United Microelectronics Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 24, 2024

There are 11 speakers on the call.

Operator

Welcome everyone to UMC's 2024 First 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. Please follow the instructions given at that time if you would like to ask a question. For your information, this conference call is now being broadcasted live over the Internet.

Operator

Webcast replay will be available within 2 hours after the conference is finished. 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.

Operator

Lin, please begin.

Speaker 1

Thank you, and welcome to UMC's conference call for the Q1 of 2024. I'm joined by Mr. Jason Wang, President of UMC and Mr. Chidong Liu, CFO of UMC. In a moment, we will hear our CFO present the Q1 financial results, followed by our President's key message to address UMC's focus and Q2 2024 guidance.

Speaker 1

Once our President and CFO complete their remarks, there will be a Q and A section. UMC's quarterly financial reports are available at our website, www.usc.com, under the Investors Financials 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 IOC'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. Chitung Liu to discuss UMC's Q1 2024 financial results.

Speaker 2

Thank you, Michael. I'd like to go through the Q1 2024 investor conference presentation material which can be downloaded or viewed in real time from our website. Starting on Page 4, the Q1 of 2024, consolidated revenue was TWD54,630,000,000 with gross margin at 30.9 percent. The net income attributable to the stockholder of the parent was TWD10.46 billion and earnings per ordinary shares were TWD0.84 Utilization rate in Q1 of 2024 was 65%, similar to 66% in Q4 of last year. However, the shipment has increased by about 4.5% sequentially.

Speaker 2

On Page 5, for the sequential financial comparison, revenue declined slightly to 54.6 percent sorry, TWD54.6 billion. Gross margin was down 5.1 percent to 30.9 percentage point or TWD 16,899,000,000. The operating expenses normally in Q1 is seasonal low point. Therefore, we can see the operating expenses was down 13.4 percent to TRY 5,700,000,000 in Q1 2024. And our other operating income mainly is subsidies from government declined quite a bit to TWD513 1,000,000 in Q1.

Speaker 2

This is largely coming from our Xiamen operation. Their government subsidies recognition is in line with their depreciation curve, which has come down significantly in 2024. And overall, net income attributable to the shareholder of the parent was RMB10.4 billion in Q1 versus RMB 13,100,000,000 in Q4 of last year. EPS was RMB 0.84 for Q1. On Page 6, the year over year comparison, revenue also stayed similar range, almost slight increase of 0.8%.

Speaker 2

And gross margin, however, declined from 35.5 percentage point to 30.9 percentage point in Q1, mainly due to increase in costs such as depreciation expenses. And for the non operating income is also a big difference mainly due to our portfolio holdings, investment holdings. This is the mark to market gain. It's only about KRW 1,000,000,000 in Q1 versus TWD 4,600,000,000 in the same period of last year. On Page 7, our cash is now about TWD119 1,000,000,000 and our total equity is TWD 378 1,000,000,000.

Speaker 2

Most of the increase is in the PP and E, property, plant and equipment, which right now stand at TRY254 1,000,000,000. On Page 8, there's a one time annual adjustment in our ASP in Q1 of 2024, which are also the main reason offset the 4% to 5% increase in wafer shipment in Q1. So the magnitude is quite similar to that in the Q1 ASP. On Page 9, the original breakdown of our revenue stay relatively similar quarter over quarter. Europe declined 3% from 11% in Q4 last year to 8% in Q1 of this year.

Speaker 2

On next page, Page 10, there is also a big change in the IDM compensation versus fabless revenue. So this quarter is 18% versus 82%, while last quarter was 22% versus 78%. On Page 11, the application breakdown remained relatively stable. On Page 12, we see a seasonal downward adjustment in some of our customers, which lead to a small decrease in our 2022, 2018 revenue percentage point of 33%. And the rest of the technology geometries are relatively stable.

Speaker 2

On Page 13, our capacity breakdown in 12 inches equivalent capacity, most of the increase is coming from 12A in our Tainan fab, which is our P6 expansion. And there will be some spotty areas of efficiency improvement for some of our other fabs. Total 12 inches equivalent capacity is RMB 1,200,000 in Q1 this year. Our CapEx for after the Q1 remain unchanged, still stay around RMB 3,300,000,000 cash base CapEx for 2024. Majority of that will be attributed to 12 inches capacity expansion.

Speaker 2

So the above is a summary of UMC results for Q1 2024. 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, Chitung. Good evening, everyone. Here I would like to share UMC's Q1 results. In the Q1, our wafer shipments increased 4.5% quarter over quarter as we saw a pickup in the computer segment. Despite a slight drop in the utilization rate to 65%, we were able to maintain relative healthy margins due to a continued cost control and operational efficiency efforts.

