United Microelectronics Q2 2024 Earnings Report

United Microelectronics EPS Results

• Actual EPS: $0.17
• Consensus EPS: $0.14
• Beat/Miss: Beat by +$0.03
• One Year Ago EPS: $0.20

United Microelectronics Revenue Results

• Actual Revenue: $1.75 billion
• Expected Revenue: $1.71 billion
• Beat/Miss: Beat by +$36.50 million
• YoY Revenue Growth: N/A

United Microelectronics Announcement Details

• Quarter: Q2 2024
• Date: 8/1/2024
• Time: Before Market Opens
• Conference Call Date: Wednesday, July 31, 2024
• Conference Call Time: 5:00AM ET

United Microelectronics (NYSE:UMC) (UMC) is a Taiwan-based semiconductor foundry that provides wafer fabrication and related manufacturing services to a global customer base. Founded in 1980, the company operates as a pure-play foundry, producing integrated circuits for a range of customers including fabless semiconductor companies and integrated device manufacturers. UMC is publicly listed (NYSE: UMC) and focuses on high-reliability manufacturing rather than branding consumer products.

UMC’s core services encompass wafer fabrication using a portfolio of process technologies, with particular emphasis on mature and specialty nodes that support analog, power-management, radio-frequency (RF), and mixed-signal applications. The company offers design enablement and process support to help customers migrate designs into production and optimize yield. Its manufacturing capabilities are applied across product types such as system-on-chip components, discrete analog devices, and other application-specific integrated circuits used in end markets ranging from consumer electronics to industrial and automotive systems.

UMC serves a global market through sales and technical support networks and maintains manufacturing capacity in Taiwan as well as operations abroad to meet regional demand. Over its multi-decade history the company has positioned itself within the semiconductor ecosystem as a reliable provider of mature-node and specialty manufacturing services, working with ecosystem partners to address industry needs for power efficiency, analog performance and application-specific integration. Public disclosures and company filings provide additional detail on UMC’s facilities, technology roadmap and corporate governance for investors and customers seeking further information.

United Microelectronics Q2 2024 Earnings Call Transcript

Key Takeaways

• UMC reported Q2 revenue of TWD56.8 billion (+4% QoQ), a 35.2% gross margin, net income of TWD13.78 billion, and EPS of TWD1.11, driven by a weaker NT dollar and improved product mix.
• Wafer shipments rose 2.5% QoQ to 31k 8"-equivalent wafers with 63% utilization in Q2; Q3 guidance calls for mid-single-digit shipment growth and ~70% utilization.
• Announced industry-first 3D IC RF-SOI wafer stacking and a 22 nm embedded high-voltage platform, bolstering its specialty technology offerings for AI, 5G and automotive markets.
• Foresees H2 margin pressure from a ~20% YoY rise in depreciation and higher utility rates, with Q3 gross margin guided to the mid-30% range despite efforts on efficiency and product mix.
• 2024 cash-based CapEx remains at US$3.3 billion and Singapore 12 nm P3 is on track for volume ramp in H2 2026, underscoring disciplined capacity expansion.

Presentation

[Operator]

Welcome everyone to UMC's 2024 Second 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 broadcast live over the internet. 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. Lin, please begin.

[Michael Lin, Head of Investor Relations at United Microelectronics Corporation]

Thank you and welcome to UMC's conference call for the second quarter of 2024. I'm joined by Mr. Jason Wang, President of UMC, and Mr. Chi-Tung Liu, the CFO of UMC. In a moment, we will hear our CFO present the second quarter financial result, followed by our President's key message to address UMC's focus on third quarter 2024 guidance. Once our President and CFO complete their remarks, there will be a Q&A session. UMC's quarterly financial reports are available at our website, www.umc.com, under the Investor's 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 result to differ materially, including the risks that may be beyond the company's control.

[Michael Lin, Head of Investor Relations at United Microelectronics Corporation]

For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC and the ROC Securities Authorities. 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. Chi-Tung Liu, to discuss UMC's second quarter 2024 financial result.

[Chi-Tung Liu, CFO at United Microelectronics Corporation]

Thank you, Michael. I'd like to go through the 2Q24 Investor Conference presentation material, which can be downloaded or viewed in real time from our website. Starting on page four, the second quarter of 2024, consolidated revenue was TWD 56.8 billion, with a gross margin at 35.2%. The net income attributable to the stockholder of the parent was TWD 13.8 billion, and earnings per ordinary share were 1.11 TWD.

[Chi-Tung Liu, CFO at United Microelectronics Corporation]

In the second quarter, our wafer shipments increased 2.5% quarter-over-quarter to 831,000 12-in wafer equivalents in the second quarter. Utilization rate in the second quarter was 68%, compared to 65% in the previous quarter. Revenue grew by 4% quarter-over-quarter to TWD 56.8 billion. Other than the 2.5% QoQ wafer shipment increase, the others were helped by the weaker NT dollar exchange rate. The gross margin we mentioned earlier was 35.2%, or nearly TWD 20 billion. With minor help from the non-operating income, the total net income reached TWD 13.77 billion, and the net income attributable to the shareholder of the parent was TWD 13.78 billion, or 1.11 EPS in the second quarter. For the first half of 2024, revenue was almost flat compared to the same period of last year, which was TWD 111 billion for the first six months of the year.

