Taiwan Semiconductor Manufacturing Co. Ltd. (TSM, Financial) – a leading pure-play semiconductor foundry – reported second-quarter results yesterday, beating the Street's bottom line consensus.
The company posted $7.85 billion in revenue for the quarter, up 11.2% year over over and in line with analysts’ estimates. The Taiwan-based foundry reported earnings of 47 cents per share, up 9% year over year. Wall Street was expecting earnings of 46 cents per share.
For the third quarter, the company is guiding for mid-point revenue of $8.50 billion, which is in line with the Street’s top-line consensus.
The market was pleased with the company's earnings performance as the stock is up more than 2% since the announcement on Thursday.Â
What supported revenue growth?
Senior Vice President and Chief Financial Officer Lora Ho commented on the company's performance:
"Our second-quarter business was mainly impacted by the mobile product seasonality, while the continuing strong demand from cryptocurrency mining and a more favorable currency exchange rate moderated the mobile softness."
The company generated most of its revenue from delivering 10, 16 and 20-nanometer semiconductor chips.
Delivery of 10-nanometer chips increased the most, making up 13% of the company's total revenue for the quarter, up from 1% in the year-ago quarter. Note that Taiwan Semiconductor was responsible for manufacturing chips for Apple's (AAPL, Financial) iPhone X and iPhone 8.
The leading edge, 7-nanometer chips, has yet to appear on Taiwan Semiconductor's financial statements. The company is reportedly manufacturing A12 for Apple’s upcoming iPhone. Advanced Micro Devices (AMD, Financial) is also relying on Taiwan Semiconductor for some of its 7-nm production of Zen chips.
On a conference call, CEO C.C. Wei said, “Our business is to benefit from new product launches using TSMC’s leading 7-nanometer [nm] technology … the 7nm chips would account for a bigger revenue share of 10 percent this quarter and rise to 20 percent next quarter, from less than 1 percent last quarter, when the technology first entered volume production.”Â
In short, Taiwan Semiconductor has its hands full going into the third fiscal quarter of the year.
What’s interesting to note is revenue from the computer segment materially jumped during the quarter as a result of cryptocurrency mining and artificial intelligence applications. Nvidia (NVDA, Financial) – one of the leading graphic processing unit players –might have benefited from this expansion as well. The company generated 25% of its revenue from computers during the second quarter as opposed to only 8% in the prior-year quarter.
Table notes: Revenue from the computer segment includes, among others, central processing unit (CPU), graphic processing unit (GPU), hard disk drive controller and application specific integrated circuits (“ASICs”) for machine learning, blockchain and cryptocurrency mining.
What’s the outlook?
Although crypto-related demand is set to fade both in the short and long term, due to proof of stake protocols, Taiwan Semiconductor's management is optimistic about offsetting the short-term weakness with rising revenue from the new iPhone launch later this year. Moreover, as the telecom industry moves toward 5G, semiconductor content-per-mobile is expected to increase, which will boost the company's revenue going forward. Further, as the industry moves towards 7nm during the next few years, TSM will continue to post solid results.
The only problem for Taiwan Semiconductor will be the high costs associated with mass producing 7-nanometer chips. Extreme ultraviolet lithography (EUV) equipment is expensive and original equipment manufacturers like Apple and Nvidia might not be willing to take on all the production costs. Consequently, the company's margins will be affected going forward.
The company has already lowered its guidance for capital expenditures from $12.5 billion to between $10 billion and $10.5 billion for the year. This means the company might be ramping up capital expenditures for mass EUV deployment later on. As there are still some caveats in EUV to be ready for mass production, Taiwan Semiconductor's reduction in capital expenditures makes sense.This doesn’t bode well for conventional semiconductor manufacturing equipment companies like Lam Research (LRCX, Financial) and Applied Materials (AMAT, Financial), however, as they rely on etch and deposition equipment.
Takeaways
The semiconductor industry will continue to grow going forward, as evident from Taiwan Semiconductor’s revenue growth across all segments and reasonable future guidance.
Revenue will materially shift toward 7-nanometer over the next couple of years, pressuring margins.
The short-term prospects for Apple and Nvidia seem bright, as evidened by the jump in computer-related revenue during the quarter. Nonetheless, weakness in cryptocurrency will take a toll on Nvidia and AMD’s top lines going forward.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
