TSMC’s Outlook Tops Estimates as IPhone 7 Helps It Defy Slowdown

  • World’s largest contract chipmaker is a major Apple supplier
  • Technology investment is helping it outpace market slowdown

Taiwan Semiconductor Manufacturing Co. forecast better-than-anticipated sales as Apple Inc. prepares to trot out its latest iPhone, helping the chipmaker defy the mobile industry’s worst-ever downturn.

TSMC gave its outlook after reporting second-quarter profit that topped analysts’ projections, as demand from up-and-coming Chinese smartphone brands such as Oppo and Vivo filled a void created by the global slowdown and a months-long lull ahead of the iPhone 7’s debut.

The world’s largest contract chipmaker, as a major supplier to Apple and other industry heavyweights from Qualcomm Inc. to Huawei Technologies Co, has emerged as a key industry bellwether. It’s now grappling with a pronounced slowdown in global demand, with Apple predicting its second straight revenue decline and smartphone sales in 2016 seen rising by a single-digit percentage for the first time, according to Gartner Inc. 

But TSMC’s lead in chipmaking technology is helping it buck the doldrums. As one of the key suppliers for the iPhone, TSMC may already have begun to crank out chipsets for the latest model, according to SinoPac Securities Investment Service. Smartphone-related demand will support half of the Taiwanese company’s growth in the coming five years, said Mark Liu, TSMC’s co-chief executive.

For a Gadfly column on TSMC’s results and outlook, please click here.

Demand for lower-end Qualcomm chipsets from Chinese brands “are keeping TSMC’s factories busy,” said Roger Sheng, a research director at Gartner Inc. “Although the iPhone series wasn’t doing well this year, TSMC was able to get the majority of iPhone chip orders, which remains a lucrative deal for them.”

TSMC now supplies more than half the world’s smartphones, Liu told investors on a call.
The custom chipmaker, which competes with Samsung Electronics Co. to make processors for Apple, is predicting revenue of NT$254 billion to NT$257 billion for third quarter, exceeding the NT$250.1 billion that analysts predict on average. That’s coming off its third-highest quarter for sales on record and a second-quarter net income of NT$72.5 billion, which also topped estimates.

Gross margins came to 51.5 percent in the second quarter, up from 44.9 percent in the previous three months and surpassing the estimate. Margins had declined due in part to an earthquake that disrupted production in February.

TSMC’s shares ended Thursday up 0.3 percent. The stock has gained about 18 percent this year and is hovering near an all-time high.

“The rising popularity of Oppo and Vivo smartphones provides upside potential to our FY16-18 sales forecasts,” CIMB Securities Ltd. analysts led by Eric Lin wrote before the results.

Scale is pivotal in an industry grappling with rising production costs and intensifying competition. TSMC’s now targeting capital spending of $9.5 billion to $10.5 billion in 2016, up from a previous target of $9 billion to $10 billion as it continues to upgrade and expand its manufacturing capabilities to hold rivals at bay. The company now plans to erect a $3 billion wafer plant in eastern China to help it win more clients in the country.

But questions remain about when investments in more advanced 7-nanometer and 10 nanometer production processes will start to pay off. Gokul Hariharan, an analyst at JPMorgan Chase & Co., downgraded TSMC to neutral from overweight, warning that the third quarter is likely a peak for the Taiwanese giant because demand for those higher-end processes may not fully materialize till 2018.

While smartphone sales growth is slowing, shipments should continue rising between now and 2020 and TSMC in turn would benefit, said Steve Myers, an analyst at Haitong International Securities Group. 

“Is there growth likely from the aggregate of TSMC’s customer base? Probably yes,” he said. “I don’t see any reason to assume that either, both or neither 2017 and 2018 will be gap years.”

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