Speaker 3

Contribution from our specialty business increased to 57% of total revenue, driven by demand for power management ICs, RFSOI chips and silicon interposers for AI servers. During the quarter, our teams continued to make good progress on key pipeline projects, both customized solutions for customers as well as new technology platforms to serve high growth segments within the 5 gs, AIoT and automotive market. This includes embedded high voltage, embedded nonvolatile memory, RFSOI and 3 d IC solutions. In line with our policy to provide a stable and predictable dividend to our shareholders, UMC's Board of Directors recently approved a shareholder cash distribution of approximately NT3 dollars per share, which will be a higher payout ratio than the previous years. This is subject to approval by shareholders at the Annual General Meeting in May.

Speaker 3

Looking ahead to the Q2, we expect to see an increase in wafer shipments as the inventory situation in the Computing, Consumer and Communications segment improves to a healthier level. As for the Automotive, Industrial segment, demand remains mild as the pace of inventory digestion has been slower than anticipated. While we still expect some lingering impact on macro uncertainties and cost headwinds in the near term, UMC will continue to invest in technology, capacity and people to ensure UMC is ready to capture the next phase of growth driven by 5 gs and AI innovations. Now let's move on to the Q2 2024 guidance. Our wafer shipments will increase by low single digit percentage.

Speaker 3

ASP in U. S. Dollars will remain firm. Gross margins will be approximately 30%. Capacity utilization rate will be in the mid-sixty percent range.

Speaker 3

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 Wong. And ladies and gentlemen, we will now begin our question and answer session. First question, we'll have Randy Abrams, UBS. Go ahead please.

Speaker 4

Okay. Yes. Thank you and good evening. The first question I wanted to ask on the 28 nanometer where you mentioned it seasonally dipped in Q1. You talk about the outlook?

Speaker 4

Like if you see that recovering and how do you see the P6 as you bring up the rest of that capacity? How do you see application to build that capacity or keep it loaded?

Speaker 3

Well, I mean, for Q1, the 2022 and 28, we saw a decline. And because we're experiencing smartphone seasonality, which will lead to a lighter 28 and 28 loading. We do expect to pick up the 28 nanometer wafer shipment in Q2 2024. Our the 28 loading will remain at a relatively healthy level based on current projection and which is supported by product in OLED drivers, larger technology such as ISP, Wi Fi and SoC process applications. After the Q1 2024, we will see higher wafer shipments and driven by the demand on both communication and consumer segments.

Speaker 4

Okay. The blended pricing is firm overall, but you do have the mix shift coming back to 28%. Could you talk about the like for like pricing environment? If you see next few quarters negotiation, would there be any like for like pressure? Or do you expect it would be like Q1 each year would be the time the bigger negotiation happens?

Speaker 3

Well, I mean, that's the typical practice. And as we mentioned in January call, the ASP will remain firm after the one off pricing refresh in Q1, and we are still expecting that. The company's pricing strategy has remained consistent, which is based on our value proposition. And at this time, we still expect the pricing will remain firm in the second half of twenty twenty four. However, we do believe that the in terms of the like to like pricing adjustment and so on, we believe the focus should be elevating our customers' product competitiveness and to help them win more market share.

Speaker 3

So while we our pricing strategy is remain consistent and aligned with our value proposition, but it also includes to stay competitive and resilient against the market dynamics. So then we'll continue monitoring the market dynamics.

Speaker 4

Okay. So it sounds like broadly firm, but some the flexibility were needed if it's yes, like if it's a competitive situation?

Speaker 3

Yes, that's correct. Yes.

Speaker 4

Okay. To revisit the CapEx, I think you mentioned last quarter, majority of it was either residual for P6 or infrastructure. So a lot of the equipment spend is still to come, but I think you were planning it to start up sometime around Q2 of next year. So is there a way to think about how much capacity in the first phase? And have you made that decision to bring up like a first phase, like if you have the amount or much you might need to outlay?

Speaker 4

And I would think it would be mostly in 2025.

Speaker 3

Are you referring to P6 or P3?

Speaker 4

Sorry, it's the Singapore. Actually, I was referring to because you're doing the construction of Singapore. So how much you plan to bring up in Singapore in next year?

Speaker 3

Yes. So well, first of all, you're right. And last quarter, we did mention among the 2024 CapEx number, around 60% of the 2024 CapEx will be spent on the 12IP3 infrastructure and as well as some minimum tools and equipment. So they are we are spending on the P3, but mainly for the infrastructure. And given the current market dynamics and the customer alignment, we are projecting the 12 I P3 production rent will actually start in January 2026 now.

Speaker 3

And the P3 or ramp up with high volume starting from the second half of twenty twenty six.

Speaker 4

Okay. Does that imply like off the big CapEx this year, would you still it sounds like most of the equipment then would push maybe some next year, some actually in 2026. So we should think I mean, is there a rough way to think about it because it would affect like depreciation has been rising, but that could maybe level it out with that push out?

Speaker 3

Right. I mean, we are. We certainly are managing that. We are projecting CapEx will peak out this year and will not impact the company cash dividend policy first. I believe that people care about that as we have stated in the past.

Speaker 3

Our CapEx strategy continue to remain disciplined and ROI driven and also along with our affordability. So that means we are managing that. But the CapEx will be peaked out at this year, the 2024.

