April 13, 2017 11:10 pm JST

TSMC sees weak 2Q but strong 2H boosted by new iPhones

Largest contract chipmaker will not bid for Toshiba memory business

CHENG TING-FANG, Nikkei staff writer

TSMC Co-CEOs C.C. Wei, left, and Mark Liu attend an investors' conference in Taipei, on Apr. 13 © Reuters

TAIPEI -- Taiwan Semiconductor Manufacturing Co., the world's largest contract chipmaker, on Thursday said the second quarter ending in June would be a weak one, due to a slowdown in China and inventory correction in the smartphone, computer and consumer electronics segments.

"Our second quarter revenue guidance reflects a quite severe inventory adjustment from our customers, particularly in the smartphone and PC markets," said Mark Liu, TSMC's co-chief executive. But Liu said that the inventory correction from the supply chain would end by June.

For the April-June period, TSMC forecast that its revenue would fall between 213 billion New Taiwan dollars ($6.9 billion) and NT$216 billion, a drop of 2.6% to 3.9% from a year ago.

The company projected a robust second half of the year that will see year-on-year growth of at least 5% in U.S. dollar terms. TSMC is expected to be the sole supplier of core processor chips to Apple's tenth anniversary iPhone range that will come out towards the end of the year.

Lora Ho, TSMC's chief financial officer, said an unfavorable exchange rate would add to earnings uncertainty this year.

"The foreign exchange market is volatile recently and very hard to predict," Ho said. "Every 1% of appreciation of the Taiwanese dollar could have 1% of negative impact on the company's sales." She expected the Taiwanese dollar to continue to advance some 2.1% and drag on the company's second quarter performance.

But for the full-year 2017, the company maintains its previous projection of 5% to 10% revenue growth year-on-year in U.S. dollar terms. Last year, it generated $29.43 billion in revenue.

The company also confirmed on Thursday that it had thoroughly evaluated whether or not to bid for Toshiba's memory business, but decided not to.

"First of all, we think [Toshiba's] business model for NAND flash memory is very different from our company," said Ho. "Further, we don't think the memory business would bring much synergy to us."

Apple reliance

Despite strong demand for the iPhone in the second half of 2017, some analysts feel that TSMC's growing reliance on Apple could become a potential risk for the Taiwanese chip group.

For all of 2017, Apple will be its biggest customer, accounting for about 21% of TSMC's revenue, according to Mark Li, an analyst at Bernstein. This is an increase from 17%, 16% and 9%, in 2016, 2015 and 2014 respectively.

Other key clients, including Qualcomm, MediaTek and Huawei Technologies' chip arm Hisilicon Technology, would together only contribute some 9% of TSMC's revenue this year, said Li.

"Being a supplier to Apple is a double-edged sword. It enabled TSMC to nearly double its revenue growth in the past four to five years," said Li. "But at the same time it also increases TSMC's risk concentration to a single customer."

Li said that although he has not seen any sign of change from Apple's side and therefore TSMC could continue to enjoy a monopoly over iPhone processor chips for a while, "investors should still be aware of the risks that either Intel or Samsung could still grab some Apple orders from the Taiwanese chip company in the future."

TSMC's Co-CEO Liu is aware of the situation and said his company would continue to develop more customers and products to further diversify its profile.

Liu said "high-performance computing" would be a key sector and a significant growth driver for the future. High-performance computing refers to semiconductors used in data centers, servers, networking, storage and various gaming products.

"By 2020, we believe high-performance computing products would become the major growth engine for our company," said Liu.

By 2020, we believe high-performance computing products would become the major growth engine for our company.
Mark Liu, TSMC's co-chief executive

For the January-March period, TSMC's net income advanced 35.3% year-on-year to NT$87.62 billion, while its revenue rose 14.9% from a year ago to NT$233.91 billion. The quarterly revenue missed the company's previous guidance in January of between NT$236 billion to NT$239 billion, with the strong Taiwanese dollar in the period causing a negative impact of NT$6 billion.

TSMC's shares closed 0.26% higher at NT$191.5 ahead of the earnings numbers on Thursday. They have advanced 5.79% so far this year.

iPhone shipment worry

Separately, Chief Executive Adam Lin of key iPhone camera supplier Largan Precision told analysts during an earnings call on Thursday that he is worried whether the company's staffing levels will be adequate to meet demand in the second half of this year, as a new facility will only be ready by the end of the third quarter.

Largan is also widely believed to be providing 3D sensing cameras for Apple this year.

Lin's comments raised some questions over whether the new iPhone range will face a component supply shortage amid speculation that its launch event may be delayed.

Apple usually launches its new iPhone line in September, and the July-December period is the traditional peak season for smartphone component suppliers.

Lin also commented that "some" customers have ordered 3D sensing cameras, indicating that a number of Chinese smartphone makers may be adopting this new feature soon too.

Nikkei staff writer Debby Wu in Taipei contributed to this report

Asia300

Taiwan Semiconductor Manufacturing Co., Ltd.

Taiwan

Market(Ticker): TAI(2330)
Sector:
Industry:
Electronic Technology
Semiconductors
Market cap(USD): 176,400.13M
Shares: 25,930.38M
Asia300

MediaTek, Inc.

Taiwan

Market(Ticker): TAI(2454)
Sector:
Industry:
Electronic Technology
Semiconductors
Market cap(USD): 10,916.84M
Shares: 1,581.60M
Asia300

LARGAN Precision Co., Ltd.

Taiwan

Market(Ticker): TAI(3008)
Sector:
Industry:
Electronic Technology
Electronic Components
Market cap(USD): 21,700.49M
Shares: 134.14M

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