United Microelectronics Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2023

There are 11 speakers on the call.

Operator

Welcome everyone to UMC's 2023 Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question and answer session. 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 has finished.

Operator

Please visit our website, www.umc.com, under the Investor Relations, Investors, Events section. And now, I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. Mr. Lin, please begin.

Speaker 1

Thank you, and welcome to UMC's conference call for the Q3 of 2023. I'm joined by Mr. Jason Wang, President of UMC and Mr. Chitung Liu, CFO of UMC. In a moment, We will hear our CFO present the 3rd quarter financial results followed by our President's key message to address UMC's focus and Q4 2023 guidance.

Speaker 1

Once our President and CFO complete their remarks, there will be a Q and A section. UNC's quarterly financial reports are available at our website, www.unc.com, under the Investors Financial section. During this conference, we may make forward looking statements based on management's current expectations These forward looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including the risks that may be beyond the company's control. For a more detailed description of these risks and uncertainties. Please refer to our recent and subsequent filings with the SEC and the ROCE's security authorities.

Speaker 1

During this conference, you may view our financial presentation material, which is being broadcast live through the Internet. Now, I would like to introduce UMC's CFO, Mr. Qi Dong Liu, to discuss UMC's Q3 2023 financial results.

Speaker 2

Thank you, Michael. I'd like to go through the Q3 2023 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on Page 4, the Q3 of 2023, Consolidated revenue was TWD57.1 billion with gross margin at 35.9 percent. Net income attributable to the shareholder of the parent was NT16 billion dollars And the earnings per ordinary shares were $1.29 which is slightly better than the previous quarter of 1.27 And our shipment in the 3rd quarter declined sequentially about 2%. And capacity utilization Page 5 is the income statement for the Q3 and revenue grew 1.4% sequentially to NT 57,000,000,000 due to better mix and also better blended ASP as well as helped by the favorable exchange rate.

Speaker 2

Gross margin remained somewhat similar to the previous quarter at 35.9 Operating income reached about RMB15.96 billion which is equivalent to RMB1.29 EPS in the Q3 of 2023. On Page 6 is the 1st 9 months performance. Because of the downturn of the cycle, We witnessed around 20.5% year over year decline in our top line, which was TWD 167.5 billion. Gross margin rate dropped from 45 0.8% in the previous year to the 1st 3 quarters of the year of 2023 of 35.8 percent And EPS for the 1st 3 quarters of the year reached $3.87 per share. On Page 7, the cash on hand is still around TWD140 1,000,000,000 with the total asset It's more than RMB 547,000,000,000.

Speaker 2

On Page 8, Our blended ASP, as I mentioned earlier, due to the better mix and also the difference in between 12 inches and 8 inches Wafer capacity utilization rate, our ASP blended ASP in the Q3 continued to edge up in the Q3 of 2023. For revenue breakdown on Page 9, Asia remains the biggest segment of the pie around 58%, which grew about 2 percentage points from the previous quarter. Europe and North America remained unchanged when Japan declined by about 2 percentage in terms of revenue breakdown. IDM versus fabless on Page 10 remain unchanged quarter over quarter. On Page 11, we see a small increase in communication, which is 46% in the 3rd quarter.

Speaker 2

And consumer dropped from 26% in the 2nd quarter to 23% in the Q3 of 2023. On Page 12, along with our increased capacity coming out of P6 in 22 and 28 nanometers, Our revenue also grew accordingly, now reached 32% in the Q3 of 2023. For total revenue for RMB 49 meter and below in the 3rd quarter reached 45%, which are compared to 41% in the previous quarter. For capacity breakdown on a quarterly basis on Page 13, as P6 continue to have new capacity come on stream, We see about more than 1% capacity increase in the 3rd quarter. And following quarter in Q4, we expect to see more than 2% Sequential capacity growth also mainly due to the capacity increase in our Thailand P6 facility.

Speaker 2

Last page of my presentation is foundry CapEx, which currently running on track And its budget to be remain unchanged around US3 $1,000,000,000 for year 2023. So the above is a summary of UMC results for Q3 of 2023. More details are available in the report, which has been posted on our website. I will now turn the call over to President of UMC, Mr. Jason Wang.

Speaker 3

Thank you, Chidong. Good evening, everyone. Here, I would like to share UMC's 3rd quarter results. During the Q3, despite a 2.3% decrease in wafer shipments, Quarterly revenue and gross margin remained firm quarter over quarter, which is primarily attributed to the demand strength In Computing and Communication segment, continuous product mix enhancement as well as a favorable currency movement. From end market perspective, strength in computing application was propelled by LCD controllers, Wi Fi, codec and touch IC controllers, while shipments in communication segments increased due to demand for RF front end IC and networking chips.

