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* Sees Q3 operating margin at 35-37% vs 31.7% year prior
* Q2 profit T$66.77 bln vs T$65.92 bln analyst view
* Q2 revenue down 1.4% on year in U.S. dollar terms (Adds Q3 guidance, executive comments)
TAIPEI, July 18 (Reuters) - Taiwan Semiconductor Manufacturing Co Ltd (TSMC) on Thursday said it expects a stronger half-year on demand for 5G telecoms gear as well as new tech like Internet of Things (IoT), after booking a profit fall in the second quarter.
The world's largest contract chipmaker also said demand from smartphone makers is likely to recover during the rest of 2019, a market hampered at present by uncertainties brought about by a Sino-U.S. trade war.
"Although our business continues to be impacted by a global slowing economy ... we have also passed the bottom of the cycle of our business and again began to see demand increasing," Chief Executive Officer and Vice Chairman C.C. Wei told analysts during an earnings briefing.
Taiwan's supply chain manufacturers have been navigating slowing global demand for smartphones - a primary source of revenue - as well as market disruption stemming from tit-for-tat import tariffs between China and the United States, plus the latter's ban on U.S. companies doing business with Chinese telecoms equipment maker Huawei Technologies Co Ltd.
TSMC, a proxy for technology demand as its clients include iPhone maker Apple and chip leader Qualcomm Inc , reported a 7.6% decline in April-June net profit at T$66.77 billion ($2.15 billion), meeting analyst estimates.
Revenue rose 3.3% to T$241 billion, but fell 1.4% to $7.75 billion in U.S. dollar terms - still topping both the firm's forecast and the average of 23 analyst estimates compiled by Refinitiv.
Business in the third quarter will be driven by increased demand for fifth-generation telecommunications (5G) equipment as well as for smartphones spurred by new product launches, and the fourth quarter will be even stronger, Wei said.
TSMC forecast a gross profit margin of 46% to 48% for the third quarter, and an operating margin of 35% to 37%, compared with 43% and 31.7% respectively a year earlier.
The chipmaker said it expected annual capital expenditure for the year to exceed the high end of its earlier forecast of $10 billion to $11 billion due to strong 5G demand.
Even so, analysts were cautious on TSMC's growth outlook for the coming months, citing a slower-than-expected introduction of 5G technology and still-tepid demand for smartphones, which they said accounted for nearly half of its first-quarter sales.
"With a still-slow demand recovery and excessive inventory, we think wafer orders from fabless companies might remain weak," Fubon Securities analyst Sherman Shang wrote in a research note prior to TSMC's earnings announcement.
TSMC's short-term downside, however, could be supported by "major customers' recovery in 2020 from a very low base in 2019, such as Apple," Shang wrote.
Indicating evolving market conditions, the spread of accelerating spread of 5G networks helped Dutch semiconductor equipment maker ASML Holding NV, a supplier to TSMC, beat analysts' second-quarter earnings estimates on Wednesday.
Prior to TSMC's announcement, shares in the chipmaker closed up 0.8% versus a 0.25% fall in the wider market. The stock has risen around 13% so far this year.
($1 = 31.0350 Taiwan dollars)
(Reporting by Yimou Lee; Editing by Christopher Cushing)