[Chi-Tung Liu, CFO at United Microelectronics Corporation]

Gross margin was around 33.1%, or TWD 36.8 billion. Net income margin is around 21.8%, or TWD 24.2 billion. EPS in the first half was TWD 1.95 per share. Our cash level is around TWD 121 billion, and our total equity at the end of second quarter of 2024 was TWD 356 billion. ASP remained flat in Q2 of 2024. In terms of revenue breakdown, Asia gained about 1% of the revenue distribution to 54%, when North America stayed unchanged at 25%. IDM declined notably from 18% in the previous quarter to 13% in Q2 2024. Communication also declined from 48% in the previous quarter to 39% in quarter two. Consumer and computer both grew by single-digit percentage, respectively; 22/28-nm revenue continued to be around 33%, and 40-nm declined from 14% in the previous quarter to 12% in this quarter.

[Chi-Tung Liu, CFO at United Microelectronics Corporation]

Capacity at the 12A continued to increase, and in the third quarter of 2024, our 12A capacity will reach 400 above the 1,000 12-in equivalent wafers in the third quarter. Currently, the estimate for 2024 CapEx remained unchanged, around $3.3 billion. The above is a summary of UMC result for Q2 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.

[Jason Wang, President at United Microelectronics Corporation]

Thank you, Chi-Tung Liu. Good evening, everyone. Here I would like to share UMC's second quarter results. In the second quarter, wafer shipment increased 2.6% quarter-over-quarter, and fab utilization rate improved to 68%, as we saw notable demand momentum in the consumer segment. Contribution from our 22/28-nm systems rose sequentially on healthy demand of Wi-Fi and digital TV applications. Together with a favorable exchange rate and improved product mix, second quarter gross margin was better than what we previously guided to. During the quarter, we announced technology updates, including a 3D IC solution to stack RF-SOI wafers, which is the first of its kind in the industry, and a 22-nm embedded high-voltage platform, currently the most advanced display driver foundry solution in the market.

[Jason Wang, President at United Microelectronics Corporation]

They reflect UMC's commitment to building on our leadership across a number of specialty technologies that are crucial for the development of AI, 5G, and automotive. Looking to the third quarter, we expect to see end-market dynamics improve further, particularly in the communication and computing segment, which will drive higher fab utilization. Our 22/28-nm business remains a promising growth driver, with a number of payoffs taking place in the second half for applications including display driver, connectivity, and networking. At the same time, we do expect to face some margin pressure going into the second half due to pickup in depreciation expense related to capacity expansions, as well as higher utility rates.

[Jason Wang, President at United Microelectronics Corporation]

Despite these cost challenges, we believe we will continue to demonstrate our resilience as we did during the recent market downturn and deliver on our strategy of providing differentiated technology solutions and a diversified manufacturing footprint to help our customers to strengthen their supply chain management. Now, let's move on to the third quarter 2024 guidance. Our wafer shipments will increase by mid single-digit percentage. ASP in US dollar will remain firm. Gross margin will be in the mid-30% range. Capacity utilization rate will be approximately 70%. Our 2024 cash-based CapEx will be budgeted at $3.3 billion. That concludes my comment. Thank you all for your attention, and now we are ready for questions.

[Operator]

Yes, thank you, President Wang. Ladies and gentlemen, we will now begin our question-and-answer session. If you have a question for any of today's speakers, please press star one on your telephone keypad, and you will enter the queue. After you are announced, please ask your question. If you find that your question has been answered before it is your turn to speak, please press star two to cancel the question. Now, please press star one on your keypad if you would like to ask the question. Thank you. Now, first question is from Sunny Lin, UBS. Go ahead, please.

[Sunny Lin, Analyst at UBS]

Thank you very much for taking my questions. Really glad to see improving gross margin in Q2. And so my first question is on the utilization rate outlook. You are seeing some improvement going to Q3 to about 70%. But if we look at in the past full cycle, your utilization rate were around 85%-90%. In a better up cycle, it could be over 90%. And so now with the improving cycle, but still considering some oversupply issues, what would be a reasonable estimate for your utilization rate going to 2025?

[Jason Wang, President at United Microelectronics Corporation]

Well, I mean, I think we'll focus on our 2024 first. For 2024, we are confident on our promising Q3 wafer demand as they continue to increase. However, we foresee that UMC's customer demand forecast has started to reflect more of a seasonal pattern where the second half of 2024 wafer shipment will increase relative to the first half. That's supported by healthier inventory level with the consumer communication and computing segment, where the demand in auto remains soft. We expect to see the mild pickup in communication, consumer, and computing segment. However, despite the mild recovery in the Q3 2024, we have not seen signs of a strong rebound as the customer remains prudent on managing their inventory level. Customers will continue to be prudent on their inventory management, which will likely lead to a seasonal Q4.

[Jason Wang, President at United Microelectronics Corporation]

And then starting from Q1 2025, once the auto's inventory gets to a healthier level, we believe that 2025 will get back to the normalcy of the industry demand outlook.

