* Q2 revenue forecast range $7.55 bln to $7.65 bln
* Sees Q2 operating margin at 31-33 pct vs 36.2 pct yr prior
* Q1 profit T$61.4 bln vs T$64.3 bln analyst view
* Q1 revenue down 16 pct on year in U.S. dollar terms (Recasts, adds other company comment)
By Yimou Lee and Roger Tung
TAIPEI, April 18 (Reuters) - Taiwan's TSMC struck an upbeat note about the outlook for the depressed global chip market, betting that a rollout of faster 5G mobile network would buoy demand, even as it posted its steepest quarterly profit drop in more than seven years.
TSMC, the world's biggest contract chipmaker, said a recent settlement between its top clients Apple and Qualcomm to end their two-year legal dispute over smartphone chips will help the Taiwanese firm.
"The settlement will bring forward 5G adoption; this will definitely benefit TSMC," Elizabeth Sun, a senior director at TSMC told reporters on Thursday.
The upbeat forecast echoes that from its supplier ASML , which reported a better-than-expected quarterly profit on Wednesday and said it expects growth to accelerate thanks to demand from Chinese chipmakers.
"While the economic factor and mobile product seasonality are still lingering as we move into second quarter, we believe we may have passed the bottom of the cycle of our business as we are seeing demand stabilizing," TSMC CFO Lora Ho said.
TSMC, a proxy for technology demand as its clients include iPhone maker Apple, Qualcomm and Huawei Technologies , posted a 32 percent drop in its net profit to T$61.4 billion ($2 billion) for January-March.
That marked the steepest fall since the third quarter of 2011 and also lagged the T$64.3 billion average of 21 analyst estimates compiled by Refinitiv.
Slowing global demand for smartphones, as well as concerns over the prolonged U.S.-China trade war, has taken a toll on Taiwan's supply chain manufacturers.
TSMC, formally Taiwan Semiconductor Manufacturing Co Ltd, forecast second-quarter revenue of $7.55 billion to $7.65 billion. That would be 2.5-3.8 percent lower than the year ago, but better than a steep 16 percent drop in the first quarter.
A defective chemical that disrupted part of its production in February weighed on its first-quarter revenue, TSMC added.
The company also forecast gross margin of 43 percent to 45 percent in the second quarter, and operating margin of 31-33 percent, compared with 47.8 percent and 36.2 percent a year earlier, respectively.
The forecast comes as investors fret about a global tech slowdown after rivals including Samsung Electronics Co Ltd recently flagged weak demand.
Analysts said TSMC would gradually recover from sluggish smartphone sales in coming months and new demand including for devices equipped with 5G communications technology could help keep full-year revenue at least broadly flat.
"Fortunately 5G should put TSMC back to growth and help it deliver double-digit earnings per share expansion in 2020 and 2021," Mark Li, an analyst at Sanford C. Bernstein, wrote in a research note prior to the earnings announcement.
Analysts also said TSMC could benefit from Chinese clients stocking up on semiconductor products in case of any adverse outcome from the U.S.-China trade negotiations.
Prior to the earnings announcement, shares in TSMC closed up 1.15 percent versus a 0.6 percent fall in the wider market . The stock has risen around 18 percent so far this year. ($1 = 30.8580 Taiwan dollars)
(Reporting by Yimou Lee and Roger Tung; Writing by Clare Jim; Editing by Christopher Cushing, Miyoung Kim and Himani Sarkar)