TSMC Benefitting from Greater Adoption of 7nm Technology

The fortunes of TSMC, a leading global foundry service provider based in Taiwan, have been linked to Apple for a long time. The company is the exclusive manufacturer of Apple’s ‘A’ series processors and often the peaks and troughs in Apple’s financial performance has looked nearly identical to that of TSMC.

But with Apple issuing a profit warning, primarily due to weak performance in its second-largest market China, as well as a prevailing ban in China and Germany, the demand for Apple’s iPhones are likely to be affected this year. This will adversely affect TSMC, which is why the company has already found options to offset this decline.

The company’s flagship 7nm (nanometer) technology is being adopted at a fast pace across the communication and computer segments by companies such as Apple, Qualcomm, AMD, HiSilicon, NVIDIA and Xilinx. As a result, within two quarters of its launch, the 7nm has had the fastest revenue growth ever for TSMC. A similarly successful product line, the 10nm, took nearly three-quarters to reach the levels that the 7nm has achieved.

Exhibit 1: TSMC Advanced Process Technology Revenue Ramp First Year

TSMC Advanced Process Technology Revenue Ramp First Year

The success of the 7nm helped TSMC to post record revenues of US$9.4 billion in Q4 2018, a 10.7% quarter-on-quarter increase and a 2% year-on-year increase. Gross margin, operating margin and net margin came in at 47.7%, 37% and 34.5%, only marginally lower than 50%, 39.2% and 35.8% in the same quarter last year. The drop was primarily due to an increase in investments in the 7nm and 5nm technologies.

This sets a good platform for TSMC’s future growth. It leads the market in wafer process node technology with its 7nm and with its upcoming 5nm technology, it is expected to maintain the lead. While the 7nm production ramped up only in the second half of 2018, it ended the year with a 9% contribution to TSMC’s total wafer revenue during the year. In Q4, the 7nm contributed to 23% of the total wafer revenue. While Q1 2019 might be affected by declining iPhone sales, orders from other clients may offset the situation in future.

As is evident from the Q4 2018 revenue growth rate for TSMC versus Apple devices, this Taiwanese company is diversifying its customer base for an advanced node by winning orders from Qualcomm and AMD through new launches using the 7nm technology. These launches include Qualcomm’s new mobile SoC flagship Snapdragon 855 paired X50 5G modem and AMD’s server processor Rome EPYC. HiSilicon’s extending product lines also inject momentum for TSMC’s future growth. Beyond the Kirin series, HiSilicon is working with TSMC on ARM-based server processor Kunpeng 920, Tiangang, Balong 5000 5G chipsets, AI processor Ascend 910/310 and more. Largely due to the 7nm, TSMC’s year-on-year growth rate surpassed its top clients in Q4.

Revenue Growth Rate Trends of TSMC Revenue vs Apple iOS Devices

Given the relatively soft end-market consumption and high inventory in the short-term, TSMC is pushing forward process upgrades and benefiting from its leadership position of 7nm to maintain a strong client base. This would help TSMC wade through short-term difficulties and emerge stronger.

Senior Analyst Ethan is a Senior Analyst with Counterpoint Mobile and Semiconductors, dedicated to IoT, the wearable, Integrated Circuits and emerging technologies. Ethan had been working in the mobile phone and semiconductor industry for 10+ years. Prior to joining Counterpoint Research, Ethan served Coolpad, VIA and Intel sequentially as senior technology researcher and product manager respectively.

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