[Sunny Lin, Analyst at UBS]

Got it. Thank you very much. Well, so my second question is on how should we think about the structural gross margin? There are some pros and cons. One is on pricing. A couple of your peers mentioned stabilizing dynamics from Q3. Is that what you are expecting for the next couple of quarters? And then second, on depreciation, you have guided depreciation should increase in second half of this year. But any sense about 2025, should we still expect like 20% type of increase for your depreciation? I will assume it could be less because you are delaying the Singapore expansion. And then the third, maybe on the cost inflation, any view on the potential impact going to 2025?

[Chi-Tung Liu, CFO at United Microelectronics Corporation]

Yeah. In terms of the depreciation, this year we still estimate around 20% year-over-year increase for 2024 over 2023. As for 2025, we don't have the final numbers yet. We will report that in the next quarter earnings call. But the magnitude should be similar to that of this year. In terms of the cost item, we are looking at the higher seasonal utility costs in the third quarter. And our quarterly depreciation is likely in terms of the increase rate, third quarter will be the highest, around 10% quarter-over-quarter increase. So we will continue to work diligently in terms of controlling our cost item, hopefully through the better efficiency and some of the automation, we will be able to offset the pressures from the increasing cost item.

[Chi-Tung Liu, CFO at United Microelectronics Corporation]

One way to look at this, we will remain a solid EBITDA margin, and we will improve along with higher utilization rate. We will continue to strengthen our competitiveness and improve product mix to maintain our structural profitability.

[Jason Wang, President at United Microelectronics Corporation]

So if we go back to the ASP question, the UMC's pricing in 2024 has remained consistent and well aligned to our strategy, as you can see. We expect pricing will stay competitive as we continually working with the customer to ensure their product offering remains competitive in the marketplace as well. It's our belief that elevating our customers' product competitiveness will help customers to win more market share. So our pricing strategy has remained consistent and aligned to the value proposition that UMC offer, which includes they are staying competitive and resilient against the market dynamic, such as capacity situation, technology solution, customer partnership, and manufacturing performance. So we will constantly manage our pricing strategy, but we remain fairly consistent with our current strategy. Yeah.

[Sunny Lin, Analyst at UBS]

Thank you. One quick follow-up on your Singapore 12i expansion. Any update you could share with us in terms of the ramp-up schedule?

[Jason Wang, President at United Microelectronics Corporation]

For the P3, the schedule has not changed. We expect the P3 ramp will reflect in our, I mean, in the one we project, the 12i P3 production ramp will start in January 26th. And the ramp-up to high volume starting from the second half of 2026. Yeah.

[Sunny Lin, Analyst at UBS]

Got it. Thank you very much.

[Operator]

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

[Gokul Hariharan, Managing Director at JPMorgan]

Yeah. Hi. Thanks for taking my question. So first of all, I just wanted to get into the gross margins, which have come in slightly better than or significantly better than your original guidance in Q2. And Q3 also looks like you're kind of holding a mid-30s level even with the cost increases. So just wanted to understand what is going into these gross margins, kind of getting back from the, let's say, 30% levels to 35% levels recently, even with a lot of the cost pressures. Just wanted to understand anything specific that you're doing to kind of get the gross margins moving up. And should we expect that as the depreciation ramp continues, we can hold this level, or we think that this level can kind of drop back to the early 30s levels that we had in Q4 last year and Q1 of this year?

[Jason Wang, President at United Microelectronics Corporation]

I mean, yeah, Chi-Tung Liu kind of touched that a little bit earlier. For the Q2 gross margin, I have to say it's mainly coming from the favorable foreign exchange rate movement that contributed to a better-than-guided gross margin result. For the Q3, while the utilization has increased a little bit, but the gross margin actually remains at the mean 30% range. It's really because in Q3, the rise depreciation expense from the capacity expansion of the 12A P6 and the 12i P3, along with some of the seasonality utility rates. And that will be considered for our Q3 gross margin guidance. However, like Chi-Tung Liu mentioned earlier, we foresee our EBITDA margin will remain firm relative to the Q2 2024.

[Gokul Hariharan, Managing Director at JPMorgan]

Got it. And just on the pricing side, just looking at it, 12-in versus 8-in, are you seeing any noticeable differences in terms of pricing tendencies? And also for your 8-in business, do you feel that 8-in can ever get back to the 90%-95% utilization that we used to have, or you see that this is a point in time where 8-in eventually has to migrate to something else and a lot of the core logic kind of business and even some of the analog power management business eventually migrates down to 12-in, given that there's a lot of capacity coming online?

[Jason Wang, President at United Microelectronics Corporation]

Okay. Well, I mean, on the ASP, while our ASP remains firm, from the like-to-like pricing will remain unchanged. And however, the blended ASP will reflect the change in product mix as well as the 8-in and 12-in composition. So I think that's on the ASP front. So at this point, for the second half, we remain firm on our pricing. Okay. For the 8-in business outlook, the 8-in loading in Q2 actually improved a little bit because the power management IC you mentioned in the computing application. We foresee that the Q3 will further increase a little bit, driven by the embedded nonvolatile memory demand for auto server-related application. However, like you said, can it ever get back to 95% level? We certainly hope so. However, we anticipate continuous pressure from some of the 12-in mature fab, like you said, and that has impacted 8-in supply chain.

[Jason Wang, President at United Microelectronics Corporation]

While the certain mainstream application will remain on the 8-in node, what we currently do is we have identified a number of additional projects and opportunities with our key customers to gradually lift our 8-in loading. So I think from the goal-wise, we are not giving up yet. I think the 95% is still our goal. But from the timing-wise, we'll probably take some time to gradually lift to that level. And so we'll continue our efforts by doing so, and we can update you accordingly. Yeah.

