United Microelectronics Corporation (NEW)

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 two 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.

Thank you and welcome to UMC's conference call for the second quarter of 2024. I am joined by Mr. Jason Wong, President of UMC, and Mr. Chi-Dong 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.unc.com under the Investors Financial section. During this conference, we may make forward-looking statements based on management's current expectations and beliefs. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially, including the risk 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 ROC security 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 UMCC FO, Mr. Chi-Dong Liu. to discuss UNC's second quarter 2024 financial results.

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 4, the second quarter of 2024, consolidated revenue was $56.8 billion, with a gross margin at 35.2%. The net income attributable to the stockholder of the parent was $13.8 billion, and earnings per ordinary share were $1.11 NT dollars. In the second quarter, our wafer shipment increased 2.5 percent quarter over quarter to 831,000 12-inch wafer equivalent in the second quarter. And utilization rate in the second quarter was 68% compared to 65% in the previous quarter. Revenue grow by 4% quarter-over-quarter to 56.8 billion NT. Other than the 2.5% QOQ wafer shipment increase, the other will help by the weaker NT dollar exchange rate. Gross margin, as we mentioned earlier, was 35.2%, or nearly $20 billion NT. With the help, minor help from the non-operating income, the total net income reached $13.77 billion, and the net income attributable to the shareholder of the parent was $13.78 billion NT. or 1.11 EPS in the second quarter. For the first half of the 2024, our revenue was almost flat compared to the same period of last year, which was $111 billion for the first six months of the year. Gross margin was around 33.1%. or 36.8 billion NT dollars. And net income margin is around 21.8% or 24.2 billion NT. EPS in the first half was 1.95 NT dollars per share. Our cash level is around 121 billion. and our total equity at the end of second quarter of 2024 was $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 Q2. consumer and computer both grow by single digit percentage respectively. 2022-2028 revenue continued to be around 33% and 40 nanometer declined from 14% in the previous quarter to 12% in this quarter. The capacity at the 12A continues to increase, and in the third quarter of 2024, our 12A capacity will reach 400, about 1,000 12-inch equivalent wafers in the third quarter. Currently, the estimate for our 2024 CAPEX remains on change, around 3.3 billion U.S. dollars. The above is a summary of UMC results 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 Wong. Thank you, Qi Dong.

Good evening, everyone. Here I would like to share UMC's second quarter results. In the second quarter, Weber Sherman increased 2.6% quarter-over-quarter, and FAP utilization rate improved to 68% as we saw notable demand momentum in the consumer segment. Contribution from our 20 to 28-nm business 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 the technology updates, including a 3D IC solution to stack RFSOI wafers, which is the first of its kind in the industry, and a 22 nanometer embedded high voltage platform, currently the most advanced display driver function solution in the market. 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 FAP utilization. Our 2228 nanometer business remains a promising growth driver. with a number of takeoffs taking place in the second half for applications including display drivers, 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 extensions, as well as higher utility rates. Despite those 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 wave assurance will increase by neat single-digit percentage. ASP in U.S. dollar will remain firm. Gross margin will be in the mean 30% range. Capacity utilization rate will be approximately 70%. Our 2024 cash-based CapEx will be budgeted at the U.S. $3.3 billion. That concludes my comment. Thank you all for your attention. And now we are ready for questions.

Yes. Thank you, President Wong. And 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 1 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 2 to cancel the question. Now please press star 1 on your keypad if you would like to ask the question. Thank you. And our first question is from Sunny Ling, UBS. Go ahead, please.

Thank you very much for taking my questions. Really glad to see improving growth 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 food cycle, your utilization rate were around 85% to 90%. And 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?

Well, I mean, I think we will focus on our 2024 first. And for 2024, we are confident on our promising Q3 wafer demand as they continue to increase. However, we foresee that UNC's customer demand forecast has started to reflect more of a seasonal pattern where the second half of 2024 wafer shimmer 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. And 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. prudent on their inventory management, which that will lead likely, will probably will likely lead to a seasonal Q4. And then starting from Q1 2025, once the out of inventory, you know, get to a healthier level, we believe that 2025 will get back to the normalcy of the industry demand outlook.