Speaker 4

Yes. And I did see you have the $3 dividend that you confirmed. Actually the last question, it ties to the AI, like a lot of the attention goes to the high end like the GPU, the ASICs. But you did put in your remarks kind of reminder on the you have the silicon interposer, but could you kind of outline where you still have opportunity, like since that seems like the strongest still the strongest momentum driver, like where UMC can participate like Silpin or Pose or other components into AI or HPC?

Speaker 3

Yes. I mean, we certainly would like to explore more, but not yet. Well, at this point, while the recent focus of AI chips has been on the most advanced computational chips to run the AI modules. And the chips will require handling data transmission and the power management are also equally important. And so UMC's focus is on those two areas, the data transmission as well as the power management.

Speaker 3

Specifically, the AI server will need a high speed IO chips and memory controllers to handle the data transmission and the power management IC for every computing and memory units to optimize the power consumption. Similarly, MZ technology offering from 55 nanometer, 12 nanometer, specialty technology, non volatile memory, 3 d IC, they are all well suited for the edge AI applications such as wearable, smartphone, etcetera. So in that, our solution will offer to enable those edge AI devices to achieve the optimal balance among cost performance, form factor, power efficiency and we'll continue to work closely with the customers to bring those innovative edge AI solution to the market. Well, I mean, like I stopped at the beginning, while we are still in the early stage of a portfolio in the edge AI, we are recognizing the growth potential of the AI market and we are ready to capture those emerging opportunity. And based on the even we are early, but based on the current projection, we are expecting UMC's addressable market.

Speaker 3

We think the overall AI semiconductor market will be around 10% to 20%.

Speaker 4

Okay. If you capture 10% to 20% of the AI TAM like with your portfolio, okay.

Speaker 3

Randy, actually that's more addressable. I hope I can

Speaker 4

Address, I should say not capture. Yes. Your solutions can target and then if you share that, makes sense. And to clarify too on the silicon interposer, do you plan to expand from the 6,000? I think that was the last guidance you gave, 6,000 if you would add further capacity to that?

Speaker 3

Yes. That's the current 2.5D interposers. Maybe elaborate a little bit more on our 3 d IC space. In addition to the interposer, our 3DIC offering includes the wafer to wafer hybrid bounding, active interposer with TSB and the 2 and half the interposals with DTC. And so the interposals is the one offering and which that's where the market is today.

Speaker 3

But we are cautious in monitoring the expansion of the current Interpolter capacity and continue to focus on the expanding on the rest of the solutions. Those solutions aims to provide a cost effective performance efficiency alternative for semiconductor device through a vertical stack of silicon wafers or dies, which delivers small form factor, enhance the bandwidth and lower power consumption for various applications, including the edge AI and the data center and communications. So we are cautious about the current solution with interposer expansion. But we are more and for the future expansion for inter portal with DTC and other the inter portal with TSB and as well as the wafer to wafer hybrid bounding.

Speaker 4

Okay, great. Thanks a lot, Jason, for the color.

Speaker 3

Thank you, Randy.

Operator

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

Speaker 5

Yes. Hi. Thanks for taking my question. My first question, Jason, I think last call, you had mentioned that your growth rate expectation for foundry is about high single digit and expect UMC to kind of grow at a similar pace or strive to go at a similar pace. Is that still your expectation right now or has anything changed given the slower automotive industrial recovery?

Speaker 5

Has anything changed on the numbers?

Speaker 3

Hi, Gugul. I mean, yes, you remember well and let me give you a bit of update. There are some changes. One, the some area we did not change. For instance, the we still project the semi industry will grow in the mid single digit.

Speaker 3

That did not change. For the foundry, you will grow at the low teens year over year and that didn't change. However, majority of the 2024 growth in the boundary will be driven by the AI servers. We are to continue monitoring that. I think the biggest momentum is coming up on the AI servers.

Speaker 3

And therefore, the growth for the UMC addressable market now remains flattish for 2024. However, you're right, our intention is still to expect to outperform our addressable market, but I think the current addressable market projection for us is flattish for 2024.

Speaker 5

Understood. That is quite clear. Second question is on some of the specialty projects that you have on RFSOI that you called out and also the high voltage driver ICs on OLED. Could you talk a little bit about your market presence, especially in RFSOI, how big this is? Because it seems like you're starting to gain some market share from the current market leader on some of these platforms.

Speaker 5

So could you talk a little bit about the specialty platform, especially RFSOI and OLED driver IC?

Speaker 6

Sure. I mean, first

Speaker 3

of all, we continue to address all specialty technology, not just limited at RFSOI. However, we see a good momentum from our RFSOI market penetration. We are seeing a significant market share gain in the space. However, I don't have a specific number to share with you right now. And the I may be able to update you next time.

Speaker 3

The as well for the non volatile memory and we also gained some traction on that, while we have maintaining our market position on the embedded high voltage.

Speaker 5

Understood. One more question I had is on the as we are kind of moving towards spending primarily for the capital IP3, Are there any CapEx offsets that we will potentially get for the Singapore fab or is it mostly the prepayment from customers and the government incentives are mostly on tax breaks and other kind of profit driven subsidy.

