Taiwan Semiconductor Revenue Slip Might Only Be Temporary

  • Taiwan Semiconductor has been negatively impacted by the loss of a lucrative deal from Qualcomm
  • The company’s revenue outlook for the remainder of the year might also be impacted, though not necessarily by a big margin
  • TSM was recently awarded a major contract by Apple
  • The mid and long-term outlook for the company remain favorable
TSMC Revenue analysis

The world’s largest contract chip manufacturer, Taiwan Semiconductor Manufacturing (NYSE:TSM), recently reported its April sales numbers that did not look particularly encouraging. TSM realized revenue of NT$75.33B ($2.45B) in April, good for 21.7% Y/Y growth and 4.2% Q/Q growth. This was a considerable slowdown from the month of March when the Taiwanese chip maker recorded healthy revenue growth of 44.7%. TSM’s monthly sales growth numbers appear to have hit a downward spiral since January when the company reported a robust 69.4%Y/Y growth.

As expected, TSM blamed the lackluster March numbers on weak demand from mobile chip makers as well as Samsung’s (OTC:SSNLF) decision not to use Qualcomm’s (NASDAQ:QCOM) high-end Snapdragon 810 processor that TSM supplied to the giant mobile phone technology company.

Some investors have become wary of TSM due to fears that the company could face another rough patch during the second half of the year. The company’s first quarter top line growth of 49.3% was slightly below the mid-point of its guidance. Meanwhile, TSM has guided for second quarter growth of 47.5%-49.5%

  1Q15 2Q15
Actual Guidance Guidance
Net Revenue (NT$ billion) 222.03 221-224 204-207
Gross Margin 49.3% 48.5%-50.5% 47.5%-49.5%
Operating Margin 39.0% 38.5%-40.5% 36.5%-38.5%
Exchange Rate (USD/NTD) 31.53 31.80 31.03

Source: Taiwan Semiconductor Manufacturing

TSM’s revenue for January through April came in at NT$297.36 billion, or a 41.5%Y/Y increase. While I believe that TSM might not match last year’s performance when its top line expanded by a brisk 48% clip, I have reasons to believe that the company can still post sound growth even in the midst of all the setbacks.

TSM to Produce SSD Controller Chips for Apple

After losing the huge Qualcomm contract, TSM recently landed another contract that could potentially turn out to be just as lucrative as the Qualcomm contract. News is in that Apple (NASDAQ:AAPL) has awarded TSM orders to produce the company’s SSD controller chips. The SSD controllers will use TSM’s industry-leading 28nm nodes. Apple uses SSDs in its iPhones, iPads and MacBooks.

An SSD controller is an embedded processor that is used to execute firmware-level software and acts as a bridge that connects Flash memory components to the input/output interfaces of SSDs. The Apple SSD controller deal was just one of several SSD connector deals that TSM has landed lately. The chipmaker recently nabbed similar deals with SSD maker Marvell Technologies (NASDAQ:MRVL) and Phison Electronics.

By using its 28nm fabrication process, TSM will be able to widen its lead over smaller rival United Microelectronics Corporation (NYSE:UMC) and GlobalFoundries. 28nm nodes remain TSM’s most successful nodes over the last couple of years, and accounted for 30% of the company’s top line during the first quarter.

SSD controller chips will officially shift to 28nm nodes during the current year, which will expand the market for TSM’s 28nm nodes. The SSD controller market is currently worth about $1.5 billion per year, but is expected to expand rapidly as SSDs continue taking over the storage industry.

Investors need not worry that 28nm nodes will soon become commoditized which could lead to shrinking margins. TSM is reputed to own a huge 78% of the 28nm node market. Its biggest rival in this category, Samsung, will be busy using the nodes in its own smartphones to have much left for the market. Demand for TSM's 28nm nodes is therefore likely to remain strong for the foreseeable future. Mobile phones fired the first huge wave of demand for 28nm nodes; the second wave will be powered by rapid adoption of SSDs, another fast-growth market.

TSM to Leverage InFO-WLP Technology to Win A10 Orders from Apple

TSM plans to use its new backend integrated fan-out (InFO) WLP (Wafer-Level Packaging) technology to manufacture its 16nm chips and win Apple business for A10 iPhone chips in 2016. TSM’s 20 nm nodes are already being used on Apple’s A8 processors. InFO-WLP is a production technology that TSM developed in-house and at first intended to use it on its 20nm nodes. But, the company decided to instead use it on 16nm nodes, which are currently its most advanced. TSM plans to combine FinFET and InFO-WLP technologies to compete for Apple’s A10 chip orders.

Even though TSM’s InFO-WLP technology is considered to be more expensive than FC-CSP, or flip-chip chip-scale packaging technology, it’s considerably cheaper than TSM’s existing CoWoS, or chip-on-wafer-on-substrate, packaging technology. TSM plans to use InFO-WLP and FinFET in both its 16nm nodes and its 10nm nodes, which will commence volume production in 2017.

The new InFO-WLP technology is expected to hit the ground running with quarterly sales expected to be around $100 million, or 5% of TSM’s current revenue, by the end of 2016. The business, however, is likely to grow much bigger since it’s expected to attract TSM’s large customers such as Qualcomm, MediaTek and Huawei, all of whom have been tipped to become its biggest users.

KGI Research estimates that TSM will get 100% of Apple’s A10 business in 2016, as well as 100% of S2 20 nm chips to be used in the Apple Watch. I believe that TSM’s new foundry technology will give the company a significant leg up against its competition. The only chip manufacturer that is close to deploying fan-out WLP is Silicon Precision Industries (NASDAQ:SPIL) which will use the technology in both entry-level and mid-range IC solutions during the current year, and in high-end mobile application processors in the coming year.

Regarding TSM’s short-term outlook, I don’t think it would be a very wise idea to short it. TSM current PE reading of 12.24 is close to the 3-year low, meaning a lot of pessimism is already baked into the shares. Moreover, the company appears to be fairly valued for its growth profile, and the downside with respect to slower growth might turn out to be pretty limited. Just buy TSM for the long haul.

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