[Gokul Hariharan, Managing Director at JPMorgan]

Okay. Thanks, Jason. Maybe one last question from me. The interposer, sir, for some of the AI-related 2.5D packaging products, what percentage of the revenues are they, given that you called it out in your prepared remarks? And is there any further capacity expansion plan for you beyond, I think, the 6,000 that you mentioned a few quarters back?

[Jason Wang, President at United Microelectronics Corporation]

Well, first of all, we have already doubled our interposer capacity to 6,000, as we reported previously, that in response to incremental demand at the beginning of 2024. For any additional interposer capacity expansion, we'll be assessed based on customer alignment. So we follow up with our customer closely, and if there is an additional incremental requirement, we will consider. But at this point, alignment is at 6,000. Yeah.

[Gokul Hariharan, Managing Director at JPMorgan]

Any thoughts on the revenue contribution from this business? Is it like 4%-5% of your revenue already, or is it much smaller than that?

[Jason Wang, President at United Microelectronics Corporation]

I don't think we have a breakdown on that with me right now, but it's not a significant revenue from that. I think your estimate is about right.

[Chi-Tung Liu, CFO at United Microelectronics Corporation]

It's actually less than 4% or 5%.

[Jason Wang, President at United Microelectronics Corporation]

Yeah.

[Gokul Hariharan, Managing Director at JPMorgan]

Okay. Thank you very much.

[Gokul Hariharan, Managing Director at JPMorgan]

Thank you, Gokul. Next, we'll have Bruce Lu, Goldman Sachs. Go ahead, please.

[Bruce Lu, Analyst at Goldman Sachs]

Hi, Jason. This is Bruce Lu. I want to ask about regarding to the Vanguard, who has built a capacity with their customer for 12-in in Singapore. It seems to me that they have a lot of customers who are signing up for the capacity in the future. So I want to know, what do we miss here? I mean, what's the reason why UMC didn't get this business? UMC has the legacy capacity in Singapore. UMC has the TSMC-like process. And obviously, you don't have the you have the existing capacity, which doesn't really require a customer to prepay or any additional wafer price hike. I mean, what do we miss here? I mean, any possibility we can win back the business or get the future business away from our competition?

[Jason Wang, President at United Microelectronics Corporation]

Well, I mean, thank you, Bruce. I think there's a few things. One is, obviously, we don't comment on our competitors, and they must have clear reasons for doing the capacity expansion. We actually feel very comfortable with our capacity situation in terms of 12-in materials, which is, that's what you're referring to. Despite, in the recent quarter, the 40-nm and the 65-nm revenue has declined a little bit quarter-over-quarter due to the customer's ongoing correction within the automotive and industrial segment. But we do expect the 40-nm and 65-nm business will grow substantially in Q3, driven by higher demand in auto and computing applications. Longer term, we expect to grow in our 40-nm and 65-nm product pipeline based on the specialty and logic technology, such as nonvolatile memory, RF-SOI, BCD, OLED display, and ISP.

[Jason Wang, President at United Microelectronics Corporation]

So our offering is very broad, and I think our solutions are competitive. So if we come back to look at this thing fundamentally, without commenting about our competitors' customer base, I think besides who you have mentioned, we have seen more regional mature capacity buildup driven by increasing importance of the semiconductor industry in addition to the geopolitical tension. It's our view that this is a change in the competitive landscape. So there's three things that I'd like to say in order to stay competitive. And first of all, we need to stay competitive so that we're working closely with our customer to provide competitive and comprehensive specialty technology with a continuous and no migration path. That's coming from our existing customer as well as a new customer.

[Jason Wang, President at United Microelectronics Corporation]

Secondly, we are one of a few foundries that have economic scale and highly efficient operations across all our fabs, whether it's in Singapore, Japan, Taiwan, or China, with a technology offering that could possibly be the cross-fab to serve our according to our cross-fab to serve our customers' sourcing needs. Going forward, we'll continue to invest where we have strength and differentiation through capacity expansion at 12i Singapore, as well as our 12-nm collaboration with a U.S. partner to fuel our future growth. So I don't think we're missing anything. I think there's within our addressable market, we focus on our customer engagement and continue delivering our solution and make sure that we can grow with our customer together. So in a way, I won't comment that there's something that we're missing here. I think we have an adequate solution to serve our customer right. Yeah.

[Bruce Lu, Analyst at Goldman Sachs]

Okay. I'm not trying to be critical, but the thing is that your customer seems to choose the competition while we believe actually, as far as we can see, that you can have a better cost structure, you have the better process, it seems to me you have pretty much everything you need. So I just wonder what does the customer think? I mean, how can we prevent that?

[Jason Wang, President at United Microelectronics Corporation]

I mean, I agree with you. I do think we have a much complete and comprehensive solution, and I think we have a much cost-effective solution as well. And the operation is a lot more efficient, and we scale as well. And so I agree with you. But there are multiple considerations for customer engagement, and there's reason beyond that we both look at it, as well as we just discussed. So I think there's a different reason behind it. And I really can't comment about our competitor as well as our customer, but I can assure you that we'll continue to strive to improve and enhance our competitiveness, and then we continue maintaining and gaining our market shares in those space.