Got it. Thank you very much. So my second question is on how should we think about the structural growth margin. There are some puts and takes. One is on pricing. A couple of your peers mentioned stabilizing dynamics from Q3. Is that what you are expecting for next couple quarters? And then second, on depreciations. 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?

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 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% QOQ increase. So we will continue to work diligently in terms of controlling our cost items, hopefully through the better efficiency and some of the automation and we will be able to offset the pressures from the increasing cost item. So one way to look at this, we will remain a solid EBITDA margin and will improve along with higher utilization rate. And we will continue to strengthen our competitiveness and improve product mix to maintain our structural profitability.

If we go back to the ASB question, 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 continue working with the customer to ensure their product offering remains competitive in the marketplace as well. It's our belief that the 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 offers, which includes the estate competitive and resilience against the market dynamic, such as the capacity situation, technology solution, customer partnership, and manufacturing performance. We're constantly managing our pricing strategy, but we remain very consistent with our current strategy.

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

For the P3, the schedule has not changed. a P3 REM we're reflecting our, I mean, in the one we project, the 12 P3 production REM will start in January 26, and the REMBOT to high volume starting from the second half of 2026. Got it.

Thank you very much.

Thank you, Suni. Next one, Goku Harihalan, JP Morgan. Go ahead, please.

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 could kind of drop back to the early 30s levels that we had in Q4 last year and Q1 of this year?

I mean, yeah, Qidong kind of touched that a little bit earlier. For the Q2 growth margin, I have to say it's mainly coming from the favorable foreign exchange rate movement that contributed to a better land-guided growth margin result. For the Q3, well, the utilization has increased a little bit, but the growth margin actually remains at the mid-30% range. It's really because in Q3 the right depreciation expense from the capacity expansion of the 12AP6 and the 12IP3 along with some of the seasonality utility rates and that will be considered for our Q3 gross margin guidance. However, like Chidong mentioned earlier, we foresee our EBITDA margin will remain firm relative to the Q2 2024.

Got it. And, Jason, on the pricing side, just looking at it, 12-inch versus 8-inch, are you seeing any noticeable differences in terms of pricing tendencies? And also for your 8-inch business, do you feel that 8-inch 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-inch 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-inch given that there's a lot of capacity coming online?

Okay. Okay. Well, I mean, on the ASP, while our ASP remains firm, from the light to light pricing will remain unchanged. And, however, the blended ASP will reflect the change in product mix as well as the 8-inch and 12-inch composition. So I think that's on the ASP front. So at this point, for the second half, we'll remember our pricing. For the 8-inch business outlook, the 8-inch 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 non-volatile 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-inch maternal fat, like you said, and that has impacted 8-inch supply chain. while certain mentoring application will remain, while the certain mentoring application will remain on the 8-inch 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-inch loading. So I think from a goal-wise, we are not giving up yet. I think 95% is still our goal. But from the from the timing-wise, will probably take some time to gradually lift to that level. And so we'll continue, you know, we're going to continue our efforts by doing so, and we can update you accordingly.

Okay, thanks, Jason. Maybe one last question from me. You're the interposer 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 6K that you mentioned a few quarters back?

First of all, we have already doubled our internal capacity to 6K, as we reported previously, in response to incremental demand at the beginning of 2024. For any additional intervals of capacity, expansion will be assessed based on customer alignment. So we follow up with our customer closely, and if there is an additional incremental requirement, then we will consider. But at this point, alignment is at 6K.

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

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

It's actually less than 4 or 5%. Okay, thank you very much.

Thank you, Goku. Next we'll have Bruce Liu, Goldman Sachs. Go ahead, please.

Hi, Jason. This is Bruce. I want to ask about regarding to the Vanguard who has built a capacity with their customer for 12-inch 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 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 a business or get the future business away from our competition?

