United Microelectronics Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 31, 2024

There are 12 speakers on the call.

Operator

Welcome everyone to UMC's 2023 4th Quarter Earnings Conference Call. All lines have been placed on mute to prevent background noise. 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, www.umc.com, under the Investor Relations, Investors, Events section.

Operator

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 Q4 of 2023. I'm joined by Mr. Jason Wang, the President of UMC and Mr. Chidong Liu, the CFO of UMC. In a moment, we will hear our CFO present the 4th quarter financial results, followed by our President's key message to address UMC's focus and the Q1 of 2024 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 and beliefs. 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 Security Authority.

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. Qidong Liu to discuss UMC's 4th quarter 2023 financial results.

Speaker 2

Thank you, Michael. I'd like to go through the 4Q, Q2, Q3 investor conference presentation material, which can be downloaded or viewed in real time from our website. Starting on Page 4, the Q4 of 2023, Consolidated revenue was TWD54.96 billion with gross margin at 32.4%. Net income attributable to the stockholder of the parent was NT13.2 billion. Earnings per ordinary shares were NT1.06 $20 in Q4 2023.

Speaker 2

On Page 5, this is the sequential performance. Revenue declined 3.7 percent quarter over quarter to RMB54.9 billion. Gross margin rate dropped roughly 3.5 percentage point to 32.4 percent or NT17.8 billion dollars With net non operating income of NT2.22 billion, The net income come to TWD13.19 billion or EPS of TWD1.06. This is compared to 1.29 in the previous quarter of 2023. For year over year comparison on Page 6, Revenue declined roughly by 20% year over year to TWD222 1,000,000,000 This is largely due to the lower capacity utilization rate As our wafer shipment declined roughly 27% year over year from 2022 to 2023.

Speaker 2

Gross margin rate as a result declined from 45.1% in 2022 to 34.9% in 2023. Overall, EPA earnings Net earnings in 2023 was NT50.99 or close to NT51 1,000,000,000. Net income rate was 27.4% compared to 31.3% in the year of 2022. EPS as a result is RMB4.93 in 2023 compared to RMB7.09 in 2022. So on Page 7, our cash on hand is still around NT132 1,000,000,000 And total equity of the company has come to RMB359.5 billion.

Speaker 2

Book value per share is close to $29 per share for at the end of 2023. On Page 8, starting from 2024, we have changed our ASP unit as well as capacity unit to 12 inches 12 inches equivalent to express the ASP number as well as the capacity number. So for the past 5 quarters, as you can see the trend chart here, the 1st 3 quarters was edging up And the last quarter was relatively firm on 12 inches wafer equivalent ASP trend. So on Page 9, for the revenue breakdown by geography, Asia is getting a little bit bigger to 62% of our total revenue and North America is about 23% of our total revenue. For year over year comparison on Page 10, Asia actually declined from 51% in 2022 to 57% in 2023.

Speaker 2

And the rest of the 3 main regions didn't change much. On Page 11, IBM continued to increase Age up to 22% and fabless is around 78% in Q4 of 2023. On a year over year comparison on Page 12, the increase in IDM is more notable from 16% in 2022 to 2023 of 22%. And in terms of application breakdown on Page 13, Communication remained the biggest of 47% and the spread among different application didn't change much quarter over quarter. As for year over year change, computer declined from 15% in 2022 to 11% in 2023.

Speaker 2

And we continue to see Bigger exposure to other segment, which is mostly Automotive and Industrial, around 20% compared to 14% in the previous year. For technology breakdown, we are happy to see that Revenue come from 40 nanometer and below now represent 50% of our total revenue And this is compared to about 45% in the previous quarter. And 2022 and 28 is our largest share of revenue around 36% in the Q4 of 2023. For the full year numbers, the trend is also similar. We see the 2022, 2018 revenue of 31% compared to 24% in the previous year.

Speaker 2

On Page 17, as I mentioned earlier, the unit of capacity wafer also changed to 12 inches equivalent. Right now, our quarterly available capacity is a bit over RMB 1,200,000 A quarter in terms of 12 inches equivalent capacity and we will continue to see some minor increase out of our 12A capacity given our P6 expansion is continuing. On the last page of my presentation, CapEx for 2024 is currently budget at US3.3 billion dollars with majority of that over 95% goes to 12 inches capacity expansion in both Tainan and also Singapore. The above is a summary of UMC's results for Q4 2023. More details are available in the report, which has been posted on our website.

