United Microelectronics Corporation (2303) Earnings Call Transcript & Summary

Welcome, everyone, to UMC's 2026 Second Quarter Earnings Conference Call. [Operator Instructions] For your information, this conference call is now being broadcasted 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 Event section. Now, I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. And Mr. Lin, please begin.

Thank you, and welcome to UMC's conference call for the second quarter of 2026. I'm joined by Mr. Jason Wang, the CEO of UMC; and Mr. Chi-Tung Liu, the CFO of UMC. In a moment, we will hear our CFO present the second quarter financial results, followed by our CEO's key message to address UMC's focus and third quarter 2026 guidance. Once our CEO and CFO complete their remarks, there will be a Q&A section. UMC's quarterly financial reports are available at our website, www.umc.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 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 UMC's CFO, Mr. Chi-Tung Liu to discuss UMC's second quarter 2026 financial results.

Thank you, Michael. I'd like to go through the 2Q '26 investor conference presentation material, which can be downloaded or view in real time from our website. Starting on Page 4. Second quarter of 2026, Consolidated revenue was TWD 68.73 billion with gross margin at 32.5%. Net income attributable to the shareholder of the parent was TWD 42.26 billion, and earnings per ordinary share was TWD 3.39. Utilization rate in quarter 2 climbed to 85% from 79% in the previous quarter, and total wafer shipment in the second quarter reached 1.13 million, 12-inch wafer equivalent. On Page 5, we will start the sequential comparison. Revenue grew 12.6% quarter-over-quarter to reach TWD 68.7 billion. Gross margin rate increased by almost over a 3 percentage basis points to 32.5% or TWD 22.3 billion. And because of the recent stock market performance, our investment and dividend income together reached TWD 30 in the third quarter under the nonoperating income and expenses, which helped our net income to reached TWD 42.2 billion. And for the net income attributable to the shareholder of the parent is TWD 42.26 billion or an EPS of TWD 3.39 per share in the second quarter. On Page 6, for the first 6 months of the year, the annual comparison for the first half, our revenue grew 11.3% year-over-year to TWD 129.77 billion in the first 6 months of 2026. Gross margin rate also grew by over 3 percentage basis points to 30.9% or TWD 40.1 billion in the first 6 months of 2026. For the net nonoperating income, similar for what happened in the second quarter, for the first half of the total nonoperating income reached TWD 35.6 billion, which leads our -- net income to reach TWD 58.4 billion in the first 6 months of the year. EPS was TWD 4.68 in the first half of 2026. On Page 7, cash on hand is around TWD 124.7 billion, with total equity reached TWD 443.9 billion at the end of second quarter of 2026. On Page 8, our blended increased by a low single-digit percentage in the second quarter of 2026. For revenue breakdown on Page 9, Asia remained our largest revenue pool, around 66% of total revenue, and North America reached about 22%. On Page 10, IDM didn't really change much. This quarter is around 15% versus 14% in the previous quarter. For Sales breakdown by application on Page 11, and there's almost no change for the revenue among 3 major assessments. So revenue breakdown by technology on Page 12. Our total revenue under 40-nanometer still around 52%, with 22 and 28-nanometer is becoming our largest revenue pool, represent 37% of the total revenue. Our quarterly capacity has shown some increase in our Singapore site, for the second quarter, and there will be a more meaningful increase in the coming quarter to reach 192,000 wafer capacity for our Singapore site. On Page 14, our annual CapEx budget has raised or increased to $2 billion from the previous number of $1.5 billion, which we will elaborate in more detail later during the conference call. So this above is the summary of UMC results for second quarter of 2026. More details are available in the report, which has been posted on our website. I will now turn the call over to CEO of UMC, Mr. Jason Wang.

