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Apple supplier TSMC sees drop in premium phone shipments in 2018

Contract chipmaker expects some relief from cryptocurrency and China demand

TSMC sees a robust year ahead with revenue growing another 10-15% in U.S. dollar terms.

TAIPEI -- Taiwan Semiconductor Manufacturing Co., the world's largest contract chipmaker by market share and a key supplier to Apple, said Thursday that shipments of upmarket smartphones will decline in 2018 but that growing cryptocurrency "mining" could help alleviate a soft mobile market.

TSMC has been the sole manufacturer of core processors for Apple's iPhones since 2016 and will continue to monopolize those orders this year.

The Taiwanese company also supplies all the key mobile chip designers worldwide, including Qualcomm, Huawei's Hisilicon and MediaTek.

"In terms of shipment units, high-end smartphones are decreasing for this year," C.C. Wei, co-chief executive of TSMC, said at the company's fourth-quarter earnings briefing. "Mid-to-low-end smartphones will increase by several percentage points. For TSMC, overall wafer revenue for mobile phones will be flat compared with 2017."

Revenue from the mobile segment accounted for roughly half of TSMC's 977.45 billion New Taiwan dollars ($33 billion) in revenue in 2017.

Despite a weakening mobile market, TSMC expects a robust year with revenue advancing 10-15% in U.S. dollar terms, more than the 9.1% sales growth seen in 2017, according to outgoing Chairman Morris Chang.

TSMC's founding Chairman Morris Chang, right, says it will be the last time he attends an earnings briefing before his retirement in June.

Chang said one of the key elements fueling growth for 2018 is a continuation of robust cryptocurrency mining, or production, and the increasing use of AI applications at data center servers and in electronic devices.

Bitcoin boost

Cryptocurrency refers to digital currency that is encrypted with a sophisticated algorithm so that it can be securely transferred between individuals. Of these, bitcoin is the most notable with the largest market capitalization. Blockchain, the technology used for verifying transactions without the need for a middleman, is at the heart of digital currencies, but also has multiple applications outside cryptocurrencies.

Since the second half of 2017, Bitmain, a Beijing-based startup specializing in bitcoin mining chips and mining solutions, has emerged as one of TSMC's top clients.

Bitmain accounted for some 3-5% of TSMC's revenue in the third quarter, comparable to Nvidia's contribution during the period, said Mark Li, an analyst at Sanford C. Bernstein.

Li added that Bitmain controlled 70-80% of the global market for mining chips for bitcoin. The analyst said Bitmain's contribution to TSMC's revenue could reach 5% this year.

Chip startups in China, and Huawei's chip unit Hisilicon Technologies, helped push TSMC's revenue from the country to a record 11% of the total in 2017, up from 9% in 2016.

However, TSMC also acknowledged the risks presented by the cryptocurrency market and said it will not rush to ramp up production capacity.

"Because of the possible volatility of cryptocurrency, TSMC is not going to add capacity for digital currency mining specifically," said Chairman Chang.

With governments in South Korea, China and Europe expected to crack down on cryptocurrency, bitcoin plunged below $10,000 on Wednesday, falling from a peak of $19,497 in December. Even after the precipitous drop, however, the price had still surged more than 11-fold since the beginning of 2017.

Long-lasting effect

Mark Liu, co-chief executive of TSMC, said it's very difficult to give a long-term forecast on crypto trends, but that demand related to deep learning and blockchain, key elements of cryptocurrency mining, will drive semiconductor innovation and demand for years to come.

TSMC said revenue from cryptocurrency mining reached between $350 million and $400 million in the July-September period, but did not provide an estimate for the current quarter or for 2018.

For the current quarter ending in March, a traditionally slow one for the chipmaker, TSMC projected its revenue at between $8.4 billion and $8.5 billion, a 12% increase year over year. Compared with the preceding quarter, revenue fell 8.3%, while the market consensus was for a 9% decline.

"Even though iPhone and Android phone demand are both very weak in the January-March period, cryptocurrency mining needs are strong enough to offset the headwinds," said Aaron Jeng, an analyst at Nomura Securities. "However, we don't know how sustainable will that be."

For the October-December period, TSMC's revenue increased 5.9% on the year to a record NT$277.57 billion.

Shares of TSMC, the largest company by market capitalization in Taiwan, closed 2.69% higher at NT$248.50 ahead of the earnings briefing on Thursday.

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