481.0
Other current liabilities 675.0 633.0 603.0 603.0 603.0 603.0 329.9
Total current liabilities 3,305.0 3,205.0 2,457.0 2,557.2 2,511.6 2,511.6 3,398.2
Long-term debt 1,208.0 1,222.0 1,147.0 1,147.0 1,147.0 1,147.0 1,147.0
Other liabilities 457.0 416.0 389.0 389.0 389.0 389.0 389.0
Total liabilities 5,030.0 4,898.0 4,074.0 4,174.2 4,128.6 4,128.6 5,015.2
Ordinary share capital 1,495.0 1,495.0 1,495.0 1,495.0 1,495.0 1,495.0 1,495.0
Additional paid in capital 5,800.0 5,800.0 5,800.0 5,800.0 5,800.0 5,800.0 5,800.0
Retained earnings -1,828.0 -1,708.0 -1,719.0 -1,735.5 -1,676.7 -1,676.7 -1,135.2
Accumulated other comprehensive (loss) income -152.0 -185.0 -190.0 -200.0 -212.0 -212.0 -212.0
Minority interests 840.0 862.0 865.0 876.0 891.0 891.0 967.0
3

Total Shareholders' equity 6,155.0 6,264.0 6,251.0 6,235.5 6,297.3 6,297.3 6,914.8
M A Y

Total Liabilities and Shareholders' equity 11,185.0 11,162.0 10,325.0 10,409.6 10,425.9 10,425.9 11,930.0
2 0 0 7
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FI N A N C I AL
Table 8 : Infineon sum-of-the-parts valuation

Implied EV/EBITA @
Value Sales EBIT margin target Estimated FCF yield
€m Per share Methodology Multiple Peers FY06 FY07 FY08 FY06 FY07 FY08 FY06 FY07 FY08 FY06 FY07 FY08

S T AT E M E NT S
AIM 4,731 6.32 EV/sales FY08 1.51 2,839 2,975 3,124 8.7% 8.9% 10.0% 7.2 6.9 6.5 4% 4% 5%
Autos 2,166 2.90 EV/sales FY08 1.70 MELE, ELG, AMIS 1,215 1,191 1,274 10.0% 11.2% 12.2%
Industrial & Multi-Market 1,724 2.31 EV/sales FY08 1.50 FCS, ONNN, IRF 955 1,074 1,150 10.5% 10.2% 10.9%
Chip card ICs and ASIC 840 1.12 EV/sales FY08 1.20 ATML 669 710 700 3.7% 3.2% 4.6%
Communications 2,577 3.45 EV/sales FY08 1.65 1,205 1,087 1,560 -12.9% -12.4% 7.0% 28.6 171.8 12.3 -5% -4% 3%
Wireless 1,627 2.18 EV/sales FY08 1.50 TXN, RFMD, SWKS 778 655 1,085 -21.3% -24.9% 6.5%
I NF I NE O N

RF transceivers 929 1.24 EV/sales FY08 1.70 SLAB, RFMD, SWKS 472 467 547 10.0% 10.0% 10.0%
Baseband 618 0.83 EV/sales FY08 1.30 TXN, AGR 276 143 475 -78.1% -149.6% 2.4%
Connectivity 80 0.11 EV/sales FY08 1.27 CSR, SIRF, DSPG 31 45 63 8.0% 8.0% 8.0%
Wireline 950 1.27 EV/sales FY08 2.00 BRCM, CNXT, MRVL 427 432 475 2.3% 6.0% 8.2%
Broadband access 612 0.82 EV/sales FY08 2.23 BRCM, CNXT, MRVL 190 220 275 -6.0% 3.1% 7.6%
Legacy access 338 0.45 EV/sales FY08 1.69 CNXT 237 212 200 9.0% 9.0% 9.0%

Corporate & others -300 -0.40 70 9 -4 n.m. n.m. n.m. n.m. n.m. n.m.

