(InfoWorld) - Taiwan Semiconductor Manufacturing Co. (TSMC), the world's largest contract chip maker, said Tuesday that its second-quarter revenue and net income dropped compared to the same period a year earlier, in part because customers demanded lower prices.

The company's business improved compared to the first quarter, however, and TSMC signaled that demand will rise throughout the rest of 2005 as it continues to recover from a severe chip glut that started in the second half of last year.

TSMC is considered a bellwether for the global IT industry because it manufactures chips for a wide variety of devices, giving it a broad exposure to business conditions.

TSMC also revised upward its prediction for global chip industry revenue growth this year to about 5 percent, from flat previously, adding that growth in 2006 should be even greater.

TSMC's revenue for the second quarter fell to NT$58.5 billion (US$1.9 billion as of June 30, the last day of the period reported), down 10 percent from the same period last year, but up from NT$55.7 billion in the first quarter. Net income dropped 22 percent to NT$18.4 billion, but beat the consensus analyst forecast of NT$17.4 billion, from a poll by Reuters Estimates.

"Despite [increased orders] in the second quarter, there was still some pricing pressure," said Lora Ho, TSMC's chief financial officer, during the company's second quarter investors' conference in Taipei.

The company's utilization rate, which measures the efficiency of its production line use, rose to 85 percent in the second quarter, from 78 percent in the first quarter. Orders for chips used in consumer electronics and computer systems rose during the quarter, while communications chips dropped slightly as a percentage of overall output.

"Consumer electronics continues to improve. Demand for chips used in TV digital set-top boxes was strong," said Ho.

In the current quarter, ending Sept. 30, demand looks strong for chips used in mobile phones, consumer products like DVD players, graphics chips and PLDs (programmable logic devices), said Rick Tsai, president of TSMC, during the investors' conference.

TSMC's production technology continues to progress, he said. In the third quarter, chips made on a 90-nanometer manufacturing technology will account for about 10 percent of revenue, up from 2 percent in the second quarter, as more companies develop new chips with the tiny 90-nanometer features. Chips made using the company's 130-nanometer technology and below accounted for 43 percent of revenue in the second quarter.

In the third quarter, TSMC expects chip shipments to rise by a mid-teen percentage point and its utilization rate to reach 90 percent. Pricing pressure will remain, however, and TSMC expects average selling prices to drop slightly compared to the second quarter.

The company's forecast for a further decline in average selling prices was the worst surprise from the investors' conference, since global chip capacity is scarce, Global chip capacity is scarce, which ordinarily should cause prices to rise, said Bhavin Shah, a chip industry analyst at JP Morgan in Hong Kong. But the chip industry overall is in an upswing, he said, and JP Morgan's forecast for overall industry growth this year and next year matches that of TSMC's.

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