United Microelectronics Corp

TWSE:2303

Earnings Call Analysis

UMC's Steady Q2 Growth and Optimistic Guidance for Q3 2024

In Q2 2024, UMC reported consolidated revenue of TWD 56.8 billion, a 4% increase from the previous quarter. Gross margin improved to 35.2%, aided by a favorable exchange rate and product mix. Wafer shipments rose by 2.5%, and utilization rates improved to 68%. For Q3 2024, UMC expects mid-single-digit growth in wafer shipments, a steady ASP, and a gross margin in the mid-30% range. Capacity utilization is anticipated to reach 70%. Despite cost pressures from rising depreciation and utilities, UMC remains resilient, focusing on advanced technologies to support growth in AI, 5G, and automotive sectors.

Introduction and Overall Performance

In the second quarter of 2024, UMC reported consolidated revenue of TWD 56.8 billion, marking a 4% growth from the previous quarter. The company's gross margin stood at 35.2%, slightly improving from earlier guidance, primarily due to a favorable exchange rate and an improved product mix. Net income attributable to shareholders was TWD 13.8 billion, translating to TWD 1.11 earnings per share (EPS). The wafer shipment increased by 2.5% quarter-over-quarter, contributing to the revenue growth, with the utilization rate improving to 68%.

Regional and Segment Revenue Breakdown

UMC's revenue distribution saw Asia rise by 1% to account for 64% of total revenue, while North America remained steady at 25%. The Integrated Device Manufacturers (IDM) segment saw a notable decline from 18% to 13%, reflecting a softer market. Similarly, revenue from the communication sector decreased significantly from 48% to 39%. However, the consumer and computer segments experienced single-digit growth. Particularly strong was the 22/28 nanometer business, driven by healthy demand for WiFi and digital TV applications.

Technological Developments and Capacity Expansion

UMC made significant technological strides, announcing a 3D IC solution for stacking RF SOI wafers and a 22-nanometer embedded high-voltage platform. Both technologies illustrate UMC's focus on advancing in AI, 5G, and automotive applications, showcasing its leadership in specialty technologies. On the capacity front, UMC's Fab 12A wafer capacity is set to reach over 1,000 12-inch equivalent wafers by the third quarter. The 2024 capital expenditure (CapEx) guidance remains unchanged at USD 3.3 billion.

Third Quarter 2024 Guidance

Looking ahead to the third quarter, UMC anticipates a mid-single-digit percentage increase in wafer shipments. The average selling price (ASP) in US dollars is expected to remain firm. Gross margin guidance is projected to be in the mid-30% range, with a capacity utilization rate reaching approximately 70%. Despite the constraints of rising depreciation expenses and higher utility rates, UMC is optimistic about maintaining its operational resilience.

Challenges and Market Dynamics

UMC faces several challenges moving forward, including increased depreciation expenses tied to capacity expansions and anticipated utility rate hikes. The company expects some margin pressure but remains confident in its ability to navigate these hurdles by focusing on resilient operations and strategic technology solutions. The overall market demand, particularly in the communication and computing segments, is expected to show improvement, aligning again with seasonal patterns by the end of the year.

Conclusion and Strategic Outlook

UMC continues to build on its strengths in specialty technologies and remains committed to providing differentiated technology solutions. For the rest of 2024 and into 2025, the company expects to see gradual improvements in end-market dynamics and aims to maintain competitive pricing strategies. By focusing on customer partnerships and leveraging technological advancements, UMC is well-positioned to capture future growth opportunities and sustain its market leadership.

Earnings Call Transcript 2024-Q2

[Operator]

Welcome everyone to UMC's 2024 Second Quarter Earnings Conference Call. [Operator Instructions] For your information, this conference call is now being broadcasted live over the Internet. A 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.

And now, I would like to introduce Mr. Michael Lin, Head of Investor Relations at UMC. Mr. Lin, please begin.