Speaker 2

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 4th quarter results. In the 4th quarter, Challenging macroeconomic condition continued prolong the inventory correction in the semiconductor industry As our wafer shipment decreased 2.5% quarter over quarter, while overall fab utilization rate slightly fell to 66%. As our Tainan-12AP-six facility continues to ramp, our 22, 28 nanometer represented 36% of our Q4 wafer revenue, reflecting record high in revenue as well as percentage of the wafer sales.

Speaker 3

Overall, 2023 was a year where UMC demonstrated its financial resilience In face of a challenging external environment, we were able to achieve yearly 34.9% gross margin Despite the utilization rates, it never currently declined in 2023. This resilience can be attributed to our WeLinda's pursuit of technology innovation differentiation, customer synergy and stickiness enhancement and manufacturing quality excellent and cost reductions. As a result, we have improved our product mix and customer portfolio, which lift ASP by single digit in 2023. Looking into the Q1 of 2024, we anticipate overall wafer demand will increase mildly. However, customer maintains a cautious approach in their inventory management.

Speaker 3

Moving forward, UMC will continue to navigate headwinds amid an increasing competitive landscape and swallowing geopolitical tensions We have diversified the manufacturing base and differentiation in 12 inches specialty technologies. Our 12 nanometer feedback collaboration is a step forward in advancing our strategy of pursuing cost efficient capacity expansion and technology node advancement in continuing our commitment to customers. This effort will enable our customer to smoothly migrate to this critical new node and also benefit from the resiliency of an added Western footprint. We anticipate 12 nanometer think back collaboration will broaden our addressable market and significantly accelerate our development roadmap. Now let's move on to Q1 2024 guidance.

Speaker 3

Our wafer shipments will increase by 2% to 3%. ASP in U. S. Dollars were decreased by 5%. Gross margins will be approximately 30%.

Speaker 3

Capacity utilization rate will be in the low 60% range. Our 2024 cash based CapEx will be budgeted at US3.3 billion dollars That concludes my comments. Thank you all for your attention. Now we are ready for questions.

Operator

Thank you, President Thank you. Now the first question will be coming from Randy Abrams, UBS. Go ahead please.

Speaker 4

Okay. Yes, thank you. I want to test the first question, probably multipart, because wanted to get a few more details on the Intel partnership, which looks like a big move in a new direction. A few maybe I'll run off the questions we had. First, if you could discuss funding of the CapEx.

Speaker 4

And then if there's any IP or NRE proceeds that UMC would get by Supplying the technology. I'll start

Speaker 5

with those. I have a few follow ups.

Speaker 3

Well, I mean the for the 12 nanometer collaboration with Intel, on the funding side, the development costs for the collaboration will be shared mutually. And the Aurang used equipment was significantly reduced the upfront investment for both parties for this cooperation. So There's not much more to discuss in detail for the funding part. This collaboration will result positive impact to our P and L. And once the volume ramps up And the profit will be recognized at the time, yes.

Speaker 4

Okay. Okay. So it sounds like no there's no process because it's a co development field, co funded in R and D. And then as it ramps, how is the sales approach? Would it be each company respectively sells to their respective customer base that offering.

Speaker 4

And would it be the same offering or you would focus on different parts of the market?

Speaker 3

Well, I mean this well, first of all, the 12 nanometer address the gap in the known portfolio for both parties. So this 12 nanometer is the offering that we're expanding our product offering And we will be serving our customer. And this will be a vertical cooperation between us and Intel.

Speaker 2

So if I may head on to that, basically, you can see this is an extension of our technology offering to our existing customer and potential customers. So coming from 20 year 2020 to 20 14 And certainly this technology roadmap will be perceived as a continuous advancement for a lot of UMC based customers and potential customers.

Speaker 1

Okay. And a question on

Speaker 4

the timeline. I think Previously, you were talking about freezing the process in early 2025 and then a year to go into volume from that initial Freezing. So the time line was listed as 27. Is I guess, two questions. Would you still do a process in your existing Asian fabs?

Speaker 4

Or is this a new focus? And would the time line push out? Or could you try to pull that development time line in?

