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TSMC Revenue Outlook Beats Estimates, Sales to Drop Next Quarter

Taiwan Semiconductor Manufacturing Co. (2330), the world’s largest contract manufacturer of chips, said sales may rise to a record this quarter, beating estimates, before dropping amid growing inventories and a worsening economic outlook.

Revenue in the three months ending Sept. 30 may be NT$136 billion ($4.5 billion) to NT$138 billion, the Hsinchu, Taiwan- based company said today, compared with the NT$134.8 billion average of 22 analyst estimates compiled by Bloomberg. Second- quarter operating income rose 23 percent to NT$46.7 billion, beating the NT$45 billion average of 15 estimates.

TSMC projects sales of leading 28-nanometer production technology to double this quarter on demand for chips used in mobile devices from Apple Inc. (AAPL), Samsung Electronics Co. and Amazon.com Inc. A worsening global economy and rising inventories will crimp the company’s sales in the final three months of the year and the first quarter of 2013, it said.

“We are now seeing a dip in our revenue in the fourth quarter,” Chairman and Chief Executive Officer Morris Chang told investors today in Taipei. “The outlook certainly has deteriorated within the last three to six months” in terms of the global economy, he said.

Second-quarter net income rose to NT$41.8 billion, missing the NT$42.2 billion average of 19 analyst estimates compiled by Bloomberg. The earnings result included a NT$2.68 billion charge for its 5.6 percent stake in Shanghai-based Semiconductor Manufacturing International Corp. (981), TSMC said.

Revenue Increase

Consolidated revenue, reported earlier, rose 16 percent from a year earlier to NT$128.1 billion, beating the NT$127.2 billion average of analyst estimates and surpassing the company’s own forecast of NT$126 billion to NT$128 billion.

Inventories climbed to three days above seasonality at the end of June and will widen to 12 days by the end of the current quarter, Chang said today. A cut in orders will help that figure narrow to eight days above normal seasonal levels in the fourth quarter, he said.

“We continue to expect demand headwinds and inventory correction to lead to a weaker outlook for the foundry sector,” Michael Chou and Kevin Wang, who rate the stock buy at Deutsche Bank AG in Taipei, wrote in a July 10 report. “However, we anticipate 28nm to enable TSMC to deliver relatively resilient earnings.”

One nanometer, equal to one billionth of a meter, measures the size of connections within a chip. A smaller number implies more advanced technology, allowing semiconductors to be smaller and more powerful.

Qualcomm, Intel

TSMC climbed 3.6 percent to NT$77.50 at the close of trade in Taipei, before the earnings were announced. The stock has gained 2.2 percent this year, outpacing a 1.1 percent increase in Taiwan’s benchmark Taiex index, of which it’s the largest component.

Client Qualcomm Inc., the world’s biggest designer of mobile-phone chips, expects a strong December quarter after its second-quarter sales and third-quarter outlook lagged behind estimates because of a shortage in supply of leading-edge manufacturing capacity, CEO Paul Jacobs said yesterday.

Intel Corp., the world’s largest semiconductor maker, whose chips are used in about 80 percent of computers, cut its full- year revenue forecast by about half on July 17, saying sales may climb 3 percent to 5 percent, compared with a previous forecast of a high-single-digit gain.

Dedicated Fabs

TSMC, whose clients also include Nvidia Corp., Advanced Micro Devices Inc. and Broadcom Corp., may consider putting aside some of its own factories for any client that may grow big enough to require specific capacity.

“It makes complete sense to dedicate a whole fab, or two whole fabs, in fact, to just one customer,” Chang said today. He didn’t name any clients it may offer a whole factory to or say whether it has immediate plans to do so.

TSMC will spend a record $8 billion to $8.5 billion this year, it said in April. It’s still in “active negotiations” with Veldhoven, Netherlands-based ASML Holding NV (ASML) to join Intel in taking a stake in the equipment maker, Chang said. Intel agreed last week to invest as much as $4.1 billion in ASML to gain a stake and accelerate development of new chipmaking technology. Samsung is also in talks, ASML said.

Higher costs for its more advanced technologies will prompt TSMC to narrow its gross margin, a key measure of profitability that tracks sales less the cost of goods sold, to 46 percent to 48 percent this quarter from 48.6 percent in the prior quarter, it said. The average of 18 analyst estimates in a Bloomberg News survey is for a gross margin of 48.2 percent.


               2Q                            3Q
               Company   Company   Analyst   Company   Analyst
               Actual    Forecast  Estimate  Forecast  Estimate
Sales NT$bln   128.1     126-128   127.2     136-138   134.8
Gross Margin%  48.6      47~49     48.4      46~48     48.2
Op Margin %    36.5      34.5~36.5 --        34-36     --


Sources: TSMC, Bloomberg News

To contact the reporter on this story: Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story: Anand Krishnamoorthy at anandk@bloomberg.net

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