Taiwan Semiconductor's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Taiwan Semiconductor Mfg. Co. Ltd. (TSM)

Q2 2012 Earnings Call

July 19, 2012 2:00 AM ET

Executives

Elizabeth Sun – Director, Corporate Communications

Lora Ho – SVP, CFO and Spokesperson

Morris Chang – Chairman and CEO

Analysts

Dan Heyler – Bank of America

Mehdi Hosseini – Susquehanna

Michael Chou – Deutsche Bank

William Lu – Morgan Stanley

Andrew Lu – Barclays

Roland Shu – Citigroup

Brett Winston – RA

Mahesh Sanganeria – RBC Capital Markets

Steven Pelayo – HSBC

Randy Abrams – Credit Suisse

Presentation

Elizabeth Sun

Welcome to TSMC’s second quarter 2012 earnings conference and conference call. This is Elizabeth Sun, TSMC’s Director of Corporate Communications, and your host for today. This is the first time that we are combining the quarterly earnings conference with the conference call, and event is webcast live via TSMC’s website at www.tsmc.com. If you’re joining us through the conference call, your dialing lines are in listen-only mode. As this conference is being viewed by investors around the world, we will conduct this event in English only.

The format for today’s event will be as follows. First, TSMC’s Senior Vice President and CFO Ms. Lora Ho will summarize our operations in the second quarter and give you our guidance for the next quarter. Afterwards TSMC’s Chairman and CEO Dr. Morris Chang will provide his general remarks on business outlook and state a couple of key messages. Then we will open the floor to questions.

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

Before we begin, I would like to remind everybody that today’s discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears on our press release.

Now I would like to turn the podium to TSMC’s CFO Ms. Lora Ho.

Lora Ho

Thank you, Elizabeth. Good afternoon, good evening and good morning to everyone. We had a very good second quarter. The financial results came in at the high end of each of the guidance.

Revenue grew 21% QoverQ to set a record of NT$128 billion. This strong demand for mobile computing devices and our leadership in 28 nanometer give us a strong growth in the second quarter.

On the margin side, second quarter gross margin was 48.6% or 0.9 percentage points higher than that in the first quarter. The increase of gross margin mainly came from the higher capacity utilization across all technologies, although 28 nanometer gross margin is currently below corporate average. We expect it will reach to corporate average by the first quarter of 2013.

Operating margin was 36.5% in second quarter, up 2.9 percentage points, both R&D and SG&A expense as a percentage of revenue decreased by about 1 percentage points each.

You may notice that we had a loss of NT$0.8 billion in a non-operating item. This is mainly due to a one-time impairment charge of NT$2.68 billion on our 5.6% holdings in SMIC shares. This contributed to NT$0.09 drop of our second quarter EPS.

Overall, our second quarter EPS was NT$1.61, ROE was 26%.

Let’s move on to revenue by product segment. We have seen revenues from all applications increased sequentially among the four major product segments. Communications increased by 27%; computer increased by 20%; consumer increased by 9%; and industry-related revenue increased by 39% in the second quarter. The high growth of industrial and standard application is mainly due to strong demand for ICs used in mobile computing devices such as power management IC and a touch controller.

In terms of technology, revenue from 28 nanometer grew nearly 90% in the second quarter. We expect shipment of 28 nanometer to double in the third quarter. Revenue from advanced technologies, that is 69 nanometer and below technology and beyond technology, accounts for 61% of our second quarter revenue.

Take a look at the balance sheet. The cash and marketable securities ended the second quarter at NT$188 billion. Accounts receivable and the inventory amount went up as a result of business growth. Current liability increased by NT$86 billion mainly due to the accrual of dividend payable of NT$78 billion.

On the cash flow side, we generated NT$70 billion from operations, invested NT$59 billion in capital expenditures, repaid NT$3.9 billion in short-term loan. As a result, our cash balance increased NT$7.6 billion to NT$178 billion at the end of the second quarter. Free cash flow generated in the second quarter was NT$10.5 billion.

Let’s look at the capacity. On February 15, we began volume production of 28 nanometer in the second quarter and we expect to ramp at a faster pace in the second half of this year. Given our CapEx, we expect our total capacity to increase by about 14% year over year and 12-inch capacity will increase about 21%.

Now, let me provide you our guidance for the third quarter. Based on our current business expectations and a forecast exchange rate of 29.76, we expect our revenue to be between NT$136 billion and NT$138 billion, which is a sequential growth of 6% to 8%. We expect the third quarter gross margin is to be between 46% and 48% and operating margin between 34% and 36%.

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