Sat, May 03, 2008 - Page 12 News List

Vanguard gross margin expected to drop 11 points

SLIDING Weak demand and the rising NT dollar were expected to contribute to the drop in gross margin from 28 percent last quarter to 17 percent this quarter

By Lisa Wang  /  STAFF REPORTER

Vanguard International Semiconductor Corp (世界先進), which makes chips used in flat panels for computers and televisions, yesterday projected a faster-than-expected decline in gross margin for the current quarter because of weakening demand and accelerating erosion stemming from the rising local currency.

Gross margin may drop by up to 11 percentage points to 17 percent during the current quarter, compared to 28 percent in the first quarter, Vanguard president Hsu Chung-shi (徐中時) told investors.

“For the driver IC [for PC and TV liquid-crystal-display (LCD) panels] business, most customers are conservative about billing. Demand is sliding,” Hsu said. “Demand this year is slower than last year and a year before.”

FLAT REVENUES

Vanguard is a 36-percent owned subsidiary of the world’s top chipmaker Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), which is also one of Vanguard’s customers.

Sales of driver ICs used in LCD panels accounted for more than 60 percent of its total revenues of NT$4.53 billion (US$159 million) last quarter. Revenues are expected to be flat during the current quarter compared to last quarter, Hsu said.

“Unfavorable foreign exchange is also an important factor behind lower gross margin,” said Robert Hsieh (謝徽榮), a vice president of Vanguard.

Erosion from a stronger local currency against the US dollar may accelerate this quarter by taking away around five percentage points from the chipmaker’s gross margin, Hsieh said.

DRAM PORTION

“The gross margin decline is bigger than I thought. Dynamic random access memory (DRAM) should be the main reason. DRAM margin is poor,” said Eric Chen (陳慧明), a semiconductor industry analyst with BNP Paribas Securities (Taiwan) Co.

As long as the DRAM business makes up a significant portion of Vanguard’s revenues, “it will be difficult for the company to report remarkable earnings this year,” Chen said.

He issued a “hold” recommendation on shares of the Hsinchu-based chipmaker.

Computer memory, or DRAM, business may make up a bigger share — more than 20 percent — of its revenues, this quarter, compared to 14 percent last quarter, Vanguard said.

The company primarily supplies DRAM chips to local memory chipmaker Winbond Electronics Corp (華邦電子) on contract basis, which is part of the agreement in a NT$8.3 billion deal made last year when Vanguard purchased a less advanced 8-inch plant from Winbond.

Factory usage may fall further by several percentage points this quarter from 87 percent last quarter due to sluggish demand and stable ramp-up of the new factory from Winbond, Hsu said.

“We are expecting a recovery in the third quarter, which is usually the strongest quarter of the year based on the company’s history over the past years,” Hsu said.

On Wednesday, Vanguard reported a 14 percent decline in net income to NT$766 million, or NT$0.45 a share, for the first quarter, compared to NT$896 million, or NT$0.53 per share, a year earlier.

The earnings results has deducted 15 percent of its net income for employee bonuses.

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