Speaker 3

Maybe Pukul, if you can repeat that question again.

Speaker 4

Yes. So I was

Speaker 5

asking for Singapore fab, do we get any capital offset, like CapEx offset that offset our CapEx? Or is it mostly going to be like tax breaks and other kind of subsidies which kick in once you start production?

Speaker 2

Yes. We cannot go into detail, but there are government incentives issued by the Singapore government, including both test break as well as the subsidies on capital expenditures. And the overall package is equal or better than the our previous investment, the P1, P2 because of the more advanced technology investment we have in Singapore. So we are very grateful for the strong support from the Singapore government and the enlarged hub in our Singapore operation actually will enable us to receive even more benefit out of this greater economic scale.

Speaker 5

Thank you, Dong. So the $5,000,000,000 spend that we had projected earlier that is more like a gross CapEx number, we should assume?

Speaker 2

Yes, roughly for P3, roughly.

Speaker 5

Okay, understood. And one more question I had is on 8 inches given 8 inches seems to be still pretty sluggish. Are there any plans on flexibility for the 8 inches capacity? Is there any plans to potentially convert 8 inches to other areas with the compound semiconductor, the silicon carbide or any of those areas?

Speaker 3

Well, first of all, we are continue anticipate pressures from the 12 inches mature no fab that has impacted 8 inches supply chain. So we definitely need to address that. While certain the mainstream application will remain 8 inches node, we also try to expanding the technology offering to silicon carbide, GaN Nitride, but they're still in a very early stage. Most of the silicon carbide today is at a 6 inches and we are more focused on the 8 inches migration. And we can update more progress once that become mature.

Speaker 5

Okay. Thank you. Thanks, gentlemen. Thank you.

Operator

Thank you. Next one, Brett Lin, Bank of America. Go ahead please.

Speaker 7

Thank you management for taking my questions. I have two questions. One is on the silicon interposer or the advanced packaging. We have learned that the management is cautious or less well active in expanding this type of this part of the capacity. So we are on track to seek hit around 6 ks per month and no further expansion.

Speaker 7

Should we assume that? And then a follow-up on that is that, we know that we are spending the other well referred to wafer technology and other 3 d solutions. So when should we expect this part of business to well take off? Thank you.

Speaker 3

So first question is the intervals. Yes, we will maintain that 6 ks capacity and we continue seeing that at a stable run rate for 2024. And for the others, some of the RF SOI applications already starting to use the wafer to wafer hybrid bounding solution. So they were ready for production in 2024 as well. And so we gradually introduced some of the advanced die to die and the 3rd wafer to wafer stacking solutions and gradually increase that capacity as well.

Speaker 7

Got it. Thank you very much. Glad to hear that. And then my second question will be on the well, our node migration. We have learned good business on that 22 and 28 nanometer with the OLED driver IC and some products migrating to 22 and 28 from 40.

Speaker 7

And we would like to learn the outlook of 40 and the well utilization outlook and what products can we expect to help fill the 40 nanometer capacity gap?

Speaker 3

So are you talking about 40 or 14? 40. For the mature 12 inches the utilization rate for both 4065 will remain flattish for the second half of twenty twenty four. And of course, this still highly depends on the pace of the overall market recovery, and we're closely monitoring that. At the same time, there are applications still coming into the 40 nanometers such as the RFSOI and as well as the nonmonetary memory.

Speaker 3

There are some of the new application will come in adopting the 40 nanometer.

Speaker 7

Got it. Thank you very much. Actually, I also wanted to add about 14, 14. So despite the limited capacity currently there is still emerging business opportunities in the market. Does the firm plan to allocate more resources for the expansion on this 14?

Speaker 3

Our current focus on the FinFET is on the 12 nanometer cooperation with the U. S. Partners, which the program is kicked off at beginning of this year. And the focus is try to making good progress on the co development and which is on track. And we're also seeing a high level interest and we see numerous increase.

Speaker 3

At this moment, we are working with our customer to accelerate the ramp schedule for the 12 nanometers. So, yes, I mean the focus will be shifting to the 12 nanometer in center 14.

Speaker 7

Got it. Thank you very much, Justin.

Operator

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

Speaker 1

Hi, thank you for taking my question. I want to ask about the, Jason, your view about the cycle, right? If you look at your guidance, you're guiding for flat to side up for the total revenue, which is sequential growth for your quarter revenues by most likely it's flattish or flattish out every quarter for the next coming quarters. And your margin is somehow flat for 30% if there is no more ASP erosion. So which is there is no recovery at all for the industry.

Speaker 1

So it seems to me that this inventory current cycle is a lot longer than expected. So when do you see the inventory correction will the restart continue to start to kick in and provide some minimal help for your business though?

Speaker 3

I mean, Bruce, the first of all, let's talk about inventory. We have noticed the overall industry inventory level are continuing to improve. Specifically, we have seen inventory getting to a healthier level in the Computing, Consumer and Communication market segments. However, we still observe our customer taking a more of a conservative approach in their inventory restocking behavior. In other words, we're seeing more of a rush order, in the confident projection going forward.

