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Taiwan Earthquake and Slow Apple Sales Shake TSMC’s Fiscal 1Q16

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Fiscal 1Q16 highlights

This earnings season is expected to be another quarter of slow or low revenues for semiconductor companies. Last quarter’s headwinds continue to affect the March 2016 quarter. The world’s largest semiconductor pure play foundry is Taiwan Semiconductor Manufacturing Company (or TSMC) (TSM). It reported its fiscal 1Q16 earnings on April 14, 2016. Earnings were better than its guidance but lower than fiscal 1Q15.

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The February earthquake in Taiwan (EWT) and Apple’s (AAPL) slowdown of its iPhone production had a significant impact on TSMC’s earnings. However, this was offset by an increased customer demand for mid and low-end smartphones and inventory restocking. In this series, we’ll look at the financial health of TSMC in fiscal 1Q16.

TSMC beat analysts’ estimates

In fiscal 1Q16, TSMC’s revenues fell 12.8% YoY (year-over-year) to $6.1 billion. But that was better than its revised guidance in February 2016. Its earnings per ADR (American depositary receipt) fell 18% YoY to $0.38, topping analysts’ estimate of $0.37.

However, the company’s guidance for fiscal 2Q16 was below analysts’ estimates, which saw TSMC’s US-traded ADR fall by 3.3% to $25.30 on April 15, 2016. The iShares MSCI Taiwan (EWT), which has 25.5% exposure in TSMC, fell 0.8% on the same day.

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Slowdown in high-end smartphone market

TSMC’s revenues were significantly affected by Apple’s scaleback of the iPhone 6s and 6s Plus until March 2016. According to estimates of Steven Pelayo, HSBC’s head of technology research, Apple accounts for 16% of TSMC’s revenue. Moreover, TSMC lost a key customer, Qualcomm (QCOM), to rival Samsung (SSNLF). Qualcomm’s Snapdragon 810 chips built by TSMC had overheating and performance issues. Low demand from these two customers affected TSMC’s high-end smartphone segment.

Damage from the Taiwan earthquake

The earthquake in Taiwan reduced TSMC’s fiscal 1Q16 revenue by about $216 million and affected its gross margin by 2.2 percentage points. Of that, 1.1 percentage points were due to property damage after factoring in insurance claims. The other 1.1 percentage points were due to the loss of productivity. The earthquake reduced the company’s fiscal 1Q16 operating margin by around 2.4 percentage points.

Despite this, the company reported stable earnings. Certain factors played in its favor. We’ll shed more light on this in the next part of the series.

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