Faraday Reports 2004 Third Quarter Results: 10% Increase in Sequential Operating Income; Growth Expected to Continue

Third Quarter 2004 Highlights [1] :    

• Quarter-over-quarter revenue increased 5.9% to NT$1,324 million (US$39 million)
• Quarter-over-quarter operating income increased 10.0% to NT$331 million (US$10 million)
• Net income of NT$371 million (US$11 million)
• EPS of NT$1.44

Hsinchu, Taiwan, ROC – Oct. 26, 2004 – Faraday Technology Corporation ( TSE: 3035) (“Faraday” or “the Company”), a leading fabless ASIC and IP provider, today announced its unconsolidated operating results for the third quarter of 2004.

“We are pleased to report higher profitability in the third quarter. During the quarter, Faraday experienced a steady increase in customer IC demand, driven by consumer applications as well as the Video/Display sector. Demand for flash-based storage chip recovered strongly late in the third quarter. For the remainder of the year, we expect storage applications to be the strongest performing segment. The Video/Display is expected to grow steadily owing to the momentum carried over from Q3. With strong growth ahead, our customers, shareholders, partners, and employees will all benefit from it, “ said Faraday President H.P. Lin.

H. P. Lin continued, “We are also working to accelerate our investment in the 130nm and below IP portfolio. Faraday is the only company in the world that is simultaneously developing deep-submicron IP technology and ASIC service infrastructure. The third quarter has been monumental in that we have launched our platform SoC/IP solutions in the area of networking, multimedia and wireless LAN.”

Faraday's SoC platform solution is based on our proprietary ARM-certified embedded 32-bit RISC CPU with metal programmable cell array technology as its backbone, which enables our customers to quickly produce their desired end products at drastically reduced manufacturing cost and design cycle.

“To date, we have already successfully developed platform chips in the networking and the multimedia arena. We are now developing, on behalf of our customers, platform chips in the area of surveillance cameras, VoIP phones, and portable audio/video players,” said H. P. Lin, “To maintain our leadership position and to demonstrate our commitment to cutting edge IC designs, Faraday will further strengthen its research and development of deep sub-micron SoC technologies and assure the availability of a complete portfolio of relevant IPs for integration in our customers' designs,”added by H. P. Lin.

[1] Unless otherwise stated, all financial figures discussed in this announcement are prepared in accordance with ROC GAAP, which differ in some material respects from generally accepted accounting principles in the United States . They are unaudited , unconsolidated , and represent comparisons among the three-month period ending September 3 0 , 200 4 , the three-month period ending June 3 0 , 200 4, and the equivalent three-month period that ended September 3 0 , 200 3 . For all 3 Q0 4 results, New Taiwan Dollar (NT$) amounts have been converted into U.S. dollars at the exchange rate of NT$ 34.00 to one U . S . dollar.

Summary of Operating Results

Operating Results
(Amount: NT$ million)	3Q04	2Q04	QoQ% change	3Q03	YoY% change
Revenue Gross Profit Operation Expenses Operating Income Non-op. Income (Expenses) Net Income EPS (NT$ per share)	1,324 588 (257) 331 5 371 1.44	1,250 553 (252) 301 13 347 1.35	5.9 6.3 2.0 10.0 (61.5) 6.9	938 457 (196) 261 (32) 259 1.00	41.1 28.7 31.1 26.8 - 43.2

Revenue increased 5.9% QoQ to NT$1,324 million, from NT$1,250 million in 2Q04, and increased 41.1% YoY, from NT$938 million in 3Q03. Gross profit was NT$588 million, or 44.4% of revenue, compared to NT$553 million, or 44.2% of 2Q04 revenue. Operating profit for the quarter was NT$331 million, or 25.0% of revenue, a 10.0% increase from NT$301 million, or 24.1% of revenue in 2Q04. Net income in 3Q04 was NT$371 million, an increase of 6.9% compared with NT$347 million in 2Q04.

Earnings per ordinary share (EPS) for the quarter were NT$1.44 compared with 2Q04 earnings per ordinary share. Total weighted average outstanding shares in 3Q04 were 257,931,426 compared with 258,519,746 shares in 2Q04 and 259,397,576 shares in 3Q03. Diluted total weighted average outstanding shares including the dilution effects of employee stock options, were 258,467,167 shares in 3Q04 compared with 258,519,746 shares in 2Q04 and 259,397,576 shares in 3Q03.

Detailed Financials Section

Salary and bonus totaled NT$107 million in 3Q04, compared with NT$98 million in 2Q04. Wafer within COGS increased by 10.8% to NT$451 million. Total operating expenses increased by 2.0% to NT$257 million. R&D spending increased 4.6% QoQ to NT$181 million primarily due to higher salary pay out of new staffs.