Speaker 3

I think that mainly because the biggest uncertainty is still at overall macro outlook, which could impact the market dynamics. The other 2 market segments for the inventory digestion for the auto or industrial segment is still slower like I mentioned earlier. So I think the market is prudent. The customer are prudent about the market outlook. We do see the overall industry are recovering.

Speaker 3

And so we do see the foundry industry will grow in the low teens percentage year over year. However, most of the resources is more allocated to the AI server. So I think the AI server will be the with more of a higher growth rate versus the rest of the market applications. So and since the we have less exposure at the AI server, so I think our projection at this point is more conservative. However, we are optimistic about the inventory of the situation.

Speaker 1

So if the AI continues to be strong for next year, you will continue to be muted? Is that the base assumption?

Speaker 3

I mean, well, firstly, the other things that we do foresee the auto and industrial segment inventory situation will become more healthier by end of the year. So I think all market segment within UNC addressable will become much healthier in terms of their inventory situation starting from 2025.

Speaker 1

I see. Okay. The next question is for the advanced 3 d IC packaging, which Jason started to talk a bit more. I want to know the value proposition for UMC in this business because you don't have the advanced node, you don't have 3 or 5 nanometers. So which is somehow vertical integration is important.

Speaker 1

So where do you see your value when you don't have the advanced note dies for the packaging? And what's the profitability looks like for this business? It's going to be the margin accretive for you?

Speaker 3

Well, I mean, first of all, I mean, you're right. But if we look at this market specifically, the some of the device is looking from a phone factor standpoint and some devices looking from the enhanced bandwidth standpoint and lower power consumptions. So if you have a horizontal view, I think from the small phone factor standpoint, some of the applications do not require most advanced technology nodes. And some of the applications will probably need a little bit better, but not still not the most advanced because they're seeking for the balance between the phone factor and the higher bandwidth and the power consumption. And by if you directly referring to the very super high bandwidth and which that's a space that we are not addressing.

Speaker 3

So there's still a sizable market within the stacking the 3 d IC space for us.

Speaker 1

So that is what you mentioned about like 15% to 20% of the addressable market?

Speaker 3

That's among the AI The total? Yes. That's about the overall AI semiconductor market, yes. And that's all.

Speaker 1

Understood. Thanks. Okay. Thank

Speaker 3

you. And the

Speaker 1

profitability for this business?

Speaker 3

I mean, we're very cautious about that. And we've been running the company, improved our structural probability for a few years already. And of course, any solution we're offering and operational efficiency, we're always part of the consideration. So that will be a profitable operation for us, yes.

Speaker 1

So we can consider as a margin accretive for this business?

Speaker 3

I mean, right now, I can't comment on the credit. But we'll try our best to maintain our structure

Operator

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

Speaker 8

Hi, Jason, Qi Dong, Michael and David. Thanks for taking my question. So first of all, Jason, great calls on the cycle and the market forecast. I think your Indus peers is converging to your kind of forecast on the non AI markets. And also excellent job on the pricing discipline, so well done on the margin side.

Speaker 8

So a couple of questions from my side. So first of all, the CapEx, right, does that include some spending for the U. S. Part of fab because you kind of mentioned that there could be some debottlenecking required for the U. S.

Speaker 8

Operation?

Speaker 3

I mean, not for the 2024 number, that's not a whole lot. So that will not change the current CapEx projection. The when we say we pick out in 2024 in terms of CapEx and 2025 will start declining. That's already including that assumption.

Speaker 8

Okay. So any CapEx for that debottlenecking should be more $275,000,000

Speaker 3

Well, yes, most of it will happen there, yes.

Speaker 8

Okay. Yes. And also staying on this 12 nanometer business, right, you said you try to service customer schedule. Do you think any kind of production can be ahead of 2027?

Speaker 3

We certainly hope so. But cooperation like this scale naturally come with various kind of challenges, right? So we have gone through a rigorous due diligence since day 1 and we have been proactive in managing those potential challenges. So, so far, the collaboration has been a positive for us. And so we want to focus on to accelerate that, but I can't give you any specific at this point.

Speaker 3

But I think we have I think I can tell you the projects are on track and we have good confidence that we're making good progress right now.

Speaker 8

Got you. So in terms of the customers' feedback or demand compared to maybe 3 months ago or 6 months ago, do you see more commitment from your customers or partners? So I remember the Intel fab capacity is 50 ks to 60 ks, right? Are you confident that you can feel that capacity?

Speaker 3

I mean, we never specifically talk about capacity size. In terms of the capacity arrangement is very typical. We have to work with our customer and align with them based on their forecast and then we can deploy that. So there's no specific capacity number at this point. Secondly, we are seeing more interest because we announced this early this year.

Speaker 3

Obviously, that customers want to know more about it. And so we see a lot of interest. And I think we're making sound of good traction. But first, first thing first, we have to demonstrate that ourselves. So all hand on deck is we just focus on execution today.

