Vanguard lowers financial target

DRAM maker and wafer foundry service provider Vanguard International Semiconductor Corp (世界先進), yesterday lowered its financial target for the year as a result of the unpredicted and steep fall in the spot price of DRAM.

The TAISDAQ-listed company lowered its revenue target for the year by 3.8 percent to NT$19.9 billion, and its pretax profit target by 30.5 percent to NT$2.5 billion. While lower than the original target, a pretax profit in the black would still end three successive years of pretax losses.

Vanguard also announced that revenue for October rose 65 percent year-on-year to NT$1.81 billion. However, the figure is down 6.4 percent from September's record high, and breaks a five-month run of successive monthly highs.

"They were too optimistic at the end of the second quarter about prospects for the second half," said an analyst at Tachan Securities Co. "A large portion of their revenue still comes from DRAM, so they will be affected by the fall in the spot price," he said.

The company, in which Taiwan Semiconductor Manufacturing Corp (TSMC, 台積電) holds a 25 percent stake, had raised its financial target in August after posting strong first half profits and expecting a traditionally strong second half of the year driven by strong DRAM prices.

However, the spot price for the industry standard 64-megabit 8X8 DRAM chip has fallen by more than 50 percent since August to an average price of US$3.85 yesterday on DRAMeXchange.com, an e-market place for DRAM trading.

"The price we had estimated was much higher than the price now," said an official at Vanguard, whose chairman, Morris Chang (張忠謀), is also the chairman of TSMC. In a statement to the Taisdaq yesterday, the company said that the fall in the DRAM price had affected key factors in its original forecast and forced it to revise its target accordingly.

With the readjustment downward expected and already factored in by the market, the company's stock rose 6.83 percent yesterday to NT$21.90.

Previously a pure DRAM manufacturer, the company announced in January that it would convert into a specialized wafer foundry business. However, DRAM products still account for about 60 percent of revenue, the Vanguard official said, so fluctuations in the DRAM price continue to have a significant effect on profits.

"Before Vanguard lowered their forecast, Powerchip and Nan Ya lowered theirs," said Kelvin Chiang, a fund manager at Barits Investment Services. "This is in line with expectations," he said.

Nan Ya Technology Corp and Powerchip Semiconductor, in which Vanguard holds a 9 percent stake, are major local DRAM makers.

Vanguard's move into the more stable foundry business will provide it with more protection against price fluctuations than some of the pure DRAM makers like Powerchip and Mosel Vitelic Inc, Chiang said. However, its costs may be higher than some of the other DRAM makers because of its less advanced production process.

The company uses its most advanced technology for DRAM products and has been migrating production from the 0.2 micron to the 0.18 micron manufacturing process, said Andrew Teng, an analyst at Taiwan International Securities Corp.

However, "the migration progress might not have gone as well as planned," he said.

Meanwhile, Vanguard may have allocated 40 percent of its capacity to wafer production to reduce volatility from the DRAM price, said Teng. But its use of the less advanced 0.5 micron and 0.35 micron technology production processes for logic IC products deprived it of a niche in a foundry market driven by much larger players with the resources to invest in, research and develop more advanced production processes, said Teng.