COGS & Expenses
(Amount: NT$ million)	3Q04	2Q04	QoQ% change	3Q03	YoY% change
Revenue COGS   Wafer   Other Mfg. Costs Gross Profit Gross Margin (%) Total Operating Exp.  G&A   Sales and Marketing   R&D Operating Income Operating Margin (%)	1,324 (736) (451) (285) 588 44.4% (257) (29) (47) (181) 331 25.0%	1,250 (697) (407) (290) 553 44.2% (252) (29) (50) (173) 301 24.1%	5.9 5.6 10.8 (1.7) 6.3 2.0 - -6.0 4.6 10.0	938 (481) (243) (238) 457 48.7% (196) (28) (30) (139) 261 27.8%	41.1 53.0 85.6 19.7 28.7   31.2 3.6 56.7 31.2 26.8

Net non-operating income during 3Q04 was NT$5 million. Net investment income was NT$9 million. This is primarily due to attributable income of NT$15 million from Faraday-USA.

Non-operating Income (Expenses)
(Amount: NT$ million)	3Q04	2Q04	3Q03
Net Non-operating Income (Loss)   Net Interest Income (Expense)   Net Investment Income (Loss)   Inventory Loss Provision   Gain (Loss) on Disposal of Investment   Exchange Gain (Loss)   Others	5 3 9 (7) - - -	13 3 14 - (2) (2) -	(32) 3 (33) (41) 21 (11) 29

Cash and cash equivalents decreased by NT$393 million to NT$1,668 million due to cash outflow for dividends from the resolution of shareholders' meeting. Notes & accounts receivables increased by NT$52 million to NT$1,004 million. On a sequential basis, days sales outstanding [2] increased to 71 days, and average inventory turnover increased to 45 days.

Current Assets
(Amount: NT$ million)	3Q04	2Q04	3Q03
Cash & Cash Equiv. Notes & Accounts Receivable   Days Sales Outstanding Inventory   Avg. Inventory Turnover Total Current Assets	1,668 1,004 71 373 45 3,582	2,061 952 65 296 40 3,800	1,388 771 79 198 51 2,801

Total debt decreased by NT$475 million to NT$1,160 million in 3Q04. The decrease was primarily due to the repayment of short-term loans. As a result, debt to equity ratio decreased to 28.6%.

Liabilities
(Amount: NT$ million)	3Q04	2Q04	3Q03
Total Current Liabilities   Notes & Accounts Payable   Others Long-term Liabilities Total Debts Debt to Equity	1,134 719 415 - 1,159 28.6%	1,613 683 930 - 1,635 44.4%	598 347 251 7 638 18.4%

<>[2] Days Sales Outstanding = 365/ [ (Operating revenues for three-month period end *4)/ [ (Beginning NR&AR balance, net + Ending NR&AR balance, net)/2] ]
Average Inventory Turnover = 365/ [ (COGS for three-month period end *4)/ [ (Beginning Inventory balance, net + Ending Inventory balance, net)/2] ]

Analysis of Revenue >

The percentage of revenue contributed from USA grew to 17.1% in 3Q04, mainly due to the customer IC demand for consumer application. The percentage of revenue contributed from Japan , Europe and Korea remained stable.

Revenue Breakdown by Region

Region	1Q04	2Q04	3Q04
Taiwan	70.9%	76.0%	72.2%
USA	15.0%	13.8%	17.1%
Japan	6.9%	6.6%	6.6%
Europe	4.3%	1.5%	1.4%
Korea	1.4%	0.3%	0.4%
China	1.5%	1.8%	2.3%

The percentage of revenue from 0.18-micron sales increased to 15.0%, compared with 6.6% in 2Q04, mainly due to stronger demand for both Video/Display & consumer ICs.

Revenue Breakdown by Geometry

Geometry	1Q04	2Q04	3Q04
0.18µm	14.4%	6.6%	15.0%
0.25µm	36.3%	46.8%	36.9%
0.35µm	30.9%	32.4%	28.4%
0.45µm	3.0%	3.3%	3.1%
0.5µm	13.8%	9.7%	14.9%
0.6µm	1.6%	1.2%	1.7%

System house orders accounted for 44.8% compared with 36.1% in 2Q04, due to strong demand from Video/Display ( Taiwan ) and consumer ( US ) customers in 3Q04.