Speaker 3

From our original milestone, we targeted to have the process ready by 2025 as reported in the past. And now, while we joint development with Intel to complete this development, we'll follow that timeline from PDK readiness on the customer engagement to the production ramp, there's still going to be a year and a half beyond that. So now we put it to expect the shipment, I mean, the production will begin at 2027. In the meantime, we will align with our customer and to finalize the final ramp schedule.

Speaker 4

Okay. And probably just sorry, so many on this one. The last one I just have on this topic, the cost of product, I mean, would it be considered as an Intel fab, so you'd be paying a foundry fee like they're manufacturing it on their line? Or would you have operators? So it's how do you handle the transfer pricing if the cost structure is not there?

Speaker 4

Or how much control do you have on the process?

Speaker 3

Well, I mean, there is a comprehensive collaboration details that I can't I'm not be able to elaborate in here. As a result, like I said, the result will be a positive impact to our P and L based on that collaboration agreement.

Speaker 1

Okay.

Speaker 4

Yes, it looks like an asset light way to do it versus at least building, I think, the original plan, if you would build a line to do FinFET in one of the other fabs, if this is the approach.

Speaker 3

Right. So this is truly just a commercial cooperation. The party will be able to share the cost while leveraging the expertise. So we believe this will be a good way to leverage the synergy on both and to accelerate to this market.

Speaker 4

Okay. And I know it was a multipart. I'll just ask one other question. If you could talk about so just on the pricing with the Q1, it was a 5% ASP decline. Could you talk how much is a mix?

Speaker 4

Like the tech migration is moving very aggressively to 28. Is there a shift in mix involved? Or how much is like for like pricing? And just after that, because there are More concerns about the mature node, the 8 inches ongoing pressure. Should we view it as a onetime reset On pricing or do you expect we may start getting into, as long as the fats aren't full and there's competition, Mild price erosion, like how do you see it from so I think first the mix versus pricing and then from the Q1 level how you see pricing environment?

Speaker 3

Maybe I'll start off on this. First of all, there is no change in our pricing strategy, which with respect to the foundry market. The Q1 ASP guidance included annual one off pricing adjustment of 2024 as well as the change in product mix. Nevertheless, I mean, UMC is being fully aware of the market dynamics, so and the competition situation. And we will support our customer and we will closely monitoring the market, align with them and on appropriate pricing position to safeguard and protect UMC towards our customers rather than market share.

Speaker 3

We will only support Our customers in order to maintain or increase their market share in selected market segments, we have no intention to bounce into a price war often reflected in the commodity market. From a mix standpoint, although the annual one off pricing adjustment, This will lead to a slightly lower planned ASP for Q1 and we expect this ASP will remain firm beyond Q1 2024 for the rest of year 2024, which Already factored in, including the product mix and LTA terms, for example, yes.

Speaker 4

Okay. No, just to clarify, in Q1, is mix Like how is 28 nanometer doing versus the mature node? Are they coming back a little bit with shipment rebound? Or is it relatively stable

Speaker 3

I mean the overall the Q1 28 nanometer loading is slightly lighter than Q4 2023, mainly due to the seasonality effect and some urging order in Q4, 'twenty three. And our overall 20 2 28 loading continue to be resilient amid the market fluctuation. And we will also continue to grow our 22 and 28 business with our customer for the application of our OLED driver, ISP, WiFi, SoC processor, while the further expansion of technology offering in the advanced MCU product and Automotive Industrial segment.

Speaker 5

Okay.

Speaker 3

In Q1, we'll be experiencing a slightly lighter up the loading for 28.

Speaker 4

Okay, great. Thanks a lot, Jason. Thanks, Chita.

Operator

Thank you, Randy. Next one, Nicholas Barrett, Macquarie. Go ahead please.

Speaker 6

Yes. Hi, good morning. Do you hear me okay or not?

Speaker 3

Yes, I think we can.

Speaker 6

Okay. Thank you. Sorry. Last quarter, I think you mentioned some weaker end demand in Automobile and Industrial. Is it still the case?

Speaker 6

And does that contribute to lower loading your ASP in 1Q 2024?

Speaker 3

Yes. For the Q1 for the on the segment side, we expect The automotive and industrial end market will continue to experiencing the inventory correction. Hence, the The wafer demand in Automotive and Industrial segment will remain soft. The Communication and Computer and Consumer segment have stabilized for now The contribution will remain flattish for the over quarter.