[Michael Lin, executive]

Thank you, and welcome to UMC's conference call for the second quarter of 2024. I'm joined by Mr. Jason Wang, President 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 President's key message to address UMC's focus and 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.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 cost actual results to different 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 UMC's CFO, Mr. Chi-Tung Liu, to discuss UMC's second quarter 2024 financial results.

[Chi-Tung Liu, executive]

Thank you, Michael. I'd like to go through the 2Q '24 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 TWD 56.8 billion with gross margin at 35.2%. The net income attributable to the stockholder of the parent was TWD 13.8 billion and earnings per ordinary share were TWD 1.11. In second quarter, our wafer shipment increased 2.5% 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 grew by 4% quarter-over-quarter to TWD 56.8 billion. Other than the 2.5% Q-o-Q wafer shipment increase, the other were helped by the weaker NT dollar exchange rate.

And the gross margin, we mentioned earlier, was 35.2% or nearly TWD 20 billion. With the help -- minor help from the non-operating income, the total net income reached TWD 13.77 billion and the net income attributable to the shareholder of the parent was TWD 13.78 billion (sic) [ TWD 13.79 billion] or TWD 1.11 EPS in the second quarter.

For the first half of the 2024, revenue was almost flat compared to the same period of last year, which was TWD 111 billion for the first 6 months of the year. Gross margin was around 33.1% or TWD 36.8 billion. And net income margin is around 21.8% or TWD 24.2 billion. EPS in the first half was TWD 1.95 per share.

Our cash level is around TWD 121 billion, and our total equity at the end of second quarter of 2024 was TWD 356 billion. ASP remained flat in Q2 of 2024. In terms of revenue breakdown, Asia gained about 1% of the revenue distribution to 64%, North America stay 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 quarter 2. Consumer and Computer both grew by single digit percentage, respectively. 22/28 revenue continued to be around 33% and 40-nanometer declined from 14% in the previous quarter to 12% in this quarter.

Capacity at the 12A continued to increase and in the third quarter of 2024, our 12A capacity will reach 400, above 1,000 12-inch equivalent wafers in the third quarter. Currently, the estimate for our 2024 CapEx remains unchanged around USD 3.3 billion.

The above is a summary of UMC result 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 Wang.

[Jason Wang, executive]

Thank you, Chi-Tung. Good evening, everyone. Here, I would like to share UMC's second quarter results. In the second quarter, wafer shipments increased 2.6% quarter-over-quarter and fab utilization rate improved to 68% as we saw notable demand momentum in the consumer segment. Contribution from our 22/28 nanometer business rose sequentially on healthy demand of WiFi 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 RF SOI 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 foundry 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 fab utilization. Our 22/28 nanometer business remains a promising growth driver, with a number of tape-outs 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 expansions as well as a higher utility rate. Despite these 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 wafer shipments will increase by mid-single digit percentage. ASP in U.S. dollar will remain firm. Gross margin will be in the mid-30% range. Capacity utilization rate will be approximately 70%. Our 2024 cash-based CapEx will be budgeted at USD 3.3 billion.

That concludes my comment. Thank you all for your attention. And now we are ready for questions.

[Operator]

[Operator Instructions] And now first question is from Sunny Lin, UBS.

[Sunny Lin, analyst]

Really glad to see improving gross 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 few cycles, your utilization rate were around 85% to 90%. In a better up-cycle it could be over 90%. And so now with the improving cycle, but still considering some oversupply issues, what will be a reasonable estimate for you to -- your utilization rate going into 2025?

[Jason Wang, executive]

I mean, I think we are focused on our 2024 first. And for 2024, we are confident on our promise in Q3 wafer demand as they continue to increase. However, we foresee that UMC's customer demand forecast has started to reflect more of a seasonal pattern, where the second half of 2024 wafer shipment will increase relative to the first half. That's supported by a 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 strong rebound as the customer remain prudent on managing their inventory level. So customer will continue to be 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 autos' inventory get to a healthier level, we believe that 2025 will get back to normalcy of the industry demand outlook.

