“As a result of the unprecedented rate of decline in semiconductor demand worldwide, Chartered revenues in fourth quarter 2008 were down 24 percent, and revenues including our share of SMP were down 26 percent compared to the previous quarter, in line with the guidance we had provided on December 12, 2008. Revenues from 0.13-micron and below technologies, including those from 65 nanometer (nm), accounted for 58 percent of our total business base revenues. Revenues from 65nm alone, including both SOI and bulk technologies, represented 23 percent of our total business base revenues. We ended the quarter with a net loss of $114 million, which also included a reversal of tax credit that was recognized in prior quarters, amounting to $34 million. Our previous guidance did not comprehend this reversal of tax credit,” said George Thomas, senior vice president and chief finance officer of Chartered.
Summary of Fourth Quarter 2008 Performance:
Revenues were $351.7 million in fourth quarter 2008, including $41.0 million from Fab 3E. Revenues in fourth quarter 2008 were down 0.3% from $352.6 million in fourth quarter 2007. Revenues including Chartered’s share of SMP were $359.0 million, down 5.0% from $377.8 million in the year-ago quarter, primarily due to weakness in the computer sector and to a significantly lesser extent the communications sector. Excluding Fab 3E, revenues in fourth quarter 2008 were down 11.9%, and revenues including Chartered’s share of SMP were down 15.8% compared to the year-ago quarter. Sequentially, revenues were down 24.1% compared to $463.7 million in third quarter 2008. Revenues including Chartered’s share of SMP were down 26.3% from $487.2 million in third quarter 2008, primarily due to the significant decline in semiconductor demand across all sectors.
Gross profit was $13.8 million, or 3.9% of revenues, compared to a gross profit of $60.5 million, or 17.2% of revenues in the year-ago quarter, primarily due to higher cost per wafer resulting from lower production volumes over which fixed costs are allocated, including the impact of significantly lower utilization of manufacturing assets, and a richer mix in production levels. Gross profit was down 79.0% sequentially from $65.6 million, or 14.1% of revenues in third quarter 2008, primarily due to higher cost per wafer resulting from lower production volumes over which fixed costs are allocated, including the impact of significantly lower utilization of manufacturing assets, partially offset by higher average selling prices (ASP) resulting from higher selling prices in certain technology nodes as well as a favorable product mix. The fixed costs in fourth quarter 2008 included the impact of an upward revision of projected useful lives and a corresponding elimination of projected residual values for twelve-inch process equipment used for leading-edge technologies. This upward revision of projected useful lives and elimination of projected residual values, which was completed in fourth quarter 2008, resulted in a favorable impact of $18.1 million for the quarter.
Other revenue which primarily relates to rental income from SMP (Fab 5) was $2.4 million, down 60.1% from $6.0 million in the year-ago quarter, due to the renewal of the lease with SMP. The rental charged to SMP is arrived at based on the terms of the original joint-venture agreement, which is a function of recovering the cost of the building and facility machinery and equipment over the period of the joint-venture agreement. The lower rental starting from second quarter 2008 reflects Chartered’s recovery of the majority of these costs over the initial 10 years of the joint venture.
Research and development (R&D) expenses were $45.4 million, an increase of 1.4% from the year-ago quarter, primarily due to cost of higher development activities related to the advanced 32nm technology node. Compared to the previous quarter, R&D expenses were up 2.7% from $44.2 million, primarily due to lower reimbursement of expenses related to grants and higher cost of development activities related to the advanced 32nm technology node.
Sales and marketing expenses were $14.5 million, down 7.9% compared to $15.8 million in the year-ago quarter, primarily due to lower payroll-related expenses, partially offset by higher financial support for pre-contract customer design validation activities. Compared to the previous quarter, sales and marketing expenses were down 25.4% from $19.5 million, primarily due to lower expenses related to Electronic Design Automation (EDA) offerings resulting mainly from the impact of an upward revision of projected useful lives for certain technology-related intangible assets and lower financial support for pre-contract customer design validation activities. This upward revision of projected useful lives, which was completed in fourth quarter 2008, resulted in a favorable impact of $1.5 million for the quarter.
General and administrative (G&A) expenses were $9.9 million, down 7.5% compared to $10.7 million in the year-ago quarter and down 11.6% from $11.2 million in the previous quarter, primarily due to lower payroll-related expenses.
Equity in loss of Chartered’s minority-owned joint-venture fab, SMP (Fab 5), was $2.0 million compared to equity in income of $9.0 million in the year-ago quarter and equity in income of $8.7 million in the previous quarter, primarily due to lower revenues resulting from lower shipments and higher cost per wafer resulting from lower production volumes over which fixed costs are allocated.
Other income (loss), net, was a loss of $5.9 million, compared to a loss of $0.9 million in third quarter 2008, primarily due to a decline in value of an investment in a private enhanced cash fund and to a lesser extent a decline in value of investments in equity securities.
Net interest expense was $14.2 million, compared to $8.1 million in the year-ago quarter, primarily due to lower interest income arising from lower interest rates, lower interest capitalization associated with the ramp of Fab 7 and to a lesser extent higher interest expense resulting from higher outstanding debt. Compared to the previous quarter, net interest expense was up 4.8% from $13.6 million, primarily due to higher interest expense resulting from higher outstanding debt and lower interest capitalization associated with the ramp of Fab 7.
The financial position of Chartered’s consolidated joint venture fab, Chartered Silicon Partners (CSP or Fab 6), continued to be in a shareholders’ deficit in fourth quarter 2008, and therefore none of the loss of $11.5 million in the fourth quarter was allocated to the minority interest. At the end of fourth quarter 2008, CSP’s shareholders’ deficit was $432.6 million.
Net loss was $114.0 million, or negative 32.4% of revenues, compared to a net income of $5.9 million, or 1.7% of revenues in the year-ago quarter, and a net loss of $24.4 million or negative 5.3% of revenues in the previous quarter. Net loss in fourth quarter 2008 included a tax expense of $33.0 million, mainly resulting from an additional valuation allowance of $34.3 million provided on a portion of the deferred tax assets that is assessed to be non-realizable, based on Chartered’s downward revision of its projections of future taxable income in view of the rapid slowing down of demand and worsening economic outlook.
Basic loss per American Depositary Share (ADS) and basic loss per share in fourth quarter 2008 were ($0.46) and ($0.05) respectively, compared with basic earnings per ADS and basic earnings per share of $0.01 and $0.00 respectively in fourth quarter 2007. Diluted loss per ADS and diluted loss per share in fourth quarter 2008 were ($0.46) and ($0.05) respectively, compared with diluted earnings per ADS and diluted earnings per share of $0.01 and $0.00 respectively in fourth quarter 2007.