Speaker 6

Thank you Very much. So you mentioned EUR 3,300,000,000 CapEx in 2024, 95% in 12 inches right, I think that's correct. Does this entirely include is it entirely 28, 22 nanometer capacity increase or is there something else?

Speaker 3

Well, for our 2024 cash based CapEx budgeted at RMB3,300,000,000 out of that, The 20% of CapEx was budgeted toward to 22/28 expansion in our the remaining expansion in T6 and the 12x, which was pushed out during the 2022 2023 time. This reflects our effort to managing our CapEx. Around 60% of the 2024 CapEx will be spent on the 12 IP3 infrastructure as well as a minimum 2 and equipment. We expect the rent of the 12 IP3 will start at April 2025. So the infrastructure is ongoing.

Speaker 3

And we project the CapEx will peak out this year and will not impact company's cash dividend policy. As we have stated in the past, our CapEx strategy will continue to remain a disciplined ROI driven base. And on affordability as well, where we invest toward future growth back with the customer commitment. If the markets do not rebound as expected in 2025, we will further adjust our CapEx accordingly. Understood.

Speaker 6

Is there a change in the plan capacity of IP3 in Singapore?

Speaker 3

I mean the P3 the 12I Singapore P3, the infrastructure As a planet, it's a pursuit as a planet. For the infrastructure, it means the overall structure of the building and the facilities. And but now, this is only with a very minimum 2 of

Speaker 6

increments. For 2024, yes. Okay. Good. Thank you very much.

Operator

Thank you, Nico. Next one Gokul Hari Hariyan, JPMorgan. Go ahead please.

Speaker 7

Hi, thanks for taking my question. My first question is just a follow-up on the Intel collaboration. Would you be also using the same node In some of your future fabs, the 12 nanometer node or like, let's say, your lateral phase of expansion in Singapore or is that going to be all the 12 nanometer capacity will be only in the U. S. Fabs of your partner?

Speaker 3

Well, I mean, not at this point. And we'll focus on to ramp this the Western footprint first. And if it comes to The market demands and or the customer commitment that we're looking to the other option as well, but not at this point, no.

Speaker 7

Okay, understood. And Jason, maybe a little bit more on the pricing front. Could you talk a little bit about what you're seeing in various parts Of your portfolio, 8 inches 28 nanometer and mature 12 inches Are you seeing any very different kind of pricing and given your firm pricing strategy, how is your market share holding up with your key customers? Are you seeing any Market share losses given all these concerns about capacity expansion in China?

Speaker 3

I mean in the boundary landscape, Some markets are more likely to become commoditized. However, our strategy has always focused on technology differentiation that will drive our long term growth and shift away from commoditized market with a low entry barrier. So right now, there's still a mix of the kind of product within our portfolio and we are gradually moving away from that. We have proactively increased our effort in technology advancement, including 12 nanometer like we talked about it and 2022, 28. For example, we expect to see higher revenue contribution from the technology nodes such as 2022, 28, eHIB, 55 nanometer RFSOI in 2024.

Speaker 3

Beyond 2024, our broader technology offering, Along with the geographical investments in manufacturing location and the customer stickiness, we elevate our overall competitive. So we expect This action will reduce our exposure by half in the next couple of years, in half for our current commoditized products by half in the next few years?

Speaker 7

Thank you. So I think a couple of years back, you had given us some numbers on specialty product mix, I think it was about 30%, 35% if I remember right, 2, 3 years back. Is there any update in terms of how much of your product mix is now and how much of it is single sourced in terms of the total business that you have?

Speaker 3

For the specialty right now is in the Q1 is in a high 50% range. So The single source product is actually quite high. It's higher than that. However, the we also have to look in the end market competition. So some of those products also consider as a commoditized area and we're gradually moving out on that space.

Speaker 7

Understood. Thank you. Last question on how do you think about overall order visibility into the next few months? Are you starting to see customers come back or you think the customer stance is still a little bit more cautious Some of your other competitors have been starting to talk about utilization bottoming out and growth kind of resuming. Any thoughts about how you expect growth to look like for the foundry industry this year and also for UMC?

Speaker 3

Sure. I mean, we'll start off on the maybe industry. We do expect the 2024, the semi industry will grow Probably to a mid single digit year over year. For foundry, we project that it will grow in a high single digit range. And for the UMC, we will strive to grow in line with the foundry industry.

