聯華電子 (UMC) 2007 Q2 法說會逐字稿

My name is Dan and I will be facilitating the conference call today.

I would like to welcome everyone to UMC's second-quarter 2007 earnings conference call.

All lines have been placed on mute to prevent background noise.

After the presentation, there will be a question and answer period.

Please follow the instructions at that time if you would like to ask a question.

For your information, this conference is now being broadcast live over the Internet.

A replay of the call will be available at www.UMC.com under the investor relations, investor events section through Tuesday, October 2, 2007.

Also, a telephone replay of the call will be available from 10 AM New York time and will run until midnight on August 2, 2007.

To access the replay, please call 888-286-8010, or 617-801-6888 if you're calling outside of the U.S.

The access code will be 28979718 throughout this period.

I would now like to turn the conference over to Mr.

Chitung Liu, CFO of UMC.

Thank you, operator.

Hello everyone.

This is Chitung and thank you for joining our second quarter conference call today.

Here, we also have Dr.

Jackson Hu, Chairman and CEO of UMC; and Mr.

Bowen Huang, Senior IR Manager.

Before we start our second quarter 2007 earnings conference call, I need to take a few seconds to go over our Safe Harbor policy.

Certain statements made during the course of our discussion today may constitute forward-looking statements that are based on management's current expectations and beliefs and are subject to a number risks and uncertainties that could cause actual results to differ materially, including risks that may [be beyond] the Company's control.

For this reason, please refer to UMC's filings with the securities authorities in the U.S.

and also in the ROC.

Now for the second quarter results.

For the first part of the call, I would like to give you a short summary of our second results.

Our revenue was NT$25.1 billion, which increased by 9% quarter-over-quarter compared to NT$23.3 billion in first quarter of 2007.

On a year-over-year revenue comparison, revenue decreased by 2.5% from NT$25.75 billion in second quarter '06.

Gross profit for the quarter was NT$4.96 billion, or 19.8% of revenue compared to NT$3.68 billion, or 16% of Q1 2007 revenue.

Operating profit was NT$1.23 billion, or 4.9% of revenue compared to NT$18 million dollars, or 0.1% of first quarter 2007 revenue.

Net income was NT$4.91 billion in second quarter 2007 compared to a net income of NT$1.46 billion in first quarter 2007.

EPS for the quarter was NT$0.28 and earnings per ADS where US$0.043.

This is a short summary of our first results and more details are available in the quarterly report which has been posted on our IR website.

Next, Dr.

Jackson Hu will provide you with the business update and our guidance for the third quarter of 2007.

Now I would like to turn the call over to Jackson.

Welcome everyone to our second quarter conference call.

We appreciate your participation on this call and your interest in UMC.

Before we move into the Q&A session which we always like to devote most amount of the time to, I will give you some insight on where we think we are heading in the third quarter.

Starting from June, we have seen a continuous reduction of our customers' inventory levels.

In fact, quite a few of them are currently experiencing inventory levels that are lower than normal.

This situation leads us to foresee very strong demand across the board for all applications in Q3.

Due to much improved product and the customer mixes, we are taking full advantage of this seasonally strong demand.

On the advanced technology front, we continue to work with several customers on multiple products.

The production [used] for 65 nm products have been very satisfactory.

However, we have also noticed that customer demand for 65 nm product is still in the early stage of the development and a meaningful percentage of revenue from 65 nm may not be seen until early 2008.

For 45 nm, we will have product takeout in Q3.

We believe that applications will make good use of the increasing chip density offered by Moore's Law which will enable integration of more and more features on a single chip.

The future of the semiconductor industry will be defined by the proliferation of this SoC.

Electronic product companies will utilize these chips to roll out a continuous stream of innovative products that feature increased functionality, lower power consumption and higher performance and current innovating products, such as the game console Wii and the iPhone can be manufactured more cost effectively.

Now let me provide you with the guidance for third quarter 2007.

Shipments are expected to increase by approximately 20%.

Wafer ASP in U.S.

dollars is expected to be flat from the previous quarter.

