UPDATE 5-Fujitsu Q4 profit halves; outsourcing chips to TSMC

* Q4 profit Y55.4 bln vs Y114.4 bln profit a year earlier

* Sees annual profit of Y80 bln vs consensus Y23.8 bln profit

* Fujitsu to outsource chip production to TSMC

* To team with TSMC in next-generation chip development

* Shares up 1.7 pct before results, market up 3.9 pct

By Sachi Izumi

TOKYO, April 30 (Reuters) - Japan's Fujitsu Ltd (6702.T) logged a 52 percent fall in quarterly profit, hit by drops in chip prices and weak demand for electronics, and said it would outsource semiconductor production to Taiwan's TSMC (2330.TW).

Fujitsu's chip business has been battered by a global downturn that has already pushed makers such as Germany's Qimonda QMNDQ.PK into insolvency and led others to seek new partnerships.

Fujitsu has been looking for a buyer or partners for the struggling operations while it shifts its focus to relatively solid server and services businesses. It also sealed a deal to sell its hard disk drive operations to Toshiba Corp (6502.T) for 30 billion yen ($308 million) on Thursday.

President Kuniaki Nozoe said the company would seek more measures for its chip business, aiming to make it profitable next financial year after an expected 15 billion yen loss this year. "What to do with the chip operations is our biggest issue this year," he told a briefing. "We are obligated to do more than this (outsourcing to TSMC)."

Group earnings at Fujitsu, Japan's biggest computer server vendor and No.2 PC maker, have still fared better than those of some rivals such as Toshiba thanks to its server and services businesses.

Fujitsu forecast a better-than-expected 16 percent rise in annual profit to 80 billion yen for the year to next March, sharply above a consensus estimate by 14 analysts for a 23.8 billion yen profit.

Fujitsu booked a net loss of 112.4 billion yen for last financial year with hefty restructuring costs, but it expects to return to profit to the tune of 20 billion yen this year.

For graphic of Fujitsu's net earnings, click: here

"The guidance is a high hurdle for Fujitsu to clear," said Soichi Yamazaki, chief analyst at Fukoku Capital Management Inc.

"Its forecast is based on the premise that by writing so much off, they will be able to at last restructure and start afresh," he said. "I want to see if that's what they are really going to do."

January-March operating profit totalled 55.4 billion yen, down from a profit of 114.4 billion yen a year earlier due also to weak PC and mobile phone demand.

Fellow Japanese electronics maker Mitsubishi Electric Corp (6503.T) reported a 26 billion yen quarterly operating loss, hit also by the chip sector slump due to its 45 percent stake in chipmaker Renesas Technology.

It forecast a 57 percent profit fall this financial year.

LATEST CHIP SHAKE-UP

The battered chip sector has seen a shakeup in recent months as companies, most of which are losing money, search for ways to ride out a prolonged downturn caused by oversupply, sharp price falls and weak demand.

Chipmakers must also grapple with ever-rising investment costs to develop more powerful chips with finer circuitry, which makes the size of a chip smaller and helps cut per-chip production costs.

Yoshihiro Shimada, chief analyst at SPI Analysis, said Japanese chip makers had sacrificed their chance for a place in the global chip industry by resisting shifting away from prized in-house production.

Fujitsu, which offers system chips used in products ranging from digital cameras and flat TVs to supercomputers, said it and TSMC, or Taiwan Semiconductor Manufacturing Co, would also consider working together on the development of next-generation chips.

"With this move, it looks like Fujitsu's chip business will start recovering from the next financial year, although this year will continue to be tough," JPMorgan Securities analyst Yoshiharu Izumi said.

The announcement of Fujitsu's collaboration with TSMC has prompted speculation over the fate of Toshiba's chip business.

Some analysts had expected Fujitsu and Toshiba might join hands after NEC Electronics (6723.T), seen as a potential partner for both companies, said it had started merger talks with Renesas Technology, which is 55 percent-owned by Hitachi Ltd (6501.T).

The alliance would also be a welcome revenue stream for TSMC, the world's biggest contract chip maker, which reported its weakest quarterly earnings in nearly eight years on Thursday. [ID:nTP343810]

Other recent moves in the chip industry include a partnership between Japanese PC memory maker Elpida Memory 6665.T and Taiwanese peers. [ID:nT162497]

Before the results, shares of Fujitsu closed up 1.7 percent against a 4.4 percent rise in the electrical machinery subindex .IELEC.T. The Nikkei .N225 average rose 3.9 percent. ($1=97.50 Yen) (Additional reporting by Mayumi Negishi and Elaine Lies; Editing by Michael Watson)