聯華電子 (UMC) 2010 Q4 法說會逐字稿

Welcome, everyone, to UMC's 2010 Q4 earnings conference call.

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

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

Please follow the instructions given at that time if you'd like to ask a question.

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

Webcast replay will be available within an hour after the conference is finished.

Please visit our website at www.umc.com under the Investor Relations Investor Events section.

I would now like to introduce Mr.

Richard Yu at Investor Relations at UMC.

Mr.

Yu, you may begin.

Thank you, and welcome to UMC's conference call for the fourth quarter of 2010.

With me today is the CEO of UMC, Dr.

Shih-Wei Sun, and the CFO, Mr.

Chitung Liu.

During this conference, we may make forward-looking statements based on management's current expectations and beliefs.

These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including risks that may be beyond the Company's control.

For these risks, please refer to UMC's filings with the SEC of the US and the ROC securities authorities.

I'd now like to introduce UMC's CFO Mr.

Chitung Liu to explain our Q4 2010 business results.

Thank you, Richard.

For the fourth quarter of 2010, revenue was TWD31.32b, a 4.1% quarter-over-quarter decrease from TWD32.65b in Q3 2010 and a 12.9% year-over-year increase from TWD27.75b in Q4 2009.

Gross margin was 32.1% with 21.1% in operating margin.

The net income was TWD6.42b and TWD0.52 earnings per ordinary shares.

In 2010, revenue for the full year was TWD120.43b with TWD23.9b net income and TWD1.91 earnings per share.

Above is a short summary for the results on Q4 2010.

More details are available in the quarterly report, which has been posted on our website.

I will now turn the call over to Dr.

Sun.

Thanks, Chitung.

With the Chinese New Year around the corner now, I would like to take this opportunity to wish everybody the best for a happy and a prosperous New Year.

Again, thank you, all, for joining us today.

As always, we appreciate your interest in UMC.

I will start with a brief summary of UMC's 2010 fourth quarter operating results and share with you our general operating status.

After that, I will provide you with the guidance for the first quarter of 2011.

We will then have the Q&A session to answer your questions.

First of all, I would like to reaffirm UMC's dedication to the customer-driven development of advanced technologies and the foundry manufacturing solutions.

This commitment has led to considerable success in our efforts to broaden our customer base, optimize product mix, and boost profit capability.

For 2010, wafer shipments reached a record high of approximately 4.52m 8-inch equivalent wafers with revenue hitting another record high of TWD120.4b.

Full-year operating profit, EPS, and an ROE of 11% also reached their highest levels in recent years.

2010 capital expenditures were $1.8b.

With the expansion of high-end capacities, 65-nanometer and below revenue contribution for the fourth quarter alone reached 35% with 40-nanometer products increasing to 5% of the total revenue.

Revenue contribution from 65-nanometer and below products for the full year grew an impressive 170% as well.

After experiencing growth momentum for over a year and a half at UMC, we anticipate revenue for the first quarter of 2011 to decline slightly due to appreciation of NT dollar, certain customers undergoing product and a technology-node transition, and other seasonal adjustments.

UMC is optimistic about demand for high-end chips this year with revenue contribution from 40-nanometer growing quarterly in 2011 to become a main revenue driver.

We will also begin 28-nanometer customer product pilot around the middle of this year.

To satisfy customers' technology and capacity requirements, while ensuring both stable growth and long-term ROE, we plan to invest about the same amount of CapEx as last year.

Looking ahead in 2011, UMC will build upon the solid foundation and continue advancing its technologies and service quality to provide its global customers the most appropriate foundry solution.

Now let me provide you with the guidance for the first quarter of 2011.

Wafer shipments will show a low single-digit percentage decline.

Wafer ASP in US dollars will decline in the low to mid single-digit percentage range.

Capacity utilization will be approximately 90%.

Gross margin will be over 25%.

The consumer segment will be relatively weaker than the computer and the communication segment.

2011 CapEx budget is approximately $1.8b.

That concludes my comments.

