• UMC’s Q3 2024 revenue increased by 8.0% YoY and 9.1% QoQ, driven by strong demand in 22/28nm mature processes.

• While the inventory has declined to healthier levels across most segments, the expected demand recovery remains sluggish.

• A one-time downward price adjustment is planned for early 2025 to address market oversupply and support customers, potentially putting more pressure on margins.

• Collaboration with Intel for 12nm technology is advancing smoothly, with production expected to begin in 2027.

Despite facing margin pressures from price competition and mature node oversupply, UMC demonstrated steady revenue growth in Q3 2024, driven by strong demand for its 22/28nm mature nodes. While the inventory has returned to healthier levels across most segments, demand recovery remains sluggish, especially in the automotive and industrial sectors. To address market oversupply issues, UMC plans a one-time downward price adjustment in early 2025, which may add further pressure on margins.

UMC’s collaboration with Intel for 12nm technology continues to progress, with production expected to commence in 2027, laying the foundation for future competitiveness.

Source: Counterpoint Research

Solid demand in 22/28nm drives revenue growth

Co-president Jason Wang: Our mature 22/28nm nodes continue to see robust demand, contributing significantly to our revenue growth this quarter. While we have seen inventories normalize across most applications, we are not yet witnessing a corresponding pickup in demand. Customers continue to be cautious, and we anticipate that this cautious sentiment may persist into the first half of 2025, particularly for our mature 12-inch and 8-inch processes.

Analyst takeaways: Demand for UMC’s 22/28nm process is primarily driven by the company’s leading position in specialized high-voltage (HV) technologies. The 28nm node has become the key enabler for applications such as AMOLED DDIC and high-end CMOS image sensors (CIS) in mobile devices. Besides, UMC’s expansion into 22nm with its enhanced eHV platform technology aligns with customers' needs for more power efficiency and advanced visual performance for high-end mobile devices.

The 22/28nm nodes enjoy structural growth since AMOLED DDIC and high-end CIS continue to migrate from older 40/45 nm nodes to 22/28nm, with the penetration of both these applications in 22/28nm also expected to increase. This trend reflects an industry shift toward improved performance and efficiency in both display and imaging applications.

However, the lack of demand recovery despite inventory normalization is concerning. As a result, we expect that the broad demand recovery scenario will be pushed to 2025. The cautious inventory management by customers and the capacity expansion suggest that UMC’s utilization rates may remain at 65%-70% over the next two to three quarters. Without a significant improvement in demand sentiment, we do not expect a meaningful increase in orders.

Price adjustment planned amid mature node oversupplies

CFO Chitung: Given the current market oversupply, especially in mature nodes, we recognize the need to adjust our pricing strategy to remain competitive and support our customers. The planned price adjustment aims to help our clients navigate market changes and maintain or enhance their market share.

Analyst takeaways: UMC’s decision to implement price cuts reflects the increasing competition and pricing pressure across mature nodes, especially in 8-inch nodes. The oversupply has been driven by capacity expansion across the industry and a slower-than-expected recovery in key sectors such as automotive and industrial applications.

As leading competitors like TSMC adjust pricing in response to the market condition, it has become necessary for UMC to follow this approach to retain market share. This adjustment also suggests that the overall industry is undergoing an extended cycle and the oversupply situation is likely to linger until 2025.

Strategic partnership with Intel on track

Co-president Jason Wang: Our cooperation with Intel is advancing as planned. The 12nm technology development is on schedule, and we are excited about the opportunities this presents. This collaboration not only strengthens our technology portfolio but also positions us well to meet future market demands.

Analyst takeaways: The partnership with Intel is significant for UMC, potentially opening new markets and enhancing competitiveness for the company. Successfully delivering on this collaboration could elevate UMC's industry position and attract additional clients seeking reliable FinFET technologies. We believe that the Intel partnership is a positive development for UMC’s long-term strategy. However, the benefits of this collaboration may not be realized for several years.

Q3 2024 result summary

• Revenue increased by 9.1% QoQ and 8.0% YoY to $1.91 billion driven by strong demand for 22/28nm processes.

• Gross margin decreased by 1.4% points QoQ to 33.8%, below expectations due to increased depreciation expenses.

• Utilization rate (UTR) improved to 71% in Q3 2024, surpassing guidance but expected to decline to 67%-69% in Q4 2024.

• After-tax EPS was at $0.036, slightly above market expectations of $0.035.

Outlook and Guidance

Q4 2024 forecast

• Revenue is expected to remain flat QoQ, wafer shipments stable, and the ASP in US dollar terms is expected to remain flat (New Taiwan dollar (NTD) appreciation may slightly reduce NTD revenue).

• Gross margin is projected to decrease to around 30% due to lower UTR, NTD appreciation and increased depreciation expenses.

• Utilization rate (UTR) is expected to be in the high-60% range.

• Capital expenditure for 2024 revised down to $3.0 billion from $3.3 billion, with 95% allotted to 12-inch fabs and 5% to 8-inch fabs.

2025 projections

• Growth drivers: Continued confidence in 22/28nm processes as main growth engines, with DDIC and CIS products migrating to 22nm, leading to strong wafer tape-out demand.

• Price adjustment impact: A one-time downward price adjustment in early 2025 may pressure margins but aims to support customers and enhance competitiveness.

• Depreciation expenses: Expected to increase by over 20% YoY due to capacity expansion, affecting profitability over the next few quarters.

• After-tax EPS: Estimated at $0.126 for 2025 (original estimate $0.138), indicating flat profit performance due to margin pressures.