The capacity utilization rate will be approximately 90%.

As for profitability, gross profit margin will improve by approximately 5 points -- 5 percentage points.

The percentage of revenues from 90 nm and below will increase to 25%.

The Communications segment is expected to be the strongest, followed by Computer segment and Consumer segment.

Finally, our 2007 CapEx budget will be within the range of US$1 billion to US$1.2 billion.

This concludes my comments.

Thank you again for attending today's conference.

We certainly appreciate your continued interest in and in support of UMC, and we will now take your questions.

(OPERATOR INSTRUCTIONS).

Pranab Sarmah, Daiwa Securities.

Congratulations for a good set of results.

I have a couple of housekeeping questions and one strategic question.

So housekeeping is, Chitung, could you give us what would be the non-operating level on third quarter, any guidance on that line?

That non-operating profit should be equal or similar to that of second quarter, or slightly better.

As you may be aware, we have announced we are selling two of our invested companies, namely OTEC and ITE.

In the meantime, third quarter is the big season in terms of cash dividend collection.

We have collected cash dividend from our holdings in MediaTek and ProMOS already.

So altogether, we expect to see equal or higher non-operating income in the third quarter.

And then on all the other foundries are talking about basically a tight capacity on the mature fab, but your guidance (inaudible) you have a tight -- that means your capacity to license are stronger on 12-inch fab.

Any particular reason behind that?

Any of your mature technology customers are migrating to that advanced technology, some color in that area?

No, no, no, the mature, the technology also have a very strong demand, but what we are seen is that the 12-inch fabs have higher loading than the 18-inch fabs, but both are well loaded.

And your 45 nm tape-out is coming out in the third quarter.

Could you give us some idea like who this customer is from what segment?

Is it from the handset side?

Communications.

Communication.

And last question is on your China investment side.

I think your Board has already approved that China (inaudible) investment [part].

What is the time frame you're looking at to apply for Taiwan government and potentially get some approvals?

The following approval is nothing related to semiconductor, it's actually a joint investment with one of our invested companies, Unimicron, in the PCB space.

They are somewhat constrained by their limits on the usable (inaudible) ratios to their (inaudible) capitals.

So they invite UMC to do a joint investment.

It's a small amount from UMC's perspective, but it is purely this PCB operation.

Up to now, we have not got any approval from the board yet regarding semiconductor side of the investment.

Okay, thank you.

Shailesh Jaitly, Nomura Singapore.

Firstly, if you could help explain as to what proportion of your business currently is coming from wireless.

And when you talk about the strength in the next quarter, is it primarily driven by single-chip solutions, or is it more broad-based?

In Q2, 65% of our revenue was contributed by communication products, which consists of both wireless and wireline.

Can you provide the split there?

The split?

It's about 4 to 1, so 80% are for wireless and 20% for wireline.

And going forward, when you talk about the strength, my question was, was it primarily driven by single-chip solutions, or is that across the board among all your wireless customers?

Pretty much across the board for all the wireless customers.

And SoC, right now is still in my opinion in the early stage in the industry and it will proliferate over time.

Thanks.

And would you provide some sense as to what proportion of your business was 65 nano, and where do you expect it by the end of the year?

I think for Q2, it's around 2% around from 65.

As we highlighted, we don't expect to see meaningful volume until early next year.

So it may not be very much different throughout the rest of the year, in terms of (inaudible) revenue.

Of course, it should increase, but nothing very meaningful (inaudible).

Thanks a lot, Chitung.

Steven Pelayo, HSBC.

I'm curious if your guidance for depreciation this year on a total basis is still down 10%.

And then, what is your guidance for depreciation that actually just occurs within the COGS line?

The guidance is pretty much the same, but just for your precise calculation's sake, we provide a more precise guidance, which is depreciation should be down 12% year-over-year compared to last year.

And the quarterly increase in third quarter should be 3 to 4%.

And there will be a higher increase in Q4.

When I look year-over-year here, your revenues are roughly the same in the second quarter.