We are now ready for questions.

Operator, please open the lines up stat.

(Operator Instructions).

Your first question comes from the line of Randy Abrams of Credit Suisse.

Yes, hi, good evening.

I wanted to know if you could elaborate on the node transition you were talking about at some customers.

Is that a one-quarter transition that's taking place?

And is that a mix shift?

Or maybe if you can elaborate the transition that's going on in the business and give the duration if that's a one-quarter event.

So as mentioned in our press, it's just certain customers having their product transition.

And also node transitions.

Some have a transition.

Some lag or priority to support it.

That's whether it's a one quarter or not, we are managing it with our customers closely.

So we expect second quarter the mix will continue to improve.

Okay.

And if you could clarify the -- I guess the 8-inch versus 12-inch, where utilization if there's a meaningful difference on utilization between the two.

It's about similar.

Okay.

It's similar.

Okay.

And capacity growth, I want to make sure from the afternoon conference, 12-inch and 8-inch, if you could review what capacity growth for both of them will be in 2011 and if that's a year end to year end or a total-year capacity growth number.

So for the total year, total-year capacity for this year for global UMC will grow by 11%, 25% for 12-inch.

Okay, 25% for 12-inch, so 8-inch won't grow very much year over year.

We're focusing on the capacity conversion.

Okay.

That makes sense.

Okay.

And then the blended pricing, you had positive mix for a number of quarters this year.

If you could talk about the pricing outlook into the coming year, one, if there's a way to offset the material move in the NT dollar and then even for the core business if you see positive benefit, either from mix or a continued firm pricing environment, so if you could talk about what you see going into this year.

So let me focus on this coming quarter, I mean Q1.

So the blended ASP shift is mainly from the mix.

As far as the pricing or pricing erosion, it's well under control.

Okay.

No, that's good.

Okay.

If I could fit a last question, I think some fabless companies have reported a bit of inventory build this results season so far.

I guess if you could assess where your customers are at, if you're getting any hesitation, or if you think they're still in that mode that they need to rebuild inventory or where you see on that front right now.

From the recent earnings reports, you can also observe some companies are having higher inventory.

But that's the trend, which has been continuing from Q2 or Q3 from 2009.

Overall speaking, everybody's quite cautious about the inventory level.

So we believe they are higher level but quite healthy still at this moment.

Okay.

Thanks a lot.

Thank you.

(Operator Instructions).

Your next question comes from the line of Mehdi Hosseini of Susquehanna.

Yes, thanks for taking my question.

Your CapEx commentary is quite interesting when compared to some of the newcomers with a very aggressive spending.

Can you remind us of what is your strategy?

How do you view the competition?

And is this CapEx kind of a minimum and would therefore be revised as your customer order momentum improves?

So for UMC, we are trying very hard to build the self-sustainable business model.

So our depreciation plus our profit will sustain our ongoing CapEx plus the reasonable cash dividend payout ratio.

So under that assumption, our long-term CapEx-to-revenue ratio about 4-year average is about 30% to 35%, even though in the past year, in this year, it's quite high, I think maybe around 45% of our revenue ratio.

Under this assumption, we are still able to provide our customers timely and adequate solution.

Another factor we are trying very hard working on is on the capacity conversion from the mature node to the advanced node.

In addition, with this kind of a CapEx, we are pretty good, we can move on with our independent R&D capability in 28-nanometer I mentioned earlier in the afternoon.

We are going to do customer pilot in the middle of this year.

And volume production actually -- even 20-nanometer is well on the way.

I don't see any gating item at all.

I'm sorry.

You said a pilot line for 28-nanometer middle of this year, right?

Yes.

Okay.

Just as a quick follow up and to the extent that you can help me, your new competitor is obviously relying on an entirely different manufacturing architecture and hoping that they could change it to gate less as they migrate to 20-nanometer in the next several years.

As you continue to engage with your customers about the long-term capacity need, is that technology difference and obstacle for your customers to diversify their foundry partners?