Thank you, Chitung. Good evening, everyone. Here, I would like to share UMC's second quarter results. In the second quarter, our wafer shipment increased 10.6% quarter-on-quarter driven by strong demand in communications and consumer segments, further improving utilization rate to 85%. Revenue from our 22, 28-nanometer business continues to set record high with 22-nanometer revenue representing the second quarter sales. Earlier this month, we announced the company's first mass production delivery of a 12-inch photonics IC to a customer, a major milestone for UMC that demonstrates the company's high-volume silicon photonics manufacturing capabilities on 12-inch wafers. As we prepare to launch our silicon photonics platform available for general customer use in 2027. Looking ahead to the third quarter, we expect demand momentum to remain stable across the computer, communication and consumer segments with the shipment projected to increase by high single digits, driven by strong demand of power management IC, sensors and microcontrollers. Our 8-inch portfolio is also seeing a strong rebar, and utilization is expected to improve significantly in the third quarter. With our 12-inch capacity already at a healthy utilization rate supporting core business, we must also prepare in advance to ensure UMC is well positioned to capture future opportunities driven by AI. To ensure we are ready to scale rapidly to support our customers, we announced today that our Board of Directors has approved a plan to expand clean room capacity at our Singapore people facility and to construct a new fab in Tainan, Taiwan. The plan will be executed in phases, enabling UMC to remain focused on capital discipline with the price of facility deploying capacity to fulfill customer demand. As a result, 2026 capital expenditure budget will be revised upward to USD 2 billion. Now, let's move on to the third quarter 2026 guidance. Our wafer shipment will increase by high single digits. ASP in U.S. dollar will remain firm. Gross margin will be in the mid-30% range. Capacity utilization rate will be greater than 90%. To support the growing customer demand in silicon advanced packaging, the 2026 CapEx will be raised to USD 2 billion from USD 1.5 billion. That concludes my comments. Thank you all for your attention. Now we are ready for questions.

Yes. Thank you. And ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Now we'll have our first question, Laura Chen from Citi.

Congratulate for the good result and outlook. It's great to see that UMC has a good progress on the silicon photonics and also see that power management IC improvement. So I assume that these are all prepared for the AI-related business. So I'm just wondering for the longer term, does UMC have any indication or target of your AI-related revenue? And can you also give us a breakdown -- as you are aiming for?

Well, the -- first of all, our AI-related is driven by the specialty semiconductor solution, supported a broad range of applications, including the power management, connectivity, FPGA as well as our growing advanced packaging and silicon photonics business. Those are the focus. This business will have already begun important -- become a contributor to our growth in 2026. The current revenue for 2026 is projected to close to approximately $300 million for this year. And looking ahead, in 3 years, we expect the AI exposure to exceed USD 1 billion.

Very helpful. My second question was about like the overall demand outlook. We know that Q3, we will see the deterioration rate improvement. But I think consumer electronics demand in general is still quite weak. So what's the management view about the sustainability into probably Q4? Or do you have any visibilities into maybe early next year?

Well, right now, what we see from the market is the worldwide demand is improving with a broader and more sustainable momentum. But it remains more AI-led, AI is leading that and is spilling over into memory, connectivity and power segment. Now, AI demand recovery is still mixed across different end device markets and supply reduction plus inventory normalization by moving to the market towards more of a balanced and predictable environment. So we do see the future outlook is increased in terms of visibility. For the AI-related demand, while they come in -- remain very strong, what may be changing is the XPU demand remains strong. Besides that, the bottleneck is not only on compute, but also on memory, connectivity, power management that I mentioned earlier. In the near term, we are seeing upside to our silicon photonics, power and FPGA-related products, particularly in our 40-nanometer and 65-nanometer technologies. For the non-AI, it's uneven. So we will not capitalize the current environment as a broad-based recovery yet. In the near term, we do acknowledge that consumer segment, including the handset, PC and notebook, will experience a year-over-year decline. However, for UMC, our wafer shipment will grow year-on-year on 22, 28 as well as our 8-inch business. In conclusion, our 2026 wafer shipment will increase both driven by our own foundry share gain as well as a customer share gain in both AI and non-AI market. The 8-inch loading will improve to mid-80% range, while mature 12-inch loading will also increase quarter-on-quarter on AI-related demand.

Okay. In that case, can I also just quickly check what's your view on the ASP trend into the second half?

I mean, the -- our pricing strategy has always remained consistent. We are not trying to maximize the short-term pricing based on the market cycle. Instead, we focus on maintaining a sustainable business model through value-based pricing that reflects our differentiated technology, manufacturing capability and long-term partnership with customers. As the demand in industry conditions continue to improve, we are working with the customers to ensure pricing appropriately reflected that value while supporting continuous investment in technology.

Next one, Gokul Hariharan, JPMorgan.

So Jason, could you talk a little bit about your -- the capacity expansion plan at Singapore P4 as well as your plan to construct a new fab in Tainan, like what are the kind of milestones we should look at? And what are the kind of places that you are looking to kind of base this capacity in? I think how should we compare it to your previous plan about 4, 5 years back when you had this new place in Tainan and then you also build out the Singapore fab? Is it similar scale or is going to be much more of scale?

