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Taiwan Semi Gives a Chipper Second-Quarter Outlook

The chip foundry says revenues may increase by as much as a quarter.

Shares of

Taiwan Semiconductor

(TSM) - Get Taiwan Semiconductor Manufacturing Co. Ltd. Report

soared after the foundry reported a hefty sequential surge in first-quarter profit, though net income remains a third below year-ago levels. The market applauded the company's forecast of double-digit sales growth in the quarter under way.

The stock tacked on 79 cents, or 10.3%, to $8.48 in recent trading.

The company's guidance implies a 24%-plus sequential increase in second-quarter revenues, said Bear Stearns in a morning note. "This implied revenue guidance for the second quarter is better than our expectations of a 12% quarter-on-quarter improvement and market expectations of 10% to 15% growth," said analyst Gurinder Kalra.

He says TSM's customers are likely building inventories in anticipation of seasonal demand in the second half of the year. But while the stock might see some near-term upside following the upside guidance surprise, says Kalra, after that it may well stay range-bound "as investors focus on the sell-through in the second quarter." Bear Stearns has no banking relationship with TSM.

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For the first quarter, Taiwan Semi's net income was down 34% from the same period last year.

But on a sequential basis, profit jumped 71%. The company attributed the income jump to lower R&D expenditures, reduced investment losses and favorable income tax results.

Earnings per ADR share amounted to 3 cents, a penny above the consensus estimate.

First-quarter sales were up 9.9% from last year's levels, though sales slipped 4% from the prior quarter. The sequential drop-off occurred because of softer average pricing, though it was partly offset by a higher level of wafer shipments and a minor adjustment on sales return and allowance, allowing gross margins to stay about flat with the prior quarter, at 26.4%.

"We are very much encouraged by these results. Not only did they improve on our guidance, they were achieved amid a number of constraints, such as the Chinese New Year holidays and the scheduled annual maintenance plans of our various fabs," said CFO Harvey Chang. "We expect this fine performance to extend into a firm trend of growth and improving profitability in the coming quarter."

The foundry expects average selling prices to grow 4% sequentially in the quarter under way due to a better product mix. Wafer shipments should grow 20% sequentially.

Meanwhile, its average utilization rate is expected to rise significantly from the first quarter's 67%. In the June quarter, the rate is expected to exceed 80%, or over 85% for advanced process technologies.

Taiwan Semi also said business demand should improve across all customer application segments, with the consumer market seeing the strongest momentum, followed by the computer and communication segments.