Speaker 3

Looking back at 2023, although foundry industry experienced a significant High in market demand. UMC maintains solid structural profitability supported by furnace in blended ASP due to continuous product mix optimization efforts and the increased contribution from specialty technologies. As UMC continues to introduce new specialty technology to solidify our differentiation, we will strengthen the competitiveness of our customers and enhance their respective market position. For the 4th quarter, With the recent rush order from PC and smartphones, we expect demand has gradually stabilized. However, customers still employ a cautious and conservative approach in maintaining a lean inventory level, while automotive business condition appear challenging.

Speaker 3

For 2024, we anticipate the production ramp of our 12A P6PAD will further enhance revenue contribution from 22 and 28 nanometers, continuing the robust This is traction for UMC. In addition, through our technology leadership, we will ramp up our offering on 22 nanometer derivative products, which will further our specialty technology product pipeline. Now, let's move on to the Q4 2023 guidance. Our wafer shipment will decline by approximately 5%. ASP in U.

Speaker 3

S. Dollar will remain flat. Gross margin will be in the low 30% range. Capacity utilization rate will be in the low 60% range. Our 2023 cash based CapEx will be budgeted at US3 $1,000,000,000 That concludes my comments.

Speaker 3

Thank you all for your attention. And now we are ready for questions.

Operator

Thank you, President And ladies and gentlemen, we will now begin our question and answer session. Thank you. And our first question is from Sunny Ling, UBS, go ahead please.

Speaker 4

Good afternoon. Thank you for taking my questions. So my first question is on gross margin. Q1 I mean, Q3 gross margin was actually better than guidance. But even with that Q4 gross margin, it's guided to drop towards low 30%.

Speaker 4

And so what's the key factors affecting gross margin into Q4?

Speaker 3

Well, first of all, for Q4 gross margin guidance will be at the low 30% range, mainly due to a decline in utilization As we expected, there will be probably a 5% decline in shipments.

Speaker 4

Got it. Then on the overall pricing environment, are you seeing any differences, I. E, intensifying competition because of the Lower demand recovery portfolio coming few quarters?

Speaker 3

Well, I mean, we're very much aware of the market situation and we We respect the foundry market and pricing trend. We're aware of the market dynamic and competitive landscape, So we will close monitoring the market and align with our customer on pricing position to ensure our customers' competitiveness. And along with securing their market share, that will be our objective. UMC maintained our pricing strategy. In addition, we do believe our value added technology, Manufacturing quality and capacity alignment that supports our customers to enhance their market position.

Speaker 3

However, we observe the 8 inches market landscape has been intensified, like you said, but we may have to adjust some pricing for some market segments to align with the market dynamics. For the 12 inches business, we will remember on our pricing position, which will reflect from Adam.

Speaker 4

Got it. Thank you very much. That's very clear. So my second question is on 20 nanometer. UMC has developed a fairly strong presence in some of the products like OLED driver, Wi Fi, ISP, etcetera.

Speaker 4

But I believe some of your competitors are also trying to ramp up capacities and capabilities, especially for OLED driver and WiFi. And so going forward, looking into next 2, 3 years, how should we think about the overall competitive landscape for 28 nanometer? And what are some of the new product opportunities that you will look to ramp in the coming few years?

Speaker 3

Well, I mean, there's A couple questions. What is our current 28 nanometer outlook, right? For the 22 and the 28 nanometer loading, we have remained resilient amid near term market volatility. Well, thanks to our customers' stickiness, our diversified product portfolio and technology differentiation, And we will continue to expand our 22 nanometer and 28 nanometer market share with application like All eight driver ISP, Wi Fi, SoC processors, while we are working with the leading Companies to bring up more applications on 22 and 28 nanometer platform. As far as the competition, We do believe there's always a competition there and we will strive to compete with that, Particularly in the 28 high voltage space you mentioned, Well, we believe 1st of all, we believe the OLED market will continue to grow and we will continue to maintain our leadership technology position and the market share position, even though we are collaborating with multiple leading customers in those key markets.

Speaker 4

Got it. Thank you very much.

Operator

Thank you. Next question, Nicholas Barrett, Macquarie. Go ahead please.

Speaker 5

Yes. Hi. When you guide for 4Q wafer shipment, it declined 5% Q on Q. Is there any segment specifically that we can attribute this to? And what I mean in particular, you mentioned better demand from computer and communication in 3Q.

Speaker 5

Is it Still the case in 4Q or what is changing into 4Q that you could talk about? Thank you.

