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Understanding TSMC’s Growth Expectations in Fiscal 3Q16

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Jul. 20 2016, Updated 5:06 p.m. ET

TSMC enjoys strong growth

In this series, we saw that TSMC (TSM) had a strong quarter in fiscal 2Q16, with its revenues and gross margin reaching new highs. The foundry expects to maintain this high level in fiscal 3Q16 as well, driven by seasonal demand for low-end Qualcomm (QCOM) chipsets by Chinese (FXI) handset makers and A10 processors for Apple’s (AAPL) flagship iPhone 7.

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Fiscal 3Q16 guidance

For fiscal 3Q16, TSMC expects revenue to grow by about 20% YoY (year-over-year) between $7.9 billion and $8 billion. In its fiscal 2Q16 earnings call, TSMC Chief Financial Officer Lora Ho said that “Looking ahead to the third quarter, we anticipate further inventory build by smartphone vendors and fabless companies stimulated by subsidies provided to telecommunication companies by the Chinese government.”

The company expects to maintain a gross margin of between 50% and 52% and an operating margin in the range of 39.5%–41.5% in fiscal 3Q16. However, such strong growth would fade with another round of inventory corrections. Generally, fiscal 4Q is when inventory corrections take place, but the degree of correction depends on the end-consumer demand.

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2016–2020 guidance

For fiscal 2016, TSMC expects its revenue and operating profit to grow between 5% and 10%, and it expects to maintain this growth rate till 2020. This guidance is based on the assumption that no destructive application is introduced during this period.

The company expects revenue from smartphones to grow by 7% YoY in fiscal 2016. It expects smartphone semiconductors to continue to account for 50% of its revenue over the next five years, even though it lowered its estimate for smartphone unit growth from 7% to 6%, given the increasing silicon content per device. The company expects double-digit growth in the silicon content in high- and mid-end phones.

Analyst opinions

Analysts have stated that TSMC will be at its peak in fiscal 3Q16 because it would be the sole manufacturer of processors for Apple’s iPhone, which was earlier dominated by Samsung (SSNLF). With a 100% supply order from Apple, there is no upside potential for TSMC in the future.

In its other segments, weakness continues in PCs, consumer electronics, IoT (internet of things), and automotive, some of which are still in their development phases and would take time to impact TSMC’s earnings significantly.

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