[Bruce Lu, Analyst at Goldman Sachs]

Okay. So my second question is regarding to the technology requirement for the display driver IC, which is an important part for your 28-nm. Do we really need to migrate to 14-nm or 12-nm, and when do we expect to see that? Is the partnership with Intel, the timing is available or it's ready, it's good enough to catch up the trend?

[Jason Wang, President at United Microelectronics Corporation]

Well, there's a couple of questions you have. Actually, the 12-nm collaboration is not only limited with the high-voltage solution. So, from a technology development standpoint, our technology advancement into a next-generation node has never slowed down. And we are considering a disciplined ROI capacity deployment. However, from a technology development standpoint, we will continue. For the high voltage, in fact, we already have delivered a 22-nm solution to help our customer migrating from 28-nm for high-end OLED display in the premium smartphone space. The 22-nm has already entered production now, and we expect it will reach high-volume production in 2025. And we are very confident that we'll maintain high shares in this market. Now, UMC is the only technology provider on the 22, which offers more competitive die area and unmatched power saving around 30%.

[Jason Wang, President at United Microelectronics Corporation]

So the UMC's 22-nm high-voltage platform extends battery life and offers superior visual experience. So we also provide sizable capacity offering in 22-nm and 28-nm into all our fabs, like I said earlier. This will actually strengthen our customer supply chain resilience beyond 22-nm. Into your question about the FinFET, our engineering development team are working on further expanding our high-voltage portfolio to the FinFET in anticipating the AI smartphone.

[Jason Wang, President at United Microelectronics Corporation]

Now, is there a benefit to the FinFET? We certainly think so. And at this point, I think the 22-nm is the best-in-class right now, and the 14-nm is under development. I mean, the FinFET is under development. Now, besides the high voltage on the 12-nms, the 12-nm program, we can serve many different applications. And after our announcement of the collaboration, we have received numerous inquiries from various industry-leading players.

[Jason Wang, President at United Microelectronics Corporation]

According to the earlier evaluation feedback from those customers, our 12-nm performance will be very competitive in the industry to serve different applications. It's not only limited at the high-voltage space.

[Bruce Lu, Analyst at Goldman Sachs]

A very quick follow-up. Do you expect the display driver IC to adopt FinFET in 2026?

[Jason Wang, President at United Microelectronics Corporation]

Twenty-twenty six? I think that's a bit early. I think the 22-nm will probably still remain as the mainstream.

[Bruce Lu, Analyst at Goldman Sachs]

I see. Thank you.

[Operator]

Thank you, Bruce. Next question, Charlie Chan, Morgan Stanley. Go ahead, please.

[Charlie Chan, Managing Director at Morgan Stanley]

Thanks, Jason. Chi-Tung. Good afternoon, and congrats for a very good results. Both the margin and the revenue surprised to the outside, especially I think most of your peers commented that outside of AI, the cycle recovery remains to be very slow. So a very, very good execution. And I still want to follow a little bit on the gross margin question. So maybe first to Chi-Tung, because according to my calculation, the NT dollars depreciation may be 3 percentage points over the past quarter. So contribution to gross margin could be 1 percentage point. But you were saying that the 2Q gross margin beats many coming from the FX. So do we miss anything on that comment?

[Chi-Tung Liu, CFO at United Microelectronics Corporation]

So roughly every 1% of NT dollar depreciation will lead to about 0.4% of the margin increase. So 3% Forex movement translates into about 1.2-1.3 percentage point for quarter two. And of course, there's some minor items, including the utility increase. Our previous forecast was slightly higher than the actual adjustment rate. But I think, again, Forex is still the main factors for the 35.2% gross margin versus our guidance of 30-ish gross margin.

[Charlie Chan, Managing Director at Morgan Stanley]

Okay. Okay. Thanks. Yeah, that's clear. So maybe next question to Jason. I mean, we heard you about you can be flexible on pricing. You want customers to stay competitive. So I was assuming that probably there would be some ASP erosion, but in return, you can get some business opportunity. But it turns out that your pricing is firm, but your revenue still grows nicely in third quarter. So again, what did we miss? Are we too conservative on end demand, or what are we missing? Thank you.

[Jason Wang, President at United Microelectronics Corporation]

Well, I mean, first of all, like you said, the like-to-like pricing remains unchanged, but the blended ASP reflects a change of product mix between 8-in and 12-in as well, mainly because that's aligned to the end market. We do see some of the segment have exiting the inventory correction cycle. So some of the restocking, the demand is actually coming back while we actually stay away from the commodity market segment. So I think we've been trying to manage this, try to balance this portfolio as well as the product mix diligently. I think that's more of a result of that. In addition to that, I also believe you have to stay fundamentally competitive by offering the differentiated technology solutions. So we're going to continue advance that, and we're going to continue expanding our specialty technology in space, and hopefully that we can continue maintaining that.

[Jason Wang, President at United Microelectronics Corporation]

Now, if it comes down to if we do need to elevate our customer for their product to be competitive in their market space and helping them to win more market share, we certainly will address that. Our end goal is we try to create a win-win scenario to benefit both sides in the long run. Yeah.

