SAN JOSE, Calif. An analyst has downgraded Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) despite strong results and major expansion plans for the silicon foundry giant. TSMC is ramping up the second phase of its 300-mm fab in southern Taiwan, with a third phase in the works.
On Thursday (April 27) TSMC reported upside to March quarter revenue at $2.41 billion and EPS of $0.20, versus consensus of $2.32 billion and $0.18, respectively, according to American Technology Research Inc., a market research firm. Utilization rates improved from 104 percent to 105 percent, with strength coming from the computing graphics and wireless segments, according to the firm.
Bill Ong, an analyst with American Technology Research, is raising his 2006 EPS estimate from $0.75 to $0.84 (Street at $0.77) to reflect March quarter upside and higher, near peak margin levels this year.
Still, Ong is somewhat bearish as well. “We are downgrading TSMC from a ‘hold’ to a ‘sell’ rating as we believe the gross margin is nearing peak levels at 49-to-50 percent,” he said in a report. “The gross margin could be under pressure with new capacity expected to come online at the end of the year and early next year.”
And TSMC is adding a ton of capacity. “Additional capacity is expected to be added as TSMC is currently ramping the second phase of Fab 14 in Tainan as well as beginning construction of its third phase in 2H ’06,” according to Ong.
“While this will likely alleviate some pressure by providing more available fab capacity, utilization rates, as well as depreciation, will likely be adversely impacted, thereby placing pressure on the gross margin," he said. "We do expect seasonal strength in 2H ‘06 to absorb the added capacity; however, the demand outlook for 2007 remains uncertain and is resulting in lower utilization rate risk.”
Indeed, the outlook is mixed for TSMC. “June quarter revenue is expected to increase 3-to-5 percent sequentially on a consolidated basis as measured in New Taiwan dollars,” according to Ong.
“Overall, end market demand should be healthy with strength in 90-nm demand continuing to lead the way. The quarter is expected to be seasonally weak due to computer inventory correction, but communications and digital consumer applications should see strength,” he said.