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Taiwan Semi (TSM) Q1 Earnings Lag Estimates, Revenues Up Y/Y

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Taiwan Semiconductor Manufacturing Company (TSM - Free Report) reported first-quarter 2018 earnings of 59 cents per ADR unit which missed the Zacks Consensus Estimate by 1 cent and also declined from 64 cents reported in the previous quarter. However, it surged from the year-ago bottom-line figure of 54 cents.

Adjusted revenues grew 12.7% on a year-over-year basis but fell 8.2% sequentially to $8.46 billion. The figure came slightly ahead of the Zacks Consensus Estimate of $8.45 billion.

The year-over-year growth was driven by robust performance of the company’s technology products in the computing sector. Moreover, Taiwan Semi witnessed increased demand from cryptocurrency, automotive, HPC and IoT industry.

However, the sequential decline was primarily due to weakness in the smartphone market and appreciation in New Taiwan dollar against U.S. dollar.

We note that the shares of the company plunged 5.7% on Thursday after the earnings release. This is mainly due to management’s lower guidance for revenues in the second quarter.

However, over a year the stock has returned 21.7%, underperforming the industry’s rally of 23.2%.



 

Top Line in Detail

North America accounted for 59% of the total revenues. Asia Pacific, China, EMEA (Europe, Middle East, and Africa) and Japan accounted for 8%, 19%, 7%, and 7% of the total revenues, respectively.

By application, Communication, Industrial/Standard, Computer and Consumer accounted for 55%, 23%, 15% and 7% of the total revenues respectively.

By technology, 10-nanometer (NM) and the combined 16/20 NM accounted for 19% and 22% of the total wafer revenues, respectively. The 28 NM and below advanced technologies contributed 59%.

 

Operating Details

In the first quarter, gross profit came in $4.26 billion or 50.3% of revenues, which expanded 30 basis points (bps) sequentially but contracted 160 bps year over year.

The quarter-over-quarter improvement was driven by adjustments to inventory valuation and efforts toward cost efficiency. Although, unfavorable exchange rate fluctuations led to lower-capacity utilization.

Operating expenses were $912 million, reflecting an increase of 8.6% year over year but a decrease of 4.7% from the previous quarter. This was due to increased research and development expenditure.

Operating margin was 39%, which contracted 20 bps sequentially and 180 bps on a year-over-year basis.

Balance Sheet & Cash Flow

As of Mar 31, 2018, cash and cash equivalents and marketable securities were $23.5 billion compared with $21.8 billion as of Dec 31, 2017.

Also, cash flow from operating activities came in NT$ 160.72 billion against NT$ 204.13 billion in the previous quarter. Further, CapEx expenditure amounted to $2.45 billion in the first quarter.

Guidance

For the second-quarter 2018, Taiwan Semi expects revenues between $7.8 billion and $7.9 billion. Whereas the Zacks Consensus Estimate is pegged at $8.51 billion.

The management has provided weak guidance since mobile phone segment is expected to continue experience softer demand. Also, uncertainty in cryptocurrency market remains a concern.

However, HPC segment is expected to strengthen in the second quarter.

Gross margin is expected to be in the range of 47-49% and operating margin is anticipated between 35% and 37%. This is based on the exchange rate assumption of $1= NT$ 29.20. Unfavorable product mix is expected to prevail in the second quarter and thus the management has lowered its guidance for gross margin.

Additionally, tax rate is expected to lie in the range of 18-19% in the next quarter.

For 2018, the company has raised its guidance for CapEx which is now anticipated to lie between $11.5 billion and $12 billion.

Our Take

We believe Taiwan Semi’s strong focus toward innovation will continue to drive its top-line growth in the long run.

Moreover, the company’s increasing investments in research and development bodewell for the idea of product innovation and expansion.

The company is also using EUV layers to make its 7 NM and N7 Plus more advanced to provide better density and greater power reduction. This is expected to enrich the company’s portfolio and hence boost revenues.

Further, the emerging trend of artificial intelligence and establishment of 5G networks are likely to bring in growth opportunities for the company as there will be an increase in the demand for semiconductors.

Zacks Rank & Other Stocks to Consider

Taiwan Semi carries a Zacks Rank #2 (Buy).

A few other top-ranked stocks in the broader technology sector are Micron Technology (MU - Free Report) , Analog Devices (ADI - Free Report) and AMETEK (AME - Free Report) . While Micron Technology and Analog Devices sport a Zacks Rank #1 (Strong Buy), AMETEK carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Micron Technology, Analog Devices and AMETEK is pegged at 10%, 12% and 12%, respectively.

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