Taiwan Semiconductor Mfg. Co. Ltd. (

TSM

)

Q1 2011 Earnings Call

April 28, 2011 8:00 AM ET

Executives

Elizabeth Sun – Head, IR

Lora Ho – SVP and CFO

Morris Chang – Chairman and CEO

Analysts

Randy Abrams – Credit Suisse

Dan Heyler – Bank of America/Merrill Lynch

Steven Pelayo – HSBC

Pranab Sarmah – Daiwa Capital Markets

Zhou Ying – BNP

Satya Kumar – Credit Suisse

C.J. Muse – Barclays Capital

Presentation

Operator

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Welcome to the TSMC’s First Quarter 2011 Results Webcast Conference Call. This conference call is being webcast live via the TSMC website at www.tsmc.com, and only in audio mode. Your dial-in lines are also in listen-only mode.

I would now like to turn the conference over to Dr. Elizabeth Sun, TSMC’s Head of Investor Relations. Please proceed.

Elizabeth Sun

All right. Good morning, and good evening, everyone. Welcome to TSMC’s first quarter 2011 conference call. Joining us on the call are Dr. Morris Chang, our Chairman and Chief Executive Officer; and Ms. Lora Ho, our Vice President and Chief Financial Officer.

The format for today’s conference call will be as follows: First, Lora will summarize our operations in the first quarter and give you our guidance for the third quarter. Afterwards, TSMC’s Chairman, Dr. Chang, will provide his general remark on the business outlook and a couple of key messages. Then and we will open the floor to questions.

For those participants who do not yet have a copy of the press release, you may download it now from TSMC’s website at www.tsmc.com. Please also download the summary slides in relation to today’s quarterly review presentation.

I would like to remind all listeners that following discussions may contain forward-looking statements that subject to significant risks and uncertainty, which could cause actual results to differ materially from those contained in the forward-looking statements.

Information as to those factors that could cause actual results to differ materially from TSMC’s forward-looking statements may be found in TSMC’s Annual Report on Form 20-F filed with the United States Securities and Exchange Commission on April 15, 2011 and such other documents as TSMC may file with or submit to the SEC from time to time. Except as required by law, we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

And now, I will like to turn the call over to Lora.

Lora Ho

Thank you, Elizabeth. Good morning, and good evening to everyone. Welcome to our 2011 first quarter earnings conference call. During today’s call I will start with financial highlights in the first quarter, then we will move to the outlook for the second quarter. You may also refer to the quarterly financial summary slides on our website or dollar figures in NT dollars unless otherwise stated.

In the first quarter wafer demand was strong, stronger than seasonal, our revenue was only slightly down 0.7% in US dollar turn. However, an unfavorable impact from a 3.6% change in foreign exchange rate lead to a decline in NT dollar denoted sales, which was at the lower end of our guidance. However, we managed to achieve albeit our guidance in margin.

First quarter wafer shipments was 3.2 million inch equivalent wafer, down 1% from the prior quarter. Revenue was $105 billion, down 4.3% sequentially. Our growth margin was 49%, and operating margin was 37.2%. Earnings per share in the first quarter was $1.40, ROE was 24.6%.

Let me move into the income statement. Our gross margin was 49%, down 0.8 percentage points sequentially, mainly reflecting lower capacity utilizations and unfavorable foreign exchange rate partially offset by a more favorable product mix revenue and cost improvements.

Operating expense decreased $800 million from the fourth quarter primarily due to lower operating expense for Fab 14 and Fab 12. Non-operating income decreased by $50 million from the last quarter. Net investment gain declined by $170 million sequentially reflecting lower profit from certain invested companies.

Net margin was 34.4%, down 2.6 percentage points sequentially and declined 2 .1 percentage points year-over-year, mainly reflecting a higher tax rate and lower tax credit for investment compared with the last year.

Now let’s examine our revenue by applications. The first quarter wafer sales decreased sequentially in all major segments. Communication, computer and consumer related applications declined 3%, 9% and 6% respectively. Meanwhile, industrial and others declined 8% from the last quarter. Revenue from communications related applications represented 48% of our total wafer revenue in the first quarter. Computer, consumer and industrial applications accounted for 23%, 11% and 18% of our wafer sales respectively.

Now revenue by technology. Demand for advanced technologies continued to grow in first quarter combining contribution from 40 nanometer and 65 nanometer represented 64% of total wafer sales, up from 52% in the last quarter.

Now let’s move on to the balance sheet. We conclude the first quarter with 163 million – $163 billion in cash and short-term investments, representing a decrease of $18 million from the prior quarter. And due to a decrease in free cash flow resulting from higher capital expenditures. Total current liabilities increased by $4 billion, primarily due to a reclassification of corporate bonds from long-term liabilities and an increase in short-term loans to hedge our increased portion of U.S. dollar position.

In sum, current ratio in the first quarter was two times. Accounts receivable days increased one-day to 39 days. Inventory turnover days were 56 days, up six days sequentially mainly due to some customers, changing in delivery schedule. Daily orders from certain customers, and the increased safety stock in materials in response to the Japan earthquake. Net fixed asset turnover for the first quarter was 1 ton.

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