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TSMC Lowers 2018 Revenue Guidance on Crypto Weakness

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TSMC’s fourth-quarter revenue guidance

TSMC (TSM) has been reporting double-digit sequential revenue growth in the third quarter. However, in the third quarter of 2018, its growth rate slowed to single digits as the crypto boom faded. Weakness in cryptocurrency is expected to impact TSMC’s fourth-quarter and full-year 2018 revenue as well.

TSMC expects its fourth-quarter revenue to grow 10.7% sequentially and 2.1% YoY (year-over-year) to $9.4 billion at the midpoint, lower than the analyst estimate of $9.55 billion. The guidance suggests a slowdown from the double-digit YoY growth rate reported in the last two fourth quarters.

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In Q4 2016, TSMC became Apple’s (AAPL) sole foundry partner for its A-series processors. In Q4 2017, TSMC benefitted from the crypto boom. However, no such major event happened in Q4 2018, which slowed its YoY revenue growth rate. In every quarter of 2018 so far, TSMC lowered its full-year 2018 revenue growth guidance, first from 10%–15% to 10%, then from 10% to 7%–9%, and now from 7%–9% to 6.5%.

Key growth drivers

TSMC largely serves the premium smartphone segment, which is witnessing strong demand. Its fourth-quarter revenue will likely be driven by volume shipments of Apple’s iPhone XR, which were available in October 2018.

On the third-quarter earnings call, TSMC’s chief financial officer, Lora Ho, stated that the fourth quarter would benefit from the strong ramp-up of its 7-nm node for a few high-end smartphones. Among these smartphones are Apple’s iPhone XR. She added that the foundry’s 16/12-nm node will also see strong demand from new-generation GPUs (graphics processing units) and AI (artificial intelligence). This includes NVIDIA’s (NVDA) Turing GPU, which has been built on TSMC’s 12-nm node.

Role of 7-nm in TSMC’s growth

Even Advanced Micro Devices (AMD) is getting its Vega server GPUs manufactured on TSMC’s 7-nm node. Given the large adoption of its 7-nm node, the company expects to earn 20% of its fourth-quarter revenue and 10% of its full-year 2018 revenue from this node.

The 7-nm ramp-up and strong smartphone demand could mitigate weakness in cryptocurrency. However, the 7-nm ramp-up would reduce TSMC’s profits and increase its capital spending. We’ll look into this next.

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