UMC predicts recovery after Q1 earnings fall

UMC's first quarter earnings fell, but the chip maker predicts a third quarter rebound.

United Microelectronics Corporation (UMC), the world's second biggest contract chipmaker, has reported that its first quarter earnings fell due to wider industry troubles, but said the second quarter should mark a bottom for the company.

"We believe some of our customers finished clearing excess chip inventories in the first quarter, particularly makers of chips for consumer electronics devices," UMC's chief executive officer, Jackson Hu, said.

Chip prices fell faster than the company expected in the three months ending March 31, he said, but he also noted particular strength in demand for chips used in LCD (liquid crystal display) screens.

UMC's revenue for the first quarter dropped to $NT20.29 billion ($US637 million as of March 31, the last day of the period reported), down 20 per cent compared to the same period last year. Net income fell 78 per cent to NT$1.52 billion, or $NT0.09 per share, slightly better than the consensus mean analyst forecast according to a poll by Thomson One Analytics. The survey had predicted UMC posting a slight profit for the quarter.

However, the company credited most of its net income to nonoperating gains, mainly sales of stock held in other companies.

The first three months of the calendar year are normally weak as consumers take a break from shopping during the year-end holiday season. But a chip glut has exacerbated troubles for chip makers.

On Tuesday, UMC's main rival, Taiwan Semiconductor Manufacturing Co (TSMC), also reported that its earnings dropped from a year ago.

Sales of chips used in communications devices fell during the first quarter, while consumer electronics increased a bit, UMC said.

Demand for UMC's chip manufacturing services from Europe dropped the most, while Asia increased and the US remained even.

The second quarter could be the bottom for UMC during the current industry downturn, with better sales in mobile phones and consumer electronics set to help boost business in the third and fourth quarters, Hu said.

UMC expects shipments to rise in the second quarter. However, the proportion of its production lines in use will probably drop to 60 per cent, from 63 per cent in the first quarter, as new production lines come on stream, outpacing the expected rise in shipments, the company said.

Average selling prices could decline by as much as 9 per cent: Contract chip makers in China were offering low prices, forcing UMC to match them, said Hu. The ongoing investigation into the company's relationship with Chinese chipmaker, He Jian Technology (Suzhou) has had no impact on operations, UMC said. The Taiwanese government has been investigating whether UMC broke investment and technology transfer rules with He Jian.

"Accusations that UMC transferred patents to He Jian are false," Hu said.

Government approval for He Jian to grant UMC a 15 per cent stake in its company would be very positive for UMC shareholders, he said.

He Jian offered UMC the stake in return for consulting help in establishing the company and its facilities in China, but it was subject to Taiwanese government approval.

Taiwan carefully controls chip investments to China because it fears Taiwanese jobs could be lost and that its technology could be used to bolster Chinese military prowess. Taiwan and China separated in 1949 amid civil war, and China has threatened to take the island by force if it declares independence.

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