Speaker 3

Sure. For the Q4 outlook, and currently, we see the PC and the Chinese smartphone segment will remain in line with Q3. However, the for the automotive market, given that the customer have been Accumulating backlog from early last year to probably Q1 this year, we expect higher than expected inventory buildup already. As a result, our auto business is projected to decline in Q4. But 4 years, Automotive contribution will still count for mid teens as a percentage of our wafer revenues.

Speaker 5

Thank you. Do you I don't think you report your revenue exposure to the Industrial segment, but Do you see similar trend in industrial?

Speaker 3

It's similar, but it's actually better than automotive right now. They both automotive and industrial is covered under the others, but the major decline is coming mostly from automotive space.

Speaker 5

Thank you. Maybe for Zhitong,

Speaker 6

Any updated view on depreciation

Speaker 1

this year compared to last year?

Speaker 5

This year, please like

Speaker 2

Yes. In terms of absolute depreciation expenses, This year, 2023, is likely to be the bottom of recent years. We probably will witness the lowest point In terms of absolute depreciation expenses in 2023, going to 2024, because of our P6 Expansion in Thailand, coupled with the shale construction in Singapore, the overall depreciation will start And the increased rate in 2024 will be more than double digit, which will provide a more precise number precise range in the next quarter's conference call.

Speaker 5

I understand next quarter, Titian, but my mechanical model, very mechanical projection with Percentage of PP and E tells me next year depreciation could go up 25%. Does that sound Vaguely, Assimo?

Speaker 2

Well, again, this year, we will see a 5% to 10% decline first. So it's a really recent low In terms of annual numbers, by next year, 2024, yes, your number is in the ballpark.

Speaker 1

Thank you.

Operator

Thank you. Next one, Gokul Hariharan, JPMorgan. Go ahead please.

Speaker 7

Yes. Hi. Thanks for taking my questions. First of all, Jason, could you talk a little bit about all this capacity that's been announced And coming online in so many places, but especially in China, we start to hear a lot from your customers also about pretty Address the price code from Chinese foundries and some of your customers starting to consider some of the capacity as well. So my question is like a little bit longer term.

Speaker 7

How do you think about pricing, given that the foundry industry has seen a pretty nice price increase through the last 2, 3 years, the pandemic years especially. And what kind of price premium can UMC maintain in like 28, 40, 65 nanometer kind of nodes. Who are some of these more aggressive competitors that are coming up? And also could you kind of refresh our memory on what is your current LPA coverage given that you have some of the New capacity that is coming on that has come online with pretty high LTA coverage?

Speaker 3

Well, okay. Yeah, sure. The Well, I mean, the competition is always going to be there. As you said, there's many new capacity announced, particularly coming out from the China. And from UMC, we have always strived to maintain our competitiveness through a few areas.

Speaker 3

One is the continuous technology innovation. 2nd is diversify the production side with a sizable capacity offering, and which has actually become increasingly important. 3rd is the manufacturing excellence. We all know both cycle time quality as well as the yield is so important to customer and for them to be competitive. And the 4th is the with the broader customer base and the product With this compelling differentiation, we believe we can continue to provide a reliable and dependable path to secure future growth for our customers.

Speaker 3

So that's pretty much on a higher level. Your question relates to In terms of the pricing, like I mentioned earlier, we respect the market dynamics and we will stay competitive in supporting our customer to be competitive. And Right now, the we have discussed and continue aligning with our customer, usually on an annual basis So one off pricing alignments and we will continue with that practice and with The understanding of the market outlook and for that, there will be a different Pricing position in terms of different technology nodes, like you said, for 'twenty eight, and we are remaining resilient and amid the near term market volatility as well as the forward looking product pipeline. And so we feel rather Comfortable about the confidence about our 28 nanometers, for the mature 12 inches outlook, We will transition into more specialty technology for our mature 12 inches note and where we foresee promising new opportunities, which coming into notebook and tablet space, such as RFSOI, non volatile memory and high voltage. And we anticipate 55 nanometer and 40 nanometer will be a mainstream for RFSOI and MCU for a broader range of the market, including the wireless, automotive and industrial application.

Speaker 3

So again, we will stay competitive and then we will aligned with the market dynamics and to support our customers in terms of the commercial needs.

Speaker 7

Got it. Thanks, Nikan. Could you also refresh your memory on roughly what is your SBA coverage now? I think it used to be about 30% to 40%, but looks like that's gone up given the new capacity that is coming.

Speaker 3

You're talking about NTA or LTA?

Speaker 7

LTA, sorry, LTA.

