World’s top foundries to feel pinch of economic uncertainty in Q3

While the top two foundries expect slower sales for Q3, number 3 Chartered is also expecting a net loss, but is forging ahead with its 45-nm process offering for 2009.

By Ann Steffora Mutschler, Senior Editor -- Electronic News, 7/31/2008

In spite of a weakening global macroeconomic environment, Hsin-Chu, Taiwan-based Taiwan Semiconductor Manufacturing Co (TSMC) today announced consolidated revenue of $2.9 billion (88.14 billion New Taiwanese dollars), a 17.6% year-over-year increase, net income up 12.9% to $949.2 million (28.77 billion NT), and diluted earnings per share up 16.3% to 18 cents per ADS unit (1.12 NT) for its Q2 ended June 30.

On a sequential basis, Q2 results represent a 0.8% increase in revenue, an increase of 2.2% in net income, and an increase of 2.1% in diluted EPS.

The world’s leading foundry said Q2 business improved from Q1, although revenue and margins continued to be negatively affected by the strength of the NT dollar. Despite the negative impact from the foreign exchange rate, margins have exceeded guidance due to significant cost improvement and higher levels of wafer movements. The company said. Q2 gross margin was 45.6%, operating margin was 34.5%, and net margin was 32.6%.

In terms of process technologies, 0.13-micron and below accounted for 63% of wafer revenues with 90-nm process technology accounting for 28% and 65-nm reaching 18% of total wafer sales.

Lora Ho, VP and CFO of TSMC commented in a statement, “Even with a weakening macroeconomic environment, our second quarter results were either in line with or slightly higher than guidance announced at the end of April, thanks to our continual effort in driving cost reduction and increasing utilization rates.”

Based on its current business outlook, TSMC expects Q3 revenue growth to be below seasonality, and expects revenue to be between $2.9 to $3 billion (90 and 92 billion NT); gross profit margin to be between 45 and 47%; and operating profit margin to be between 34 and 36%.

Meanwhile, the world’s second largest foundry United Microelectronics Corp (UMC) reported its Q2 results that included a sequential revenue increase of 5.1% to $833 million (25.24 billion NT); gross profit margin was 23%; operating margin of 9.3%. UMC’s Q2 net income increased to $79 million (2.4 billion NT). And EPS was $0.032 (19 cents NT)

Gross profit was $189.3 million (5.8 billion NT), or 23% of revenue, compared to $116.9 million (3.58 billion NT), or 14.9% of Q1 revenue. Operating income increased 1,132% sequentially to $76.4 million (2.34 billion NT), or 9.3% of Q2 revenue. UMC attributed better capacity utilization and activities on cost control as the key reasons for the increase in revenue, gross profit and operating income during Q2. Net income in Q2 was $78.3 million (2.4 billion NT), an increase of 1,064% compared to $6.7 million (206 million) in Q1.

UMC’s Q2 EPS were 19 cents NT, while earnings per ADS (EPADS) were less than one cent, compared to Q1 EPS of (2 cents NT) and EPADS of less than one cent. One ADS represents five Taiwan-listed ordinary shares.

“As the newly appointed CEO of UMC, I am happy to report that in Q2 2008 UMC saw improvements in revenue, gross margin, and operating margin compared to Q1,” said UMC CEO, Dr. Shih-Wei Sun, in a statement.

“These results were in line with our previously released guidance. Customer demand for advanced 90nm and 65nm technologies remained steady, with combined revenue from these process nodes totaling 36%. Looking forward to Q3, we see that the environment is more challenging than we previously expected. In general, customers have adopted a cautious attitude due to the rising uncertainty in the global economy. We will continue to monitor the situation closely and adjust our operations accordingly,” Sun continued.

“Going forward as CEO, my top priority is to ensure that UMC’s foundry solutions deliver the greatest benefits to our global customer base. This will enable us to increase our market share among our key foundry customers and maximize profitability. UMC will also continue to focus on operational efficiency and cost control activities through an emphasis on teamwork and execution. At the same time, we will continue to invest in the development of advanced technologies that are critical to our future growth and profitability. UMC is well positioned to weather the headwinds that face the overall economy due to our strengths in R&D and manufacturing, as well as our sound financial structure and our excellent team that has a wealth of experience dealing with the cyclical nature of the semiconductor industry."

