Thu, Aug 04, 2011 - Page 12 News List

UMC’s quarterly profit drops steeply

TWO-YEAR LOW:The chipmaker is fast approaching the break-even point of 70 percent of factory utilization as end-demand for handsets and TVs slows down

By Lisa Wang  /  Staff Reporter

United Microelectronics Corp (UMC, 聯電), the world’s second-largest contract chipmaker, yesterday posted its weakest quarterly net profit in two years and the chipmaker expected excessive inventory levels and slack end-demand for handsets and TVs to drive down revenues by as much as 13 percent this quarter.

Factory utilization is expected to drop to just above 70 percent in the current quarter, approaching the chipmaker’s break-even point, UMC said.

Operating margin will also plunge to a low single-digit percentage this quarter, from 11.8 percent in the second quarter, when factory usage fell to 87 percent in a downward spiral that started last summer, the company said.

The quarterly decline in revenue would be the biggest in the past 10 years during the normally busy third quarter, chief executive Sun Shih-wei (孫世偉) told investors.

The decrease was deeper than Credit Suisse’s forecast of a 10 percent drop and an increase of 2 percent that was forecast by most analysts.

“As we enter the third quarter, certain macroeconomic factors, such as the European and US sovereign debt issues and emerging market inflation, have led to unfavorable global economic conditions,” Sun said.

“These macroeconomic uncertainties have led customers to adopt a conservative outlook. Furthermore, customers have adjusted their order patterns so that hey can consume elevated inventory levels because of overstocking following the earthquake and tsunami in Japan in March,” he added.

However, UMC kept this year’s capital spending unchanged at US$1.8 billion as the company hopes to catch up with its main rivals by ramping up production of advanced 28-nanometer and 40-nanometer technologies. The world’s largest contract chipmaker, Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), announced last week that it was cutting its capital expenditure by 5 percent this year to US$7.4 billion because of slumping demand.

During the April-to-June period, UMC’s net income shrank 28.8 percent to NT$3.19 billion (US$110 million), the lowest level since the second quarter of 2009, from NT$4.48 billion in the first quarter. The results were a 39 percent decline from the NT$5.27 billion posted a year ago.

Sun said end demand in the communications sector would be the weakest this quarter, when compared with computers and consumer electronics. Chips used in communications are the biggest source of revenue at UMC, making up 53 percent of last quarter’s revenues.

“UMC is also facing some customer specific shortfalls,” Credit Suisse analyst Randy Abrams said in a research note yesterday.

The chipmaker’s major handset chip customers, including Infineon Technologies AG, Texas Instruments Inc, Xilix Inc and MediaTek Inc (聯發科), are having difficulties for a variety of reasons, such as loss of market share and product revamps, and some of them are gradually shifting production to TSMC, Abrams said.

UMC yesterday gave a more cautious third-quarter outlook than its peers, such as TSMC, Abrams said.

TSMC said last week that the latest slowdown would be a brief one and that it expected revenues to contract by between 6 percent and 8 percent this quarter from last quarter.

Abrams blamed lower exposure to smartphones and tablet devices for UMC’s larger decline in revenue.

“The ongoing situation [weak market demand] could last for several months, or even several quarters,” Sun said.

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