Taiwan Semi Posts Strong Quarter but Cautions on '04

Utilization rates are way up, but the chip foundry puts growth next year below a lot of estimates.
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Leading chip foundry

Taiwan Semiconductor

(TSM) - Get Report

posted double-digit growth in sales and earnings for the June quarter, but it issued a somewhat sobering forecast for chip growth in 2004.

On the conference call, "They were more cautious than I've heard any other chip company be in terms of the growth rate for 2004, at 11% for the chip industry," says Banc of America analyst Mark FitzGerald. "Most analysts and pontificators are at around 20% at this point."

In midafternoon trading, the stock dipped 11 cents, or 1.1%, to $9.96.

TSM's second-quarter sales grew 13% from the prior year to $49.92 billion in new Taiwan dollars ($1.45 billion in U.S. dollars, according to the most recent exchange rate), while net income per share jumped 27%, to 8 cents (U.S.) a share. Wall Street analysts were expecting 6 cents EPS for the June quarter.

The company said second-quarter revenue saw a boost from stronger wafer sales, with wafer shipments up 28% and wafer average selling prices gaining 4%.

Profit levels jumped from the prior quarter, with gross margin vaulting to 36.8% from 26.4% as the company put more of its factory capacity to work. In the quarter now under way, TSM predicts its utilization rate -- a measure of the percentage of factory capacity in use -- will reach over 90%.

"They had good numbers and guided well," says FitzGerald. Besides that, the company's utilization rate of around 90% compares favorably with the industrywide rate of around 70%, he adds. Generally speaking, high utilization rates mean companies can extract higher prices from customers.

"They're in a little bit better position than a lot of chip companies. I think price deflation will be the big bugaboo for the chip industry as it recovers," points out FitzGerald. He has a buy rating on the stock; his firm hasn't done recent banking.

CFO Harvey Chang pointed out that the company's net income of $11.7 billion in new Taiwan dollars ($341 million in U.S. dollars) marks its best profit since the industry skidded into recession in 2001. "For two consecutive fiscal quarters, TSMC has gained solid improvements in its operating results. We expect the performance of the coming quarter will be at least in line with that of the second quarter," said Chang in a statement.

In the quarter under way, wafer shipments are expected to rise in the mid- to high-single digits from the prior quarter, with ASPs likely to stay flat or possibly rise. TSMC expects demand in PCs to decline but chip demand to improve in consumer and communications markets.