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TSMC's Virus Panic Stopped the Production Lines for a Full Day

Close-up of a computer screen showing several blue padlock icons, all locked, with a red, unlocked icon breaking the pattern in the middle of the view.

Over the weekend, chip manufacturing giant Taiwan Semiconductor Manufacturing (NYSE: TSM) was hit by a computer virus. CFO Lora Ho told Bloomberg that this was a first for the company.

"TSMC has been attacked by viruses before, but this is the first time a virus attack has affected our production lines," Ho said.

This morning, the company issued more detail on the operational impact of this virus. Long story short, this issue will make a material difference to TSMC's third-quarter report -- but the company hopes to make up the lost ground in the last reporting period of the year, and management stands firm by its full-year guidance targets.

The virus impact

The virus stopped several production lines across more than one of TSMC's manufacturing locations. As of 2 p.m. Taiwan time, which translated into 2 a.m. EDT today, the company had brought 80% of its operations back online and expected a full recovery later today.

The incident should reduce third-quarter revenues by approximately 3%. The less-than-optimal operating conditions will also lower TSMC's gross margins by roughly 1%. The posted third-quarter guidance had been pointing at revenues near $8.5 billion and a gross margin near 49%. The updated targets are zeroing in on $8.25 billion and 48%, respectively, which would work out to 9% year-over-year sales growth and a weaker bottom line.

Close-up of a computer screen showing several blue padlock icons, all locked, with a red, unlocked icon breaking the pattern in the middle of the view.

Image source: Getty Images.

Who else might this incident hurt?

TSMC is talking its customers through this snag, rescheduling production runs and deliveries while reassuring everyone that no customer or product data was lost or stolen. According to the press statement:

The Company is confident shipments delayed in third quarter will be recovered in the fourth quarter 2018, and maintains its forecast of high single-digit revenue growth for 2018 in U.S. dollars given on July 19, 2018.

I don't expect TSMC to disclose the identity of customers feeling the impact of this delay. As a contract manufacturer for pretty much every fabless chip designer you can think of, tapping the production brakes for a single day could affect almost anybody. The company's largest customers probably won't feel much pain since their semiconductor designs are running through the factory lines every day anyway.

In particular, you might see some hand-wringing about how TSMC's outage might affect the holiday-prep chip production schedules for Apple (NASDAQ: AAPL) , Qualcomm (NASDAQ: QCOM) , and NVIDIA (NASDAQ: NVDA) . Again, all of these accounts should be watched carefully through the virus impact, and none of these names should suffer any significant delivery delays.

If anything, I expect TSMC's gross margins to come back strong in the fourth quarter as every available ounce of manufacturing efficiency is squeezed out of its systems through longer operating hours. This is not the end of the world for TSMC, or any of its customers. However, this is another sharp reminder that computer security issues have the power to stop the trains, so to speak, and can never be taken lightly.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and Nvidia. The Motley Fool owns shares of Qualcomm and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy .

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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