TSMC forecast tips chip cycle nearing its peak

LONDON -- The second quarter financial results from TSMC, with profits leaping upwards, have been reported in glowing terms. However, a closer examination shows a return to normal after the excursions of 2008 and 2009 and signs that the chip market cycle may be nearing its peak.

Indeed, TSMC's Q2 and forecast Q3 are slightly below historical averages for the company in terms of sequential growth. Allied to sporadic reports of double-ordering excess and one or two companies missing analysts' estimates in the current reporting season and the usual seasonal sequential fall must be expected for the market overall in Q4.

TSMC's second quarter sales revenue of NT$104.96 billion (about $2.51 billion) was up sequentially by 13.9 percent. This compares with an average over the last ten years that shows TSMC's Q2 revenue increasing over Q1 revenue by 15.7 percent.  If the best (87.9 percent in 2009) and worst (negative 33.5 percent in 2001) are taken out, the average is 12.8 percent.

TSMC made a modest prediction about its Q3 revenues. At between NT$109 billion (about $2.60 billion) and NT$111 billion (about $2.65 billion) TSMC is predicting sequential growth of between 3.85 and 5.75 percent. TSMC's ten-year historical average for Q3 sales is that they advance by 12.35 percent sequentially. So TSMC is predicting that Q3 will be sequentially worse in 2010 than the long-term average. Even with the outlying best and worst taken out from the last ten years, TSMC averages a 10.5 percent revenue hike in Q3.

Either TSMC sees the end of the boom cycle or it is managing expectations down so that it looks good when it exceeds those expectations later this year.

The chip industry as a whole climbs sequentially, on average, by 8.1 percent in Q3 before settling back by 0.6 percent in Q4. The size of the sequential fall in Q4, if any, will say much about prospects for 2011.