Or how should we think about your customers' strategy as they look at a foundry supplier that has actually increased?

Yes, you probably mixed us up with somebody else.

We are gate-last on our --

Right.

And --

We are pretty much mainstream.

Right.

Global --

We are gate-last on our 20-nanometer, yes.

(multiple speakers)

Right.

So we are 28-nanometer, we are gate-last.

Even 20-nanometer, not only gate-last, we are high-k-last.

So we are pretty much mainstream.

We are on our way on the technology alignment and the migration.

I guess what I was trying to figure out is, as you talk to your customers about the long-term capacity requirement and with GlobalFoundries, and gate-first architecture, how do your customers communicate with you about that, the GlobalFoundries and their approach?

Is this something that you would consider as a significant risk to your business relationship with your customers?

Or is that something that GlobalFoundries has yet to prove that it could scale before you become concerned?

First of all, we don't talk with the other competitors too much.

But I think our gate-last approach is a great advantage for UMC's position.

Got it.

Thank you.

Thank you.

(Operator Instructions).

Your next question comes from the line of Steven Pelayo of HSBC.

Hey, thank you.

Just a few questions here, I'm curious if you could help us understand your 45-nanometer activity.

I think you've already said you want to get it to 10% of revenues by the end of this year.

But maybe talk about the number of customers and the number of products that are being worked on and how that's changed over the last quarter or two.

Yes, for 40-nanometer, we have around 40 product tape-outs.

And 20 of them are in production today, approximately from about 15 customers.

And there are certainly more in the pipeline.

Okay, excellent.

And then I'm curious when you look at your fourth quarter results, you guys obviously had strengthened IDMs, strengthened US and Europe, and obviously weakness in fabless in Asia, a pretty significant Asia revenue fall off.

So help me understand what that's going to look like in Q1.

Do we have to continue to count on these US, European IDMs?

Or does Asia fabless come back?

How should I be thinking about that?

I don't have the exact breakout.

We will report the numbers next quarter on Q1 situation.

But as I mentioned in the afternoon, recently, you can observe the -- because of the new killer applications, the US and European customers, because of their vicinity to the system companies, I guess they have a better handle on the new specs and the new applications.

Also, they are the early adopter of the advanced technologies.

So this wave, they seems -- are getting stronger.

But I think they're -- it's actually quite typical.

Give some time to the Asian design houses, they will catch up aggressively.

Okay.

And then I'm curious about your expectations as you look throughout 2011.

Do you feel like your mix richens back up again as you get into 2Q and that ASPs maybe return to kind of the fourth quarter levels?

Help me understand your kind of ASP outlook as you go through 2011.

We don't have an over yearly kind of forecast.

But as I mentioned earlier, the 40-nanometer will continue the growth momentum quarter by quarter, reaching 10% of revenue in the second half of this year.

So I also mentioned that because of the mix improvement from Q2, I think the mix and the blended ASP will continue to improve.

I guess what I'm getting at here is, given the increased concentration of US and Europe and IDMs, does that make it more difficult?

Do we need everybody firing on all cylinders to surpass the previous peak in revenue that you were doing back in 3Q?

And if that's true, do I need to wait one quarter, two quarter, three quarters?

How should I be thinking about that?

We will focus on the coming quarter first.

And as Dr.

Sun mentioned, we expect the enhancement mix improvement to kick in, in quarter two.

In terms of the magnitude and detailed numbers, we will have to wait until the next quarter.

Okay.

And then just a quick follow up to you, I know you guided your depreciation to be down less than -- or up less than 10% in 2011.

The fourth quarter, the portion in cost of goods sold was actually lower than what I had thought.

So is there a step function up here in Q1 to try to get that going?

What would be your first quarter depreciation in cost of goods sold?

I think roughly you can model in about 10% sequential increase.

Okay, excellent.

Thank you.

Thanks.

Your next question comes from the line of Sam Wang of Gartner.

Happy New Year to you, Dr.

Sun.

This is Samuel Wang.