Speaker 3

Despite that, our transport market will probably remain flattish. As far as the demand outlook, of course, we start off with the inventory situation. And although we have observed healthier inventory level in PC and smartphone market segment in Q4, 2023, The customer remained cautious after the Q1 'twenty four restocking of the mobile applications. For the auto and Industrial segment, they will likely require more time to digest the inventory and return back to normal in the second half of the twenty twenty three. So overall, the visibility of 2024 is relatively limited due to macro uncertainties.

Speaker 3

And while there is a lingering inventory issue in auto and Industrial segment, we are cautiously optimistic about the market demand given the PC and mobile inventory have returned to a bit healthier level in Q4 'twenty three already. So I think customer is behaving a little bit cautious after the Q1 restocking and then we'll continue monitoring the market dynamics.

Speaker 7

Got it. Thank you very much. Thanks.

Operator

Thank you. Next one Bruce Lu of Goldman Sachs. Go ahead please.

Speaker 8

Hello, can you hear me?

Speaker 4

Yes.

Speaker 8

Okay. So first of all, I want to double check about the foundry growth you just mentioned that you Talk about like the foundry is going to grow about like 10% and your addressable market is going to be flattish. I think this is meaningfully lower than what your peers were talking about 20%. Can you Tell us where is the discrepancy? Why you are so much more conservative than your peers?

Speaker 3

I mean, we I can't really comment our peer because I don't know what data they're using on, but I'm sure We all of us are collecting the data from both the market and our customer in different market segment. Our data shows that the 2024 on the foundry side, I mean foundry market will probably grow to the high single digit and close to 10%. And while the foundries, at least within our addressable, we'll probably stay flattish. That's what our data shows. Since I don't have the our peers' information, so I can't really comment about the discrepancy.

Speaker 8

I see. I understand. Okay. The second thing is that regarding to the again, for the Intel collaborations. I think Can you provide us couple milestone that we can check I'll follow-up because I think the key for this strategy is all about the executions, right?

Speaker 8

I mean, how can we track execution from both parties. I mean, for example, what time frame you can complete your process what kind of time frame you can avail for Tebao? What kind of time frame customer can get by We can recognize some revenue or profit. Can we have some time frame for that? And also, is it Is the collaboration only limited to 12 nanometers?

Speaker 8

What about like 10 nanometer or 7 nanometer or any other parts of development?

Speaker 3

Well, first of all, this cooperation is focused on the 12 nanometer process. And we look at this 12 nanometer, it represents a long term commitment and the opportunity for both party. And as far as the future opportunity, we hope there will be, but it's probably going to be in the future. And once there is anything, we're glad to report that. For the milestone, there's You're right.

Speaker 3

There's a very comprehensive project milestones under this joint development program. The major milestone is we like to freeze our process in 2025 and get everything ready for customer engagement After that and hopefully the pilot at 26 and the production in 27, so which is aligned to what we have reported is production in 'twenty seven. And we hope that we see a meaningful revenue contribution started from the year 2027. And that's probably in a very high level of a milestone. There are many, many details that We understand that we're fully aware of it.

Speaker 3

So we just have to executing it and we're putting a great attention to it. We believe this collaboration actually already be mitigated by leveraging the existing Manufacturing footprint without going through the complicated setup of the Greenfield facility. So we have mitigated some of the risk in terms of execution and we've seen the rest of it. We just have to execute and report it accordingly.

Speaker 2

Yes. And also for both Intel and UMC are public listed companies. Of course, this collaboration is more material given our size relatively to Intel. So certainly, we will report the progress on a quality basis to our stakeholder. And as Jason mentioned, once we freeze the PDK And with customer engagement, hopefully, we have some kind of customer announcement in between.

Speaker 8

Okay. Thank you.

Operator

Thank you. Next one, Charlie Chan from Morgan Stanley. Go ahead please.

Speaker 5

Thank you. Hi, Jason and Qi Dong. First of all, Happy New Year and also Truly congratulations for your partnership with Intel. I think this should be a win win situation. But maybe we kind of come back with some details.

Speaker 5

First of all is the Long term profitability with this Intel partnership. So maybe Chi Dong or Jason, so what was kind of estimated Kind of gross margin or IRR ROE compared to your own Investments, I worry to be your fully owned investment. What would be the difference in terms of gross margin and ROE?