However, your depreciation was up around 39% of revenues, and now in this most recent quarter, about 31.5%, so about 7.5 percentage points of gross margin right there alone on the much lower depreciation.

I believe your depreciations in COGS is down about 20% year-over-year.

So since your total gross margin reported is about the same year-over-year, it really means that the variable or cash COGS component has gone up quite significantly.

I'm wondering if that's an opportunity for gross margin upside going forward, if we're going to be able to see that cash COGS component come down.

It's not that kind of straightforward calculation.

The depreciation also has been allocated to R&D and other operations as well, not only to the cost of goods sold.

So the way you calculate may not be 100% correct.

But again, just to pinpoint the depreciation guidance, this year, we expect to see somewhere between 12-13% of decrease in depreciation year-over-year, and third quarter we expect to see 3 to 4% increase quarter over quarter.

Okay.

I think the difficulty is really just trying to figure out the portion that is allocated to the cost of goods line versus other lines and overall.

We can chat more about that off-line.

Thank you.

Dan Heyler, Merrill Lynch.

I wanted to ask you a question on the pricing environment, if you could update us on how things have evolved relative to previous cycles.

Is it worse, better, or in-line with your experience in the industry?

On the pricing, there is pricing pressure on the leading edge, and -- but the blended ASP is still sustainable due to better product mixes.

And of course, the better utilization helped relieve some pricing pressure.

Okay.

As you typically enter an upturn, customers come back and place orders.

And I imagine they negotiate pricing with you a little more intensively as they have units.

Have you seen a more intense pricing pressure than in the past?

When the demand is strong, they use less of (MULTIPLE SPEAKERS).

So now you're moving into -- is it -- are you saying that pricing now is now moving more into a stable environment relative to, say, two quarters ago?

In the foreseeable future, or the foreseeable quarter, that is the case.

Okay.

And then on -- if you could talk a little bit about the overall engagement in activity on 65.

The issue there on the pickup, is it related to the end market readiness for next generation 65 nm parts, such as feature phones and other phones that you're waiting for market acceptance that are being tested, or is it a function of you getting qualified into those customers you're still working on getting designed in, or it's just a question on demand?

All of the above, and I cannot elaborate more.

As a matter of fact, we have engaged with 11 customers and we have more than 20 products at this stage, and five of them are in production.

However, we did notice that the [end of] market the demand is not as strong as we originally expected.

We also noticed that, due to the complexity, increasing complexity of the products, customers are taking longer to take out and to qualify the product.

So as a combined result, that is why the 65 nm revenue contribution we believed will be delayed through early next year.

Okay.

Then on the end demand side of that equation, what are customers telling you?

Is it more related to product launches?

Because I imagine it's next-generation product, right?

So are they waiting for signs of demand pickup before launching, or can they give you a better sense of when these products will be launched?

They did not give a very clear picture.

Okay, because there is quite a bit of 65 into feature phones and next-generation phones and those are starting to get launched, so I'm wondering why -- when you expect to see that benefit.

Depending on customers.

Okay, thank you.

Mark Fitzgerald, Banc of America Securities.

Thank you.

With the tight capacity, are you going to move ahead on a new 12-inch factory at this point?

Well, our CapEx expense -- CapEx plan for this year is unchanged.

But I'm saying, looking out into 2008?

2008, we will make that decision by the end of the year.

Okay.

And then the second issue us, on the 65 nm, kind the slowing, is there any issue here with the cost associated with your customers with the design costs going up so significantly that that's slowing customers down or preventing some customers from making the transition?

No, I don't think that is the reason.

And also, I explained this afternoon in Taipei that we are seeing, some of the customers are skipping nodes.

In other words, they do not follow the Moore's Law as closely as they used to.

To give you an example, one customer may skip, may consider 0.13 microns as a major node, and 90 nm as a minor node, and then [next], they skip to 65 nm as a major node again.

And whereas another customer may treat 90 nm as a major node and 65 nm as a minor node.

So due to maybe a couple of reasons in my opinion; number one, the complexity of the design is taking customers a longer time, especially the preparation of IP is taking time.