[Sunny Lin, analyst]

Got it. Also my second question is on how should we think about the structural gross 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 the next couple of quarters? And then second on depreciation, 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 would assume it could be less because you are delaying the Singapore expansion. Then the third maybe on the cost inflation. Any view on the potential impact going to 2025?

[Chi-Tung Liu, executive]

Now 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 items, we are looking at higher seasonal utility costs in the third quarter. And our quarterly depreciation is likely -- in terms of the increased rate, third quarter will be the highest, around 10% Q-o-Q increase. So we will continue to work diligently in terms of controlling our cost item. Hopefully, through the better efficiency in some of the automation, we will be able to offset the pressures from the increasing cost items.

So one way to look at this, we will remain a solid EBITDA margin and we will improve along with higher utilization rate, and we will continue to strengthen our competitiveness and improve product mix to maintain our structural profitability.

[Jason Wang, executive]

If we go back to the ASP 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 continually working with the customer to ensure their product offering remain competitive in the marketplace as well.

It's our belief that 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 stay competitive and resilient against the market dynamics such as the capacity situation, technology solution, customer partnership and manufacturing performance. So we're constantly managing our pricing strategy, but we remain fairly consistent with our current strategy.

[Sunny Lin, analyst]

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

[Jason Wang, executive]

For the P3, the schedule has not changed. We expect the P3 ramp will reflect in our -- I mean, in the -- we project the 12 P3 production will start in January '26, and the ramp up to high volume starting from the second half of 2026.

[Operator]

Next one, Gokul Hariharan, JPMorgan.

[Gokul Hariharan, analyst]

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 I just wanted to understand what is going into this gross margin 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, they'll kind of drop back to the early 30s levels that we had in Q4 last year and Q1 of this year?

[Jason Wang, executive]

I mean, yes, Chi-Tung kind of touch that a little bit earlier. For the Q2 gross margin, I have to say it's mainly coming from the favorable foreign exchange rate movement that contributed to a better than guided gross margin result. For Q3, while the utilization has increased a little bit, but the gross margin actually remains at the mid-30% range. It's really because the decrease -- in Q3, the rise in depreciation expense from the capacity expansion of the 12A P6 and the 12i P3 along with some seasonality utility rate, and that will be considered for our Q3 gross margin guidance. However, like Chi-Tung mentioned earlier, we foresee our EBITDA margin will remain firm relative to the Q2 2024.

[Gokul Hariharan, analyst]

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% utilizations 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?

[Jason Wang, executive]

Okay. Well, I mean, on the ASP, the -- while we -- while our ASP remains firm, from -- the like-to-like pricing will remain unchanged. 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 remain firm on our pricing, okay?

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 we ever get back to 95% level? We certainly hope so. However, we anticipate continuous pressure from some of the 12-inch mature node fab, like you said, and that has impacted 8-inch's supply chain. While certain mainstream application will remain -- while that certain mainstream application will remain on the 8-inch node, we -- what we currently do is we have identified a number of additional project opportunity 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 that 95% is still our goal. But from the timing-wise, we'll probably take some time to gradually lift to that level. And so we'll continue -- we're going to continue our efforts by doing so, and we can update you accordingly.

[Gokul Hariharan, analyst]

Okay. And maybe one last question from me. Your -- the interposer for some of the AI-related 2.5D packaging products, what percentage of the revenues have 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 6,000 that you mentioned a few quarters back?

[Jason Wang, executive]

Well, we -- first of all, we already -- we have already doubled our interposer capacity to 6,000, as we reported previously, in response to an incremental demand at the beginning of 2024. For any additional interposer capacity expansion will be assessed based on customer alignment. So we follow up with our customers closely, and if there is additional incremental requirement, then we will consider. But at this point, the alignment is at 6,000, yeah.