Revenue Breakdown by Customer Type

Customer Type	1Q04	2Q04	3Q04
Design House	64.7%	55.3%	45.6%
System House	26.9%	36.1%	44.8%
Foundry	7.4%	7.8%	8.4%
IDM	1.0%	0.8%	1.2%

Revenue from the Video/Display and consumer market segments increased significantly, and accounted for 17.1% and 15.1% respectively of total revenue in 3Q04. Most of the increase was due to strong demand for LCD controller (Taiwan) and electronic handheld study tool ICs (US).

Revenue Breakdown by Application

Application	1Q04	2Q04	3Q04
Peripheral	35.1%	35.2%	31.0%
Storage	28.3%	27.8%	22.1%
Communication	12.4%	8.2%	8.4%
Video/Display	13.4%	11.1%	17.1%
Consumer	6.8%	8.6%	15.1%
Image	1.6%	2.3%	2.5%
Audio	1.2%	0.2%	0.4%
Others	1.2%	6.6%	3.4%

The percentage distribution of ASIC, design service, and IP against the total revenue remains stable.

Revenue Breakdown by Billing Method

Billing Method	1Q04	2Q04	3Q04
ASIC	74.4%	79.3%	80.0%
Design Service	13.5%	9.2%	9.5%
IP	12.1%	11.5%	10.5%

 

Recap of Recent Important Events & Announcements

• 2004-10-05 Faraday Unveils Highest Performance NPU with Structured ASIC Programmability
• 2004-09-21 Faraday Announces Its Proprietary WirelessLAN SoC Application Platform
• 2004-09-20 Faraday Introduces PCI Express IP Solutions
• 2004-09-17 Faraday Introduces MPEG4/JPEG Multimedia Platform
• 2004-09-16 Faraday Uncovers New TEMPLATE Family That Achieves 0.13um Performance at 0.25um Production Cost
• 2004-09-15 Faraday's USB 2.0 OTG High Speed IP Core Silicon Proven on UMC's 0.13um Technology
• 2004-09-13 Faraday Unveils Highest Performance NPU with ASIC Programmability at Very Low Cost
• 2004-09-06 Faraday Technology Introduces Industry's Smallest PCI-Express Solution at UMC 0.13um
• 2004-08-20 Faraday's client - Skymedi Produced the World's First MultiMediaCard ™ 4.0 Chip Using Faraday's 0.18um Structured ASIC Library
• 2004-07-22 Faraday's USB2.0 ASIC Reached over 24 Million Pieces in Production
• 2004-07-07 Faraday Sets July 26 and August 1 as the Ex-dividend Date and Record Date of Its Common Shares, respectively
• 2004-07-06 Faraday Technology's Showcase at the 7th Embedded Systems Expo & Conference (ESEC) 2004 in  Tokyo

Please visit Faraday's Web site ( http://www.faraday-tech.com ) for details about these and other announcements.

 <>Third Quarter of 2004 Outlook & Guidance >

[Region Distribution]

It is likely to revert back to the Q2 ratio with Taiwan at slight advantage due to increasing demand on the flash-based storage market segment.

Europe and Korea is expected to experience a slight increase in revenue due to the new IC production in the Video/Display applications.

China will also grow in revenue due to the new IC production on MP3 applications in consumer market segment.

[Technology Process Distribution]

0.25um and 0.35um is still the dominant revenue generator, however, we are also expecting a small increase in the.0.18µm production.

[Application Distribution ]

We are expecting to see a strong 4 th Quarter in the flash-base storage IC production, primarily due to the strong demand on the flash controller chips from our customers, taking the advantage of the recent lower flash cost.

Video/Display revenue is expected to grow in the steady pace mainly because of the improved production demand from Korea and Europe regions.

[ Profitability ]

Gross margin remains stable.

About Faraday Technology Corporation

Faraday Technology Corporation is a leading silicon IP and fabless ASIC vendor. The company's broad IP portfolio includes 32-bit RISC CPUs, DSPs, PHY/Controllers for USB 2.0, Ethernet, and Serial ATA. With more than 500 employees and 2003 revenue of NT$3,767 million (US$111 million), Faraday is one of the largest fabless ASIC companies in the Asia-Pacific region, and it also has a significant presence in other markets, world-wide. Headquartered in Taiwan , Faraday has service and support offices around the world, including the U.S. , Japan , Europe, and China . For more information, please visit: http://www.faraday-tech.com

The financial statements included in this release were unaudited and unconsolidated, and prepared and published in accordance with ROC GAAP. Investors are cautioned that there are many differences between ROC GAAP and U.S. GAAP.

The forward-looking statements in this release reflect the current belief of Faraday as of the date of this release and Faraday undertakes no obligation to update these forward-looking statements for events or circumstances that occur subsequent to such date.

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