Secondly, customers, end customers, where they need more time to qualify the products.

So those two reasons contribute to the two skipping nodes situation.

Thank you.

Michael McConnell, Pacific Crest Securities.

I wanted to touch on something you alluded to earlier about the cadence maybe to which some of your customers are ramping the most current or leading-edge process node.

So you're basically saying that it was 65 nm, because the complexity of some of these devices is increasing, the ramp you've seen at some of the customers has been slower than maybe what you saw at 90 nm?

Is that correct?

I also said some other customers consider 65 nm as a major node.

But if we look at just 65 nm across the board, do you view the cadence to which you will be ramping that node relative to 90 nm to be at the same pace, or faster, or slower?

I think from a manufacturer ability point of view, 65 nm is a smooth node, actually, from 90 nm.

So from the technology readiness or manufacturability readiness point of view, 65 nm is ready.

Okay, but that is the process, but you have to also think about the design on that process.

So with the design complexity increasing, do you expect overall the cadence to which you're ramping, 65 nm, or the pace to be as moving up at the same rate as 90 nm?

Yes, I think it's just that initially, it will take a little bit longer.

And when customers are ready, then you will start to ramp.

And what about 45 nm?

What do you expect quarter that?

45 nm is, relatively speaking, it's (inaudible) a little bit earlier, right?

But I think for applications that can benefit from 45 nm, they are moving forward fast.

Thank you very much.

Sunil Gupta, Morgan Stanley.

Could I just go back to your earlier comments about wafer pricing environment?

You mentioned that the pricing erosion is quite steep at the leading-edge.

Is it only at 90 nm, or are you also seeing it at 0.13 micron?

And would it be fair to say that you're seeing more than 5% decline in pricing on the same node basis every quarter?

No, I would not give an exact percentage number because it's a very complex situation.

The customers' products may have a different layer, a different number of layers.

But, yes, for both 0.13 micron and the 90 nm, we see price pressure.

Okay.

And could you also provide an update on your [cap rate] reduction, a timetable as to -- if there have been any changes to that?

Yes.

We have sent in the application for the local authority, the [FSC], and they are in the process of reviewing it.

And if we follow a benchmark of other companies' similar case, we should receive the approval by mid of August.

After we receive the approval, we will provide a very detailed schedule to our investors and the expected cash return should happen in late September, early October.

It takes about 1.5 months after we receive the approval.

Okay, thank you.

Bhavin Shah, JP Morgan.

Can you clarify the depreciation comment again, and specifically if you can provide guidance on the depreciation [incurred] and cost of goods sold?

Is that also down 12% year-on-year, or is that a different number?

Overall, depreciation of the Company is down 12% year-over-year, and the third quarter will be up by 3 to 4% quarter-over-quarter, and we don't have guidance in terms of a breakdown.

Right.

Because generally, the cost of goods sold (inaudible) drags a little depreciation, and in order to get to a 12% decline year-on-year, your Q4 depreciation has to go up more than 20%.

No, our current calculation is to go up about 7% in Q4.

7%, right.

And any thoughts on where it might the next year on a year-on-year basis, as your mean that the CapEx remains roughly, let's say, at the same level?

Yes.

If we keep our current run rate, 2008, we're talking about 5 to 6% of the increase.

Okay.

And the capital spending in the second half of the year, is that going be for equipment, or for building up the facility for the next phase-up (inaudible)?

Next phase of 12 inch?

I guess [12-B].

Well, mainly for the -- extending the existing 12-inch facility capacity.

Okay, so it's for equipment?

Yes.

Okay, thank you.

Pranab Sarmah, Daiwa Securities.

I have a follow-up question.

Mr.

Jackson, about three months back, you had a very strong visibility for the third quarter number.

Now what type of visibility do you have for the fourth quarter?

We think the visibility that we have, the fourth quarter looks good.

Fourth quarter looks good.

That's as much as I can put.

That's fine, because last time you have given very strong guidance for third quarter three months back.

