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Here's Why Taiwan Semiconductor Manufacturing Co. Ltd.'s 16-Nano Shipments Dropped

By Ashraf Eassa - Oct 26, 2017 at 7:42AM

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Relax, it's all going according to plan.

Taiwan Semiconductor Manufacturing Company (TSM -5.81%) is the world's largest contract chip manufacturer by revenue. The company builds chips for a broad set of customers across a range of manufacturing technologies.

Each quarter, TSMC breaks out the percentage of its total revenue by manufacturing technology generation. In its most recent quarter, TSMC reported that revenue from its 16-nanometer and 20-nanometer technologies combined made up 24% of its revenue.

This figure was down from 31% in the same period a year ago.

An iPhone X against a white background.

TSMC manufactures the chip inside of Apple's iPhone X. Image source: Apple.

On the earnings call accompanying TSMC's earnings release, analyst Brett Simpson asked company management to "talk a bit about what happened at 16-nanometer at TSMC."

TSMC co-CEO C.C. Wei, in response to the question, didn't really answer the question. Instead, he pointed out that the technology has been successful for the company and that TSMC continues to enhance the technology as it aims to maintain high factory utilization rates for its 16-nano factories.

A giant move forward

Over the last year, arguably the single largest customer of TSMC's 16-nanometer technology has been Apple (AAPL 1.62%). Apple was among the first to use the 16-nanometer technology when it debuted in the second half of 2015 for a portion of the A9 chips that powered its iPhone 6s family of smartphones, and it increased its use of the technology when it chose to build the A10 Fusion chip, which powered the iPhone 7-series smartphones, using the same technology.

For the A11 Bionic processors that power this year's new iPhones (iPhone 8, iPhone 8 Plus, and iPhone X), Apple is now using TSMC's new 10-nanometer technology. This means that year over year, Apple's 16-nanometer chip purchases are going to decline, which will have a significant impact on TSMC's 16-nanometer revenue.

TSMC said 10% of its revenue last quarter came from sales of 10-nanometer chips and it expects that proportion to increase next year. That increase will certainly come at the expense of TSMC's 16-nanometer revenue.

What does this mean for TSMC stock?

There are two situations that might worry investors about a year-over-year reduction in 16-nanometer revenue.

The first would be fear of market share loss. If TSMC is losing market share, then that's bad for its business. The second would be fear of low factory utilization rates, which would reduce the profitability of each 16-nanometer wafer sold.

Given that these are the things investors would be concerned about, it's clear why Wei cut right to the chase by defending the competitiveness of TSMC's 16-nanometer technology and assuring investors that its 16-nanometer factory utilization rates remain "very high" and should continue to be over the next several years.

This isn't unexpected. TSMC works closely with its major customers and knows when those customers intend to transition to new manufacturing technologies. This means TSMC can appropriately manage the capacity it has in place for each of its chip manufacturing technologies, avoiding the pitfalls associated with underutilized factories.

TSMC investors shouldn't fear -- everything seems to be going as planned.

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Taiwan Semiconductor Manufacturing Company Limited
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