Along with larger rival Taiwan Semiconductor (NYSE:TSM), Taiwan's UnitedMicroelectronics (NYSE:UMC) is in what I would call the tech-commodity business. The second-largest chip foundry business in the world, United Microelectronics produces chips for semiconductor companies -- a good business when capacity is tight and margins are rich, but a difficult business with high fixed costs when utilization isn't so high.

Whether third-quarter results are good or bad depends very much on your point of view. The business has been hit hard as customers work through excess chip inventory, but there are definite signs of improvement on a quarter-to-quarter basis.

While United Microelectronics' revenue was down nearly 32% annually, it was up more than 21% from the second quarter. Likewise for gross profits, operating loss, and net income -- all pale in comparison to year-ago levels, but all are improved from the second quarter. Although this has been a tough year, the company has stayed free cash flow positive thus far -- producing nearly $600 million in free cash flow through the first nine months of the year.

There are other positive signs, as well. Revenue from 90nm (the most advanced in regular production) chips made up 14% of revenue in the quarter versus just 2% last year and 9% in the second quarter, and management thinks that could grow into the high teens in the next quarter. What's more, average selling prices are still trending up, and the company believes capacity utilization will reach about 85% for the next quarter versus 78% this quarter and 94% a year ago.

United Microelectronics' success ultimately depends on two factors: (1) its ability to stay competitive technologically and price-wise with rivals like Taiwan Semi, CharteredSemiconductor (NASDAQ:CHRT), and Semiconductor Manufacturing International (NYSE:SMI), and (2) the strength of business at customers like Texas Instruments (NYSE:TXN), Advanced Micro Devices (NYSE:AMD), LSI (NYSE:LSI), and Sony. If capacity utilization remains high, the company can make good money. If the utilization is too low, margins take a beating and profits aren't so good.

United Microelectronics could be shaping up to be a decent turnaround idea if overall chip demand firms up. The stock's current valuation is in the vicinity of past cyclical troughs, and guidance suggests business is getting better. I wouldn't expect to hold these shares as a long-term investment, but if the semiconductor industry recovers, they should go along for the ride.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).