TSMC Reports Steepest Quarterly Profit Drop in Over 7 Years, Amid Fears of Slowing Demand

TSMC, the world's largest contract chipmaker, posted on Thursday its steepest profit decline in over seven years in the first quarter of the year, amid fears about the impact that slowing electronics demand could have on its business.

TSMC, formally Taiwan Semiconductor Manufacturing, posted net profit of TWD 61.4 billion ($1.99 billion) for January-March, 31.6 percent less than a year earlier, and the steepest fall since the third quarter of 2011.

The result also lagged the TWD 64.3 billion average of 21 analyst estimates compiled by Refinitiv.

The company, a proxy for global technology demand as its clients include iPhone maker Apple, Qualcomm and Huawei Technologies, forecast second-quarter revenue of $7.55 billion to $7.65 billion. That would be 2.5 percent to 3.8 percent lower than the year earlier.

It also forecast gross margin for the second quarter of 43 percent to 45 percent, while operating margin will be 31 percent to 33 percent, compared with 47.8 percent and 36.2 percent a year earlier, respectively.

The forecast comes as investors fret about a global tech slowdown after chip suppliers including Samsung Electronics recently flagged weak demand.

Slowing global demand for smartphones, as well as concerns over the prolonged US-China trade war, has also taken a toll on Taiwan's supply chain manufacturers.

Analysts said TSMC would gradually recover from sluggish smartphone sales in coming months and new demand including for devices equipped with fifth-generation (5G) communications technology could help keep full-year revenue at least broadly flat.

"Fortunately 5G should put TSMC back to growth and help it deliver double-digit earnings per share expansion in 2020 and 2021," Mark Li, an analyst at Sanford C. Bernstein, wrote in a research note prior to the earnings announcement.

Analysts said TSMC could also benefit from Chinese clients stocking up on semiconductor products in case of any adverse outcome from the US-China trade negotiations.

Revenue in U.S. dollar terms fell 16.1 percent to $7.1 billion in the first quarter, versus the company's previously estimated range of $7.0 billion to $7.1 billion, and compared with the $7.15 billion average of 22 analyst estimates.

Prior to the earnings announcement, shares in TSMC closed up 1.15 percent versus a 0.6 percent fall in the wider market. The stock has risen around 18 percent so far this year.

© Thomson Reuters 2019