[Gokul Hariharan, analyst]

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

[Jason Wang, executive]

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

[Chi-Tung Liu, executive]

It's actually less than 4%, 5%.

[Operator]

Next, we'll have Bruce Lu, Goldman Sachs.

[Zheng Lu, analyst]

Jason, this is Bruce. I want to ask about the -- 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 don't have the -- you have the existing capacity, which doesn't really require a customer to prepay [ for ] any additional wafer price hike. I mean what do we miss here? I mean any possibility we can win back business or get the future business away from our competition?

[Jason Wang, executive]

I think there's a few things. One is, obviously, we don't comment on our competitors, and they must have their reason by doing the capacity expansion. We actually feel very comfortable with our capacity situation in terms of 12-inch mature node, which is -- that's what you're referring to.

Despite -- in the recent quarter, the 40 and 65 revenues has declined a little bit quarter-over-quarter due to the customer ongoing correction within the automotive and industrial segment. But we do expect the 40- and 65-nanometer business will grow essentially 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, RF SOI, BCD, OLED display and ISP. 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' customer 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 that's the 3 things that I'd like to say in order to stay competitive.

And 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 no migration path. That's coming from our customer as well as the new customer. Secondly, we are one of a few foundries that have economic scale and highly efficient operations across all our fabs, whether it's in Singapore, Japan, Taiwan or China, with a technology offering that could pose a -- the prospect to serve our -- according to our -- the prospect 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 12-nanometer collaboration with a U.S. partner to fuel our future growth. So I don't think we're missing anything. I think that within our addressable market, we focus on our customer engagement and continue delivering our solution and make sure that we can grow with our customer together. So in a way, I won't comment that there is something that we're missing here. I think the -- I think we have an adequate solution to serve our customer right, yes.

[Zheng Lu, analyst]

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

[Jason Wang, executive]

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 reasons beyond that we both look at us and that's what we just discussed. So I think there's a different reason behind it. And I really can't comment about our competitors as well as our customer, but I can assure you that we'll continue to strive to improve and enhance our competitiveness and then we continue maintaining and gaining our market shares in those places.

[Zheng Lu, analyst]

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

[Jason Wang, executive]

Well, it's a couple of questions you have. Actually, the 12-nanometer 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 22-nanometer solution to help our customer migrating from 28-nanometer for high-end OLED display in the premium smart phone space. The 22-nanometer has already entered production now, and we have -- we are expected, we will 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-nanometer, which offer more competitive die area and unmatched power saving around 30%. And so, the UMC's 22-nanometer high-voltage platform extend battery life and offer superior visual experience. So we also provide sizable capacity offering in 22-nanometer. And that has into all our fabs, like I said earlier, this will actually strengthen our customer supply chain. We see it in beyond 22-nanometer into your question about the FinFET. Our engineering development team are working on further expanding our high-voltage portfolio to the thing that we are anticipating the AI smart phone.

Now, is there a benefit to the FinFET? We certainly think so. And at this point, I think the 22-nanometer is the best-in-class right now and 14-nanometer is under development. I mean the FinFETs under development. Now if we -- besides the high-voltage on the 12-nanometers, the 12-nanometer program, we can serve many different applications and giving after since our announcement of the cooperation, we have received numerous increase from various industry-leading players. And according to the earlier evaluation feedback from those customers, our 12-nanometer's performance will be very competitive in the industry to serve different applications. So it's not only limited at the high-voltage space.

[Zheng Lu, analyst]

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

[Jason Wang, executive]

2026, I think that's a bit early. I think there is the 22-nanometer will probably still remain as the main strength.

[Operator]

Next question, Charlie Chan, Morgan Stanley.

[Charlie Chan, analyst]

Jason and Chi-Tung, good afternoon and congrats for very good results, both the margin and the revenue surprise of that size, 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 Chi-Tung because according to my calculation, any dollar depreciation may be 3 percentage point over the past quarter. So contribution to gross margin could be 1 percentage point. But you were saying that the 2Q gross margin beat mainly coming from the FX? So do we miss anything on that comment?

