TAIPEI, Taiwan Foundry Semiconductor Manufacturing International Corp. slid back into the red in the third quarter, losing $35 million even though sales slightly increased 2.1 percent to $368 million. Despite expectations of higher sales in the fourth quarter, the foundry is likely to lose money again, hit by a double whammy of low gross margins and an industry-wide inventory build.
The good news is that SMIC's first 90 nanometer logic product shifted into mass production at its 300
millimeter wafer fab in Beijing last quarter. It also started mass producing Elpida Memory's 90nm, 512Mbit DDR2 DRAM and will do the same for Qimonda AG in the fourth quarter. Last quarter, 90nm contributed 4.9 percent of total wafer revenues. SMIC expects to ramp up its 65nm technology in the second half of 2007.
But like other parts of the IC supply chain, SMIC is suffering from an inventory build. Its average selling prices declined last quarter, and utilization rates have been declining for several months, hitting 84 percent in third quarter. That's the lowest in five quarters. "We continue to see customers going through a period of inventory correction carrying over into the fourth quarter. This inventory situation is improving and depending on the holiday sell-through, it may continue to improve," the company said in its earnings statement.
SMIC was also knocked by an increase in R&D, which hit $27.3 million, up 12.2 percent quarter on quarter. It attributed the higher cost to 65nm R&D activities and a decrease in R&D subsidies from the Chinese government. Foreign exchange losses also played a small role, as did increases in depreciation and amortization.
SMIC also cautioned that it may need to set money aside in case things go bad in a new lawsuit filed by rival Taiwan Semiconductor manufacturing Co. A few months ago, TSMC once again accused SMIC of using its stolen intellectual property. Saying the lawsuit is at a "very early stage," SMIC plans to review whether intangible assets acquired during the last settlement, including licensed patents, will lose their value. Those assets have a net book value of $99.5 million, the company said.
-- Sales increased to $368.9 million, up 2.1 percent quarter on quarter and up 19 percent from last year, because of increased 8-inch equivalent wafer shipments of 413,985, up 6.6 percent quarterly, the company said. Net loss increased to $35.1 million, compared to a net income of $2.2 million in the second quarter and a net loss of $26.1 million a year ago, the company said.
-- Capital expenditures for the third quarter were $157.4 million; fourth quarter's will be about $300 million to $320 million and total expenditures for 2006 are on pace for $1 billion. Depreciation and amortization will be about $255 million to $260 million.
-- Sales are expected to increase by 1 percent to 2 percent in the fourth quarter, with a gross margin of about 9 percent to 11 percent.