Net cash 391 0.52
Deferred tax assets 566 0.76

EV/sales
Total Logic market cap 7,965 10.65 1.70 4,114 4,071 4,680 -1.7% 2.2% 8.0% 12.6 11.6 8.6 -1% 1% 4%
FY08

Qimonda (85.9% stake) 3,130 4.18 $ 14.44 293.7m shares 3,815 4,247 5,456 4.9% 7.0% 8.2%

Total 11,095 14.83 7,929 8,318 10,136 1.5% 4.7% 8.1% 7.4 6.8 5.6

Current IFX EV 8,121 10.86 11.38 € 7,929 8,318 10,136 1.5% 4.7% 8.1% 5.5 5.0 4.1
Implied 'stub' EV 4,991 6.67 EV/sales FY08 1.07 4,114 4,071 4,680 -1.7% 2.2% 8.0% 8.0 7.3 5.5 -1% 1% 6%
Implied valuation for Comms 170 0.23
Source: Company data, ABN AMRO estimates
3
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DISCLOSURES APPENDIX

Recommendation structure

Absolute performance, short term (trading) recommendation: A Trading Buy recommendation implies upside of 5% or more and a Trading Sell indicates downside
of 5% or more. The trading recommendation time horizon is 0-60 days. For Australian coverage, a Trading Buy recommendation implies upside of 5% or more
from the suggested entry price range, and a Trading Sell recommendation implies downside of 5% or more from the suggested entry price range. The trading
recommendation time horizon is 0-60 days.
Absolute performance, long term (fundamental) recommendation: The recommendation is based on implied upside/downside for the stock from the target price. A
Buy/Sell implies upside/downside of 10% or more and a Hold less than 10%. For listed property trusts (LPT) or real estate investment trusts (REIT) the
recommendation is based upon the target price plus the dividend yield, ie total return. A Buy implies a total return of 10% or more, a Hold 5-10% and a Sell less
than 5%. This structure applies to research on Asian and European stocks published from 1 November 2005; on Australian stocks from 7 November 2006 and on
continental European small and mid cap stocks from 23 November 2006. For UK small caps a Buy/Sell implies upside/downside of 10% or more, an Add/Reduce 5-
10% and a Hold less than 5%.
Performance parameters and horizon: Given the volatility of share prices and our pre-disposition not to change recommendations frequently, these performance
parameters should be interpreted flexibly. Performance in this context only reflects capital appreciation and the horizon is 12 months.
Sector relative to market: The sector view relative to the market is the responsibility of the strategy team. Overweight/Underweight implies upside/downside of
10% or more and Neutral implies less than 10% upside/downside.
Target price: The target price is the level the stock should currently trade at if the market were to accept the analyst's view of the stock and if the necessary
catalysts were in place to effect this change in perception within the performance horizon. In this way, therefore, the target price abstracts from the need to take a
view on the market or sector. If it is felt that the catalysts are not fully in place to effect a re-rating of the stock to its warranted value, the target price will differ
from 'fair' value.
Asset allocation: The asset allocation is the responsibility of the economics team. The recommended weight (Over, Neutral and Under) for equities, cash and bonds
is based on a number of metrics and does not relate to a particular size change in one variable.
Stock borrowing rating: The stock borrowing rating is the subjective view and responsibility of the ABN AMRO equity finance team: Easy implies ready availability.
Moderate implies some availability. Hard implies availability is tight. Impossible implies no availability.

Distribution of recommendations

The tables below show the distribution of ABN AMRO's recommendations (both long term and trading). The first column displays the distribution of
recommendations globally and the second column shows the distribution for the region. Numbers in brackets show the percentage for each category where ABN
AMRO has an investment banking relationship.

Long Term recommendations (as at 02 May 2007) Trading recommendations (as at 02 May 2007)
Global total (IB%) Europe total (IB%) Global total (IB%) Europe total (IB%)
Buy 625 (20) 250 (45) Trading Buy 11 (27) 5 (60)
Add 24 (54) 23 (57)
Hold 494 (19) 223 (37)
Reduce 0 (0) 0 (0)
Sell 139 (6) 52 (15) Trading Sell 4 (25) 1 (100)
Total (IB%) 1282 (19) 548 (39) Total (IB%) 15 (27) 6 (67)

Valuation and risks to target price

Infineon (RIC: IFXGn.DE, Rec: Buy, CP: €11.47, TP: €14.50): The downside risks to our DCF-based target price include: (1) a negative impact of the high
inventory levels in the channel; (2) a further slowdown in the automotive and smart-cards markets; (3) failure of the ramp-up and a negative impact from
competition in the wireless handset market; (4) a significant slowdown in the DRAM market; and (5) failure to achieve the cost reductions the company is seeking.

