uploads/2019/04/A6_Semiconductors_TSM-capital-spending-2019-1.png

TSMC’s Capital Spending Focus Is High-Performance Computing

By

Updated

TSMC’s profitability

TSMC (TSM) reported its worst dip in profit in seven years as weak smartphone demand and high semiconductor inventory impacted its factory utilization rate. Moreover, a faulty chemical also resulted in wastage of wafer output, adding to the production cost and reducing the gross margin.

The effect of the lower gross margin trickled to the down line and reduced its operating margin by 760 basis points sequentially to a seven-year low of 29.4% in the first quarter. The foundry’s net income fell 38.6% sequentially to $2 billion, its steepest sequential decline since the third quarter of 2011.

Ready to put your morning scrolling to use? Sign up for Bagels & Stox, our witty take on the top market and investment news straight to your inbox! Whether you’re a serious investor or just want to be informed, Bagels & Stox will be your favorite email.

TSMC stated that its earnings bottomed out in the first quarter. From this point, its earnings are expected to grow, and the growth rate will accelerate with every passing quarter. For the second quarter, it expects the operating margin to improve 260 basis points sequentially to 32%.

Article continues below advertisement

Cash flows

TSMC’s first-quarter profits converted into operating cash flow of $4.95 billion of which it spent $2.5 billion on capital spending, resulting in an FCF (free cash flow) of $2.45 billion. The company has set aside $10 billion to $11 billion for capital spending in 2019, of which it has allocated 80% for advanced process technologies (7-nanometer and smaller). This investment has put TSMC ahead of Samsung and Intel in the manufacturing technology race.

TSMC’s capital spending focused on HPC

TSMC will spend the remaining 20% of its capital equally between specialty technologies and advanced packaging and mask making technologies. Its advanced packaging technologies include InFO (integrated fan-out), CoWoS (chip-on-wafer-on-substrate), and the new SoIC (system-on-integrated chips), which is scheduled to begin production in 2021.

At the first quarter earnings call, TSMC’s CEO C.C. Wei stated that its packaging technologies are gaining traction in the mobile and HPC (high-performance computing) markets. Even automotive customers are showing interest in these technologies. Wei expects HPC applications like CPUs (central processing units), AI (artificial intelligence) accelerators, and networking devices to drive double-digit revenue growth in the long term.

TSMC’s spending in advanced nodes and packaging technologies will attract HPC chipmakers like NVIDIA and Advanced Micro Devices (AMD). AMD switched to TSMC after its foundry partner Global Foundries scrapped plans to invest in the 7-nm node.

Check out all the data we have added to our quote pages. Now you can get a valuation snapshot, earnings and revenue estimates, and historical data as well as dividend info. Take a look!

Advertisement

More From Market Realist