I just have one simple question.

I understand that from your next quarter's guided number that your 12-inch total capacity will increase monthly by about 4,300 wafers.

Do you expect this will be the similar case for next few quarters?

Well, I don't have the exact number.

But for the overall UMC capacity increase, I have the rough number for -- Q2 would have the largest percentage increase, I think over 5% capacity increase quarter over quarter.

The other quarters, it's about a two-ish kind of a percentage every quarter.

Thank you.

I mean Q1 and Q3, Q4.

Thank you.

Thank you.

Your next question comes from the line of Pranab Sarmah of Daiwa Capital.

Hi, good afternoon, gentlemen.

It's Pranab from Daiwa.

I have two questions.

The first one is could you give some color on the linearity in the first quarter revenue, how you look on the monthly basis, starting from January onwards?

So because of the less working days in February, so February was the trough for the Q1.

So March will be above January?

That is what we can look at?

I mean, January and March?

Yes, March sales.

Yes, so February's lower.

Okay.

Good.

And then the second one is -- looks like your capacity expansion will be -- 2011 will be slightly lower than your peers.

Do you fear you are going to lose some of the market share in 2011?

Again, our strategy's about really balancing the market share and the profitability.

And also again, as I mentioned, we are working very hard on capacity conversion.

Lastly, you can see we are doing pretty good on converting lots of 12-inch capacity to 65-nanometer.

And we plan to do similar on 40-nanometer and moving forward.

Would it be fair to say, like at least on the advanced technology, 65- and 40-nanometer, you'd be able to maintain your market share?

Or how do you look in that area?

I cannot project those kind of numbers at this moment because I really don't know the other competitors' situation.

Okay.

And the last one is could you give us some color, like out of your communication business, how many percent is going to smartphone related area?

That is a high-growth area now.

And what percent of your revenue is going to tablet-related product, any rough color?

Again, I don't have the numbers.

Communication covers a lot of our business.

Yes, okay.

Yes.

(multiple speakers) high-growth area in future.

If you can just give us some color, that would be helpful.

I don't have the number.

Also, somebody mentioned that tablets should belong to the computing segment.

So it's very gray now.

Okay.

All right.

Thank you.

Have a good quarter ahead.

Yes, thank you very much.

Your next question comes from the line of Aaron Husok of Lanexa Global.

Great.

Thanks for taking my question.

Maybe first, just to clarify, I think I heard you say the gross margin in Q1 would be over 25%.

But I was reading some notes from your -- from some analysts talking about your earlier call in Taiwan, they talked about gross margin guidance of low 30s in Q1.

Can you just clarify what you think your gross margin will be in Q1?

It's written in the press.

It's over 25%.

Okay.

So you're saying over 25%, not saying low 30s.

Over 25%, yes.

Okay.

Can you kind of walk me through why the gross margin falls so much in Q1 compared to Q4 when it seems like, your utilization's holding in pretty well, and pricing's not down that much.

The biggest portion is the NT dollar appreciation.

We are factoring assuming a 7%, approximately 7% impact from the NT dollar appreciation.

And also, we guided some relatively minor ASP decline.

Okay.

Okay.

When you look at your guidance for a small ASP decline, are you starting to see GlobalFoundries and Samsung Foundry come up more in customer conversations, as those companies have made large CapEx commitments this year?

Are customers starting to use them as pricing leverage against you or not really?

Again, when we deal with our customers, we really don't talk too much about our competitors.

We are focusing on our service and their requirements.

Okay, great.

Thank you.

Thank you very much.

(Operator Instructions).

And there are no audio questions at this time.

I'd like to turn it over to management for closing remarks.

Thank you.

And thank you, everyone, for your interest in UMC.

Please feel free to contact us directly if you have additional questions.

And, operator, back to you for the closing comment.

Thank you.

If you would like to participate in UMC's conference, there will be a webcast replay within an hour.

Please visit www.umc.com under the Investor Relations investor event section.

You may now disconnect.

Goodbye.