Speaker 2

We agreed, I mean, both sides not to touch upon these numbers because probably it's 3 years away. And again, the material impact for both companies are relatively different. But what we can say is all the questions you asked, we have internal pro form a simulate numbers support our decision to go into this collaboration. And we do believe 12 nanometer is a multibillion dollars market and currently is dominant by a few players. With the collaboration and the setup of the contribution from both sides, we think we can offer a very competitive Technology, 12 nanometer solutions at the Western footprint to our existing customers as well as our potential customers.

Speaker 2

So we do have high hopes for this collaboration including the P and L impact to UMC.

Speaker 3

And Charlie, first of all, thank you for Happy New Year to you too. I also like to add The background of this 12 nanometer cooperation is very much aligned to our growth strategy that we have set up to do 5 years or 5 or 6 years ago. Our growth strategy has always been to pursue a cost effective capacity expansion and technology note for the management to continue our commitment to our customers, while enlarging our addressable market and increase our market relevance. And so as such, we have always been exploring potential collaborations that's aligned with our strategic objectives. So this actually fits that very well.

Speaker 3

Like Qudong said, there's many benefits about this 12 nanometer cooperation. And so we set up our goal and we will execute this. And we're seeing at the end of the day, this will be A win win win scenario for our customers, Intel as well as ourselves.

Speaker 5

Yes. Thanks. Thanks, Jason and Ji Dong. So A follow-up to the question. So I think you seems to imply the business is not just exceeding customers migration, right, it should be also some share gain in this 12 nanometer foundry business.

Speaker 5

So since you mentioned about a win win win, For the customers use your industry peer, right. Would you be able to provide Some tea like process. The reason I'm asking you is that, if you add the 2nd source foundry, you probably I need to spend some upfront cost, photo mask, etcetera. How do you justify that customers to use your 12 nanometer as a second source?

Speaker 3

Well, I mean, first of all, in our view, the 12 nanometer, It is a competitive solution. And not only that, from a market standpoint, it's a long life note that address many of the high growth market such as mobile communication, infrastructure and networking. Now many of the product actually just count to 12. So they're not necessary to be a second source product. So they many of the product pipeline actually arrived at this time.

Speaker 3

So we are aligning our milestone with the end market demand. Now From a competitive standpoint, this 12 nanometer process will be a comparable industrial standard node. And we utilize our executive process experience and foundry know how and as well as the Intel FinFET transistor foundation. So I think there's We will provide a very compelling and competitive solution to the customer.

Speaker 5

I see. Thank you. And then also another question on this one. Yes, I'm wondering If before 20 27, there is some causes demand, would you use your current 14 nanometer capacity in Taiwan or commerce on the 20 nanometer to fulfill the demand before 2027?

Speaker 3

No. I mean, the right now, we have evaluate all options. We believe this is the best best option for us. The primary reuse is this increment for the 12 nanometer production. And we expect it will have required some of the conversion kits and limited new tools, which is going to be more efficient than we're producing in our facility.

Speaker 3

So overall, leveraging the equipment, existing equipment will tremendously reduce the upfront investment for this project.

Speaker 5

Okay. Thank you. And lastly, just on this Intel partnership, right, just Two kind of logistic question. So first of all, who will be in charge of the fab operation? I saw the News today, you suggest you will run the fab, but I feel like it could be pretty Challenging, right?

Speaker 5

I'm not sure how you're who's going to be in charge of the operation. Can you answer this one?

Speaker 3

No. I mean, we have people that assist for the joint development on the engine, the process development side. So from the operation, Intel will operate that facility.

Speaker 5

Okay. And would that require additional government approval for this collaboration?

Speaker 3

We'll file the following for any regulatory requirements and we'll comply

Speaker 5

Okay, okay. Okay, thank you. Yes, and switch gears to near term, right? I mean, The long term dream is great, but back to near term. So Jason, do you think The fab utilization will have a second leg down this year.

Speaker 5

I noticed some of your customers' inventory days is strong and pretty low, right. So can you give us some kind of observation about the cycle recovery For this year, just like quarterly patent?