Infineon

Stock performance, recommendations and coverage (as at 1 May 2007) Trading recommendation
history (as at 02 May 2007)
Date Rec Analyst
16 Mar 2007 Trading Buy CA
11 Jan 2007 n/a CA
22 Nov 2006 Trading Buy CA
18 Nov 2006 n/a CA
18 Sep 2006 Trading Buy CA

Didier Scemama started covering this stock on 18 Aug 04
Moved to new recommendation structure between 1 November 2005 and 31 January 2006

Regulatory disclosures

Subject companies: IFXGn.DE
ABN AMRO ROTHSCHILD is appointed by Infineon as Co-Lead Manager of Qimonda AG's IPO offering.: IFXGn.DE
ABN AMRO has received compensation for investment banking services from this company, its subsidiaries or affiliates during the previous 12 months: IFXGn.DE
ABN AMRO expects to receive, or intends to seek, compensation during the next three months for investment banking services from this company, its subsidiaries
or affiliates: IFXGn.DE
ABN AMRO Rothschild was appointed as Joint Lead Manager for the GDR offering of Inotera Memories Inc.: IFXGn.DE

I NF I NE O N 3 M A Y 2 0 0 7
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13

DISCLOSURES APPENDIX

Global disclaimer
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I NF I NE O N 3 M A Y 2 0 0 7
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INFINEON: KEY FINANCIAL DATA

Income statement
€m FY05A FY06A FY07F FY08F
Revenue 6631 7929 8318 10136
Cost of sales -4774 -5854 -6099 -7203
Operating costs -719.0 -554.0 -557.9 -924.9
EBITDA 1138 1521 1661 2008
DDA & Impairment (ex gw) -1316 -1405 -1271 -1190
EBITA -178.0 116.0 390.3 818.3
Goodwill (amort/impaired) n/a n/a n/a n/a
EBIT -178.0 116.0 390.3 818.3
Net interest -9.00 -92.0 -45.0 -40.0
Associates (pre-tax) n/a n/a n/a n/a
Other pre-tax items -20.0 -142.0 -34.0 0.00
Reported PTP -207.0 -118.0 311.3 778.3
Taxation -120.0 -161.0 -161.4 -238.7
Minority interests -1.00 -1.00 0.00 0.00
Other post-tax items 0.00 0.00 0.00 0.00
Reported net profit -328.0 -280.0 149.9 539.6
Tot normalised items -20.0 -142.0 -34.0 0.00
Normalised EBITDA 1138 1521 1661 2008
Normalised PTP -187.0 24.0 345.3 778.3
Normalised net profit -308.0 -138.0 183.9 539.6
Source: Company data, ABN AMRO forecasts year to Sep

Balance sheet
Cash & market secs (1) 2006 2655 1833 3159
Other current assets 2568 3026 3047 3435
Tangible fixed assets 3751 3764 3605 3515
Intang assets (incl gw) n/a n/a n/a n/a
Oth non-curr assets 1959 1740 1941 1821
Total assets 10284 11185 10426 11930
Short term debt (2) 99.0 797.0 251.0 1201
Trade & oth current liab 1566 1807 1639 1848
Long term debt (3) 1566 1208 1147 1147
Oth non-current liab 1424 1218 1092 818.9
Total liabilities 4655 5030 4129 5015
Total equity (incl min) 5629 6155 6297 6915
Total liab & sh equity 10284 11185 10426 11930
Net debt (2+3-1) -341.0 -650.0 -434.5 -810.7
Source: Company data, ABN AMRO forecasts year ended Sep

Cash flow statement
EBITDA 1138 1521 1661 2008
Change in working capital -76.0 -407.0 -428.8 94.9
Net interest (pd) / rec -9.00 -92.0 -45.0 -40.0
Taxes paid -120.0 -161.0 -161.4 -238.7
Other oper cash items 111.0 244.0 76.0 64.0
Cash flow from ops (1) 1044 1105 1102 1889
Capex (2) -1368 -1253 -1284 -1100
Disposals/(acquisitions) 0.00 0.00 0.00 0.00
Other investing cash flow 1130 429.0 9.00 0.00
Cash flow from invest (3) -238.0 -824.0 -1275 -1100
Incr / (decr) in equity 23.0 0.00 4.00 0.00
Incr / (decr) in debt -289.0 762.0 25.0 0.00
Ordinary dividend paid n/a n/a n/a n/a
Preferred dividends (4) n/a n/a n/a n/a
Other financing cash flow 5.00 0.00 0.00 0.00
Cash flow from fin (5) -261.0 762.0 29.0 0.00
Forex & disc ops (6) n/a n/a n/a n/a
Inc/(decr) cash (1+3+5+6) 545.0 1043 -143.8 788.5
Equity FCF (1+2+4) -324.0 -148.0 -181.8 788.5
Lines in bold can be derived from the immediately preceding lines. year to Sep
Source: Company data, ABN AMRO forecasts

I NF I NE O N 3 M A Y 2 0 0 7
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