Company leaders expect strong results for 2014, despite a tablet/smartphone slowdown in Q1

As slowdown struck the high-end side of the smartphone and tablet market in Q3 and Q4, many investors feared we would be in for a rocky ride in 2014.  While those concerns still remain to an extent, many industry leaders have now suggested that the slowdown may be more of a short-lived blip than a long-term development.  Many companies believe that by Q2 smartphone sales will be picking up, as flashy entries like the Samsung Electronics Comp., Ltd.'s (KRX:005935) (KRX:005930) Galaxy S5 (expected in Q2) and Apple, Inc.'s (AAPL) iPhone 6 (expected in Q3) make their market debut.

I. Third Party Fab Market is Expected to Revive Soon

Reinvigorated sales would would be good news for investors in companies like Samsung or Taiwan Semiconductor Manufacturing Comp., Ltd. (TPE:2330) (TSMC). 

Samsung derives a major part of its revenue from third party chipmaking, despite the bulk of its profits coming from its smartphone and tablet sales.  Hence its investors are concerned about a double hit from a slowdown.  TSMC is solely devoted to third-party fabrication, so in a way it is even more sensitive to general industry-wide trends.

The latest development comes courtesy of the latter fab firm, who announced its Q4 2013 earnings early Today at the close of the Taiwanese market.

[Image Source: Cult of Mac]

In Q4 TSMC saw a net profit of NT$44.8B ($1.49B USD) (NT$1.73 per share), better than the figures of NT$42B ($1.40B USD) and NT$41.8B ($1.39B USD) that analysts surveyed by Thomson Reuters I/B/E/S and Bloomberg, respectively, were expecting.  That's still down 13.7 percent from TSMC's strong Q3 2013 performance, but it wasn't as bad as was expected.  On a year to year basis TSMC still mustered a modest 7.7 percent profit growth.

Revenue stacked in at NT$145.8B ($4.85B USD), a hair higher than the on average NT$145.4B ($4.84B USD) that the 23 analysts surveyed by Bloomberg expected.  Again, this was down 10.3 percent on a quarter-to-quarter (QoQ) basis, but up 10.9 percent on a year to year (YoY) basis.

II. Strong 2014 Predicted for TSMC

TSMC's forecast is where things get interesting.  In Q1 the story is mixed.  Analysts were expecting NT$141B ($4.69B USD), but TSMC forecast revenue of NT$136-138B ($4.52-4.59B USD).  At worst, that would represent a 6.7 percent drop from Q4's revenue.  And yet there's also a positive surprise in the guidance as improvements in high end (high margin) chip sales were expected to be strong enough to drive TSMC to a NT$44.5-46.5B ($1.48-1.55B USD) profit (likely a small growth from Q4), versus the analyst expectation of NT$43.7B ($1.45B USD)

For the year TSMC's expectations were even rosier.  It say its expects double digit growth in both revenue and profit for the fiscal year 2014 (FY2014).  That indicates an expectation of a strong Q2-Q4 2014 sales run, as the profit growth expectation in Q1 is about 3.7 percent at best.

TSMC chips
TSMC is still seeing strong orders for 28 nm processors.  [Image Source: Reuters]

TSMC's biggest rival -- South Korea's Samsung is reporting its Q4 results on Jan. 24 and the results are not expected to be good, judging by the company's preliminary sales forecast, released before CES.  Where as TSMC's issues are more isolated to sales alone, Samsung is also being hit by a strong won, the currency of its home nation.  This strengthening has created difficulties for Samsung as it is making it harder to bring its money back home to spend on new tehcnology.

Samsung and TSMC both play the roles of "mobile arms dealers" of sort, or, more aptly mobile ARM dealers.  Both rely heavily on third party orders of chips using ARM Holdings Plc's (LON:ARM) ARM architectures and mobile instruction sets, technologies that dominate today's mobile processor market.

TSMC controls 50 percent of the mobile chip market. [Image Source: TSMC]

At last estimate TSMC was the biggest processor producer in the mobile space, responsible for an estimated 50 percent of production by volume.

