TAIPEI -- Taiwan Semiconductor Manufacturing Co., the world's largest contract chipmaker and a key Apple supplier, said on Thursday that its third quarter was not proving as strong as expected, with inventory correction offsetting healthy demand from its major smartphone customer.
TSMC projected flat revenues in the July to September quarter of between $8.12 billion and $8.22 billion, between 0.9% down or up 0.2% year-over-year, and up 15.7% from the previous quarter.
The guidance is lower than the market consensus for TSMC sales to rise 20% quarter-over-quarter, as the industry is bullish on prospects for the upcoming premium iPhone, which sports an organic light-emitting diode (OLED) display.
Co-chief executive Mark Liu said growth for the current quarter was mostly driven by demand from its main mobile customer using the latest production technology, but he said the upside would be "moderated by the continuous inventory adjustment." Liu was widely reckoned to be referring to Apple as the company's main mobile customer.
TSMC has been the sole supplier for iPhone core processor chips since 2016.
"The inventory correction lasts into the third quarter, which is a bit longer than we previously expected. So the third quarter doesn't look as strong as people would expect," said Lora Ho, TSMC chief financial officer.
Ho said the company foresaw some 5% upside in revenue for the second half of 2017, and hinted at a record October to December quarter.
Liu said that although China's smartphone market began to recover in the current quarter, it still takes time for chip designers to digest previous inventories and to place new orders.
TSMC's key customers supplying Chinese smartphone makers are MediaTek, Spreadtrum Communications and Huawei's chip division, Hisilicon Technology.
TSMC upheld its January forecast for revenue growth of 5% to 10% in U.S. dollar terms for the full-year.
China market slowdown
For the past April to June quarter, however, the company was hit by a substantial slowdown in China's smartphone market, underwent a severe inventory adjustment, and suffered from an unfavorable foreign exchange rate.
Revenue decreased 3.6% year-over-year to 213.86 billion New Taiwan dollars, but grew some 3.2% in U.S. dollar terms to $7.06 billion, for the three months ending in June. The company generated net income of NT$66.27 billion, down 8.6% year-over-year, in the same period.
TSMC switched to offer revenue guidance in U.S. dollar terms from this quarter to eliminate the impact from the unfavorable exchange rate on its operations.
Rick Hsu, an analyst at Daiwa Capital Market, said the main growth driver for TSMC in 2017 is still mostly from making A11 core processor chips for Apple.
"The third quarter guidance is weaker than we thought. We think Apple might possibly defer some orders for the third quarter to the last quarter of this year since there is some delay in other components such as integration work of the 3D sensing feature," said Hsu.
Hsu added that the iPhone issue this year is not in core processor chips but from other components. However, the delay or bottleneck in new technology may eventually have a negative impact on the overall shipment volume for A11 chips, according to Hsu.
Mark Li, an analyst at Bernstein Research, said the market is still positive about iPhone demand toward the end of this year. "It could be time that some investors would start to take profit for the short-term."
Shares of TSMC closed 1.9% higher at NT$214.5 ahead of the earnings report. They have advanced almost 18% so far this year.
Meanwhile, iPhone lens supplier Largan Precision said on Tuesday that its gross margin suffered from a poor yield rate in the April to June period, and might continue to struggle due to production of new components in the current quarter. It did not give specific details.
In the second quarter, Largan booked revenue of NT$11.31 billion, up 13% year-over-year. However, gross margin was only 66.49%, dropping from 70.94% in the previous quarter. Net income was NT$4.71 billion, up 27.64% year-over-year.
Largan confirmed in mid-June that it will begin to ship lenses for 3D sensing modules in the second half of this year.
While it did not say the parts were for Apple, analysts say that the U.S. company will be the only smartphone brand offering the 3D sensing function this year.