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TSMC Profit, Sales Outlook Miss Estimates on Slower Economy

Taiwan Semiconductor Manufacturing Co., the world’s largest contract manufacturer of chips, posted its first profit decline in almost two years and forecast revenue and profitability that missed analysts’ estimates after global economic weakness forced clients to scale back orders.

Second-quarter net income fell 11 percent to NT$36 billion (1.3 billion), from NT$40.3 billion a year earlier, the Hsinchu, Taiwan-based company said in a statement today. The average of 15 analyst estimates compiled by Bloomberg was for profit of NT$36.4 billion.

Slowing demand for computers and concerns about Europe’s debt crisis are forcing clients such as Qualcomm Inc. to reduce their sales expectations. TSMC, which supplies chips used in Sony Corp. game machines and Apple Inc. iPhones, forecast its first sales decline in two years, citing the economic weakness and order cuts from customers who bought excess inventory following Japan’s March 11 earthquake.

“The whole industry was too optimistic in the first half of the year, leading to a high inventory situation,” said Daniel Heyler, an analyst at Bank of America Merrill Lynch in Hong Kong who rates TSMC “underperform.” “A lot of faith was put on the second half, and we see that isn’t materializing.”

Revenue Forecasts Cut

Revenue in the third quarter will be NT$102 billion to NT$104 billion, the company said today, compared with the NT$108.6 billion average of seven analyst estimates in the past 28 days compiled by Bloomberg. Analysts cut their third-quarter revenue forecasts for TSMC by an average NT$9.8 billion in the past four weeks, according to Bloomberg data.

Second-quarter sales climbed 5 percent to NT$110.5 billion, in line with TSMC’s forecast for NT$109 billion to NT$111 billion.

The main reasons for the lower sales and profitability forecasts are a slower-than-expected recovery, “compounded by this inventory problem,” Chairman and Chief Executive Officer Morris Chang, 80, said at an investors conference. The current economic slowdown will be “quite a bit shallower and shorter than the last one,” he said.

Customers rushed to buy chips after the quake, fearing a shortage of materials would hurt supply of key components used in consumer electronics, phones and computers.

Spending Plans

TSMC’s 2011 spending plan was cut to $7.4 billion from $7.8 billion, Chief Financial Officer Lora Ho said today. The median of eight analyst estimates in a Bloomberg News survey was for expenditure to be lowered to $7.25 billion. Rival United Microelectronics Corp. will cut its full-year spending plan to $1.55 billion, from $1.8 billion, when it announces earnings Aug. 3, according to the same survey.

Global economic growth will be 2.8 percent this year, from an earlier forecast for 3.8 percent, Chang said. That slowdown will cut growth in chip market revenue, excluding memory, to 4 percent in 2011 from an earlier 7 percent, while the custom foundry industry will climb 7 percent from a previous 15 percent estimate, Chang said.

Gross margin, a key measure of profitability that tracks sales less the cost of goods sold, will be 40.5 percent to 42.5 percent this quarter, the lowest in more than two years. The median of eight analyst estimates in a Bloomberg News survey is for gross margin of 44.55 percent.

Taiwanese Dollar Rises

A 10 percent rise in the Taiwan dollar against its U.S. counterpart over a 12-month period cut gross margin by 3.6 percentage points, while lower utilization this quarter will also have an impact on the measure, Chang said. The rising Taiwan currency limited the size of the spending cut, Ho said.

Qualcomm, the world’s biggest maker of cellphone chips, announced July 20 it cut its forecast for CDMA chips used in phones, citing economic troubles in Europe that “are holding back the consumer.” Production at some computer and consumer electronics makers “appears lukewarm,” Texas Instruments Inc. said in a July 25 statement, forecasting third-quarter profit that missed some analysts’ estimates.

Taiwan’s AU Optronics Corp., which supplies panels used in televisions, smartphones and computers, yesterday posted a loss double analyst estimates and slashed its full-year spending, citing “ongoing macroeconomic concerns.”

               2Q                            3Q
               Company   Company   Analyst   Company   Analyst
               Actual    Guidance  Estimate  Guidance  Estimate
Sales NT$bln   110.5     109-111   109.6     102-104   108.6*
Gross Margin%  46.0      45.5~47.5 46.9      40.5~42.5 44.55
Op Margin %    34.3      33.5~35.5 35.25     28.0~30.0 32.55
FY2011 Capex Estimate    $7.8 bln            $7.4 bln  $7.25 bln

Source: Bloomberg, TSMC
*3Q revenue is from estimates in past 28 days.

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