The percentage of UMC’s Q2 revenue from 90-nm business increased to 31%, compared to 30% in Q1, mainly due to stronger demand for wireless communication chips. The percentage of revenue from 90-nm and below was 36% in Q2.

Interestingly, the percentage of UMC’s revenue from fabless customers increased to 71% in Q2 from 70% in Q1, and capacity utilization was up to 85% in Q2 from 73% in Q1.

UMC maintained its original CAPEX plans for 2008 of $500 to $700 million. Capital expenditure for UMC during Q2 was $82 million. Accumulated CAPEX in the first half was $269 million.

Looking ahead to Q3, UMC expects Q3 wafer shipments to be flat from Q2, with wafer ASPs in US$ to decrease by approximately 0 to 2% points. The company expects an impact from currency fluctuation to be 0 to -2% on revenue. Capacity utilization should remain at approximately 80%; gross profit margin to be in high teen % points; the consumer segment expected to be the strongest followed by the communication and computer segments

Chartered sees revenue increase y/y and q/q

In the third spot, Milpitas, Calif-based Chartered Semiconductor Manufacturing Ltd announced its Q2 revenues last week of $457.6 million, up 41.1% year-over-year and up 17.9% sequentially. Revenues including Chartered’s share of SMP were $482.5 million, up 36.7% year-over-year, and up 16.5% sequentially.

Chartered’s Q2 net income of $43.4 million, which included a tax benefit of $49.5 million, compared to net loss of $25.3 million in Q2 2007 and net income of $2.4 million in Q1.

“Chartered revenues in the second quarter of 2008 were up 18% and revenues including our share of SMP were up 17% compared to the previous quarter, in line with the guidance we provided on June 10, 2008. Revenues from 0.13-micron and below technologies, including those from 65-nm, accounted for 49% of our total business base revenues. Revenues from 65nm alone, including both SOI and bulk technologies, grew approximately 50% sequentially and represented 13% of our total business base revenues. We ended the quarter with a net income of approximately $43 million, which included a tax benefit of $50 million,” noted George Thomas, senior VP and CFO of Chartered, in a statement.

Looking ahead to Q3, Thomas continued, “Between the second half of the year 2007 and the first half of the year 2008, we posted revenue growth of approximately 20% at the Chartered level and approximately 18% including our share of SMP revenues. If we exclude the Fab 3E revenues from the second quarter of 2008, this growth translates to approximately 14% and approximately 13% respectively, compared to the foundry industry which was roughly flat during the same period. After this significant growth, we are now seeing growth moderating into the third quarter, and we expect Chartered revenues and revenues including our share of SMP to grow approximately 4% and 3% respectively.”

Despite the moderate overall revenue growth, Chartered said it is seeing healthy momentum at the leading edge as it ramps its 65-nm programs with revenues from 65-nm alone expected to grow around 43% sequentially and represent approximately 18% of its total business base revenues.

Revenues from 0.13-micron and below technologies, including those from 65-nm, are expected to grow approximately 16% sequentially and account for approximately 55% of Chartered’s total business base revenues.

“Growth in these technology nodes is expected to be partly offset by the decline in revenues from 0.18-, 0.25- and 0.35-micron technology nodes. After comprehending an approximately 6% sequential increase in capacity, we expect utilization in the third quarter to be approximately 84%. Primarily due to the expected cost impact of approximately $11 million resulting from lower wafer starts during the quarter, higher depreciation of approximately $9 million due to Fab 7 ramp up, and the absence of non-operating gains which we had in previous quarters, we expect to post a net loss of approximately $29 million for the third quarter.”