[Chi-Tung Liu, executive]

So roughly every 1% of TWD depreciation will lead to about 0.4% of the margin increase. So 3% Forex movement translate into about 1.2 percentage points, 1.3 percentage points for Quarter 2. 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, Forex is still the main factors for the 35.2% gross margin versus our guidance of 30-ish gross margin.

[Charlie Chan, analyst]

Yes, that's clear. So maybe next question to Jason. I mean, we heard you about you can be flexible on pricing, you want to cut us to stay competitive, right? So I was assuming that probably there will be some ASP erosion. But in return, you can get some business opportunity. But it turns out that your pricing is firm, but your revenues still grow 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.

[Jason Wang, executive]

Well, I mean, first of all, from the -- like you said, the like-to-like pricing remain unchanged, but the blended ASP reflects the change in product mix between 8-inch and 12-inch as well, mainly because we -- that's aligned to the end market. We do see some of the -- some of the segments have exiting the inventory correction cycle. So some of the restocking, the demand is actually coming back. While we actually stay away from a commodity market segment. So I think we've been -- we try to manage this -- try to balance this portfolio as well as the product mix diligently. I think that's more of a result of that. But in addition to that, I also believe you have to say fundamentally competitive by offering the differentiated technology solutions. We're going to continue to advance that and from continued expanding our specialty technology and space and hopefully that we can continue maintaining that.

Now if it comes down to if we do need to elevating our customer, you know, 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 angle is we try to -- creating a win-win scenario to benefit both sides in the long run. Yes.

[Charlie Chan, analyst]

I see. Yes. And maybe -- maybe on that interposer side because my understanding is that the end customer is probably migrating to the next-generation AI GPU and the interposer design may change. So I am a bit concerned whether you found about whether you can maintain the interposer capacity? I'm concerned that interposer business may go away, maybe 1 year or 2 years. Is that a fair concern?

[Jason Wang, executive]

Sure. Absolutely. I mean, just like any other technology, the product will continue migrating into the next generation. But at the same time, like any other I think on capacity on different technology nodes, there's also another product pipeline is coming into that. So the product pipeline management is the 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, in addition to interposer that which we will engage in the pipeline, we're also developing the wafer-to-wafer hybrid bonding, which that we have announced in the past quarter.

So the way we view this is the 3D IC solution offers the advantage, including 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 foundry that with wafer-to-wafer bonding solution for the RF SOI that are production ready today.

And our second RF SOI wafer solution is able to achieve an impressive 45% form 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-focused customer on tailored solution to meet their specific needs in a various combination of our hybrid bonding technologies.

In summary, we are confident that the interposer hybrid bonding has a great potential, and we are committed to continue to invest in R&D to ensure we can serve our customers as best we can.

[Charlie Chan, analyst]

Understood. 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? And as you also see that Intel is changing their foundry business leadership, do you think they will change or service your partnership with Intel?

[Jason Wang, executive]

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 and as well as the key customers to further accelerate the schedule. Overall, we are cautiously optimistic about the progress and we'll update accordingly. So I actually feel very good about the current progress.

Now in terms of the leadership question, and the project itself is -- I consider progressing well. And I think the leadership will continue to view that as the same. 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 mass production in the 12-nanometer sort of cooperation.

[Charlie Chan, analyst]

Jason. So very, very last one. Because I am still a little bit still surprised by to the upside by your third quarter revenue guidance, right. Because your -- one of your major customer, MediaTek, their second quarter inventory days actually went up to 72 days, right? 1Q it was 66 days. So first of all, inventory base start to go up again. And they are guiding their third quarter revenue to be flat, right? So I'm just wondering why you can outgrow the market, especially customers inventory data go out again? Sorry, if we keep coming back to this inventory or second question.