Well, I mean, thank you, Bruce. I think there's a few things. One is obviously we don't come in with our competitors, and they must have clear reasons by doing the capacity expansion. We actually feel very comfortable with our capacity situation, you know, in terms of 12-inch mature notes, which is that's what you're referring to. You know, despite in the recent quarter the 40 and the 65 revenue has declined a little bit, quarter over quarter due to the customer ongoing correction within the automotive industry segment. But we do expect the 40 and 65 nanometer business world growth, potentially in Q3, driven by higher demand in auto and computing applications. Longer term, we expect to grow in our 40 and 65 product pipeline based on the specialty and the larger technology such as non-volatile memory, RFSOI, BCD, OLED display, and ISD. 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' custom 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, you know, in order to stay competitive. First of all, we need to stay competitive so that we're working closely with our customers 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. Secondly, we are one of a few foundries that have an economic scale and highly efficient operation across all our fasts. whether it's in Singapore, Japan, Taiwan, or China, with a technology offering that could pose a cross-step to serve our customers' sourcing needs. Going forward, we'll continue to invest where we have strength and differentiation through capacity expansion. At 12i in Singapore, as well as our development, we need the cooperation with a U.S. partner to fuel our future growth. So I don't think we're missing anything. I think there's, you know, within our addressable market, we focus on our customer engagement and continue delivering our solution and make sure that we, you know, we can grow with our customer together. So, in a way, you know, 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.

Okay.

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

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 with 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, and that's what we just discussed. So I think there's a different reason behind it. And I really can comment about our competitors as well as our customers, but I can assure you that we'll continue to strive to improve and enhance our competitiveness, and then we'll continue maintaining and getting our market shares in those spaces.

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

There's a couple questions you have. Actually, the 12-millimeter cooperation is not only limited with the high-voltage solution. So if, 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 nanometer solution to help our customers by grading from 28 nanometer for high-end OLED display in the premium smartphone space. The 22 nanometer has already entered production now, and we are expected to 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 offer more competitive die area and unmatched power saving, around 30%. So the UMC's 22 high voltage platforms extend battery life and offer superior visual experience. So we also provide sizable capacity offering in 22. And that has into all our fab, like I said earlier. This will actually strengthen our customer supply chain. We see it beyond 22 into your question about the FinFab. Our engineering development team are working on further expanding our high-voltage portfolio to the FinFET in anticipating the AI smartphone. Now, is there a benefit to the FinFET? We certainly think so. And at this point, I think the 22 is the best in the class right now, and the 14 is on the development. I mean, the FinFET is on the development. Now, beside the high-voltage on the 12 nanometers, The 12 nanometer program, we can serve many different applications. And given after our announcement of the cooperation, we have received numerous inquiries from various industry leading players. And according to the earlier evaluation feedback from those customers, our 12 nanometers performance will be very competitive in the industry to serve different applications. So it's not only limited at the high voltage space.

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

2026, I think that's a bit early. I think the 22 will probably still remain as the mainstream.

I see. Thank you.

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

Thanks. Jason Jidong. Good afternoon, and congrats for a very good resource, both the margin and the revenue surprise to the upside, 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 Qi Dong, because according to my calculation, the $80 depreciation may be 3% points over the past quarter. So contribution to gross margin could be 1% points. But you are saying that the 2Q gross margin beats many coming from the FX. So do we miss anything on that comment?

So roughly every 1% of $20 depreciation will lead to about 0.4% of the margin increase. So 3% Forex movement translate 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, forest is still the main factor for the 35.2% gross margin versus our guidance of 30-ish gross margin.

Okay. Okay. Thanks. 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 ASC 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 the end demand, or what are we missing? Thank you.

Well, I mean, first of all, like you said, the like-to-like pricing remains unchanged. But the blended ASP reflects the change of product mix, you know, between 8 and 12-inch as well, mainly because that's aligned to the end markets. We do see some of the segment exiting the inventory correction cycle. So some of the restocking, the demand's actually coming back. While we actually stay away from the commodity, So I think we've been trying to manage this, you know, try to balance this portfolio as well as the product mix diligently. I think that's more of a result. In addition to that, I also believe, you know, you have to stay fundamentally competitive by offering the differentiated technology solutions. So we're going to continue to advance that and continue expanding our specialty technology space, and hopefully we can continue maintaining that. Now, if it comes down to if we do need to elevate our customers for their product to be competitive in their market space and helping them to win more market share, we certainly will address that. and our end goal is we try to create a win-win scenario to benefit both sides in the long run.