Okay. Let me maybe start off what drives that, right? What drives that decision that we made today. When we map out the industry growth over the next 5 years, we see several important trends. Within the AI data center, while growth in compute and memory will remain high, we also see the connectivity and power also growing at a high CAGR, driven by the need for more bandwidth and more efficient power. The second is the automotive electrification trend continues. They are not just for EV, but for autonomy and infotainment applications. This third is when we look at this emerging applications such as the robotics, satellites, we know that again, very, very high growth in compute, memory, sensing, connectivity and power. These industry trends, combined with our entry into the advanced packaging such as logic and memory stacking as well as the silicon photonics, will accelerate growth within the UMC addressable market. Within our existing portfolio, we also see that advanced packaging is enabling our customers to think differently about new architectures and designs of their products. Since we believe we are ahead of our peers in events packaging, this is leading to a share gain and many new opportunities. Therefore, we actually believe the actually will grow significantly compared to the past. Consistent with this long-term outlook, in terms of how to do this, we're going to execute each expansion phases we will pursue is based on the market validation, this alignment and customer commitment, which will provide both long-term capacity assurance to our partners and loading protection to UMC. So that's truly the systems behind the decision as well as how we want to execute this. You also have a follow-on question in terms of scale? the milestone and the schedule, right? For right now, for the Singapore, we will invest in the clean room for our P4 facility and the 2 purchase to expanding our silicon photonics capacity. In Tainan, the construction of 128 P7 and P8 will set up a robust foundation for the UMC to scale the advanced packaging alongside with the customers, long-term product roadmap, but that's only going to be more of the foundation. We're building the shelf for the 12,8 P7 and PA. The clean room installation at this time is focused on the Singapore P4. And from the milestone line, we -- now the Board has approved it and then we're going to start engaging with the follow-on activities and then we will report back in terms of the install schedule once we get the confirmation from our class again.

Got it. Understood. And just follow up on the Intel collaboration on the 12-nanometer now that we are likely to start recognizing some revenues next year. How should we think about how meaningful these 12-nanometer base revenues are going to be? And is it going to be like gross margin accretive given you have like a revenue sharing and a profit sharing kind of agreement with them? Could you talk a little bit more about how we should model this contribution going into next year?

Well, first, let me update the 12 current status. The -- overall, the 12-nanometer cooperation project with Intel is advancing smoothly, and we anticipate the product tape-out will commence in 2027. So all the PDK will be ready in May 2026, and the customer design and design in and ready to tape out in 2027. So 2027 was still at the early stage of ramping the product, I would say, probably at a pilot stage. The production will probably be more meaningful in 2028. So at the current size of the 12-nanometers, in terms of the business model, there will be accreted to our current models -- current financials.

Okay. Maybe 1 question on gross margins, Jason and Chitung. So you are already about guiding for about 80% across utilization, and gross margin is kind of reaching mid-30s. Any thoughts about how you think gross margins could progress in this cycle because it feels like in the past cycles where utilization had reached above 90%, gross margins were probably at a higher level given you probably had a little bit more price leverage, so just wanted to understand how you think about like where gross margins can reach given the demand seems to be pretty strong and utilization continue to improve. Can we go beyond 40% gross margins like we did in -- back in 2022 or that is a little bit of a challenge right now?

So our utilization rate and operating income has increased versus last year, we will continue to improve our fundamental, and we do expect the new project like silicon photonic and advanced packaging will enhance our EBITDA margin, but the higher depreciation expenses certainly has a slight impact on the gross margin. So I think with the announcement of the new fab in Tainan and also the new clean room in Singapore, no doubt, the depreciation expenses will increase as a result. So we are confident to deliver higher profit numbers and also improve -- enhance our EBITDA margins, but -- gross margin will also highly depend on the installed equipment and the depreciation expenses curve as a result.

Okay. So I think previously, we were expecting maybe after this year, depreciation curve could kind of taper down. Is that still the case? Or should we expect that there is still some increase in depreciation next year as you bring on some of the new clean room and some new faces?

Yes, the new clean room and the new faces in China certainly changed the curve. And now we are expecting the depreciation to increase by low teens for over the next 2 years at least.

So low teens each year over the next few years or low teens...

Each year, at least, yes.

Next one, Charlie Chan, Morgan Stanley.

Jason, Qidong, Mike. Yes. So just some quick follow-up about a previous topic. So first of all, I know you kind of gaining share, but how about your customers' chip inventory, right, because the end market seems to be pretty challenging. So according to our analysis, it seems like your -- some of you have revenue is kind of undergoing your wafer shipment. So I'm wondering whether you're concerned about the chief inventory accumulated at your customer side.

