GUC Q3 Revenue Expected to Decline by Single Digits; Advanced Packaging Projects Delayed to Next Year

GUC (3035-TW) held its earnings conference today (28th), forecasting that third-quarter revenue will decline by a single-digit percentage compared to the second quarter. This is primarily due to some customers pulling forward orders in Q2 amid concerns over supply chain price hikes, which raised the base for comparison. Additionally, multiple advanced packaging projects originally scheduled for mass production in the second half of this year have been largely delayed to next year due to customer chip delivery delays, verification issues, and insufficient engineering resources at packaging and testing facilities.

GUC reported that second-quarter revenue reached approximately NT$3.31 billion, up 28% quarter-on-quarter and exceeding initial expectations. This growth was driven by strong performance in both IP licensing and volume production businesses. Volume production revenue reached NT$2.43 billion, a 48% increase from the previous quarter, accounting for over 70% of total revenue. Both MCU and ASIC volume production saw significant increases compared to the prior quarter.

However, due to customers pulling forward wafer foundry, packaging, testing, and other supply chain orders in Q2 to build up safety stock amid rising costs, the high base effect has led GUC to forecast a single-digit percentage decline in Q3 revenue.

By business segment, IP revenue is expected to continue growing in Q3, while NRE (Non-Recurring Engineering) and volume production revenue will decrease compared to Q2. Gross margin is expected to remain stable at around 45%, while operating expenses are projected to increase by a mid-single-digit percentage.

GUC emphasized that the Q3 revenue decline is a normal adjustment following the early pull-in of orders, and its full-year revenue target remains unchanged. Excluding customer material revenue from the same period last year, the company still expects full-year revenue to grow by more than 10% year-on-year. The main growth drivers for the year, in order, are volume production ASIC, IP, and NRE.

Regarding advanced packaging, GUC acknowledged that most projects expected to contribute mass production revenue in the second half of this year have been postponed to next year, falling short of initial expectations. Key reasons include delayed SoC delivery from customers, chip verification issues, and the need for design modifications and re-taping.

GUC noted that if a chip requires a revision, project timelines could be delayed by three to six months, subsequently affecting packaging validation and mass production schedules.

Moreover, for some advanced packaging projects, customers are responsible for securing mass production chips directly from foundries. However, some customers have slowed down in acquiring chips and advancing to high-volume production stages, further delaying project timelines.

Tight capacity and engineering resources at packaging and testing facilities are also contributing to the delays. GUC pointed out that support from packaging and testing vendors is less than initially expected. Bottlenecks are not solely due to lack of mass production capacity but also stem from engineering validation, sample production, process adjustments, and manpower onboarding.

Since engineering resources are prioritized for larger customers, GUC's project wait times have extended beyond initial expectations, impacting customers' subsequent ramp-up speeds.

Nonetheless, GUC emphasized that these advanced packaging projects have been delayed, not canceled. The company has reserved necessary resources with its packaging and testing partners, and customers have already invested in design and development costs. Despite tight supply chain conditions, the projects will continue to move forward. If customer progress varies, GUC can prioritize allocated engineering and production resources to faster-moving customers to improve overall resource utilization efficiency.

Although advanced packaging revenue contribution in 2023 is below expectations, strong performance in MCU and mature-process ASIC volume production has helped offset some of the gap, allowing the company to maintain its full-year revenue guidance.

Looking ahead to next year, GUC expects the delayed advanced packaging projects to enter mass production one after another. Additionally, two to three projects for which GUC is responsible for SoC design are expected to progress into later stages, enabling advanced packaging and advanced process revenue to begin stacking up.