uploads///A_Semiconductors_TSM_gross margins Q

What Factors Are Affecting TSMC’s Gross Margin?

Puja Tayal - Author

Aug. 18 2020, Updated 6:34 a.m. ET

TSMC’s profitability

In the previous article, we learned that Taiwan Semiconductor Manufacturing Company (TSM) is moving ahead of the competition by starting volume production on the 7 nm (nanometer) node by the end of 2018.

TSMC is a pure-play foundry and bears fixed overhead costs for running its fabs (fabrication facilities). Its profitability is subject to higher yields, the optimal utilization of its production capacity, and a favorable mix of technology nodes.

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As we can see in the graph above, TSMC’s gross margin expanded significantly in the second quarter of 2016 as it became the sole manufacturer of Apple’s (AAPL) A-series processors, which improved its product mix and factory utilization. TSMC’s gross margin contracted from 51.5% in the second quarter of 2016 to 47.8% in the second quarter of 2018 as smartphone sales slowed, which reduced orders from Apple.

Second-quarter gross margin

In the second quarter, TSMC’s gross margin contracted to 47.8% from 50.3% in the previous quarter. Its gross margin contracted 2.5 percentage points as weak orders from smartphone and cryptocurrency customers reduced its capacity utilization. This contraction was partially offset by a favorable foreign exchange rate and a reduction in the cost of production through a favorable technology mix.

Third-quarter gross margin estimate

For the third quarter, TSMC expects its gross margin to expand by more than 1 percentage point to 49% at the midpoint of its guidance. The company expects increasing orders from smartphone clients to improve its capacity utilization. It also expects the foreign exchange rate to remain favorable and have a positive effect on its gross margin.

However, these benefits will be partially offset by the ramp-up of the 7 nm node, which could take time to achieve a mature yield. Moreover, the shift of product mix to HPC (high-performance computing) will see more products being produced on advanced nodes, thereby reducing the contribution of the mature 28 nm node, which has a low production cost.

TSMC aims to achieve a gross margin of 50% in the long term. Next, let’s look at its operating margin.


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