TAIPEI Taiwan Semiconductor Manufacturing Co Ltd (TSMC) (2330.TW) reported its second-highest quarterly profit, helped by hot demand from smartphones and tablets, but flagged a slowdown as sales drop off because some tech firms will have more chips in stock than they need.
The world's biggest contract chipmaker, and rivals including Samsung Electronics (005930.KS) and AMD AMD.N, could face a downturn in global technology spending as Europe's woes continue to dent demand and China's economy slows.
Top chipmaker Intel Corp (INTC.O) and chip gear maker Applied Materials Inc (AMAT.O) have cut their full-year sales forecasts, while Qualcomm Inc (QCOM.O) cut its revenue and earnings forecast for the current quarter but predicted a stronger fourth quarter.
TSMC's chairman, Morris Chang, told an investor conference on Thursday that inventory levels at its clients have been increasing due to a deteriorating macroeconomic environment.
At the end of the first quarter, chip stocks held by hardware manufacturers were about six days below the usual seasonal level. By the end of the third quarter, inventory levels would be 12 days above usual stocks, he said.
That would lead to an inventory correction in the fourth quarter and a dip in TSMC's revenue in that period that would continue into the first quarter of 2013 before a "healthy" rebound in the second quarter.
"High hopes led to high inventory. Everybody had high hopes," Chang said. He trimmed his forecast for global revenue growth in the chip industry this year to 1 percent to 2 percent from a previous forecast of 2 percent.
TSMC's (2330.TW) net profit in the March-June quarter rose 16.3 percent to T$41.81 billion ($1.4 billion), just below the T$42.28 billion average estimate of 22 analysts polled by Thomson Reuters I/B/E/S.
The figure compares with T$33.47 billion in the first quarter and T$35.96 billion a year earlier, but is just shy of TSMC's record quarterly profit of T$46.94 billion, set in July-September 2010.
The company forecast revenue in the third quarter of T$136 billion to T$138 billion, above a consensus analyst forecast of around T$134.39 billion.
It forecast gross margins of between 46 percent and 48 percent in the third quarter, slightly lower than the second quarter's 48.6 percent, while operating margins would be between 34 percent and 36 percent compared with the second quarter's 36.5 percent.
SMALLER AND THINNER
Analysts said the company's 28-nanometer chips would continue to be the main profit driver in the third quarter because TSMC has a better yield rate than rivals on such chips, which are made with the latest ultra-thin processes and are in hot demand for mobile devices.
However global uncertainty will continue to overshadow the company and the whole industry.
"We continue to expect demand headwinds and inventory correction to lead to a weaker outlook for the foundry sector in 2H12. However, we anticipate 28nm to enable TSMC to deliver relatively resilient earnings momentum amid an unfavorable macro backdrop," said Deutsche Bank analyst Michael Chou.
That unfavorable backdrop has some fund managers turning bearish on the stock.
"The biggest worry is the slowdown of Chinese economic growth. A major portion of TSMC's earnings is consumer electronics, whose demand has softened due to the slowdown in China," said J. J. Lee, chief investment officer of Fubon Financial's (2881.TW) fund arm.
"We've reduced some of our holdings in TSMC stocks. We'll not accumulate TSMC shares in the short run, since there is still downside to come."
TSMC supplies chips to clients including Texas Instruments TXN.N and Nvidia (NVDA.O).
Chang said TSMC was still actively negotiating with ASML (ASML.AS) over a partnership that may see the Taiwanese firm take a stake in the world's top chip equipment maker.
ASML signed up Intel Corp (INTC.O) last week to bankroll its research into costly next-generation chipmaking technology and has said it was looking to reach similar deals with Samsung as well as TSMC.
"If we are to invest, it would be for speeding up the EUV development, which is good for TSMC," Chang said. "This is our main consideration."
EUV lithography refers to the light source used in lithography machines to make tinier, but more powerful semiconductors. It is one of the areas ASML wants to fast-track.
Before the results announcement, TSMC shares closed up 3.6 percent, outperforming a 1.4 percent rise in broader market .TWII.
Smaller rival United Microelectronics Corp (2303.TW), which is making a push to keep up with TSMC via a tie-up with IBM on next-generation 20-nanometre technology, is expected to report third-quarter earnings on July 25. Its shares ended 2.88 percent higher on Thursday.
(Editing by Matt Driskill and Alex Richardson)