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TSMC's Chang sees recovery in Q3

"Our customers' inventories are decreasing ? we have seen a healthy reduction of customer inventory since the first quarter [of this year]."

Morris Chang, TSMC chairman

The global semiconductor industry is expected to bottom out in the current quarter and rebound in the third quarter, driven by a continued reduction in client inventories, the head of Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) said yesterday.

"Our customers' inventories are decreasing ? we have seen a healthy reduction of customer inventory since the first quarter [of this year]," TSMC's chairman, Morris Chang (張忠謀), told investors yesterday.

The inventory level of an unnamed customer that contributes 60 percent of TSMC's revenue dropped to 71 days at the end of the first quarter from 79 days at the end of last year, Chang said.

Another customer, he said, which accounts for 20 percent of TSMC's sales, saw the same trend, with its inventory level decreasing to 77 days from 80 days over the same time.

Their inventories are expected to continue to decline in the current quarter, he said, adding that "these are encouraging signs."

Accordingly, the world's largest made-to-order chipmaker expects the industry to hit bottom in the second quarter and start to recover in the third, TSMC's chief financial officer Lora Ho (何麗梅) said.

TSMC's first-quarter net income dropped by 11.8 percent year-on-year to NT$16.82 billion, or NT$0.72 per share, on revenue of NT$55.65 billion, down from NT$57.51 billion a year ago, as the customers cut orders in order to use up inventories on hand.

The chipmaker shipped 1.11 million wafers in the January-March quarter, down from 1.17 million wafers a year ago while its utilization rate dropped to 78 percent from 105 percent a year earlier, dragged down mainly by sluggish demand and sliding 200mm (8-inch) wafer shipments, the company said.

Looking ahead, TSMC hopes to see second-quarter wafer shipments increase by between 4 percent and 9 percent from the first quarter. The overall utilization rate, meanwhile, is expected to improve to 80 percent, driven by growing demand for consumer products like set-top boxes and digital TVs, and computer products such as liquid-crystal displays and notebook panels, Chang said.

However, average selling prices (ASP) for the second quarter are expected to decline by between 4 percent and 6 percent from the first quarter, due to the chipmaker's product mix.

The expected decline is because of a lack of increase in the proportion of advanced technology products -- which enjoy higher value -- and the faster decline of mature technology products, Chang said.

Nevertheless, TSMC expects ASPs to rebound in the third quarter in line with increasing shipments of advanced technology products, with sales from 90-nanometer products expected to account for over 10 percent of revenue in the same quarter, Chang said.

"Second-quarter profits may see a slight decline of around 5 percent, as ASP falls from about US$1,350 to US$1,400 per wafer in the previous quarter," said Frank Chi (紀鈞中), an analyst with Grand Cathay Securities Co (大華證券).

In principle, TSMC's forecast for the industry is in line with analyst views, Chi said, adding that Grand Cathay Securities had raised its rating on TSMC shares to "overweight" from "neutral" and suggests investors bottom fish for semiconductor stocks.

TSMC shares yesterday closed up 3.61 percent to NT$51.60 on the Taiwan Stock Exchange. Foreign investors yesterday bought a net 10.3 million shares of TSMC after eight straight days of net sales.

Despite excess cash of over US$2 billion, the chipmaker said it has no plans to buy back its own stock.

The best way to utilize the cash is to reward shareholders through cash dividends, the company said.

TSMC may issue cash dividends of over NT$2 per share over the next two years, Chang said.
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