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Taiwan Semi (TSM) Q2 Earnings Top Estimates, Revenues In Line

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Taiwan Semiconductor Manufacturing Company (TSM - Free Report) delivered second-quarter 2018 earnings of 47 cents per ADR unit surpassing the Zacks Consensus Estimate by 2 cents and also improved the year-ago quarter figure of 42 cents. However, it declined from the previous quarter figure of 59 cents.

Adjusted revenues grew 11.2% on a year-over-year basis but fell 7.2% sequentially to $7.85 billion. The figure came in line with the Zacks Consensus Estimate of $7.85 billion.

The year-over-year growth was driven by robust performance of the company’s technology products in the computer sector and Chinese geography.

Moreover, Taiwan Semi witnessed strong demand in the cryptocurrency mining space in the quarter under review. Further, favorable exchange rate contributed to top-line growth.

However, the sequential decline was primarily due to weakness in the mobile phone market.

Top-Line in Detail

Taiwan Semi’s total revenues can be categorized in three ways – application, technology and geography.

By application, Communication, Industrial/Standard, Computer and Consumer sectors accounted for 48%, 23%, 21% and 8%, respectively. The company has witnessed massive improvement in computer market from the year-ago quarter where it previously accounted for only 8%.

By technology, 10-nanometer (NM) and the combined 16/20 NM accounted for 13% and 25% of the total wafer revenues, respectively. The 28 NM and below advanced technologies contributed 61%.

By geography, North America contributed the most to the total revenues, which accounted for 53%. Asia Pacific, China, EMEA (Europe, Middle East, and Africa) and Japan accounted for 10%, 23%, 7%, and 7% of the total revenues, respectively.

Among all these regions, the company’s performance has shown year-over-year improvement only in China which accounted for 11% in the year-ago quarter.

Operating Details

In the second quarter, gross profit came in $3.75 billion or 47.8% of revenues, which contracted 250 basis points (bps) sequentially and 300 bps year over year.

Taiwan Semi witnessed quarter-over-quarter decline in its gross margin owing to the absence of inventory valuation and lower-capacity utilization. The year-over-year decline can be attributed to surge in the cost which expanded 270 bps from the year-ago quarter.

Operating expenses were $890 million, reflecting an increase of 6.2% year over year due to increased research & development and selling, general & administrative expenditure. However, the figure went down 2.4% from the previous quarter.

Operating margin was 36.2%, which contracted 280 bps sequentially and 270 bps on a year-over-year basis.

Balance Sheet & Cash Flow

As of Jun 30, 2018, cash and cash equivalents and marketable securities were $24.5 billion compared with $23.5 billion as of Mar 31, 2018.

The company generated cash flow from operating activities which came in NT$ 129.8 billion against NT$ 160.7 billion in the previous quarter. Moreover, free cash flow in the reported quarter was NT$ 70.1 billion.

Further, CapEx expenditure amounted to $2.01 billion in the second quarter.

Guidance

For third-quarter 2018, Taiwan Semi expects revenues between $8.45 billion and $8.55 billion. The Zacks Consensus Estimate is pegged at $9.1 billion.

Additionally, the Zacks Consensus Estimate for earnings is projected at 59 cents per share.

Management is optimistic about the new product launches which are based on its 7 NM technology. However, it anticipates a decline in the cryptocurrency mining demand due to uncertainty in the cryptocurrency space.

Taiwan Semi expects gross margin to be in a range of 48-50% and operating margin between 36.5% and 38.5% (assuming exchange rate of $1 = NT$ 30.5).

Zacks Rank & Other Stocks to Consider

Taiwan Semi carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the broader technology sector are Analog Devices (ADI - Free Report) , AMETEK (AME - Free Report) and Texas Instruments (TXN - Free Report) . All the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings growth rate for Analog Devices, AMETEK and Texas Instruments is pegged at 12.4%, 10.7% and 9.5%, respectively.

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