Speaker 3

The LTA has been stays fairly flat. It's about 25% to 30% coverage. And We've been reporting many times in the past. The LTA still is a mechanism To support both customer and UMC on the longer term perspective and particularly given the recent market dynamics And we both examine our current LTA quality as well as the status on the LTAs. And because our customer continue to want to make sure their supply resilience and align with our interest of protecting our investment, So, many LTAs being reviewed and we actually believe those LTAs have mutual commitment as children.

Speaker 3

So the 25% 30% remain fairly resilient at this time.

Speaker 7

Okay. One follow-up on the LPAs. Are you seeing any price downward negotiations on any of your LPAs given that you mentioned that you're seeing some of the reviews

Speaker 3

on the Well, during the downturn cycle, we definitely work with our customer And look at the market situation and given a change in the demand and supply dynamics, we But between the UMC and our customer, we remain confident in the long term objective. But in the short term, we do have some tactics and flexibility to make the customer and UMC collective selected to navigate through this market fluctuation. So yes, there are some flexibility in terms of that. With the long term contractual obligation commitments, they are still intact.

Speaker 7

Understood. Thank you. One last question from me. How do you think about capacity expansion Given the downturn seems to be lasting a little bit longer than expected and you're running at 60% or low-60s utilization exiting the year, Do you have any thinking about pushing out some capacity expansion further, especially for some of the new capacity in Singapore? Importantly, so because depreciation burden is also rising quite a bit going into next year.

Speaker 3

Absolutely. For the P6, we're already in the process of ramping up. So it's Harder to make an adjustment on those. So we anticipate our 12AP6 monthly capacity will still reach to 12 ks per month by end of 2023, and it will reach its design capacity of 31.5 ks per month by September 2024 and that's still there. And for the P3 Singapore, we have Deployed the clean room construction, so the clean room will still be ready by the first half of twenty twenty four.

Speaker 3

And but however, we expect the P3 capacity ramp starting time at April 2025 without change. And because we have alignment with some of the customer already, however, the rent profile will be moderated based on the market dynamics, which that has some adjustment to the

Speaker 8

rent profile.

Speaker 7

Understood. That's very clear. Thank you very much. Thank you.

Operator

Next one, Bruce Lu of Goldman Sachs. Go ahead please, Bruce.

Speaker 6

Hi. Thank you for taking my question. I want to I'll ask you about the outlook for 2024. I mean, based on my mechanical mathematics, You seem to be very comfortable for your P6 expansion with LTA remain on track. So which piece of it will give you 30,000 wafer per month capacity for next year?

Speaker 6

Each wafer should be $3,000 to $3,500

Speaker 7

If

Speaker 6

you're multiple by that, You can easily take like 15% -plus revenue growth. In addition, you should have some inventory restock in demand for that. So That can usually give you like 15 plus percent revenue growth for 1294. So is that sounds right? I mean, At least you can get the revenue growth from your LTA contribution from P6.

Speaker 3

I mean, yes, I mean, of course, the revenue growth For 2024, it's a composition between the volume and the ASP. So For the 2024, our early view for the next year is we will expect our loading and wafer shipment will increase year over year. And so that said, however, we have to look at quarterly outlook by quarterly, Given with Sandy, the current customers' behavior are more cautious and conservative. So, we will provide quarterly outlook on quarterly basis. And so, In terms of actual what will be the growth for the next year, we probably will probably give you A bit of more clarity in upcoming calls.

Speaker 6

Well, I mean for the LTA pricing environment is for sure, right?

Speaker 3

I mean, yes, I mean, LTA right now is still intact. And so for that portion, it is. But that's still some base that has to align with the market dynamic. And also on the same time, we did talk about for the LTA, there are some flexibility in terms of adjustment, but the longer term perspective on LTA did not change, but the short term LTA, it has some flexibility that we are trying to align with our customer with. So, They also will come to account for the next year's projections.

Speaker 6

I see. I understand. Because the reason I asked LTA alone is 15% plus for the group unless you have a lot of push out or additional ASP erosion. Otherwise, that should be the base case.

Speaker 3

Well, theoretically, that's correct assumption, but

Speaker 8

you have

Speaker 3

to look at the mix, right?

Speaker 6

Understand. The

Speaker 5

second thing is that I tried to

Speaker 6

ask a bit different question is that the if you look at your customer profile, Asia customer contribute a lot more than most of their peers. The communication also consume a lot, a major portion of this, which result in a much bigger fluctuation in terms of revenue, order visibility, longevity. Do you see any chance any possible way to see meaningful changes in terms of your customer profile and application profile in the coming years.

