Editors’ take: TSMC raises capex, but slowdown imminent?

by James Montgomery, news editor

July 30, 2010 – Quick hits from TSMC’s 2Q10 results, conference call, and analyst reactions:

Revenues: $3.23B (Street expected $3.2B), up 17.5% Q/Q and 41% Y/Y.

Margins: (gross) 49.5%, (operating) 38.6%

Net income: ~$1.3B, up 20% Q/Q and 65% Y/Y; Street expected ~$1.18B. (EPS ~$0.24 ADS, vs. Street’s $0.21).

Capex: 2010 capex budget hiked about 20% to $5.9B, vs. $4.8B previous forecast. ($3.1B has already been spent in 1H10; indicates slower spending in 2H10.) Added 7% capacity in 2Q vs. 1Q, and for all of 2010 plans to increase capacity (200mm-equivalent) by 14%; of that, 300mm capacity will be pushed up 36%.

Capacity additions: 1Q: 1%; 2Q: 7%; 3Q: 7%; 4Q: 3.5%. FY 2010: 13.5% (to 11.3M wafers, 200mm-equivalents)

3Q10 outlook: Revenues up ~4%-6% to $3.49B-$3.55B; gross & operating margins slightly down (48%-50% and 36%-38%).

Of TSMC’s newly raised $5.9B capex budget for 2010, $3.1B of that has already been spent — meaning the foundry will slow its spending somewhat in 2H10. And TSMC’s wafer capacity forecast suggests the same, suggests Deutsche Bank’s Steve O’Rourke: a 3.5% total capacity addition in 4Q10/~15k WSPM, vs. 7%/~25k WSPM in 3Q10 and 7%/26k WSPM in 2Q10.

Hiking capex and maintaining nearly 20% sales growth might be encouraging, but there are also reasons to be cautious:

— Oversupply warning? Now that the industry seems to be realigning with seasonal patterns, that means all eyes are on the all-important year-end holiday selling season, and devicemakers’ ramp-up to prepare for it. And there’s some doubt as to just how strong demand really is, as well as lingering financial problems in Europe — which could leave the industry with significant stockpiles to burn through in 2011. "We are seeing some double bookings" between the top two foundries (TSMC and UMC), said John Chiu, from Taiwan’s Fuh Hwa Securities Investment Trust, quoted by Reuters, adding that "some of their clients might have started adjusting their inventories." nVidia’s reduced 3Q sales outlook, for example, has prompted worries of carryover into TSMC, notes the Taiwan Economic News.

New facilities, new digestion. TSMC, UMC, GlobalFoundries, and Samsung should all open (at least) one new fab in 2011. O’Rourke cautions that there could be "a period of digestion" that could push out ramp-up beyond initial phases of capacity. "Based on the pace of quarterly capacity adds, we believe TSMC is already at a peak pace," he writes. And he expects this slowing-down trend to carry over to other foundries, including those lined up for tool shipments in 4Q10.

O’Rourke maps out how TSMC’s new capacity additions will likely start to decline in 4Q10…

TSMC’s CapEx and q/q change to 300mm wafer starts. (Source: Deutsche Bank, company reports)

…but see how capacity is surging over the trendline:

(Source: Deutsche Bank, company reports)

Semiconductor capital equipment suppliers, be warned. Remember the DRAM memory craze of 2007, when everyone was building fabs and adding capacity? (O’Rourke: It was "at least nine" players.) And we know how that ended up: a capital spending spree, and then silence for several years. "While we do not believe foundries are to this point, we believe a measure of prudence in 2011 foundry CapEx will likely hold sway," O’Rourke warns. (By the way, he also expects DRAM spending "to take a breather" in 2H10, though NAND capacity buildouts should stay steady.)


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