2Q06 was a solid quarter for Taiwan’s top two foundries, although each raised some concerns about inventory levels among customers and some cloudy outlooks for the quarters ahead.

Taiwan Semiconductor Manufacturing Co. (TSMC) said 2Q06 revenues rose 5.5% sequentially to approximately $2.50 billion, up about 37% from 2Q05. On a sequential basis, revenues from consumer and communication applications increased by 21% and 19%, respectively, while revenues from computer applications declined by 16%. Consolidated net income was about $1.03 billion, up 4.3% sequentially and an 85% leap from the same period a year ago. Wafer shipments rose nearly 8% quarter-on-quarter and were up 47% year-on-year.

TSMC added about 3% total capacity to 1.7 million wafers/month (200mm equivalent), and total group capital spending totaled $664 million during the quarter, mostly to purchase 300mm production equipment. TSMC predicts 3Q06 results will be flat to slightly lower across the board, with revenues in a range of $2.4-$2.5 billion, as customers work off an inventory correction.

The foundry plans to add another 5.8% capacity (200mm equivalent) in 3Q and another 6.3% in 4Q — including a 20,000 wafers/month ramp each quarter at its new Fab 14 300mm facility, and similar ramp at its 200mm fab in Shanghai — for a total 2006 capacity of more than seven million wafers/month. TSMC’s total FY06 capital expenditure projections remain unchanged, in a range of $2.6-$2.8 billion.

Meanwhile, United Microelectronics Corp. (UMC) posted a 20x year-on-year increase in 2Q06 net profits to about $187 million, on 32% higher sales of about $796 million, although a big chunk of those earnings ($136.2 million) came from the sale of ownership stakes in MediaTek Inc. and SirF Technology Holdings Inc. Sequentially, sales rose about 5%, but profits were cut in half, as margins were higher due to more shipments of 130nm and 90nm chips. Growth was strongest in consumer electronics segments, due to demand particularly for cell phones.

Echoing statements from rival foundry TSMC, UMC chairman and CEO Jackson Hu noted “a significant change in market conditions over the past three months,” including signs of higher inventories from some customers. ICs related to flat-panel displays and digital TVs are one sore spot, as overproduction in anticipation of the World Cup soccer event this summer, resulted in product buildup that will have to be digested, he said. Although 2Q inventories traditionally rise ahead of busy 3Q demand, Hu warned that “there are signs that demand is being postponed due to delays in the release of new CPUs and operating systems,” pointing to some inventory build-up at smaller handset providers.

For 3Q06, UMC projects revenues in 3Q06 will likely be flat, due to customers’ efforts to work off inventories. Capex plans for FY06 remain unchanged at $1.0 billion, and will be heavily loaded into the second half of the year (UMC spent only $346 million in 1H06), with 97% of investments going toward expansion and R&D at UMC’s two 300mm fabs, Fab 12A and Fab 12i, which accounted for 303,000 (200mm-equivalent) wafers/month in 2Q.