III. Samsung vs. Intel vs. TSMC -- Roadmaps

Intel Corp. (INTC), the auburn ruler of the personal computer processor space, stirred much fear and speculation among investors in TSMC and other fabs when it announced in Oct. 2013 that it would be manufacturing chips for Altera Corp. (ALTR).  The particularly heated point of controversy was the fact that these FPGAs included 64-bit ARM cores.

Intel currently enjoys a modest process lead over TSMC.  TSMC in 2013 was in its second year of building 28 nanometer transistors, while Intel was in its second year of building 22 nanometer transistors.  That said, Intel has saved its best chip lines for some time for traditional PC processors, building mobile chips on older facilities on larger nodes.

TSMC is starting its first 20 nm mass production this quarter, which will put it ahead of Intel -- if only briefly.  Intel may still have a slight edge in power thanks to its power-saving 3D transistor design commonly referred to as FinFETs (Fin field effect transistors).

Intel spent $11B USD last year on semiconductor research and fab development, while TSMC spent slightly less -- $9.7B USD.  That was still a record expenditure from TSMC, who expects to bump investment again this year.  Samsung spent $22B USD in 2013, making it the biggest spender, capital investment-wise.

TSMC roadmap
[Image Source: ExtremeTech]

IDF 2013
[Image Source: Jason Mick/DailyTech LLC]

samsung die shrinks

[Image Source: Samsung]
The next node for TSMC is the 16 nm node (which will finally bring in FinFET designs), expected to be taped out late this year (Q4 2014) or very early next year (Q1 2015).  The next node for Intel  -- 14 nm -- was already tape out last year.  Next year it plans to tape out 10 nm chips, in preparation for a 2016 product launch.  Samsung is also expected to tape out 20 nm this year, reach volume production next year.

So arguably TSMC is about a year behind Intel in process, at present, and Samsung is a year behind TSMC.  Globalfoundries, a fourth major player, is thought to be a little behind Samsung.

IV. No Minor Threat

Intel is a serious threat to TSMC.  The rumor that it's expected to devote its best lines to third party chip production are likely baseless, but even if it opts to primarily push its own mobile product, that's dangerous to TSMC due to its process leadership.

Samsung is dangerous for different reasons.  As the world's top smartphone maker, it can cut costs by controlling the entire supply chain, something TSMC can't do.  It also is spending much more on chipmaking research and fab development that Intels or TSMC.

Fab worker
Samsung may trail TSMC in market share and process, but it's a deep-pocketed and dangerous rival. [Image Source: IntoMobile]

Still, TSMC is confident in its future path.  Chairman Morris Chang, who recently stepped down from the CEO spot at the fab firm, expects mobile and tablet chip revenue will grow roughly 35 percent in 2014.  New co-CEO , reigning alongside CC Wei, remarked during the earnings call, "[TSMC's 28 nm is] scaling is much better than what Intel said, though still a little bit behind.  [TSMC is] far superior [than Intel or Samsung] in mobile execution."

TSMC's Mr. Liu insists that his firm is more less tied with Intel, calling Intel's claims of process supremacy "erroneous and based on outdated data".  He may technically be right, but it won't be long before Intel has product on the market that once more leapfrogs TSMC in node size.

But it should not be discounted that Intel has thus far been unable to leverage its node advantage into sales in the mobile market, and that TSMC has dominated that market despite some struggles making smaller transistor nodes.

Intel has had some recent struggles of its own, delaying the release of its first 14 nm processor Broadwell from Q3 2014 to Q4 2014.  It also announced it would hold off on 14 nm upgrades to its Arizona fab, out of concern dwindling PC sales would mean insufficient orders for 14 nm chips.  The Arizona facility was one of three facilities that had previously been announced as a source of 14 nm production.

Intel CEO
Intel CEO Brian Krzanich [SOURCE:]

Intel CEO Brian Krzanich said last week that Intel would be "pragmatic" in leveraging its process expertise to win third party clients, but in a nod to TSMC's prowess in the budget space added, "[We are] not going to get into a price war with TSMC."

Sources: TSMC, Reuters, Bloomberg

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