Speaker 3

Yes. Like I kind of stated earlier, we're cautiously optimistic about it, 2024. However, the visibility of 2024 is still relatively limited due to the macro uncertainties. The consumer spending, higher interest rate and inflationary pressure. So our customers It's remained fairly cautious even after the Q1 restocking that we have observed.

Speaker 3

So we'll Hanging hand with our customer going through this turbulence. And meanwhile, our primary focus on 2024 is we will continue to enhance the company's resilience and to weather through this market turbulence and then embrace the market upturn. So I am cautiously optimistic about the But meanwhile, we'll continue to focus on the company's resilience.

Speaker 5

I see. So last question is a financial question So now you have the 2024 CapEx guidance, you have the full year Revenue forecast, can you give us some update about your full year depreciation growth and also your full year gross margin guidance?

Speaker 2

Well, The depreciation estimate for 2024 is about 20% higher than that of 2023. As I mentioned, 2023 was really a trough for a recent depreciation curve. So the 2024 with 20% increase is probably back to the 2021 level. For margins?

Speaker 3

Well, I mean the for the margin, we understand there is a softer market demand. So our like I said, our focus is with a relentless effort. And in the past year, as Well, in 2024, we'll continue to improve our structural profitability. And so our margins highly depends on the capacity utilization, like you know. We expect we'll get market share in second half, which will lift our utilization rate.

Speaker 3

Some of the new product will start ramping in the second half. However, we expect the depreciation expense like Qidong set will increased 20% year over year in 2024.

Speaker 2

So we don't really give the full year guidance in terms of margins. Of course, We have a goal for a very longer term structure trend for our gross margin, but not the 2024 gross margin guidance.

Speaker 4

Okay.

Speaker 5

So use the Q1 30% as a benchmark. Do you think full year can You bet at similar level?

Speaker 2

Again, we don't comment on the full year margin. I think,

Speaker 9

we have

Speaker 2

a long term goal, right?

Speaker 3

Maybe I can share this with you. Then we hope to stay around the midpoint of 20222023 gross margin number while continuing to add resilience to our profit margin, I guess.

Speaker 2

As a structure gross margin Target not for 2024. Yes.

Speaker 5

Okay. Okay. I will need to go back to check my model. Anyway, thanks for the tip. Okay.

Speaker 5

Good luck, gentlemen. Thanks for your answers. Thank you.

Speaker 3

Thank you.

Operator

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

Speaker 9

Hi, gentlemen. I have a question on R and D. In Q4, the number edged up quite a bit. Is it due to the fact that we are starting to do the 12 nano R and D activities?

Speaker 2

Yes, of course, 12 nanometer is one of the key focus for R and D activities. But there's also some year end adjustment for R and D effort. So I would say the overall R and D budget will continue to increase, but we will try to manage as a fixed number in terms of percentage of revenue.

Speaker 9

I see. But can you share with us what would be the R and D run rate going into let's say 2024 and 2025?

Speaker 2

Sorry, say that again, please.

Speaker 9

The R and D run rate into 2024 and 2025, can you share with us, let's say, as a percentage?

Speaker 2

I think the run rate will be similar to 2023.

Speaker 9

Okay, all right. I see. And second question regarding the cash dividend policy, was that still be based on the payout?

Speaker 2

So as I mentioned, even though we may see a peak CapEx in 2024, That will not affect our dividend policy. So we still intend to balance The payout ratio as well as the absolute dollar terms in terms of cash dividends.

Speaker 9

I see, I see, I see. Fair enough. And then last question regarding the partnership with Intel. With the fact that you're targeting those customers order serving the European and also the U. S.

Speaker 9

Markets primarily?

Speaker 3

I mean the solution will be serving customer growth globally. So it's not limited to any market segment.

Speaker 2

It's a good Western footprint for the first time for UMC's perspective.

Speaker 9

But would that be biased or focus more on overseas market and Asia side of the market?

Speaker 3

No, it was serving the customer worldwide.

Speaker 9

Okay. All right. Okay. Thank you very much.

Operator

Thank you. And the next question, Brett Simpson from Arete. Go ahead please.

Speaker 10

Yes, thanks very much. Most of my questions have been answered, but I had a follow-up on the FinFET partnership with Intel. I mean, I guess the 3 Intel fabs in question equates to about 60,000 wafers a month capacity. Is that the rough plan we're talking about as part of this partnership? And can you just help us with the math around the CapEx assumption to convert these fabs to your process?

