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TSMC to Cut Capex in 2015 and Issues Weak Q2 Forecasts

Apr 23, 2015 | By Ken Liu

At a recent institutional-investor conference, Taiwan Semiconductor Manufacturing Co. (TSMC), reportedly the world's No.1 pure silicon foundry, issued weaker-than-expected forecasts for its second-quarter finances and announced reduction in capital expenditure for this year.

The company estimates its consolidated revenue for the second quarter to be between NT$204 billion (US$6.58 billion) and NT$207 billion (US$6.67 billion), contracting 7-8 percent from the previous quarter, which is less optimistic than the 3-5 percent reduction range as expected by the market.

Its gross margin ratio for the second quarter is projected at 47.5-49.5 percent, compared with the first quarter's 49.3 percent, with operating income ratio being cut to 36.5-38.5 percent from the first quarter's 39 percent.

Its capital expenditure for this year is to be reduced over 8 percent from the originally planned US$11.5-12 billion to US$10.5-11.0 billion. Such reduction makes TSMC another big chipmaker in the world to follow Intel's downward revision of capital expenditure for 2015, triggering investor fears about the outlook of the market.

TSMC spokesperson Lora Ho said the spending cut is less about falling global demand but more about the company's customers shifting to buy its 16-nanometer foundry service from 20nm service.

She adds that the company's 16nm and 20nm processes are 95 percent similar, enabling the company to convert part of its 20nm process tools to 16nm chip production without extra investment. Besides, the company scales down investment when every 1,000 silicon wafers yield more chips.

The projected reduction in consolidated revenue for the second quarter is not considered steep in the company's history, with TSMC stressing its growth will rally in the second half and maintain the projected double-digit growth rate for this year.

The above-mentioned reductions are due to slashed orders from the company's major customers of mobile phone chips, higher-than-expected inventory backlog throughout global IC supply chains, and depreciating NT-dollar.

In spite of the weak Q2 financial forecasts, the company reported a sturdy first quarter, with after-tax net income of NT$78.99 billion (US$2.54 billion), or NT$3.05 per share, to mark the second highest quarterly earning in company history, with gross margin ratio of 49.3 percent, a fourth consecutive quarter of above 49 percent.

Its revenue of NT$222.03 billion (US$7.16 billion) for the first quarter represented a 1.2 percent decrease from the previous quarter but a 49.8 percent surge year on year, to which the company attributes mostly swarming orders from Apple earlier that quarter.

TSMC's revenue from sales of 20nm process foundry began slipping to 16 percent of the company's total revenue towards the end of the first quarter, down from 20 percent in the final quarter of last year due to seasonally adjusted Apple orders. But the foundry's sales of 28nm service remained strong, constituting 30 percent of the company's total revenue in the first quarter.

TSMC estimates its 20nm process foundry to generate twice as much as revenue this year relative to last year, but its 28nm foundry service to lose market share to about 74-75 percent worldwide this year from last year's 80 percent. Nevertheless, 28nm foundry will remain its primary revenue earner and 20nm foundry is projected to drop to account for 15 percent of the company's revenue this year from previously planned 20 percent.

The foundry giant's 28nm capacity utilization ratio will slip to around 85 percent in the second quarter from the first quarter's 90 percent, with such ratio, the company projects, to rally to exceed 90 percent in the third quarter.

TSMC's 16nm foundry will begin to generate revenue in the third quarter, with Co-Chief Executive Officer and President Mark Liu saying  16nm sales to further help boost the company's share in the global foundry market, over half of which the company already commanded last year.

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