[Jason Wang, executive]

I mean, first of all, I mean, we see a continuous inventory improvement across all segments. And some of the customers may have been a little bit of tying up. And the -- basically all segments have improved their inventory level, and we have seen that. And we expect to see the inventory will reach a relatively healthy by end of this year. And so that's also we guided that the customer was still cautious -- have a cautious of approach to their inventory management based on the current market outlook.

However, for the automotive segment, the end market demand outlook for the automotive ones still remains very soft compared to other segments. And the inventory level has improved, but the base of inventory is still above the seasonal level. So I think the -- besides the auto, the rest of the market segment will probably start experiencing some of the seasonality patterns. So I feel from an inventory correction point, we should have already activate it for those communication, consumer and computing.

[Charlie Chan, analyst]

So in that case, do you change your industry assumption this time or Ex-memory and also foundry?

[Jason Wang, executive]

You are talking about our addressable market outlook?

[Charlie Chan, analyst]

Yes, yes. Yes. Do you revise that this time?

[Jason Wang, executive]

Last time we talked about our UMC addressable margin will remain flattish.

[Charlie Chan, analyst]

Yes.

[Jason Wang, executive]

And our outlook has not changed. And our projection still shows the UMC addressable market will remain flattish in 2024. And our goal is we expect to outperform our addressable market in 2024, as some of our customers have adapted our solution and ramping and gaining market share for the second half.

[Charlie Chan, analyst]

I see. It's super helpful.

[Operator]

Next one, Laura Chen, Citi.

[Chia Yi Chen, analyst]

I also have a follow-up questions in terms of the end demand. As 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 is the order visibility can be sustainable into Q4 from your perspective?

[Jason Wang, executive]

Well, I hope if I mislead you, I'm sorry about that, but Laura, what I said is we expect to see a mild pickup in communication, consumer and computing segment. And despite the -- however, despite a mild recovery in Q3, we have not seen the sign of a strong rebound as the customer remain prudent on managing their inventory level.

So I think on the some of the market segments such as communication, consumer and computing area, I think we are in the process of accessing 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. So, and I think right now the phenomenon is more showing, we are going back to the traditional seasonal pattern on the annually to the seasonal pattern that aligns to the market outlook.

[Chia Yi Chen, analyst]

That's very clear. And also I noted that for our IDMs, that's fine, the revenue declined quite substantially since the peak in Q4 last year. Can we assume that is mainly because of the automotive related or also we are seeing the same trend that for the consumer, computing part that gradually improved, while automotive, industrial, how far the IDMs that could still relatively muted for the next few months?

[Jason Wang, executive]

Well, first of all, you're right. Our -- so our IDM customer were also impacted by the global semiconductor downturn across not only communication, automotive, across the consumer, communication, computer and automotive segment. And some of the IDMs 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. So -- however, we anticipate the inventory level will improve and so although at a slower pace again and so longer term, we -- once the inventory corrections over and on the longer term we foresee IDM will continue to rely on foundry partner and their contribution will gradually recover.

[Chia Yi Chen, analyst]

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

[Jason Wang, executive]

I think after the COVID, after the capacity constraint, there's many different companies that look at their supply chain resilience question. So having internal capacity is one of the solution 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 that will be considered one of the entire supply chain ecosystem. And I think the IDM will continue rely on the foundry partners to an extent. However, they will probably balance that a little bit to ensure their supply chain resilience is improved.

[Chia Yi Chen, analyst]

Okay. Thank you. And also, hopefully you can give me more understanding about the PDIC business model. We know that a lot of advanced packaging or wafer base done by on the wafer foundry side. But since we are also expanding the PDICs, the hyper bonding type of design. Can you elaborate more on how is that business model going with the OSAT and also our competitors or potentially customers? Thank you.

