Taiwan Semiconductor ( TSM) said fourth-quarter earnings surged 39% from a year ago on a 10.5% jump in sales, but executives voiced caution about the state of the chip market in 2005.

TSM earned $672 million, or 15 cents per American depositary share, in the quarter, about 2 cents better than expected. Revenue was roughly $2.0 billion in the quarter, compared with estimate of about $1.95 billion.

Shares rose 15 cents, or 1.86%, to $8.20 Thursday morning.

The results represented a sequential decline of 8.4% in revenue, reflecting lower shipments of silicon wafers used in microchip manufacturing.

"Due primarily to customers' continuing inventory digestion, our 2004 fourth-quarter business had declined as we expected," the company said in a statement.

The company continued to temper expectations for 2005, with CEO Morris Chang reportedly telling analysts that overall revenue will probably fall by 2% from 2004 after surging 28% last year. Still, Chang reportedly said TSM sees the industry's inventory glut resolved in 2005 before an upturn lifts the sector in 2006.

"We expect most of the reduction to be done in the first quarter," said Chang, according to media reports. "A few customers may continue to reduce inventories in the second quarter."