Further, Chia Song Hwee, president and CEO of Chartered noted, “We expect margin pressure to continue in the near term as we are moving away from the impact of unfavorable work-in-progress build-up in this and the prior quarter, to that of dealing with the challenges of rising input costs. Crude oil price increases, a weaker US dollar and input cost increases in items such as chemicals, process gases and supplies are nullifying the results of our cost reduction and productivity improvement efforts. Specifically, we expect a substantial increase in our energy cost in the fourth quarter due to the expiration of our long-term fixed rate contract for power supply. Due to the unprecedented situation and limited opportunities to offset such increases through internal cost reduction measures in the near term, we have initiated discussions with our customers to share the cost increases.”

“Though we have not seen any broad-based reduction in our customer demand, we continue to be cautious about the worsening economic situation as we manage our business. However, we are not losing sight of the longer-term opportunities ahead of us, and we are at a point where we can no longer defer enabling 45-nm capacity. An additional cash-flow based capital expenditure of $160 million for the year is required to support our early customers at 45-nm in 2009 as well as for rebalancing the mix between 65-nm and 45-nm. As we further ramp our 65-nm programs and execute on our 45-nm offering and production ramp, we are addressing the margin challenges internally as well as in collaboration with our customers and suppliers in order to improve our financial performance,” Chia concluded.

SMIC boosts revenue by 24% y/y

The world’s fourth largest semiconductor manufacturing foundry, Shanghai, China-based Semiconductor Manufacturing International Corp (SMIC), reported Monday that its Q2 non-DRAM revenue increased by 3.8% sequentially to $330.7 million and was 24% higher year-over-year.

However, overall revenue decreased to $342.9 million in Q2, down 5.4% sequentially and down 8.5% year-over-year due to reduced DRAM shipments following the decision in Q1 to exit the commodity DRAM business.

DRAM as a proportion of total revenue fell to 3.6% in Q2 from 12.1% in Q1, while logic sales from 0.13-micron full-flow and 90-nm technology nodes have increased by 14.5% in Q2 on a sequential basis.

Q2 gross margin was 6.1% compared to -9% in Q1, while simplified ASP increased by 6.9% sequentially to $853 per wafer from $798 in Q1.

SMIC recorded a net loss of $45.6 million in Q2 due to the transitional stage of converting the DRAM capacity in its Beijing facility into logic production.

The company reminded that during Q1, it reached an agreement with customers to exit the commodity DRAM business, and considered it an indicator of impairment in regard to the long-lived assets of the company’s Beijing facility in accordance with SFAS 144. As such, the company has recorded an impairment loss of $105.8 million, and has restated its Q1 financial results.

Dr. Richard Chang, CEO of SMIC, said in a statement, “Overall, as expected, our revenue for the second quarter of 2008 declined slightly to $342.9 million, but due to our gain in logic foundry services, we were able to significantly narrow our quarterly losses to $45.6 million. The losses in the second quarter were primarily due to the fact that we are still transitioning from majority DRAM production to pure logic production in our Beijing facility.”

“The process of converting DRAM capacity into logic has been successful. Quite a number of new logic tape-outs with high yield are now in customer qualification, and a few have entered into production. Our total logic wafer shipments increased by 7.8% in the second quarter, and are expected to increase at least 30% in 2008, as compared to 2007. The ramp-up of our logic capacity remains critical to our strategy, as it will better position us to match the market demand for our services,” he continued.

“In the second quarter, we witnessed rather strong customer demand, despite the severe macroeconomic situation in the US. The demand for our 8-inch fab service has been very strong consecutively every month for the second quarter,” he pointed out.

“We foresee persistently increased customer demand throughout the remainder of 2008, particularly in communications and consumer applications, such as DTV, mobile TV, and wireless networking ICs, which comprise the major portion of our business. On a regional basis, revenue from North America remains solid, while revenue from the Asia Pacific region, including Mainland China and Taiwan, has seen the highest growth,” he went on.

“We are continuing our efforts in developing advanced technology nodes as more and more of our customers have migrated to finer line width technologies.  Logic output for the 0.13-micron and 90-nm technology nodes is expected to increase around 10% in the third quarter.  We have also commenced our internal 65-nm library and bit cell development, and our 45-nm collaboration with IBM is proceeding smoothly in accordance to schedule,” Chang concluded.