UMC likely to suffer a loss for 2Q

United Microelectronics Corp (UMC, 聯電), the second-largest maker of chips to other companies' specifications, will probably say it turned to a loss in the second quarter as sales fell by more than a third.

UMC may post a loss of NT$775.7 million (US$22.1 million), or NT$0.5 a share, in the three months to June, compared with a net income of NT$12.07 billion, or NT$1.10, a year ago, according to the average estimate of six analysts surveyed.

Sales fell to NT$15.3 billion from NT$24.4 billion.

UMC, which said 48 percent of its sales in the first quarter came from customers of communications chips such as Xilinx Inc, forecast operating losses in the second and third quarters as some of its largest clients cut orders. UMC could turn to a profit toward the end of the year, investors said.

"The third quarter may be the bottom of UMC's cycle," said David Yu, who manages the US$40 million Taipei Fund, which includes UMC shares, at the National Investment Trust Co (建弘投信). "The company is likely to report a profit in the fourth quarter."

Xilinx said that its net income for the quarter ended in June fell 80 percent to US$18.5 million from a year ago. The company, which designs chips for networking equipment made by Cisco Systems Inc and Lucent Technologies Inc, was one of UMC's largest customers in the first quarter this year.

Infineon Technologies AG, also among UMC's largest customers in the first quarter, makes chips for mobile phones and other communications products. Infineon has cut orders with UMC to keep its own plants operating closer to full capacity, analysts said.

UMC will report earnings today, after the Taiwan stock market closes.

While UMC's chip business will probably recover only by the fourth quarter, earnings in the second and third quarters will be boosted from selling shares in chip-design affiliates such as Novatek Microelectronics Corp and Mediatek Inc (聯發科技), analysts said.

``When it comes to the bottom line in the second quarter, UMC will get an NT$300 million non-operating gain from the listing of Novatek,'' said Rick Hsu, an analyst with Nomura Securities Co (野村證券).

UMC may even report a profit in the third quarter from the listing of Mediatek, he said.

Mediatek, which analysts consider UMC's largest customer after Xilinx and Infineon cut orders, first sold shares to the public on July 23.

UMC's operations will also benefit from new technology the company is investing in, analysts said. UMC and its larger rival, Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), are two of fewer than 10 companies worldwide that are investing in the production of 300mm silicon wafers.

These dinner-plate-sized wafers will more than double the number of chips yielded from the 200mm wafers more commonly made today and help cut the cost of production by almost a third, analysts said.

UMC has started producing 300mm wafers at its Japanese unit Trecenti, which is a venture with Hitachi Ltd. UMC plans to start production from another 300mm plant in Taiwan by the third quarter and is building a third factory for the wafers in Singapore at an estimated cost of US$3.6 billion.

Still, UMC, which is now operating at about 45 percent of its production capacity, may be forced to scale back investment in the larger wafers, analysts said.

``I expect UMC to cut production of 300mm wafers to 5,000 per month instead of the original target of 10,000 per month by the end of this year,'' said Andrew Lu, an analyst with Salomon Smith Barney Securities Taiwan. The company will probably cut capital expenditure for this year to about US$900 million from the original US$1.5 billion, he said.