Speaker 3

I mean, we continue to enhance our product mix, right? I mean, not only from the broader customer mix point of view, also look at from the product mix point of view. So, I think that's the clear focus, all right. However, whether the addressable we have to also address align to our addressable market. And whether the addressable market is representing higher percentage of the communications and computing as well as the consumer which is highly tied aligned with the Asia market.

Speaker 3

We may not be able to mute But we definitely want to continue to increase the quality of that mix and that will be our objective here, Not typically from the geographical standpoint.

Speaker 6

So can we foresee a narrower Range for the pick and truck margin moving forward, because margin volatility is still very, very big. It's still a lot of investors feel comfortable, right?

Speaker 3

Right. So like we said, the technology innovation, differentiation, Given the diversified capacity located in a different region And given the specialty offering, we think that will help us to defend that to a certain extent. The other approach is we are committed to continue developing the FinTech technology that will actually enlarge The differentiation offering as well and we continue with that development and in terms of the And we see some of the progress on our FinTech development as well. Having successfully entering into the mass production of our 22 nanometer business and we have witnessed some steady rise of the revenue from 22 And then which we can build upon our 22 low power logic expanding into the specialty now. At the same time, we based on that customer base, Continue migrating to the things that we think that will also help us in terms of differentiation.

Operator

Next question, Charlie Chan, Morgan Stanley. Go ahead please.

Speaker 8

Good afternoon, Jason, Chitung and Michael. And first of all, congratulations for Great results. The gross margin sustained at very, very good level. So my first question is really a follow-up on your 12 nanometer. So I do agree that is the key approach for UNT to differentiate yourself, especially compared to China competitors.

Speaker 8

So since you mentioned that there are some kind of Demand from certain customers, can you elaborate a little bit? First of all, when are you going to Spend CapEx for data FinFET capacity. And secondly, you mentioned about low power logic. Can you give us some hints on what kind of application or product for those 12 nanometer FinFET. Thank you.

Speaker 3

Sure. Well, first of all, FinFET does give you a power leakage benefit. So there is continuous low power benefit on the FinFET. Our plan is to fully exploit the DUV capabilities, which we can continue migrating to FinFET for that reason. So, we're actively progressing with the development of specialty FinFET based on the 14 FinFET that we have and also the 12 FinFET based upon the current feedback technology.

Speaker 3

We are currently engaging with customer on product spec performance criteria to fulfill their needs. And as far as for the Capacity expansion, the future FinTech expansion consideration, all business was still subject to our ROI justification to ensure the proper return on investment. For the capacity preparation, the method that The approach that we have is we will employ a cost effective approach using the YiXin 22 and 28 nanometer capacity pool to transition into the FinFET based on a high two conversion rate. So, that will help us to achieve our ROI driven criteria. And meanwhile, we will give you more update on our FinFET technology development when it's more appropriate.

Speaker 8

Got it. Thanks, Jason. So, yes, so just roughly, roughly, since you have a Great idea about the end demand, even some smart and efficient way, right, to convert Capacity from 28 nanometer for that demand. So Can we get a sense when you're going to see a first revenue contribution from 12 nanometer?

Speaker 3

For the 12 nanometers, the process will be freeze in early 2025. So I think there's probably there will be time after that. Well, so when the time comes, we'll probably better that we'll give you more precise projection because the process is by the probably Q1, 2025.

Speaker 8

Okay. Thanks for that. And then coming back to more kind of short term Question, Shay. So you mentioned about some rush orders, but you also said that customers want to Keep the inventory buffer very, very lean. So my question is, first of all, do you expect Those are large orders keep coming in the coming quarter.

Speaker 8

And compared to the traditional seasonality, do you think Your first quarter revenue or fab utilization will be better than historical sustainability? Thank you.

Speaker 3

Okay. Well, I mean, we certainly hope that the rush will come in.

Speaker 7

Well, as

Speaker 3

far as for the Q1 Outlook, we'll provide that in the upcoming January call. From the Inventory, I mean, the fundamental is we believe, given the rush order coming up on the PC and the smartphone space, And we believe there's a sign that indicates this could

Speaker 9

be an

Speaker 3

early sign of Asset management for a correction for this segment. And however, there are other market segments that's still Having inventory build out that could linger into 2024. So we just have We are optimistic, but we have to be cautious about that. So We will continue monitoring the rush order situation as well as the DOI situation on those cement. Hopefully, we can validate that some of the cement is for sure We're out of the inventory correction cycle, but we do know the auto will probably be lingering into 2024.