[Charlie Chan, Managing Director at Morgan Stanley]

I see. Thank you. Yeah. And maybe on that interposer side, because my understanding is that the end customer is probably migrating to the next generation AI GPU, and the interposer design may change. So I'm a little bit concerned whether it's not about whether you can maintain the interposer capacity. I'm concerned that the interposer business may go away maybe in one or two years. Is that a fair concern?

[Jason Wang, President at United Microelectronics Corporation]

Sure. Absolutely. I mean, just like any other technology, the product will continue migrating into the next generations. But at the same time, like any other capacity on different technology nodes, there's also another product pipeline that is coming into that. So the product pipeline management is key. We continue engaging a new product coming into the existing capacity, and while some of the existing product may migrate into the next generation. However, on our 3D IC roadmap, in addition to interposer, which will engage the pipeline, we're also developing the wafer-to-wafer hybrid bonding, which we have announced in the past quarter. So the way we view this is the 3D IC solution offers the advantage, including form factor reduction, higher bandwidth, and lower power consumptions. So not only on interposer, we also want to expand our offering in that front.

[Jason Wang, President at United Microelectronics Corporation]

We are the first foundry that with the wafer-to-wafer bonding solution for the RF-SOI that are production ready today. Our second RF-SOI wafer solution is able to achieve an impressive 45% form factor reduction. Even beyond the form factor reduction, our high bandwidth hybrid bonding solution can also cover memory and ASIC with our qualified IP foundations that will make our offering well-positioned to address the increasing needs of inference engine of various edge AI applications in the future. At the moment, we are working closely with AI-focused customer on tailored solutions to meet their specific needs in a various combination of our hybrid bonding technologies. In summary, we are confident that the interposer hybrid bonding has a great potential, and we are committed to continue to invest in R&D to ensure we can serve our customers the best we can.

[Charlie Chan, Managing Director at Morgan Stanley]

Understood. Thank you. Yeah. And last one, I'm not sure if I missed it, but about your 12-nm partnership with Intel. One is that I wanted to know about the progress and maybe whether the timing can be ahead. And as you also see that Intel is changing their foundry business leadership, do you think that will change or accelerate your partnership with Intel?

[Jason Wang, President at United Microelectronics Corporation]

Well, I mean, first, the 12-nm collaboration with Intel has been on track for mass production in 2027. That project is very much on track and progressing well. From the schedule-wise, right now, we are working diligently with our partner and as well as the key customers to further accelerate the schedule. Overall, we are cautiously optimistic about the progress and will update accordingly. I actually feel very good about the current progress. Now, in terms of the leadership question, and the project itself, I consider progressing well. I think the leadership will continue to view that as a win. I think the objective of this collaboration has not changed. The goal remains the same. Our current focus is to deliver a very competitive solution for the mass production in the 12-nm through this collaboration.

[Charlie Chan, Managing Director at Morgan Stanley]

Jason, sorry, very, very last one. Because I'm still a little bit still surprised to the outside by your third quarter revenue guidance. Because one of your major customers, MediaTek, their second quarter inventory days actually went up to 72 days. 1Q was 66 days. So first of all, inventory days start to go up again. And they are guiding their third quarter revenue to be flat. So I'm just wondering why you can outgrow the market, especially customers' inventory days go out again. Sorry for keep coming back to this inventory or cycle question.

[Jason Wang, President at United Microelectronics Corporation]

I mean, first of all, I mean, we see a continuous inventory improvement across all segments. And some of the customers may have seen a little bit of piling up. But basically all segments have improved their inventory level. And we have seen that. And we expect to see the inventory reach a relatively healthy by end of this year. And so that's also we guided that the customer will still have a cautious approach to their inventory management based on the current market outlook. However, for the automotive segment, the end market demand for the automotive still remains fairly soft compared to other segments. And the inventory level has improved, but the base inventory is still above the seasonal level. So I think besides the auto, the rest of the market segment will probably start experiencing some of the seasonality patterns.

[Jason Wang, President at United Microelectronics Corporation]

I feel from the inventory correction point, we should have already exited for those communication, consumer, and computing ends.

[Charlie Chan, Managing Director at Morgan Stanley]

In that case, do you change your industry assumption this time for ex-memory and also foundry?

[Jason Wang, President at United Microelectronics Corporation]

You're talking about our addressable market outlook?

[Charlie Chan, Managing Director at Morgan Stanley]

Yes, yes. Yeah. Do you revise this time?

[Jason Wang, President at United Microelectronics Corporation]

Last time we talked about our UMC addressable market will remain flat-ish. Our outlook has not changed. Our projection still shows the UMC addressable market will remain flat-ish in 2024. Our goal is we expect to outperform our addressable market in 2024 as some of our customers have adapted our solution and ramping and gaining market share for the second half.

[Charlie Chan, Managing Director at Morgan Stanley]

I see. Thank you. It's super helpful. Thanks, guys.

[Jason Wang, President at United Microelectronics Corporation]

Sure.

[Operator]

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

[Laura Chen, Analyst at Citi]

Thank you very much for taking my questions. I also have a follow-up question in terms of the end demand. As Jason, you mentioned that you see the relatively strong order for computing and also communication. But some of your competitors, they mentioned that they just kind of rush order. So I'm wondering that if the order visibility can be sustainable into Q4 from your perspective?

