Taiwan Semiconductor, the world's top contract chip maker by revenue, said it expects demand to recover during the second quarter.

Net income for the company's December quarter was NT$27.91 billion ($851 million), down from NT$33.90 in the year-earlier period, the company said.

Speaking at an investor conference, Chief Executive Rick Tsai said surplus inventories of handset chips would dampen company sales in the first quarter of this year but added he expected a pick up by the second quarter once the inventory glut is worked off.

Shares of Taiwan Semiconductor rose 0.7% to NT$71 in Taipei, before the earnings were released. For the year to date, the company's shares have risen 5.2%.

The benchmark Taiwan Weighted Price Index fell 0.15% during Thursday trading.

Tsai also forecast that the semiconductor industry would achieve growth this year of 4% to 6%, down from 8% to 9% growth in 2006.

Profit margins are also expected to narrow, after coming in at 46% for the latest quarter, eroding from 52.1% a year earlier. Taiwan Semiconductor pegged its profit margin at 37% to 39% for the first quarter.

The company plans to maintain heavy investment on new equipment and technology. Taiwan Semiconductor spent $2.46 billion in 2006 and plans to raise the figure to between $2.6 billion and $2.8 billion this year.

Tsai said the company will undertake a share buyback this year, partly to improve its capital efficiency. He added the buyback would involve repurchasing stock owned by major shareholder Royal Philips Electronics NV, although he declined to give details.

Taiwan Semiconductor also said wafers shipments totaled 1.72 million in the fourth quarter, up from 1.71 million in the year-earlier period.

-----------