I see. Thank you. Yeah, and maybe on that interposer side, because my understanding is that the end customer is probably migrating to the 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 basis may go away, maybe in one or two years. Is that a fair concern?

Oh, 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 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, our 3D IC roadmap, you know, in addition to interposer that which will engage the pipeline, we're also developing the wafer-to-wafer hyperbonding, which that we have announced in the past quarter. So the way we view this is the 3D IC solution offers the advantage, including a form factor reduction higher bandwidth and lower power consumption. So not only on Interposer, we also want to expanding our offering in that front. We are the first boundary that with the wafer to wafer bonding solution for the RFSOI that are production ready today. And our second RFSOI wafer solution is able to achieving an impressive 45% foam factor reduction. and 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 the inference engine of the various edge ai applications in the future at the moment we are working closely with ai focus the customer on taylor's solution to meet their specific needs in a various combination of our hybrid bonding technologies. In summary, we are confident that the intervals of 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.

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

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

Jason, sorry, very, very last one. Because I'm still a little bit surprised to the outside by your third quarter revenue guidance. Because one of your major customer, MediaTek, their second quarter inventory days actually went up to 72 days. One queue 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, you know, why you can outgrow the market, especially customers' inventory data go out again. Sorry for coming back to this inventory or cycle question.

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. And so the, you know, basically all settlers have improved their inventory level. And we have seen that. And we expect to see the inventory will reach a relatively healthy, you know, by end of this year. And so that's, you know, that's also we guided that the customer was still cautious of have a cautious approach to their inventory management based on the current market outlook. However, for the automotive segment, the end market demand outlook for the automotive still remains very soft compared to other segments. And the inventory level has improved but the data inventory is still above the seasonal level. So I think besides the auto, the rest of the market segments will probably start experiencing some of the seasonality patterns. So I feel from an inventory correction point, we should have already accident for those communication and computing.

So in that case, do you change your industry assumption this time for X memory and also foundry.

You're talking about our addressable market outlook?

Yes, yes. Yeah. Do you realize that this time?

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

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

Thank you, Charlie. Next one, Lola Chang, Citi. Go ahead, please.

Thank you very much for taking my question. I also have a follow-up question in terms of the end demand. 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 the order visibility can be sustainable into Q4 from your perspective?

Well, I hope not. If I mislead you, I'm sorry about that, but what I said is we expect to see a mild pickup in communication, consumer, and computing segment. And despite the, 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 the 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 exiting by Q1 next year. And while we're exiting this, and I think the customers remain prudent, and I think right now the market The phenomenon is more showing we are going back to the traditional seasonal pattern anyway, the seasonal pattern that aligns with market outlook.

Okay, thank you. That's very clear. And also I noted that for our IDM, the revenue declines 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 parts that gradually improved while automotive industrial found the IDM that could still relatively muted for the next few months.

Well, first of all, you're right. So our IDM customer was 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 IDNs and their customer have a pile up inventory, which result in a decline in wafer demand at their foundry supplier. So I think that 2024 is a year with a complication of inventory correction as well as end market soft. 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 Fungipana, and their contribution will gradually recover.

Okay, also a follow-up on that, because we see some of the IDNs, our clients like Texas Instruments, they think they're also aggressively expanding their internal capacity. But once they are, like, demarcating, stabilizing, are we still assuming that they will continue to do, like, outsourcing like before? Or they will tend to insource more internally, from your perspective?

I think after the COVID, after the capacity constraint, you know, 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 it will be considered as one of the entire supply chain ecosystem. And I think the idea will continue to rely on the Fungi partner to an extent. However, they will probably balance that a little bit to ensure their supply chain resilience is improved.

Okay, thank you.

And I also have a question. Hopefully, you can give me more understanding about the CDIC business model. We know that a lot of advanced pathogens or wafer-based is done by on the wafer funding side. But since we are also expanding that the CDICs are hyperbonding that type of design, can you elaborate more on how is the business model going with the OSEP and also our competitors or potentially customers? Thank you.