[Jason Wang, executive]

It's in our view, the semiconductor foundry OSAT ecosystem remains very important. So I think that's our view. So the 3D IC roadmap that we have that require us to working 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 partner as well. So I think this in our view, this still consider us an ecosystem to serve our customers.

[Operator]

Next we'll have Brad Lin, Bank of America.

[Brad Lin, analyst]

So my first question is I want to follow-up on the interposer capacity thing as we recognize some potential downside eyeing on the, well, potential, well, CoWoS-L or CoWoS-R adoption in the future. So we explained that we are well, UMC 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?

[Jason Wang, executive]

No, they are different offering and the interposer capacity will continue serving as the 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'll see more interest coming for the interposer thing. And I think that we actually engage different application of the continued pipeline for this in the future. 3D IC wafer-to-wafer, hybrid bonding is extension of our advanced packaging offering. So we'll continue expanding that and we think from our addressable -- for our addressable market the wafer-to-wafer hybrid bonding will provide us the expansion of the addressable market and I think we are well fitted with our solutions.

[Brad Lin, analyst]

Got it. And so, we see we are pretty good potential there on the edge AI 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?

[Jason Wang, executive]

In the near-term, we already announced for the RFSOI stacking, it's already ready for production. So on the RF front end, that's already started to production. And from being related to future AI exposure, I think we kind of touched that last quarter as well. The AI expense on the cloud to edge, I think it will still take some time. But it's our belief, the new use cases will inevitably emerge along with the value chain.

Right now, we are only seeing the growing number from existing AI, PC, notebook or smartphone that requires silicon content to handle this case. But furthermore, the real opportunity that we believe lies beyond the existing edge device, which is in the new emergent application under the AI megatrends 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 interposer 3D IC, wafer-to-wafer also for the other low power BCD number that will also very well suited to meeting those demands in those AI related market.

[Brad Lin, analyst]

Got it, got it. So that actually quite related to the second question that I want to try to ask here is that well, for the utilization rate, yes, even though we see pretty well good recovery in the second half of the year with more than 70% of the UTR, but we are eyeing on the future. We are definitely not, I mean, the company is definitely not satisfied with only this level. So we totally believe that well, UMC already well 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 of new device or application might be the ones like robots. So would you please share with us your visibility on that and also how would that bring you in the well, mid to long run? Thank you.

[Jason Wang, executive]

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 so not some of the new use cases will still have -- we have to see them to come. And I think this is still a bit early right now. However, we have very, very high expectation in the longer term. Meanwhile, while we ascertain 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 is subject to the end market demand.

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 improvement -- 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 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 manifesting patient 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 upturn 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-nanometer products to our 22-nanometer technology. Customers are also adopting our 12-nanometer thin fab.

For high-voltage product, we expect the 40, 28 high-voltage customer will be adopting the 22 high V. Emerging memory application will transition to 28 and 22. We are very confident about the 28 and 22 for the longer term.

We also expect to see more interest in the 35, 40 mature area such as RF SOI. And while we talk about all those from the future capacity expansion plan 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 for the 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.

[Brad Lin, analyst]

And maybe one last question will be on the -- well, so given the product design lead time, we believe definitely 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 confidence -- do we have a good confidence level that the ASP will remain well resilient at least in terms of the blend ASP wise?

[Jason Wang, executive]

I mean, from a pricing strategy point, I mean, we on a higher level, like I said, we believe we have to elevate our customers' competitiveness, right? And by doing so, that's you have to provide your value proposition, including the technology offering, including the partnership and added with a scale capacity support so on and so forth and the manufacturing performance. So the -- certainly that will help with the ASP, 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.

[Operator]

And Brad was our last question for today's conference. We thank you for all your questions. This concludes today's Q&A session. I'll turn things over to UMC, Head of IR for closing remarks.

[Michael Lin, executive]

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 [e-mail]. Have a good day.

[Operator]

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 2 hours. Please visit www.umc.com under the Investors, Events section. You may now disconnect. Thank you and goodbye.