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TSMC cuts 2018 sales target on weak iPhone demand

No.1 contract chipmaker cites cryptocurrency volatility as a risk, but sees little impact from ZTE

TAIPEI -- Taiwan Semiconductor Manufacturing Co., the world's biggest contract chipmaker and a key Apple supplier, on Thursday slashed its 2018 sales target, citing continuous soft demand for premium phones and a volatile cryptocurrency mining market.

The company expects its full-year revenue to grow about 10%, down from its previous forecast of 10% to 15% in U.S. dollar terms, according to C.C. Wei, co-chief executive of TSMC.

"We adjust [the guidance] because we see continuous weakness in smartphone demand and uncertainties in cryptocurrency mining segment," said Wei.

Wei blamed the lackluster performance on a "very high-end smartphone," without naming Apple or iPhone, and said that Chinese branded smartphones were instead seeing an increase in demand. As the sole iPhone core processor chip supplier, TSMC counts Apple as its biggest customer, which accounted for 22% of its revenue in 2017.

Mark Li, an analyst at Bernstein Research, said TSMC's forecast signals that the Taiwanese chip giant is turning more conservative about new iPhone core processor chip orders for the second half of this year.

TSMC's shares plunged nearly 7% on early trading on Friday, due to weak-than-expected earnings forecast, making it a victim for the muted iPhone demand.

The company's weak-than-expected guidance for the three months ending in June also hit by the soft iPhone sale. In the period, TSMC expected to make $7.8 billion to $7.9 billion in revenue, down up to 7.8% from the previous quarter. Such guidance was, however, far below a market consensus of decline up to only minimum 2%.

Since the second half of 2017, TSMC's business has been boosted by cryptocurrency mining chip business brought in by China-based startups Bitmain Technologies, the biggest bitcoin mining chip provider, Canaan Creative and others. However, TSMC is cautious about the volatile market.

"We will not expand capacity for cryptocurrency mining chips unless we find that demand is sustainable," said Wei.

Wei said its customers that had previously worked on cryptocurrency mining chips have turned to designing chips for artificial intelligence and blockchain applications, two areas in which TSMC sees huge growth potential.

These new Chinese customers along with Huawei's chip arm Hisilicon Technologies help push TSMC's revenue from China to 19% for the January-March period, compared with only 11% a year ago.

The company's first advanced 12-inch chip facility in the Chinese city of Nanjing has already begun production this month to meet rising market demand in the country.

TSMC's customers also include Qualcomm, Nvidia, MediaTek, Broadcom, NXP, Xilinx and some 450 others globally. Many of them supply to ZTE, China's No. 2 telecom equipment provider and a smartphone maker, that has been hit by a seven-year U.S. ban on the purchase of any American made components.

Mark Liu, co-chief executive officer, said TSMC sees "very minimal impact" from the ZTE case as it has a wide range of customers.

TSMC raised its 2018 capital expenditure to $11.5 billion to $12 billion, from $10.5 billion to $11 billion it forecast three months ago. Lora Ho, chief financial officer, attributed the rise to an expected $500 million expense on mask-making materials and a $300 million prepayment to ASML for pre-orders of new -generation chip production equipment.

For the January-March period, TSMC generated 248.08 billion New Taiwan dollars, or $8.46 billion in revenue. Net profit of NT$89.79 billion went up 2.5% from a year ago. Gross margin was 50.3%, compared with 51.9% in a year-ago period. Shares of TSMC closed 2.73% higher at NT$244.5 ahead of its earnings report.

For most TSMC investors, trade tensions between the U.S. and China, and risks in the cryptocurrency market are the two main causes of worry, analysts said. "We are monitoring the trade tensions [ between U.S. and China] and whether that could cause an impact to the market although the first round did not hit tech products meaningfully," said Randy Abrams, an analyst at Credit Suisse.

"For TSMC, doing the cryptocurrency mining chip business had filled in some of the gaps from the smartphone weakness in the early part of this year. They are trying to limit having even more exposure to that market. But there are still risks about the volatility in such market, which is expected to contribute a mid- to high-single-degit percent of TSMC's revenue for this year," Abrams said.

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