Speaker 10

Thank you.

Speaker 3

First of all, the capacity planning, it has a subject to the customer engagement. So While we're referring where the project, the 12 nanometer will be developed in that location, But doesn't mean that the capacity numbers, the we're aligned with the customer and finalize the capacity size, But the site is actually available for us to plan that accordingly. The for the CapEx, Like I also mentioned earlier, the primarily we'll reuse the existing equipment That will be very limited, the new tools and also some of the conversion kits And I required the CapEx, but the CapEx number is relatively small, yes.

Speaker 10

And Is Intel taking any of the capacity for internal means as part of this agreement? And then is there any Chip Act funding Does this qualify for any Chip Act funding going forward? Thank you.

Speaker 2

We cannot speak for Intel. I think they will make their own decisions. As for us, we won't do that.

Speaker 9

Okay.

Speaker 5

Thanks very much.

Operator

Thank you. Next question is from Gokul Hanifalan, JPMorgan. Go ahead please.

Speaker 7

Yes. Hi. I just had one question. So given, Chitung, you mentioned the CapEx will probably peak out this year. How should we think about depreciation going forward?

Speaker 7

I think you have this 20% bump in depreciation this year. Should we expect depreciation to continue to keep growing at this kind of pace into the next couple of years as well? Or is it kind of Largely kind of this is like the big jump in depreciation that we're going to see in 2024?

Speaker 2

Yes. We see a little bit delay impact from the peak of CapEx to depreciation. So we will probably see peak of depreciation in year 2026, 2 years after that 2 years after 2024.

Speaker 7

Okay, understood. Yes, thank you very much. Thanks.

Operator

Thank you. Ladies and gentlemen, we are running out of time. So we are taking the last one. The last question, Laura Chen from Citi. Go ahead please.

Speaker 11

Hi, thank you for taking my question. Just a follow-up on the Intel's cooperation as well. Just wondering that based on your agreement with Intel, is there any like a license fee or IP transaction of the cooperation?

Speaker 3

No, there's not.

Speaker 11

Okay. And also, I know there's a lot of different kind of a type and the demands could adapt to 12 Narometers, but just wondering do you have any priorities or like your first generation of the FinFET ramp you are scheduling, it will put into your first consideration right now?

Speaker 3

Well, I mean, they are listed customers that we are engaging with. So we'll first finalize our discussion with the customer and then try to align with our development milestone and then hopefully we can confirm the engagement. So We are at very early stage of this joint development. And while we just announced it, we're already having a customer discussion, but we have not finalized it

Speaker 11

Okay. Thank you very much and happy New Year.

Speaker 3

Thank you. Happy New Year to you. Thank

Operator

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

Speaker 1

Thank you 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 alacusc.com. Have a good day.

Operator

Thank you. Ladies and gentlemen, that concludes our conference for 4Q '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. Thank you and goodbye.

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Key Takeaways

  • In Q4 2023, UMC reported consolidated revenue of TWD54.96 billion with a gross margin of 32.4%, net income of TWD13.19 billion and EPS of NT1.06, reflecting a 20% revenue decline year-over-year due to lower capacity utilization from a 27% drop in wafer shipments.
  • Looking into Q1 2024, the company guides wafer shipments to rise 2–3% sequentially, ASPs to decline by 5%, gross margin to be approximately 30% and fab utilization to remain in the low 60% range, while planning US$3.3 billion in cash-based CapEx mainly for 12-inch expansion.
  • UMC has entered a 12 nm FinFET co-development partnership with Intel, sharing R&D costs and leveraging Intel’s fabs, targeting process freeze in 2025, pilot runs in 2026 and volume production in 2027 to broaden its specialty technology offering and Western footprint.
  • For 2024, UMC’s CapEx budget is focused on disciplined, ROI-driven investments with over 95% allocated to 12-inch capacity, including ~20% for 22/28 nm expansion and ~60% for IP3 infrastructure and minimum-2 tools, with depreciation expected to rise ~20% year-over-year.
  • Amid challenging macro conditions and ongoing inventory corrections in automotive and industrial segments, UMC remains cautiously optimistic about a mild market rebound in H2 2024, noting healthier PC and mobile inventories by Q4 2023.
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Earnings Conference Call
United Microelectronics Q4 2023
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