MediaTek Profits Fall

MediaTek, the world's largest maker of chips for DVD players, said its quarterly profit fell for the first time, after it lost market share and prices fell in the three months ending June 30.

The company's second-quarter net income declined to NT$3.2 billion (US$96.5 million) from NT$3.3 billion in the year-earlier period. Earnings per share fell to NT$5.08 from NT$5.18.

MediaTek, the first company to combine the functions of several DVD player chips into one, lost market share as rivals introduced similar products. Inventory at makers of DVD players in China rose, as rivals forced companies into bankruptcy in the second quarter, Merrill Lynch & Co. analyst Dan Heyler said before the earnings announcement.

"MediaTek's net income was slightly lower than expected, signaling dwindling profit due to rising inventory," said Maggie Chien, who helps manage the equivalent of US$30 million at Capital Investment Management Co. in Taipei. "It probably still can make a net income of around NT$4 billion in the third quarter as the industry enters annual peak season."

The Hsinchu-based company was expected to earn NT$3.3 billion based on the median estimate of five analysts surveyed by Bloomberg.

MediaTek sells most of its chips to Sichuan Changhong Electric Co. and rival DVD player makers in China. These captured the bulk of the market more than two years ago, by selling products that retailed for about US$35. At least 30 player makers went bankrupt in the second quarter to avoid paying royalty fees, according to Merrill Lynch.

MediaTek's share of the market for DVD controller chips in the first half this year slipped to 39 percent from 65 percent, according to Merrill Lynch. Zoran Corp., a Sunnyvale, California, rival, raised its share to 17.7 percent, from 4.5 percent in the same period a year earlier, Merrill Lynch said.

The company's gross margin, or the percentage of revenues left after deducting production costs, fell to 47.9 percent in the second quarter from 51.9 percent in the year-earlier period. Mediatek said it hopes its gross margin will remain unchanged in the third quarter from the second quarter.

MediaTek's second-quarter sales, posted earlier, rose 21 percent to NT$9.7 billion. The company said it expected third-quarter sales to remain unchanged or "slightly better" compared with the second quarter.

Mediatek shares closed unchanged at NT$194, before the earnings were announced. The shares have lost 28 percent of their value since January 1, compared with an 8.9 percent decline for the benchmark Taiwan stock index.

The company had its smallest quarterly profit gain on record, at 10 percent, in the first quarter this year. MediaTek posted 18 percent profit growth in the first quarter of 2003, the smallest previous rise.

MediaTek has been aiming to offer new products to help lift profit. New chips for mobile phones won't contribute to the company's sales until the end of this year, later than MediaTek earlier predicted. MediaTek said it plans to sell the chips to handset makers in Taiwan and China, the world's largest market for cell phones.

MediaTek said that it and Taiwan rival Via Technologies Inc. have settled patent, copyright and other lawsuits in Taiwan and the U.S.

MediaTek and Via will dismiss or withdraw all pending litigation, the companies said in an e-mailed statement. MediaTek will let a Via unit use MediaTek's copyrights and trade secrets in exchange for payment by the Via unit of a US$25 million royalty and US$5 million per year for the next five years.