Well, I mean, Charlie, the first -- I mean, we're always cautious about the inventory situation, right? I mean -- but not to the level that we need to be worried at this point. For the first quarter '26, the DOI level is actually rose slightly. They've gone up a little bit. What we see is really coming from 1 PC was strongest driver of inventory buildup as the AI infrastructure build cycle is still ongoing. In the PC -- I mean the HPC was the strongest driver. In the PC 7, early stocking and shipments occurred in response to rising memory prices, we are seeing that. The inventory and the DOI for the smartphone and consumer segments are rising simultaneously, indicating the end market remains weak. So there are some areas are weaker. And although the demand in automotive and industrial side is stable, their DOI remained higher than the historical average. For the Q2 '26, while we're tracking that the overall consumer spending remains weak, and we expect the semiconductor sales to stay strong in 2026, so which will drive the DOI by several days again. But certainly, we're not to the level that we need to be worried, but we are cautious and continue tracking the progress of that.

I see. Yes. So with that kind of impact your kind of negotiation with customers to pay in sites because you're kind of increasing your investments, right? Do you think some dynamic change for you to reflect your value next year?

Well, I mean, first of all, the market outlook for us is we remain optimistic because it's driven by both AI-related and non-AI-related demand. While those demand and industry continues to improve, the pricing environment become more constructive, so the discussion -- engaging discussion with customers is actually a constructive discussion, giving that visibility, and we expect the annual pricing trend to be better than we anticipated, and we're even expecting more meaningful pricing uplift in 2027.

Okay. Okay. Great to hear. Yes. And can I follow up a little bit about advanced packaging business plan because I think it's a pretty to me that you want to extend your event advanced packaging cleanroom for 2 faces. My understanding is that for 2.5D, your previous focus was more about the interposer production, and you do have some CDIC, but this is more for RF. First of all, are you going to do like the full stack of 5G for Campo Coors? And for the CDIC, are you going to do not just the RF, but also some -- as a ratio kind of products. And lastly, we noticed that your Vice Chairman right now kind of move to Unimicron, so I'm not sure whether we can link this to development together. You go to see very aggressive advanced packaging and your kind of partnership with the Unimicron in substrate will be even closer than before. Should we think in that way?

I mean from our advanced packaging offering, let's start out with that, you're absolutely right. We start with the interposer solution and follow with the as 3D IC, the chiplet solution. But it's actually -- offering is actually more than that now. The overall addressable market is projected to more than double by 2030 in our addressable market because it expanded fund the 2.5D interposer with CDC, discrete DTC, 3D wafer to wafer stacking which that's what you're referring to the ROI and the memory to memory stacking as well. Our customer engagement is building up. with more than 10 active customers now and over certify new products in discussions and expect to tape out in 2026 and early 2027, and we actually feel pretty optimistic about this advanced packaging space. We -- and that's why we start to deploy the facility preparation. Now, we have -- like you said, we have already entered production for the 3D wafer to wafer hypos, bridge die and discrete DTC, but they will follow by the wafer to wafer stacking as well. So we'll continue to broaden our advanced packaging offering, and -- but not to the coach solution because it's not a platform solution. It's advanced packaging capability serving various different combinations of a solution, both from the -- on our existing offering to even the new offering, new integration options. So we see many different new exciting opportunities there, but not a, okay? Now, in terms of the ecosystem, I mean, we're working with entire ecosystem in terms of the -- our solution to serve our customers. So it's not going to be limited to any 1 particular.

Okay. Any kind of a strategic angle or synergy or partnership between you and Uni Micron going forward besides the kind of financial investment?

At this point, it is mainly driven by the financial. It's 1 of our investor portfolio company, and we remain as an investor. And so not at this current point. But once there is an opportunity, right, in the ecosystem, we will definitely explore that with them. .

Okay. And last one, if I may. Just the AI derivative revenue. So Jason, did you say that your overall revenue from AI already exceeded the USD 1 billion. What was that, your comments?

Yes, close to TWD 300 million this year. And in 3 years, we will exceed TWD 1 billion.

Okay. Then, how would you define the AI relative revenue? I believe all ICS silicon photonics takeout in the posters. But what's your definition about your AI revenue?

Well, the solution associated with AI as end product, including the connectivity, power management, those are all category of AI.

Okay. So silicon photonic can be considered as the connectivity.

Yes, as part of the connectivity solution, yes.

Okay. Okay. Yes, I think that's all for me.