TSMC to see slow Q4 as foundry market declines

Citing inventory correction issues in the marketplace, for example, a research firm has lowered its estimates for bellwether foundries Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) and United Microelectronics Corp. (UMC).

Second-tier foundries, including 1st Silicon (Malaysia) Sdn., Silterra Malaysia Sdn. Bhd., and others, are also seeing a sudden decline in fab utilization, due to wafer cancellations from their respective customers, said Michael McConnell, an analyst with investment banking firm Pacific Crest Securities Inc. (Portland, Ore.)

Foundry vendors are expected to be crying the blues at the FSA Suppliers Expo, which takes place on Wednesday (Oct. 6.) Indeed, the sudden lull in the foundry industry reflects the overall problems in the IC business.

"A weaker back-to-school season and inventory corrections at IC manufacturers and distributors have led to a myriad of pre-announcements and revised expectations," McConnell said in a report. "With IC demand in flux and inventories likely to rise again at many IC manufacturers in Q3, we remain cautious on the group, as lower fab utilizations and aggressive pricing could deplete profitability further in Q4 and Q1."

As a result, the analyst has recently lowered his forecast for TSMC. The company's third-quarter sales are expected to be at the low end of its guidance, which calls for 4-to-6 percent sequential growth over the second quarter.

In the third quarter, TSMC is projected to earn $0.16 on sales of $2.022 billion. Previously, it was expected to earn $0.16 on sales of $2.045 billion. In the second quarter of 2004, TSMC earned $0.15 a share on sales of $1.943 billion.

Pacific Crest is also lowering its estimates for TSMC in Q4. Order forecasts from the PC, communications and consumer markets look flat-to-down in the period, the report said.

Fab utilizations are projected to fall from 95 percent to 90 percent in Q4, according to the firm. "We are adjusting our Q4 estimates [for TSMC] to reflect a 5 percent sequential revenue decline from a 2 percent sequential increase," McConnell said in the report. "Sources also indicate that TSMC's waferstart forecasts for Q4 are down 6-to-7 percent sequentially."

In Q4, TSMC is projected to earn $0.15 on sales of $1.917 billion. Previously, the company was supposed to earn $0.16 on sales of $2.082 billion, according to Pacific Crest.

TSMC's rival, UMC, is also seeing a similar weak sales picture, McConnell said. "UMC's order decline is more pronounced," he said in an interview. "They are still communication heavy."

UMC is projected to earn $0.10 on sales of $1.036 billion in Q3. Meanwhile, early last month, semiconductor foundry Chartered Semiconductor Manufacturing reaffirmed its third-quarter guidance originally provided on July 23 projecting revenue of $256 million and net income of $15.3 million (see Sept. 2 story).

Second-tier foundries, such as 1st Silicon, Silterra, are seeing weakness as well. For example, Silterra's utilizations are projected to drop from 90 percent to 80 percent due to wafer cancellations from Agere, Broadcom, and LSI, according to the analyst.

1st Silicon is seeing an order lull among its customers, such as Sharp Corp. 1st Silicon is making flash memories on a foundry basis for the Japanese company.