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

Taiwan Semiconductor Manufacturing Co. TSM 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 and NVIDIA Corporation NVDA , both sporting a Zacks Rank #1 (Strong Buy), while ASML Holding ASML , holding a Zacks Rank #2 (Buy). You can see the 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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