4 Key Takeaways for Apple, Nvidia and Others From TSMC's Earnings Report

Though below analyst estimates, Taiwan Semiconductor's (TSM) guidance was better than feared and to some extent a positive for Apple (AAPL) .

Key Numbers

TSMC, the world's top chip contract manufacturer (foundry), reported Q2 revenue of $7.85 billion (up 11% annually) and EPS of $0.47. Revenue was for all intents already known thanks to monthly sales reports, and EPS beat consensus by a penny.

Q3 sales guidance is for revenue of $8.45 billion to $8.55 billion, which is below an $8.83 billion consensus. And on its earnings call, TSMC, which had already cut its full-year sales guidance in April, said it now expects "high single-digit" 2018 revenue growth, below prior guidance for 10% growth.

Nonetheless, TSMC shares are up over 4% in Thursday trading. As noted a couple weeks ago while making a bull case for TSMC, shares had already priced in investor concerns about slowing smartphone demand.

Key Takeaways

  1. In remarks that are somewhat encouraging for Apple  (AAPL) and its chip suppliers, CFO Lora Ho said on the earnings call that TSMC sees "slight improvement" in its outlook for second-half smartphone demand relative to its forecast three months ago. Though Apple is by no means the only big smartphone OEM that TSMC is exposed to, the company does have considerable iPhone exposure, courtesy of its manufacturing contracts for Apple's A-series system-on-chips (SoCs) and chips from suppliers such as Cirrus Logic (CRUS)  and Broadcom (AVGO) . Apple, which reports on July 31st, is up about 1% in Thursday trading.
  2. So why did TSMC lower its full-year sales guidance? The company blames "general weakness in cryptocurrency mining demand" caused by declining crypto prices. That's likely a reference to both GPU-related mining activity -- both Nvidia  (NVDA) and AMD  (AMD) have cautioned that their crypto-related sales are declining -- as well as mining work relying on ASICs from the likes of China's Bitmain. It's worth noting that Bitmain, Nvidia and (though it also relies on other foundries for GPU production) AMD are all TSMC clients.
  3. TSMC cut its 2018 capital spending budget by $1.5 billion to a range of $10 billion to $10.5 billion. The company attributes $700 million of this decline to the push-out of an order payment to 2019, and another $200 million to currency swings. Nonetheless, the capex cut is a slight negative for chip equipment makers such as Applied Materials (AMAT) , KLA-Tencor  (KLAC) and Lam Research (LRCX) , many of which are trading moderately lower on Thursday. Research firm Semiconductor Advisors thinks business trends may have influenced TSMC's decision to cut its capex, as may have spending shifts related to TSMC's planned use of EUV lithography in volume production in future years.
  4. The production ramp for TSMC's cutting-edge 7-nanometer manufacturing process appears to be going well. Ho says chips relying on the process, which Apple is expected to use to make the A-series SoCs going inside its 2018 iPhones, will account for about 10% of TSMC's Q3 revenue, up from less than 1% in Q2. AMD and many other TSMC clients are also expected to use its 7nm process, which gives the company a competitive edge against Intel (INTC) -- volume production for a 10nm Intel process that's seen as competitive with TSMC's 7nm process now isn't expected until some point in 2019.
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