Speaker 3

And given the project execution standpoint, we don't foresee any major risks.

Speaker 4

Okay.

Speaker 8

Yes. So I heard that your progress also get on nerve of your industry peer, for example, this key customer Novatek, right? I'm not sure whether there's some dynamic that you exceed Novatek supports because Novatek in the future, probably they would more depends on TSMC and TSMC also want to bundle with these customers tighter. So I'm not sure if there's already some counter move from your major competitor in 12 nanometer.

Speaker 3

I mean, first of all, we do not comment any specific customer. We never do. And from the competition standpoint, I we more look at this in a way of building a strong relationship with our customers is it can only forge upon a fundamental strength of in technology leadership, manufacturing, capability excellence, the capacity offering. And so you have to win by debt. You don't win by relationship.

Speaker 3

So having a true relationship is always good, but that's not we focus on. And we will continue to strengthen our competitive advantage in supporting our customer and winning their business and building that relationship.

Speaker 8

Got you. Yes. So we should have success. So may I switch gear to some near term or financial questions?

Speaker 6

Sure. Absolutely. Yes.

Speaker 8

Thank you. Yes. So, Chitung, so on the gross margin side, I'm wondering how you model the kind of electricity cost impact to your gross margin? And also, is it depreciation and sales growing like 20% year on year for 2024?

Speaker 2

Yes. Depreciation should grow around 20% or a little bit less maybe given the current new schedule for Singapore P3. And the utility impact is actually after the older cost together blended together is actually rather minimum. And our goal is always try to offset that through our operating efficiencies and also the benefit from the larger economies of scale. So our forecast is a small impact to our operating to our gross margin.

Speaker 8

Okay. So it sounds like you don't intend to pass through this kind of minimal additional cost to your customers. Do I interpret these comments, right? I mean

Speaker 3

the cost and the pricing is to us is actually 2 different things. From an ASP standpoint, I mean, we our pricing strategy, like I said, is consistent based on our value proposition. And then we and the they have to align with that and includes the competitive resilience, right? And but on cost and the we always want to try the aggressive cost reduction effort to compensate or offset down the headwinds and to maintain our structure probability. So we it's not a cost plus business model for us.

Speaker 8

I see. So in the Q and A with Bruce, I seems to hear you kind of admit that second half margin can be also at a similar level. Did I hear you right?

Speaker 3

I mean, we typically giving guidance quarter over quarter. But at this point, we more look at the market outlook and the ASP projection will stay firm. And but we do keep down the headwinds. Like you said, the utility cost increased, inflationary cost increased, depreciation cost increased. And so there are some headwinds that we have to deal with.

Speaker 3

So we will continue aggressively spend the effort to improve our cost structure. But and so the goal will be at the least that's continue to improve our structure profitability from that standpoint. I mean, I have to say currently, we have been navigating the industry dynamics even with the utilization rate below 70%, right? I mean, so I think we have demonstrated that for the past periods. And now we're dealing with the headwinds in depreciation, all those inflationary cost pressure.

Speaker 3

And I think we'll continue to do so. And so despite those challenges, we'll have relentless effort to overcome those challenges.

Speaker 8

I see. So last one from me. So on the end market trends, one observation, so I fully respect and you have been right about the cycle recovery, in the market forecast, right? But recently, we seem to hear that smartphone supply chain continues to see all the cuts. Your one of your major customer will report this Friday, I guess.

Speaker 8

So we are seeing inventory destocking, right, some tough situation for China smartphone still. You seem to say the inventories are healthy. So can I know how you're going to reconcile those data points?

Speaker 3

I mean the I mean, I kind of touched that. So first, we are cautiously optimistic about

Speaker 7

the rest of the

Speaker 3

year. If I put it this way, at this moment, we foresee the Q1 2024 could be the bottom. And the biggest uncertainty is the overall macro outlooks that could impact end market dynamics. So because the visibility insufficient visibility at this point, giving the customer is practice rush order practice approach. So we feel optimistic about it, but we need to be cautious about it.

Speaker 3

If the end market does not recover as we expected, we could have a challenging second half. But however, at this point, we have not seen that. So we really hope that if the market continues digesting the inventory, gradually improving the end market demand gradually improving, we actually foresee the Q1 2024 will be a bottom for the year.

Speaker 8

I see. Thanks, gentlemen. Awesome execution on the pricing discipline and also the 12 nanometer strategy. Thank you.

Speaker 3

Given that you have compliment me twice, I have to say thank you, Ali.

Operator

Thank you. Thank you. Next one, Jason Zhang, CLSA. Go ahead please.

Speaker 6

Thank you for taking my questions. Wondered if you can give us more details in terms of demand in second half. I mean, can you give us outlook or more details for 28 nanometers or 42 nanometers or 8 inches?