In our view, the semiconductor foundry offset 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 expanding our ecosystem and to strengthen our partnership with our back-end partners as well. So I think this, in our view, still consider us an ecosystem to serve our customers.

Okay, thank you.

Thank you, Laura. Next, we'll have Brad Ling, Bank of America. Go ahead, please.

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

No, they are different offerings, and the interposer capacity will continue serving as interposer needs. And while we have a continued roadmap for the interposer going to the next generation as well. And so that technology advancement is not going to stop. And at the same time, we see more interest coming for the interposer needs. And I think that we actually engage different application of the continued pipeline for this interposer. 3D IC wafer-to-wafer hyperbonding is an extension of our advanced packaging offering. So we'll continue extending that. And we think for our addressable market, the wafer-to-wafer hyperbonding will provide us the expansion of the addressable market. And I think it will fit with our solution.

Got it. And so we see, well, pretty good potential there on the HAI 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?

In the near term, we already announced for the RFSOI stacking, it's already ready for production. So on our front end, that's already started to production. And in related to future AI exposure, I think we kind of touched that last quarter as well. As the AI extends from the cloud to edge, I think it will still take some time. But it's our belief that 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 certain 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 megatrend, such as the ADAS, autonomous driving, robotics, industrial 4.0, future breakthroughs. So which will drive significant increase of silicon content accordingly. And those, the technology solution that we offer would definitely be beneficial to that. And I think the offering that we have, not only on interposers, 3D IC, waiver to waiver, also for the other low-power BCD non-volatile, were all very well suited to meeting those demands. and in those AI related markets.

Got it, got it. So that actually quite related to the second question that I want to try to add 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, well, more than 70% of the UTR, but, well, eyeing on the future, we are definitely not, I mean, the company is definitely not satisfied with only this level. So, yeah. So we totally believe that UMC already will foresee some of the long-term drivers to kind of potentially leave the UTR, meaningfully back to a sustained 80% or 90% in the future. So I think you also mentioned that some new device or application might be the ones that like a robot, so would you please share with us your visibility on that and also what would that bring you in the, well, mid-to-long run? Thank you.

Well, first of all, we're very, very optimistic about the future semiconductor market. The AI is going to be a very big driver, and however, I think the some of the new use cases will still have, we have to see them to come. And I think it's still a bit early right now. However, we have very, very high expectation in the longer term. Meanwhile, while we're asserting the 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. And 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. And at this point, maybe too early to say how much of a utilization rate improvement we will expect. 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 We want to continue to sustain our strong financial performance, like what we did 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 opportunity once they come. On the specialty technology development, our industrial leading offers, 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 nanometers to our products to our 22 nanometer technology. Customer were also adapting our 12 nanometer thin-fat. For high voltage product, we expect the 4028 high voltage customer were adopting a 22 high V. Emerging memory application will transition to 20 and 22. We are very confident about the 28 and 22 for the longer term. We also expect to see more interest in the 55, 40 mature area, such as RF and so on. And while we talk about all those, I found the future capacity expansion plan, you know, with our geographically diverse manufacturing footprint, we'll strive for growth through our P3 expansion in Singapore, 12 nanometer partnership in U.S., I think we're well-positioned to capture the future growth of semiconductor needs, and the utilization rate will increase. And meanwhile, I think we just have to wait and navigate through this cycle. And I think that's how I feel about the utilization rate projection.

Got it. Thank you very much. Maybe one last question will be on the, well, so given the product design lead time, we believe we definitely have 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 are used in the next year. And then, well, do we have a good confidence level that the ASP will remain resilient, at least in terms of the ASP-wise?

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 customers Value proposition, including the technology offering, including the partnership, you know, and with the scale capacity support, so on and so forth, and the manufacturing performance. So it's, you know, certainly that will help with the AAC, 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.

Got it. Thank you very much.

Thank you, Brett. And Brett 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.

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.

Thank you. And 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 two hours. please visit www.umc.com under the Investors Events section. You may now disconnect. Thank you and goodbye.