UMC posts steep net loss, outlook remains bleak

United Microelectronics Corp (聯電), the world's second-largest contract chipmaker, announced losses totaling NT$1.85 billion (US$53.3 million) for the period April to June at a stock investors' conference yesterday.

The steep second-quarter loss was twice as bad as most analysts' forecasts and a far cry from the same period last year, when UMC posted a profit of NT$12.07 billion (US$348 million).

"The second quarter was worse than expected," said Henry Wang (王漢寧), electronics analyst at Entrust Securities Corp (永昌證券). "I'm not so positive about semiconductor [industry] performance in the second half of the year."

On predictions for the next quarter, UMC chairman Robert Tsao (曹興誠) painted a bleak picture, saying his company's utilization rate -- which keeps track of how many manufacturing lines are churning out customer orders -- will drop to 30 percent from its current level of 45 percent.

He also expected sales to decline 15 percent to 20 percent between now and the end of the third quarter in September -- leading to a another net loss for UMC. The third quarter, however, will be the bottom, UMC said.

"Our fourth quarter will be a little bit better than our third quarter," said John Hsuan (宣明智), vice chairman of UMC.

Analysts blamed UMC's second-quarter loss on over-dependence on the telecom sector for chip orders. UMC customers, like US-based Xilinx Inc, a top designer of chips for networking equipment, have seen orders plummet after multinationals such as JDS Uniphase Corp, Cisco Systems Inc and Nortel Networks Ltd announced steep losses and took billions of dollars in charges to write off excess inventory.

The problem in the telecom sector is so severe that Intel CEO Craig Barrett said Monday that it would take another six to 12 months for the communications chip market to turn around.

One of the most damaging aspects of UMC's bottom line was a one-time charge on inventory and investment losses of NT$2.3 billion (US$66.3 million). To bump up the numbers, however, UMC cashed in on government tax credits valued at NT$1.2 billion.

Both UMC and rival Taiwan Semiconductor Manufacturing Co (台積電) receive government tax credits in return for new plant and equipment spending in Taiwan. The companies can choose when to cash in on the tax credits, and both chose to take a large portion during the second quarter.

Had TSMC opted not to take a tax credit, it would have suffered a second-quarter loss of NT$870 million (US$25 million) instead of the NT$312 million (US$8.9 million) profit the company reported. TSMC's tax credit in the second quarter totaled NT$1.18 billion (US$34 million).

The only good news to come out of the UMC report is in progress made using new technology. UMC is ramping up production on new 12-inch semiconductor lines. The new wafers are expected to increase cost efficiency by 30 percent over old technology.

Also See UMC Inside