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TSMC reports record profits as customers hoard chips

Chipmaker braces for a course correction but remains 'highly confident' in long-term outlook

Taiwan Semiconductor Manufacturing Company (TSMC) has offered guidance adjustments that signal preparations for a market correction despite reporting record profits as customers hoard excessive inventory.

For a calendar Q2 ended 30 June, the world's largest contract chip manufacturer said it made a 76 percent year-on-year hike in profit to nearly $8 billion. Revenue jumped 43.5 percent to around $17.8 billion.

The increases were seen as raw material costs rose and TSMC in turn upped its prices, which are expected to continue rising in the short-term, even though the cost of raw materials have come down.

CFO Wendall Huang noted [PDF] that TSMC was not immune to inflation, experiencing it both in component and electricity cost, but an improvement in the exchange rate for the Taiwanese dollar led to a 3.5 percent rise in Q2 gross margin to 59.1 percent.

In terms of the sales breakdown, 5 nanometer process tech contributed 21 percent of wafer revenue in Q2, with 30 percent coming from 7 nanometer and the remainder from Advanced Technologies, which TSMC defines as 7 nanometer and below.

As for sales contribution by platform, smartphone was up 3 percent to 38 percent of total revenue, HPC grew 13 percent to 43 percent of the total, with IoT, Automotive and digital consumer electronics comprising the rest.

The semiconductor maker reported that customers were holding onto excess inventory, a factor that could have led to its record profits but also signal a looming adjustment, as predicted in May.

"Our expectation is for the excess inventory in the semiconductor supply chain to take a few quarters to rebalance to a healthier level," said CEO CC Wei. "We believe the current semiconductor cycle will be more similar to a typical cycle, with a few quarters of inventory adjustment, likely through first half 2023."

TSMC said it expects Q3 revenue to be between $19.8 billion and $20.6 billion, and gross margin to be between 57.5 per cent to 59.5 percent, or 58.5 percent at the midpoint - down 600 basis points year-on-year.

Gross margin wasn't the only item receiving an adjustment – capex was altered from April 2021 guidance of $100 billion over three years to $40 billion for the year as equipment and tools delivery was pushed out until 2023. Huang declined to talk about capex beyond 2022.

As to the effects of any course correction, Wei said the team was "highly confident in... long-term growth outlook" as it was well positioned to capitalize on 5G and high-performance computing. Furthermore, demand in chips for consumer electronics is expected to shift to demand in datacenters and carmakers as the worldwide economy declines, encouraging TSMC production to shift and remain profitable.

"We reiterate our long-term revenues to be between 15 and 20 CAGR over the next several years in US dollar terms," said Wei.

TSMC shares are down more than 20 percent this year, but rose over 3 percent with the release of the latest quarterly report.

All eyes are on the tech giants as the financial results seasons kicks off, amid fears of a slowndown in enterprise tech spending that is seeing a range of companies from Microsoft, to Cisco and Google to slowdown their hiring cycle.

Just last week Micron reported record revenues but also sounded a note of caution as it forecast a 13 percent drop for the next quarter due to falling PC and smartphone memory demand. ®

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