Speaker 3

For the well, I mean, let's talk about the Q2 since we're in the current quarter. And the Q2 outlook, when we look at the by applications, we expect the wafer demand in Consumer and Computing segment will grow, while the Automotive Industrial segment will remain soft they're still digesting the inventory. So they're still in the mixed bag for the Q2, but overall shipment, I think, will be it will grow quarter over quarter sequentially. If you break it down to a technology node, the 2822 will gradually improve. And for the mature nodes, the 12 inches and 4065 will stay flattish and while the 8 inches will stay flattish as well.

Speaker 3

And so that will be the current projection for us.

Speaker 6

Okay. Thank you. So can we expect that there will be normal seasonality demand in Q3? And how can we expect whether your utilization rate can reach maybe around 70 percent in this traditional house season. Can we expect that kind of seasonality

Speaker 3

or demand in Q3? Well, I mean, the at this time, the market still lack of a sufficient visibility, like I said, for the second half. I tried to give you an example there. We have observed rush orders from customers as they continue to managing their business prudently. And for Auto and Industrial, they have a slower inventory digestion.

Speaker 3

So we think by end of the year, I think auto and the industrial will be at a much healthier position. So given the mix of that, it's hard to tell you if the Q3 will recover to 70% utilization rate. We certainly see the sound of the market segment has a healthy inventory, so they have the demand will more directly link to the end market needs and versus the auto and the industrial still have to digest their existing inventory on hand. So if the macro situation is healthier, if the macro is recovered, which we expect, the computer, consumer and the communication segment, the demand will redirect to us as improve the loading situation. So there's so many different variable right now.

Speaker 3

And giving the insufficient visibility, I can't give you anything specific, but we definitely feel optimistic about that because the inventory situation is improving many of the market segments already. We just have to continue monitoring the progress and we will keep you updated quarter by quarter.

Speaker 6

Great. Thank you. So my last question is in terms of 28 nanometers or 2022 because on the demand side, actually, we found some of the clients are migrating from 22, 28 to maybe FinFET process nodes, including SSD controller or Wi Fi 7s. And on the supply side, we found that your competitor in China is planning to enter into mass production for 28 high voltage process node. So the demand is moving into the FinFET process node.

Speaker 6

And on the supply side, we know that UMC had kept good positions in 28 nanometers. But on the supply side, we found that there's new players are planning to into the high voltage process market. So how do you look at or how do you plan to keep your market shares or keep your technology leadership in high voltage or in those kind of niche markets or your products or to maintain your market share?

Speaker 3

I mean fundamentally the answer to that is we need to stay competitive. We know in the past and even currently right now at this moment, we work closely with customers, strategic customer to build specialty technologies, differentiation and lasting value for them to enhance their our product portfolio as well as our customers' product portfolio and with a diversified capacity. And so that we want to do that to offer our customer with a competitive solution. And so I think that's the answer to that. The competition is everywhere.

Speaker 3

And the key answer to that is we have to stay competitive and we'll definitely strive to do that.

Speaker 6

Okay. Thank you. I have no more questions. Back to queue.

Operator

Thank you. Next one, Laura Chen, Citi. Go ahead please.

Speaker 9

Hi, good afternoon. Thank you, gentlemen, for taking my question. I think my question is also kind of a follow-up on the CapEx outlook and also the depreciation. Since just you mentioned that CapEx will pick out in this year. I'm just wondering that looking forward, how should we look at the depreciation cost trend into next year?

Speaker 9

How would that impact our gross margin?

Speaker 2

The depreciation impact will be kind of delay factor. So if the CapEx is peak in 2024, I think the depreciation expense probably will be peak 2 or 3 years later. So the trend will still be on a minor upward trend all the way to 2026.

Speaker 9

Yes. So the magnitude of the depreciation cost increase for the following few years, you expect that will be more like a steady increase or that will be gradually like a scale up? Because still in the past 2 years, we see the CapEx increase.

Speaker 2

So given our ROI driven base CapEx and we are managing our overall depreciation expenses as a percentage of overall revenue. So I do expect the increased magnitude should be under control and also acceptable by the investor community.

Speaker 9

Okay. Thank you. And also for the AI opportunities, I understand that, Jason, you mentioned that will be 10%, 20% addressable market. And where are we now? And do we expect there will be a secular growth for the following 2, 3 years?

Speaker 3

Well, I mean, Laura, the like I said, we're still in the early stage of the proliferation of the edge AI. Most of the focus today is to running the computation shifts for the AI modules today. So we have a very small exposure there. And but we do expect the edge AI will start coming in. And there are some of the project that we have in discussion with customers.

Speaker 3

They all have a very high expectation. The market will taking out soon. And but I don't have any specific today. We do project those application or those features will be used in the Edge AI in the next few years and that will probably representing at a 10% to 20%. It could be even higher, but at this point we project about 10% to 20% of the AI silicon.

Speaker 3

Okay.

Speaker 9

Thank you very clear.

Speaker 3

Thank you, Laura.

Speaker 9

Thank you.

Operator

Ladies and gentlemen, we are taking the last one. The last question, Tim Shost Melander, Rappler, Atlantic. Go ahead please.