[Jason Wang, President at United Microelectronics Corporation]

Well, I hope if I mislead you, I'm sorry about that, but Laura, what I said is we expect to see a mild pickup in communication, consumer, and computing segment. However, despite the mild recovery in Q3, we have not seen the sign of a strong rebound as the customer remains prudent on managing their inventory level. So I think on some of the market segments such as the communication, consumer, and computing area, I think we are in the process of exiting the inventory correction cycle by end of this year. And while the automotive will probably be exiting by Q1 next year. And while we're exiting this, and I think the customers remain prudent. And I think right now the phenomenon is more showing we are going back to the traditional seasonal pattern on the annual basis. The seasonal patterns that aligns with the market outlook. Yeah.

[Laura Chen, Analyst at Citi]

Okay. Thank you. That's very clear. Also, I noted that for our IDMs, the revenue declined quite substantially since the peak in Q4 last year. Can we assume that it's mainly because of the automotive-related, or also we are seeing the same trend that for the consumer computing price that gradually improved, while automotive industrial from the IDMs that could still relatively muted for the next few months?

[Jason Wang, President at United Microelectronics Corporation]

Well, first of all, you're right. So our IDM customers were also impacted by the global semiconductor downturn across not only communication or automotive, across the consumer, communication, computer, and automotive segment. And some of the IDMs and their customers have a pile-up inventory, which results in a decline in wafer demand at their foundry supplier. So I think the 2024 is a year with a complication of inventory correction as well as the end market soft. So however, we anticipate the inventory level will improve. And so although at a slower pace, again, and so longer term, once the inventory correction is over, and on the longer term, we foresee IDM will continue to rely on foundry partners, and their contribution will gradually recover. Yeah.

[Laura Chen, Analyst at Citi]

Okay. Also, a follow-up on that, because we see some of the IDM, our clients like Texas Instruments, they seem to also aggressively expanding their internal capacity. But once their demand getting stabilizing, are we still assuming that they will continue to do outsourcing like before, or they will tend to insource more internally from your perspective?

[Jason Wang, President at United Microelectronics Corporation]

I think after the COVID, after the capacity constraint, there's many different companies that look at their supply chain resilience question. So having internal capacity is one of the solutions to address that supply chain resilience question, a concern they have. And from the foundry partner standpoint, I think that remains very important. I think that will be considered as one of the entire supply chain ecosystem. And I think the IDM will continue to rely on the foundry partner to an extent. However, they will probably balance that a little bit to ensure their supply chain resilience is improved. Yeah.

[Laura Chen, Analyst at Citi]

Okay. Thank you. And also, hopefully, you can give me more understanding about the DDIC business model. We know that a lot of advanced packaging or wafer-based is done on the wafer foundry side. But since we are also expanding that the 3D ICs, hybrid bonding, that type of design, can you elaborate more on how is the business model going with the OSAT and also our competitors or potentially customers? Thank you.

[Jason Wang, President at United Microelectronics Corporation]

Well, in our view, the semiconductor foundry OSAT ecosystem remains very important. So I think that's our view. So the 3D IC roadmap that we have that requires us to work closely with our ecosystem partners. And not only on the OSAT, also as well as the memory or ASIC on the qualified IP supplier as well. So I think the landscape will require us to expand our ecosystem and to strengthen our partnership with our backend partner as well. So I think in our view, this still considers us an ecosystem to serve our customer.

[Laura Chen, Analyst at Citi]

Okay. Thank you.

[Operator]

Thank you, Laura. Next, we have Brad Lin, Bank of America. Go ahead, please.

[Brad Lin, Director at Bank of America Merrill Lynch]

Thank you for taking my question. My first question is I want to follow up on the interposer capacity thing as we recognize some potential downside eyeing on the potential CoWoS-L or CoWoS-R adoption in the future. We explained that UMC is developing the wafer-to-wafer hybrid bonding. Does that mean that this interposer capacity can be fungible and then applied to this kind of 3D IC in the future?

[Jason Wang, President at United Microelectronics Corporation]

No. They are different offerings. The interposer capacity will continue serving us interposer needs. While we have a continued roadmap for the interposer going to the next generation as well. So that technology advancement is not going to stop. At the same time, we see more interest coming for the interposer needs. I think we actually engage different applications. The continued pipeline for this interposer; 3D IC wafer-to-wafer hybrid bonding is an extension of our advanced packaging offering. So we'll continue expanding that. We think for our addressable market, the wafer-to-wafer hybrid bonding will provide the expansion of the addressable market. I think they are well fitted with our solutions.

[Brad Lin, Director at Bank of America Merrill Lynch]

Got it. And so we see pretty good potential there on the edge AI from this wafer-to-wafer technology. So what time does UMC expect this contribution to rise? And which are the, well, maybe potential key clients?

[Jason Wang, President at United Microelectronics Corporation]

In the near term, we already announced for the RF-SOI stacking is already ready for production. So on our front end, that's already started to production. And related to future AI exposure, I think we kind of touched that last quarter as well. The AI extends from the cloud to edge. I think it will still take some time. But it's our belief the new use cases will inevitably emerge along with the value chain. Right now, we're only seeing the growing number from existing AI, PC, notebook, or smartphone that requires silicon content to handle this case. But furthermore, the real opportunity that we believe lies beyond the existing edge device, which is in the new emerging application under the AI mega trends, such as the ADAS, autonomous driving, robotics, industrial 4.0, future breakthroughs, which will drive significant increase of silicon content accordingly.

