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Taiwan Semi (TSM) Q3 Earnings Beat on Mobile Product Ramp Up

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Taiwan Semiconductor Manufacturing Co. (TSM - Free Report) reported third-quarter 2017 earnings of 57 cents per ADR, which exceeded the Zacks Consensus Estimate by a penny. Further, it increased 35.7% sequentially but decreased 3.4% year over year.

Moreover, revenues decreased 3.2% year over year but increased 17.9% sequentially. The sequential increase was primarily driven by major mobile product launches and a healthy demand environment. The company also witnessed strength in automotive, IoT and high-performance computing, resulting in cryptocurrency mining. However, customers' continued inventory management impacted third-quarter revenues.

Notably, shares of Taiwan Semiconductor have returned approximately 42.9% year to date, underperforming the industry’s gain of 44.4%.

Quarter Details

North America accounted for 64% of total revenues. Asia Pacific, China, EMEA (Europe, Middle East, and Africa) and Japan accounted for 10%, 11%, 8%, and 7% of total revenues, respectively.

By application, Communication, Computer, Consumer and Industrial/Standard increased 10%, 46%, 15% and 13%, respectively.

By technology, 10-nanometer (nm) process technology contributed 10% of total wafer revenues. The combined 16/20-nm contribution was 24% of total wafer revenues.

Advanced technologies (28-nm and below) accounted for 57% of total wafer revenues. The company has increased 28-nm capacity to meet customer demand.

N7 & N7+ Details

Management noted that the 7-nm product (including N7 and N7+ products) has gained significant traction within a short span of receiving technology qualification. Taiwan Semi expects to have more than 50 new N7 product tape-outs by the end of 2018. So far, N7 yield is wellahead of the company’s plan. Moreover, it continues to expect 10-nm to contribute to about 10% of wafer revenues this year.

Taiwan Semi expects to have a very fast and smooth N7 ramp-up in 2018, with its yield better than the 16-nm. Management also noted that N7+ would be the most advanced foundry process in 2018. It anticipates offering EUV in second-half 2018 on N7+ and then full insertion in first-quarter 2019.


Per the press release, gross margin was 49.9%, down 90 basis points (bps) sequentially and 80 bps year over year. The decrease was due to margin dilution from higher 10nm contribution, partially offset by a higher level of capacity utilization.

Operating margin was 38.9%, flat sequentially but down 190 bps year over year.

Fourth Quarter Guidance

For fourth-quarter 2017, Taiwan Semi expects revenues to be in the range of $9.10-$9.20 billion. The guidance implies 10.0% sequential growth in revenues, driven by fast increase in the availability of 10-nm mobile customer products, partially offset by continuous inventory adjustments.

Gross margin is anticipated to be between 48.0% and 50.0%, while operating margin is expected to be in the range of 37- 39%.

Zacks Rank & Stocks to Consider

Currently, Taiwan Semiconductorcarries a Zacks Rank #3 (Hold). A few other better-ranked stocks in the broader technology sector are Applied Materials, Inc. (AMAT - Free Report) and NVIDIA Corporation (NVDA - Free Report) , both sporting a Zacks Rank #1 (Strong Buy), while ASML Holding (ASML - Free Report) , holding a Zacks Rank #2 (Buy). You can seethe complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings per share growth rate for Applied Materials, NVIDIA Corporation and ASML Holding N.V. is projected to be 17.1%, 10.3% and 21.4%, respectively.

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