Chip maker UMC doubles Q4 profit

United Microelectronics Corp., the world’s second-largest contract chip maker, said Tuesday its net profit for the three months ending Dec. 31 more than doubled compared to the same time a year earlier, as shipments increased and it raised prices.

United Microelectronics, the world’s second-largest contract chip maker, said Tuesday its net profit for the three months ending Dec. 31 more than doubled compared to the same time a year earlier, as shipments increased and it raised prices.

The company credited its performance to better overall conditions in the industry compared to the same quarter in 2004, when a chip glut hurt the chip maker’s ability to command premium pricing. UMC also said it sold more chips produced using cutting-edge technologies, increasing its profit margin.

UMC’s revenue declined slightly to NT$27.47 billion ($836 million) during the fourth quarter, from NT$28.23 billion a year earlier, but its net profit soared to NT$3.04 billion from NT$1.33 billion.

The net profit exceeded the consensus estimate of NT$2.63 billion from analysts polled by Thomson Financial.

The company doesn’t expect any oversupply troubles in the next few months.

“Aside from a few exceptions, the inventory situation looks normal,” said Jackson Hu, the new chairman of UMC, during the company’s fourth quarter investors’ conference in Taipei.

The company’s former chairman, Robert Tsao, resigned in early January after being indicted over allegations he conspired to invest in China’s semiconductor industry without government approval, which is against the law in Taiwan.

Revenue at UMC might fall slightly as shipments decline by around 8% in the first three months of this year, Hu said, while the company may have to reduce prices slightly. But the drop-off is normal for this time of year, because consumers tend to slow their gadget-buying after the fourth quarter holiday season.

To combat relatively slim profit margins, UMC is beefing up its new technology offerings. The percentage of revenue the company gained from chips made using 90-nm technology rose to 15% in the fourth quarter, up from 14% in the third quarter, while the proportion made using its slightly larger 130-nm technology increased to 23% from 18%.

The nanometer measurements are an indication of the size of transistors and other parts that are etched onto chips. The more transistors on a chip, and the closer they are together and the faster the chip can perform tasks. Shrinking the size of chips is important because users are demanding smaller gadgets that can perform more tasks, such as mobile phones with built-in digital cameras and MP3 music players. In addition, as contract chip makers shrink the size of features on a chip, they can charge more for production.

UMC said it has multiple customers engaged in tinier 65-nm chip technology, including a product from U.S. chip designer Xilinx, which it expects to be in small-scale production within the next several months at a chip plant in southern Taiwan.

The cutting-edge chip technologies should also help UMC with another issue it’s facing: trouble filling factories that make chips on 300mm (12-inch) wafers.

“UMC has only one problem today, and that is how to fill a 12-inch [chip plant],” Hu said. The expensive plants, which cost around $3 billion to build and equip, have become an issue for UMC because some of its customers failed to finish chip designs that would have gone into volume production at its 300mm plants, idling some of their production lines. It’s expensive to the company because UMC still has to account for depreciation of the plants.

“Their problem at 12-inch is pretty straightforward,” said Dan Heyler, chip industry analyst at Merrill Lynch. The company will have to work with customers to alleviate the issue. But the recent change in leadership at UMC could potentially improve the company’s overall situation since Hu has a strong background in the kind of customers UMC is targeting, he added.

Hu said he plans to focus on customer service and providing the best technology available to its clients. The situation in UMC’s 300mm plants should improve over the next few quarters, he said.

UMC projected its capital spending at $1 billion this year, up from $700 million last year, mainly to be spent on cutting-edge technologies. The chip maker’s 2005 spending ended down from its original projection of between $1 billion and $1.5 billion. It spent $1.5 billion in 2004.

The company’s main rival, Taiwan Semiconductor Manufacturing (TSMC), plans to spend between $2.6 billion and $2.8 billion on new production lines and factories this year, up slightly from $2.49 billion last year. A TSMC representative said the company has delivered chips made using 65-nm technology to customers for qualification. The company listed five customers for 65-nm technology on a recent news release, including Broadcom, Freescale Semiconductor and Altera, which are all based in the United States.