Speaker 8

Got it. Thank you very much. And my next two questions for Chi Dong, if that's okay. So it seems like you have a ballpark depreciation increase for next year. And Jason, You'll share some confidence about the pricing trend, especially for 12 inches So I'm wondering whether full year 2024, you can maintain gross margin at above 30%, because based on the 3rd quarter trend and the 4th quarter guidance, I feel like that is kind of achievable target.

Speaker 8

But I really want to get some comments or confirmation from management.

Speaker 2

Yes. We cannot comment on the numbers, We do foresee headwinds from micro uncertainty such as utility, grain power and associated carbon costs And we're increasing depreciation in 2024. So we will strive our best to maintain our So we will continue with our cost reduction effort. Hopefully, we can offset the impact From those headwinds I just mentioned, the income number still will be on a quarterly basis And we will provide that

Operator

next quarter. And

Speaker 8

Charles, if

Speaker 3

I may add, Our perspective now is that amid the inventory correction cycle, We have dramatically improved our structure profitability compared to the prepayment period and have strengthened by the stable ASP cost reduction conducting many cost Reduction activities and continued product mix optimization and increasing contribution from specialty technology. And all this activity will work off to offset headwinds such as rising costs and depreciation. We do expect when the demand returns, our profitability will also return to a healthier level. We can't really guide you a

Speaker 9

number right

Speaker 3

now, But we also understand and humble enough to understand that we'll be we will foresee some of the cost increase headwinds And we will continue to manage that cautiously as we have done in those few years.

Speaker 8

Got it. And Jason, sorry, I come up with a follow-up question to your previous 12 nanometer comment. So I'm a little bit surprised that you're trying to convert some 28 and the 22 nanometer for the FinFETs. Is that because you have some conservatism for your long term 28 nanometer demand or Why don't you try to buy new equipment for the feedback capacity expansion?

Speaker 3

I mean, clearly, I mean, we have for these past few years, we have driven this we do have ROI driven principle that we have for Beibai. So, the converting of 22, 28 nanometer capacity is one of the possibility. That's the only possibility. So, we will look at overall ROI and also the company's financials and to determine what would be best approach, yes.

Speaker 8

Okay. So I don't need to In the territory, that has kind of some concern about the 28 nanometer overcapacity in the long term.

Speaker 3

Right. Like I said earlier, Once this is more clear, we will report that at appropriate time.

Speaker 8

Okay. Thanks. And sorry, the last question to Qidong is really about sorry, actually two questions. So first of all, for your Q3 gross Margin, how much of that is coming from the currency depreciation help? And second small question is about the China government subsidy contribution to your OpEx.

Speaker 8

And would that totally go away in 2024? Thanks.

Speaker 2

So every one percentage point change In currency, it will cause around 0.4%, percentage point change in our gross margin. So That answers your first question. And secondly, for the subsidy for our Xiamen fabs, that Numbers goes along with our depreciation curve for our Xiamen facility, which has come to an end Majority of that has come to an end by end of this year. So going forward, We will still have some small portion of subsidy coming in, but it will not go back to the previous level.

Speaker 8

So may we know a rough difference between this year and the next year in terms of The total amount of the subsidy from China government, just a rough idea.

Speaker 2

Yes. On average, it will be slightly Slowly declined from the Q3 level, which is a little bit over RMB 500,000,000.

Speaker 8

Okay. So US500 $1,000,000 in the 3rd quarter and we'll gradually phase out to like US100 million dollars by the end of next year, the quarter?

Speaker 2

It will gradually decline, but we will continue To apply for merit based incentives, not only in China, but in many other our production sites as well. So there will still be some.

Speaker 8

Okay. Thank you very much.

Operator

Thank you. Next one, Zhihong, China Renaissance. Go ahead please.

Speaker 10

Hi, gentlemen. My first question regarding second interposer. For the capacity we put in, will it be dedicated for interposer production only or will it be fungible between interposer and silicon wafer application?

Speaker 3

Well, I mean, the silicon interposer is a part of the capacity. The for the dedicated tool on the silicon interposals cannot be converted to the other use, but they are common tool that can be used. So the I don't know if that qualifies as a fungibility, but So from a dedicated tool standpoint, no, it's not. But that's a relatively small portion.

Speaker 10

Right. Got you. And the other question regarding the automotive inventory adjustment, you mentioned that Q4, we start to see some adjustment. But how long would it last in your opinion?

Speaker 3

I mean, the starter adjusts After the Q2 this year and so we have facing the automotive inventory I mean demand adjustment headwind starting from Q3 already and we do believe this will probably lingering into 2024.

Speaker 10

For 2024, is it the entire year or the first half next year?

