Apple Supplier TSMC Sees Demand Waning for Phones Above $500

  • Co-CEO foresees China, emerging markets countering a downturn
  • Contract chipmaker's quarterly sales forecast disappoints

Taiwan Semiconductor Manufacturing Co., one of the biggest suppliers of chips to Apple Inc., forecast second-quarter revenue well below analysts’ estimates as demand for smartphones priced above $500 peters out.

The world’s largest contract chipmaker, expected by analysts to supply processors for the iPhone 7, predicted China and other emerging markets will drive the popularity of cheaper devices, helping mitigate a global mobile industry downturn.

TSMC and other smartphone suppliers are grappling with the most pronounced slowdown in mobile demand on record. Apple expects its first revenue decline in more than a decade and worldwide smartphone sales in 2016 are expected to rise by a single-digit percentage for the first time, according to Gartner Inc. On Thursday, TSMC cut its own 2016 smartphone demand growth forecast to 7 percent from 8 percent previously.

Its U.S.-traded American Depositary Receipts slid 3.3 percent to $25.30 Thursday.

“The smartphone growth is this year mostly from the medium and the low end,” TSMC co-Chief Executive Officer Mark Liu told investors on a conference call. “We see the over-$500 phone is reducing, but the $400 phone is increasing quickly.”

Liu’s comments gel with Gartner’s forecast for sales of basic smartphones to climb 10.6 percent in 2016, outpacing the market’s 7.2 percent rise. 

“Growth of premium smartphones will stagnate at 2.1 percent,” Gartner’s senior research analyst, C.K. Lu, said in an e-mail.

TSMC’s Liu didn’t specifically identify Apple as a client. The Cupertino, California-based company yields about 16 percent of TSMC’s revenue, HSBC’s head of technology research, Steven Pelayo, estimated in an April report. The world’s largest smartphone maker is again expected to trot out a next-generation iPhone in time for the holidays, which will drive TSMC’s business, he said.

Other major customers include Qualcomm Inc. and Huawei Technologies Co., the world’s third largest mobile brand, according to data compiled by Bloomberg.

TSMC, which competes with Samsung Electronics Co. to make processors for Apple, dealt last quarter with the dual impact of slowing demand and fallout from a February earthquake that held up production. Earnings have now fallen three straight quarters as profit margins shrank. On Thursday, it projected sales of NT$215 billion ($6.6 billion) to NT$218 billion in the second quarter, trailing analysts’ estimates for NT$225 billion.

It also reported an 18 percent slide in net income to NT$64.8 billion. The February temblor in southern Taiwan prompted the company to cut margin forecasts that month. Gross margin was 44.9 percent in the first quarter, down 4.4 percentage points and trailing a 46.8 percent average estimate. It blamed the quake for about half that drop.

Revenue from TSMC’s computer segment fell by 7 percent, thanks in part to the persistently depressed PC market.

“February sales missed our expectation due to earthquake damage,” Ethan Chen, an analyst with Sinopac Financial Holdings, wrote before earnings were released. That impact was exacerbated by a relatively long Chinese New Year break, he said.

Largan Precision Co., which supplies camera parts for iPhones, also reported first-quarter net income of NT$3.62 billion, 9 percent lower than the NT$3.99 billion analysts had expected.

To offset market declines, TSMC is shifting toward more advanced 16-nanometer chip manufacturing. That gives it an edge against rivals such as China’s Semiconductor Manufacturing International Corp. The company said it will keep its capital expenditure budget of between $9 billion and $10 billion over the full year, and expects volume production using 7-nanometer nodes by the first half of 2018.

TSMC had previously reported an 8.3 percent slide in first-quarter sales to NT$203.5 billion, marginally beating estimates for NT$201.1 billion. Its stock has gained 13 percent this year.

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