April 26, 2007 – Efforts to work down inventory pileups cut into TSMC’s profits in 1Q07, but the company expects margins to bounce back again in the next quarter.

The foundry reported a net profit of about $570.9 million, down 32% Q-Q and 42% Y-Y, while sales slipped 13% sequentially/17% Y-Y to about $1.95 billion. Gross margins shrunk to 37.9%, vs. 46% in 4Q06 and 48.5% in 1Q06; operating margins also slumped to 27.5%, while net margins fell to 29%.

Revenues from all three of TSMC’s target areas saw double-digit declines in 1Q — computer, communications and consumer applications declined by 21%, 15%, and 12%, respectively. An inventory correction as well as seasonal declines dented the 1Q numbers, though sales in 1Q ended up better than TSMC had predicted at the start of the year. However, most of its customers’ excess inventories have been worked through, noted TSMC CFO Lora Ho, who predicted that communication and consumer sales “will rebound quite well,” with a bit slower growth in the computer segment.

TSMC’s total managed capacity in 1Q was 1.89 million wafers (200mm-equivalent), 1% lower than 4Q, though the foundry said its managed capacity would rise 4% in 2Q to 1.97 million wafers, and rise 18% for FY07 to 8.34 million wafers, with nearly a third of TSMC’s planned additional capacity this year going toward 300mm equipment.

Capex declined by 26% in 1Q vs. the prior quarter (about $147 million), with most of the spending used to purchase tools for its two 300mm sites, Fab 12 and Fab 14. Total capex for 2007 is still pegged at $2.6-$2.8 billion, primarily backend-loaded, according to CEO Rick Tsai in the conference call discussing the results, suggesting the heaviest capex would occur in 2Q and 3Q.

Mehdi Hosseini, analyst with FBR Research, notes that TSMC’s projections suggest sequential capacity increases of 4%, 11%, and 5% in 2Q, 3Q, and 4Q, respectively, and noted that TSMC execs indicated they have already ordered the equipment for 2Q and 3Q expansion. Those expansion rates suggest the company will end the year near full capacity, he said, meaning that by late summer the foundry will need to determine what its capex needs will be for FY08.

TSMC projects revenues will rebound 12%-15% in 2Q07 to about $2.20-$2.26 billion, with gross margins rising to 42%-44%, and operating margins improving to 32%-34%.