Speaker 3

Well, I mean, it's also subject to the end market consumption, Right. We hope the correction will be ended in the first part or first half And but they also subject to the end market and macro environment. So, we'll continue monitoring that. Right now, we for sure there is inventory buildup for automotive space and we do believe that we're lingering into 2024 In terms of whether they will be depleted by early or mid or later, we will continue to update that on quarterly basis. And it is our hope that they can decrease as early as possible, yes.

Speaker 10

I see, I see. Based on the initial selling, Yes. Do you think the adjustment will be more severe in Q1 compared with Q4, I mean, for the automotive vertical?

Speaker 3

I mean, we already see quite a bit of adjustment in Q3 already and we continue to adjust in Q4. And so And we do believe that will linger into Q1. In terms of magnitude, again, we're subject to the macro Situation. So we just have to we have to see it. We also kind of Updated earlier saying because given the customer current behavior, This behavior is more of a cautious and conservative.

Speaker 3

So the visibility is much shorter. And so, we'll probably better that if we give you more precise view on the quarterly basis. Right now, our view is that inventory will linger into 2024.

Speaker 10

I see. All right. Fair enough. Thank you very much.

Operator

Next question, Brad Lin of Bank of America. Go ahead please.

Speaker 9

Thanks. Thank you for taking my question. Hi, Jason and Qi Dong. Congrats on the strong Q3 results. And I have two questions.

Speaker 9

So basically one on the generative AI and Another is on the wafer technology of UMC. So firstly, have the firm seen business opportunity Also writing from the N device AI application, if any, the key specs of those chips and what time do we expect it to take off? Thank you.

Speaker 3

I mean, sure. Of course. In the quarter for sure, but before that, Your question about AI. AI is a megatrend and it has rapidly emerged as we see. And there will be a strong demand on related chips on various functionality such as sensing, MCU connectivity and so that's within our addressable market.

Speaker 3

And so, UMC is proactively preparing those solution to it for this market. And that includes the Interposer solution as one. And we hope that having those Solution prepared, we can enable our customers to capture those market share in AI applications. So many of the products that we're engaging today, we do see there's a High possibility, they will start adding the AI function into it. And so we just have to align with the product specification, make sure we can enable and support them with As far as the near term, very specifically on the interposers, We're already in interposer production.

Speaker 3

Currently, UMC interposer capacity plant will be doubled To reach 6 ks per month by Q1 2024, at this point, any additional capacity for intervals expansion It depends on customer demand outlook as well. So, meanwhile, we are continuing developing the active interposer, which supports the DTC, The deep trench capacitor and for the active interposer so on, so the roadmap is also aligning with the customer for the future growth in the interposer space.

Speaker 9

Got it. So for the interposer expansion, We believe it definitely depends on very much depends on the client demand. So compared to our last earnings call, do we See the demand is getting stronger or it's just well flattish in terms of visibility?

Speaker 3

We already increased double to 6 ks. And beyond that 6 ks, we have Not have any alignment for increased that beyond the 6 ks. Right now, the focus is more on the pipeline of continuity for the interposer solution. So, in terms of technology development, that's already aligned for the next generation. But in terms of capacity, no, there's no number beyond the 6 ks yet.

Speaker 3

Once there is any number increase, we can also report that.

Speaker 9

Got it. Thank you very much. So the second question is on the wafer to wafer technology. So we have learned UMC has been investing in this technology for many years. And what time do we expect the contribution to rise?

Speaker 9

And what are the key applications that we expect to well, up this kind of the technology. Thank you.

Speaker 3

The first product by using the hybrid bunk will be in The RF front end modules, so and that's already the development is already underway. And so, We do believe that will provide many benefits. So we have some expectation on that. So, but the program is under development and the product application will be for the RF front end.

Speaker 9

Got it. Thank you. And then, may I know the potential margin profile for this kind of the products?

Speaker 3

I mean, as we said, we continue to enhance our product portfolio and the product mix. And for those specialty technology, It will continue helping us to achieving that target. So from a mix standpoint, it will be benefit from it.

Operator

And the last question, Gokul Hadi Hallum, JPMorgan. Go ahead please.

Speaker 4

Yes. Hi. I just

Speaker 7

had one question. Given this comment about the depreciation increase next year, Could we talk a little bit about what are our like medium term gross margin targets? Like We expect to still remain within the 35% to 40% kind of gross margin range, especially since you're also thinking about potentially developing some FinTech nodes, especially the 12 nanometer nodes in 2025 and beyond, which are likely to be a little bit more expensive. Just wanted to understand what is the rough gross margin kind of range that management is comfortable operating in over the next couple of years?

