TSMC, UMC see light at end of tunnel after soft 1Q

February 8, 2007 – Taiwan foundries Taiwan Semiconductor Manufacturing Corp. (TSMC) and United Microelectronics Corp. (UMC) both posted 4Q06 results that showed dents from an inventory correction, but both firms expect that to ease out by 2Q, and both are inching up their spending plans for 2007.

UMC said 4Q profits rose 87% from the same period a year ago, even though revenues slipped about 5% during the same period. Compared with the previous quarter, net profits slumped 34% to $172.6 million, on 6% lower revenues of $792.4 million. For all of 2006, UMC profits jumped more than fourfold to $989.9 million, while revenues increased about 15% to $3.16 billion.

Capacity utilization fell to 76%, partly due to expansions at Fab 12A (Taiwan) and Fab 12i (Singapore), where the company is planning to add more capacity (~4% and 12%, respectively) in 1Q07. Wafer shipments declined by about 2% during the quarter, and average selling prices (ASP) for 4Q were down 5% sequentially in US dollar terms, mainly due fewer 0.13-micron shipments and more 0.35um shipments in the mix.

For 1Q, UMC projects profits to fall further to about breakeven levels, with both wafer shipments and ASPs decreasing by 5%-6%, and utilization rates falling to about 70%. Customer inventory issues are expected to keep wafer shipments down until 2Q, the company said.

CEO Jackson Hu predicted “mild growth” for the overall foundry market, with an inventory correction in 1Q07 and a “smooth” recovery in 2Q, followed by strong demand in the second half of the year.

“The number one goal for everyone within UMC is to quickly increase capacity utilization to improve company profits,” he said, in a statement, adding that advanced technology development progress will help expand the foundry’s customer base and increase utilization rates. “As long as we strategically time our capacity expansion, we will see the economic rewards.”

The foundry also said it is increasing its capex budget slightly in 2007, from $1.0 billion to a range of $1.0-$1.2 billion, mainly to invest more in 300mm R&D at the expense of 300mm volume manufacturing. That includes “a few million dollars” for shell construction of its second 300mm fab in the Tainan Science Park.

A few days ago, TSMC also reported its 4Q financials: sales and profits down 9% and 14% sequentially to ~$850 million and $2.3 billion, respectively, representing year-on-year decreases of about 5% and 14%.

Rick Tsai, TSMC president/CEO, predicted “quite a challenging quarter” in 1Q for the company as an inventory correction bottoms out. He cited optimism due to “no major issues” from end markets, citing better-than-expected sales during the holiday season from major electronics retailers including Best Buy and Circuit City.

TSMC’s 2007 capex is also slightly higher than last year, to $2.6-$2.8 billion, vs. $2.5 billion in 2006. Spending will be “backend-loaded,” similar to 2006 spending patterns, according to Tsai, speaking during the company’s quarterly conference call. He added that overall capacity increases will also closely track, but somewhat lower than, 2006’s 18% increase.

He acknowledged that the company’s ramp of chips using 65nm process technologies “has been somewhat slower than expected,” due in part to an inventory correction, largely weighted toward handsets, but should accelerate starting in 2Q with handsets recovering and increased use with graphics and consumer-oriented processors.


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