And on the mature technology node, would you consider some time maybe next year by converting any of the data DRAM fabs to logic fab if your demand increases significantly?

Indeed, it depends how [significantly is it significant].

In the meantime, we also noticed that there is plenty of [aging] capacity in the industry and that many of them tried to enter by offering very low, low price.

So we have to watch the situation.

And the last one is, you have given a very strong guidance of 90 nm sequential increase for third quarter.

Could you give us which product category by application you're seeing [those] growth?

Across the board -- communications, computer, and also even consumer products.

[At] 90 nm consumer product?

That is correct.

Okay, thank you.

Sunil Gupta, Morgan Stanley.

Jackson, I wanted to get your view on the inventory situation, particularly in the wireless communications segment.

I think earlier in the day, you mentioned that inventory at some of the customers is slow.

Is that specifically in wireless, is it across the board?

And what are these customers telling you?

Are they looking to replenish and [re-stock] some inventory, or do they just want to run with the lean inventory numbers that they have?

Of course, we cannot get -- we cannot disclose the customers' names.

But for awhile, as a category, I think that their inventory level is normal.

Okay.

So which area are you seeing the low inventories in that case?

I cannot talk about it specifically.

It's scattered around the application areas, and it's customer-dependent.

Okay.

And, are these customers telling you that they're going to rebuild their inventory; or given the demand outlook, are they happy to run with these lean inventories that they have?

Yes, I think we see strong order for them, that's the indication (inaudible).

Bhavin Shah, JP Morgan.

Just a follow-up.

What is the market value of the investments at the end of -- ?

Based upon the quarterly financial report, it's at least -- about NT$30 billion-plus.

Right.

And do you expect this to be -- I mean, there has obviously been still meaningful gains from disposal.

Do you think that will happen in '08 as well?

I cannot predict share price, but our policy has been continuously bring down our holdings in the mature non-core assets in a timely manner which will not affect gross share prices.

Thank you.

Dan Hyler, Merrill Lynch.

Thank you.

I had a question on your SOI developments, you made that announcement a little while ago.

Are you seeing much traction there in that business, and when would we see that contribute more meaningfully to revenue?

Would you please repeat again?

Oh, SOI.

Oh, SOI, sure.

Yes, we're continuously developing our SOI technology, and you may have noticed that [ARM] talk about that in the June DAC conference.

So we expect to have our IP ready in Q3, near the end of Q3, and then we can start to offer it to customers.

The first offering will be based on 65 nm.

Okay.

And so when would you start normally I guess the design and development stage and qualification?

Would that be contributing to revenue then more in the second half of '08, then, or would it be their first half of '08?

It's still a little too early to predict that.

We are talking to multiple customers.

Or put it this way -- multiple customers showed interest.

Is the result of you joining kind of the SOI [camp] -- I guess the complaints or the issues have been that there has not been a huge amount of IP.

Obviously, ARM is supporting it.

With UMC joining it, has that made an impact in terms of the interest in the level of IP development in SOI?

Definitely, that helps.

It enables customers who are interested in it.

Great, thanks.

And then a follow-up on your investment.

Chitung, can you remind me how much you currently own in MediaTek and Novatek, in terms of (MULTIPLE SPEAKERS)?

MediaTek, I recall, it's about 1.5%, and Novatek about 12%.

Great, thank you.

(OPERATOR INSTRUCTIONS).

At this time, there are no further questions in the queue.

I would now like to turn the call back over to Mr.

Liu for closing remarks.

Thank you, everyone.

With no more questions, we will conclude the call today.

Thank you for joining us.

If you have any additional questions, please do not hesitate to contact us directly.

And now, operator, back to you.

Thank you.

A link to the replay of this call will be available until the end of Tuesday, October 7, 2007, in the investor relations section of UMC web site.

A dial-in version of the replay can be accessed by calling 888-286-8010 if you are in the U.S., or at 617-801-6888 for international calls.

The dial-in replay will be available until midnight on August 2, 2007, New York time.

The access code is 28979718.

If you have any additional questions, please feel free to contact us directly.

Thank you all again and have a good day.