Speaker 10

Hi. Thank you very much for taking my questions. I just had 2, if I could sneak them in please. The first one was on the advanced packaging and chip integration. You talked about hybrid bonding moving into greater volume in 2024.

Speaker 10

Just wondering if you could share a few more details about the end application and if that's the partnership that you had press released with ASC, Faraday and Cadence. Is that the application? And then I had a quick follow-up, please.

Speaker 3

Well, first, for the wafer to wafer hyperbonding solution today, the applications for the RF front end module And the is for the is not completely correlated with the ecosystem press release. But to address your part of the question about the ecosystem conversation. For the ecosystem, we are not talking about one specific solution. We're talking about the UMC overall 3 d IC solution is leveraging the entire ecosystems to support that. We do not do turnkey solution, means the end to end solution.

Speaker 3

We're only providing wafer to wafer fiber bonding for the interposers and solution, while we have all the ecosystem partners to support the customer to provide a total solution. So that's not only limited with the hybrid bonding.

Speaker 10

Okay. But for that hybrid bonding, are you actually doing that wafer to wafer bond yourself in a UMC facility or is that being outsourced or shared with some partners?

Speaker 3

It's in house, yes.

Speaker 10

Okay. And maybe just if I can one sort of much, much bigger picture long term question. The last year or so has seen significant capacity expansion in more mature nodes among China based chipmakers across a whole range of products. Just as you look out 3, 5 years, how does that sort of influence the sort of strategic landscape and the amount of competition that you see or that you expect UMC to face? Thank you.

Speaker 3

Well, I mean, we kind of touched that earlier. There is a couple of things that we see that's driving the landscape changes. One is we do see more capacity build up, expanding for geopolitical reasons and or for the reason the semiconductor industry has become so important. So people want to build up more capacity regionally. And so there are multiple reasons that drives the overall capacity buildup.

Speaker 3

And the fundamentally, I mean, we believe we need to stay competitive. So we're working closely with our customer to build differentiation and to provide value to enhance our product portfolio. And the angle is we will strive to minimize some of the commodities exposure in some of the selected market if those capacity build up and it could have affected market, end market with some of the commoditized products. And so we need to continue to differentiate ourselves to minimize the exposure of that. If we look at the buildup situation, if they are driven by the geopolitical tension, that will in our view, it impose not only this constraint, but it also presents on the opportunity as a customer seeking alternative to support their sourcing objective.

Speaker 3

And for UMC, we are well positioned because our geographically diversified the manufacturing sites, which allow us to work with the customers to navigate this geopolitical concurrence. We are only the few foundry that have fabs across Singapore, Japan, Taiwan and China and back with a comprehensive technology portfolio, not single node, not limited technology offering, but very comprehensive technology portfolio. And that could be bridged between fabs, which actually is very beneficial to some of the customer if they want to have a fab flexibility, the cross fab flexibility. And each of our sites is equipped with a sizable capacity that can serve numerous market segments. And each our regional mini batching site also being well established with a scale and complete ecosystem, and we can run very highly efficient local operations.

Speaker 3

And if you look at our self, if you look at longer term, beside our strong manufacturing footprint in Asia, now we also extend our capacity offering into Arizona. We saw the cooperation with the U. S. Partner in 12 nanometer. That's another testament that we're expanding our technology offering as well.

Speaker 3

And so this will continue to further our competitiveness and to strengthen our customer supply chain resilience. So I think we can bring value to customer and that's how you compete. I think we are positioning ourselves to continue improve our market relevance, our market position And hopefully, the customer will see that and they recognize the value, then we'll stay competitive and to differentiate ourselves. I hope that gives you a bit of context in terms of bigger picture.

Operator

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

Speaker 1

Thank you for attending UMC conference call today. We appreciate your questions. As always, if you have any additional follow-up questions, please feel free to contact UMC at irumc.com. Have a nice day.

Operator

Thank you. Ladies and gentlemen, that concludes our conference for Q1 24. 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

  • Q1 financials: Consolidated revenue was TWD 54.63 billion with a 30.9% gross margin, net income of TWD 10.46 billion and EPS of TWD 0.84, while utilization was 65% and shipments rose 4.5% sequentially.
  • Specialty segment now represents 57% of revenue, driven by power management ICs, RFSOI chips and silicon interposers for AI servers, with new offerings in embedded high-voltage, embedded nonvolatile memory, RFSOI and 3D IC solutions progressing.
  • Q2 guidance: Wafer shipments are expected to increase by low single digits, ASPs will remain firm, gross margin is guided at ~30% and utilization in the mid-60% range, with 2024 cash CapEx of US$3.3 billion focused on 12-inch expansion.
  • The Board has proposed a higher cash dividend of NT$3 per share—over 33% above prior years—in line with UMC’s policy of stable, predictable payouts, subject to shareholder approval in May.
  • Market outlook: Inventories in Computing, Consumer and Communications are improving, while Automotive and Industrial segments see slower digestion; UMC will continue investing in technology, capacity and talent to capture growth from 5G and AI innovations.
AI Generated. May Contain Errors.
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