Chip Maker UMC Posts Higher Profit

JANUARY 26, 2011 THE WALL STREET JOURNAL

By LORRAINE LUK
TAIPEI—United Microelectronics Corp., the world's second-largest contract chip manufacturer by revenue, reported a 46% gain in fourth-quarter net profit because of strong growth in wafer shipments, but said Wednesday that economic uncertainties in the U.S. and emerging markets may weigh on demand for chips this year.
Net profit for the three months ended Dec. 31 rose to 6.42 billion New Taiwan dollars (US$219 million) from NT$4.40 billion, slightly above the average NT$6.04 billion forecast of eight analysts polled earlier. Revenue rose 13% to NT$31.32 billion from NT$27.75 billion.
Increasing popularity of smartphones and tablet personal computers have helped chip sales, supporting the continued recovery of the semiconductor industry from the global financial crisis. But currency pressures and a possible weakening in demand later this year could weigh on earnings growth in coming quarters, analysts said.
"After experiencing growth momentum for over a year and a half at UMC, we anticipate first-quarter revenue to decline slightly due to the strengthening of the local currency against the U.S. dollar and certain customers undergoing product and technology-node transitions," UMC Chief Executive Shih-Wei Sun said at an investors' conference after the company issued the fourth-quarter results. Technology upgrades by customers will affect the company's product mix and weigh on revenue in the current quarter, he said.
Mr. Sun said demand for chips used in tablets and smartphones remains strong and will drive the company's growth this year, though UMC said it expects wafer shipments to decline in the low single-digits in the first quarter from the previous quarter. It shipped 1.13 million eight-inch-equivalent wafers in the fourth quarter, down from 1.20 million in the third quarter.
"[Demand from the] consumer segment will be relatively weaker than computer and communications segments in the current quarter. We also closely monitor the uncertainties caused by the unemployment rate in the U.S. and economic development in the emerging countries," he said.
UMC said its gross profit margin narrowed to 32.1% in the fourth quarter from 32.6% in the third quarter. It said it expects its first-quarter gross margin to be above 25% and its average selling price to fall by a low to mid single-digit from the fourth quarter. It didn't disclose its fourth-quarter figure.
Mr. Sun said the company plans capital spending of US$1.8 billion this year, the same amount as last year, to expand production using 40-nanometer process technology and to migrate to the more advanced 28 nanometer process technology. A chip's transistor components and the spaces between them are measured in nanometers. The smaller and more closely transistors can be packed together, the more powerful the chip.
He said 40-nanometer chips will be the company's main revenue driver this year and that he expects the chips to account for 10% of UMC's revenue in the second half of the year, up from 5% last year.
UMC's capacity utilization rate was 94% in the three months ended Dec. 31, down from over 99% in the previous three months. The firm said it expects its utilization rate to fall to around 90% in the first quarter.
To seek a new growth driver, UMC has joined other major technology companies in Taiwan, including larger rival Taiwan Semiconductor Manufacturing Co. and AU Optronics Corp., in expanding into the fast-growing renewable energy market. UMC has invested more than US$1 billion in companies including solar module company NexPower Technology, solar cell maker Topcell Solar International Co. and solar product trading company SolarGate Technology Corp.
Chief Financial Officer Chitung Liu said he expects the company's solar energy business to contribute a profit in one to two years.
HSBC on Wednesday raised UMC's target price to NT$20.00 (69 U.S. cents) from NT$16.50, citing better-than-expected first-quarter guidance and higher estimates for 2011. It forecast revenue growth of 10% this year with less acute margin pressure due to relatively lower depreciation costs.