Speaker 3

Yes, of course. Thank you for the question. When Charlie asked about our margin and the outlooks, I kind of adding a comment about it's our belief that our structural profitability is become much resilient and healthier. And so it's also our belief once the loadings return and the probability will also return to a healthier level. When we talk about healthier level, we believe it's going to be in the high 30%, 40% range for in a very high loading situation.

Speaker 3

So we continue to march into that direction and we have confidence that we That's fairly achievable. But given the past few years, we've just gone through the super cycle and now we're going through the down cycle And we want to test that situation. And hopefully, that we can report to you more clearly in a later day. But while we have a mapping out and model it, we think we have a roadmap to achieve that. And in terms of when can we achieve that, we'll give you let's give that test and then we'll report that on a tiny bit.

Speaker 2

Yes. For cloud FinFET capacity buildup, as Jason mentioned, it has to be ROI justified. So we will do it with the precondition that it won't damage To our overall corporate average structure margin, so we mentioned that it could be coming from some of the conversion of 2022, 28 capacity, which will result in better margin compared to greenfield FinFET capacity, but we are also working on other solution too. So it will be a few years out In terms of massive FinFET capacity, so we still will have a few more options coming in the pipeline. So we

Speaker 3

will definitely keep that discipline. As you can see for the past few years, we have been keeping that

Speaker 7

Definitely. Thank you. One last question is on the 8 inches side. It seems like in the downturn, 8 inches is facing a lot more pressure. Many staple products on 8 inches have already migrated to metro 12 inches whether it's 65, 55 nanometer or even 40 nanometer.

Speaker 7

So how do you see the 8 inches evolution in the next couple of years? Do you feel that 8 inches I believe some of the capacity will start becoming a little bit obsolete in the industry given many applications, particularly high volume applications that are migrating to

Speaker 3

Sure. I mean, the recent 8 inches loading has declined as a result of the demand softness across communication, consumer and computing segments. We still believe that 8 inches is the mainstream node for PMIC, high voltage application, so we expect that 8 inches loading will improve when the market rebounds. Meanwhile, we do see some intensified competition in the 8 inches landscape, Like you said, such as a 12 inches supplier participating in the 8 inches business, even with Some of the questions earlier, the Chinese local manufacturing fulfilled the demand and for the domestic demand and the pricing pressure as well. So UMC will continue to strengthen our technology, competitiveness, enhance our product and customer portfolio to adjust and also adjust our pricing strategy to Now as far as the loading recovery, in the short term, I think the pricing will mitigate some of the 8 inches business when the demand recovers.

Speaker 3

For the longer term, Well, given the time and the resource required to enhance the fundamental position for the competitive solution where the pricing is not only alternative and we probably have to do with all above mentioned effort and focus. And however, we do expect 8 inches loading and product compensation will improve to a healthier level. And for the recovery mode, we'll probably undertake for at least 12 months.

Speaker 4

Understood. Not clear. Thank you. Thank you very much, Abe.

Operator

Sure. Thank you. Ladies and gentlemen, we thank you for all your questions. That concludes today's Q and A session. Then I'll turn it over to UMC, Head of IR, for closing remarks.

Speaker 8

Thank you

Speaker 1

for attending this conference today. We appreciate your questions. As always, if you have any additional follow-up questions, Please feel free to contact UMC at irunc.com. Have a good day.

Operator

Thank you. Ladies and gentlemen, that concludes our conference for 3Q 'twenty three. Thank you for your participation in UMC's conference. There will be a webcast replay within 2 hours. Please visit www.umc.com under the Investors, Events section.

Operator

You may now disconnect. Goodbye.

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Key Takeaways

  • Consolidated Q3 revenue was TWD 57.1 billion with a 35.9% gross margin and NT$1.29 EPS, slightly above guidance despite a 2% sequential shipment decline.
  • Q4 guidance calls for ~5% QoQ wafer shipment drop, USD ASP flat, gross margin in the low‐30% range and utilization in the low‐60% range, reflecting continued demand weakness.
  • P6 (12 nm) capacity is on track to hit ~12 k wpm by end-2023 and 31.5 k wpm by Sep 2024, boosting 22/28 nm revenue mix to 32% in Q3.
  • Automotive segment is under inventory correction that may extend into 2024, leading to a QoQ decline in auto‐related shipments despite mid-teens revenue share.
  • UMC is advancing its roadmap with 12 nm FinFET (process freeze early 2025) and doubling interposer capacity to 6 k wpm by Q1 2024 to target AI, RF front‐end and advanced packaging markets.
AI Generated. May Contain Errors.
Earnings Conference Call
United Microelectronics Q3 2023
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