[Jason Wang, President at United Microelectronics Corporation]

The technology solution that we offer will definitely be beneficial to that. I think the offering that we have, not only on interposers, 3D IC, wafer-to-wafer, also for the RF-SOI low-power BCD non-volatile will also be very well-suited to meeting those demands in those AI-related markets.

[Brad Lin, Director at Bank of America Merrill Lynch]

Got it. Got it. So that actually quite related to the second question that I want to try to ask here is that, well, for the utilization rate, yeah, even though we see pretty well good recovery in the second half of the year with more than 70% of the UTR, but eyeing on the future, we are definitely not, I mean, the company is definitely not satisfied with only this level. So we totally believe that UMC already foresee some of the long-term drivers to kind of potentially leave the UTR meaningfully back to sustained 80% or 90% in the future. So I think you also mentioned that some new device or application might be the ones like robots. So would you please share with us your visibility on that? And also, how would that bring you in the middle long run? Thank you.

[Jason Wang, President at United Microelectronics Corporation]

Well, first of all, we're very, very optimistic about the future semiconductor market. The AI is going to be a very big driver. However, I think some of the new use cases will still have we have to see them to come. I think it's still a bit early right now. However, we have very, very high expectations in the longer term. Meanwhile, while we're exiting the inventory correction cycle between end of this year to early next year, I think the market will go back to normalcy. So that means that we're very much subject to the end market demands. So I think for the next year, we have to wait and see how the end market demand goes because there's still macroeconomics, inflation concerns. At this point, maybe too early to say how much of a utilization improvement, utilization rate improvement we will expect.

[Jason Wang, President at United Microelectronics Corporation]

However, going longer term, I have no doubt the utilization rate will increase. While we don't have the clear projection on when, so our focus now is we want to continue to sustain our strong financial performance while we stay in the down cycle. And as a result of our company resilience, this is a manifestation of our continuous effort in developing a competitive specialty technology offering as well as optimizing our customer base and product portfolio. I hope that the current performance shows that. Going forward, we will continue to focus on specialty technology development and our ROI-driven capacity expansion to capture the market upturn once they come. On the specialty technology development, our industry-leading offerings, which will broaden our addressable market and enhance our customers' competitiveness, like what we have recently announced. And the customers are currently migrating their 28-nm products to our 22-nm technology.

[Jason Wang, President at United Microelectronics Corporation]

Customers will also adopt our 12-nm FinFET. For high-voltage products, we expect the 40/28-nm high-voltage customers will adopt the 22-nm High-V. Embedded memory applications will transition to 28-nm and 22-nm. We are very confident about the 28-nm and 22-nm for the longer term. We also expect to see more interest in the 55-nm, 40-nm mature area, such as RF-SOI. I mean, and while we're talking about all those, from the future capacity expansion plan with our geographically diverse manufacturing footprint, we'll strive for growth through our P3 expansion in Singapore, 12-nm partnership in the U.S. I think we're well positioned for the capture of the future growth of semiconductor needs. The utilization rate will increase. Meanwhile, I think we just have to weather through and navigate through the cycle. I think that's how I feel about the utilization rate projection.

[Brad Lin, Director at Bank of America Merrill Lynch]

Got it. Thank you very much. Maybe one last question would be on the, well, so given the product design lead time, we believe we definitely, but definitely limited visibility into next year. But we believe we are totally engaging with the clients on the potential design or specialty technology adoption or the new node technology that is used in the next year. And then, well, do we have a confidence? Do we have a good confidence level that the ASP will remain well resilient, at least in terms of the band ASP-wise?

[Jason Wang, President at United Microelectronics Corporation]

I mean, from a pricing strategy point, I mean, on a higher level, like I said, we believe we have to elevate our customers' competitiveness, right? And by doing so, you have to provide your value proposition, including the technology offering, including the partnership, and with the scale capacity support, so on and so forth, and the manufacturing performance. So it's certainly that will help with the ASP. But the bottom line is we want to stay competitive. And we will. And I think that's been all along our pricing position as well as strategy for the past year and as well as going forward. Yeah.

[Brad Lin, Director at Bank of America Merrill Lynch]

Got it. Thank you very much.

[Jason Wang, President at United Microelectronics Corporation]

Thank you.

[Operator]

Thank you, Brad. Brad was our last question for today's conference. We thank you for all your questions. That concludes today's Q&A session. I'll turn things over to UMC Head of IR for closing remarks.

[Michael Lin, Head of Investor Relations at United Microelectronics Corporation]

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 ir@umc.com. Have a good day.

[Operator]

Thank you. Ladies and gentlemen, that concludes our conference for second quarter 2024. 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. You may now disconnect. Thank you and goodbye.

Participants

Executives

• Chi-Tung Liu, CFO
• Jason Wang, President
• Michael Lin, Head of Investor Relations

Analysts

• Brad Lin, Director at Bank of America Merrill Lynch
• Bruce Lu, Analyst at Goldman Sachs
• Charlie Chan, Managing Director at Morgan Stanley
• Gokul Hariharan, Managing Director at JPMorgan
• Laura Chen, Analyst at Citi
• Sunny Lin, Analyst at UBS