TSMC Conference Call: 2024 is a "very strong growth year", with CoWoS capacity doubling at least in the next two years

In terms of the profit guidance that the market is focusing on, Taiwan Semiconductor Manufacturing Company (TSMC) has raised its sales forecast for the third quarter and full year. It is expected that the third-quarter sales will be between $22.4 billion and $23.2 billion, with a full-year sales growth rate of 24%-26% in US dollars. At the same time, TSMC has also raised the lower limit of its full-year capital expenditure from $28 billion to $32 billion, now ranging from $30 billion to $32 billion.

Wei Zhejia stated that the reason for raising the full-year capital expenditure for 2024 to $30 billion to $32 billion is mainly due to consideration of higher growth opportunities. Specifically, 70%-80% of this will be used for advanced processes, 10%-20% for specialty technologies, and 10% for advanced packaging, masks, etc.

Regarding the part of Q2 revenue that exceeded the previous upper limit guidance, Wei Zhejia pointed out that this was mainly due to the N3 and N5 processes being partially offset by smartphones. It is expected that revenue growth in the third quarter will be mainly driven by advanced processes propelled by smartphones and AI.

Wei Zhejia also mentioned that over the past three months, strong demand from AI and smartphones has been supporting growth. It is expected that the 5nm process will remain at a high level in the second half of the year, with revenue growth slightly exceeding the mid-range of 20% in US dollars for the full year.

Regarding the more advanced 2nm process, Wei Zhejia stated that the early wafer volume of 2nm is expected to be higher than that of 3nm and 5nm, with device performance also expected to increase by 25%-30% and chip density by over 15%. It is projected that by 2026, the revenue from the 2nm process will surpass that of the 3nm process; N2P (performance-enhanced 2nm) is expected to enter mass production in the second half of 2026.

When discussing CoWoS capacity, Wei Zhejia responded that the current demand for CoWoS capacity remains strong and it is difficult to meet customer needs. It is expected that the tight supply situation will continue until 2025, with some relief possible in 2026. The company is expected to at least double its CoWoS capacity this year and next year.

【Q】Looking at future capacity planning, there is a high demand for advanced packaging capacity related to AI. How is this capacity planned for the future? What about CoWoS capacity in the next year?

The demand is very strong, and it is difficult to meet customer needs. It is uncertain when the balance will be reached in 2025 and 2026. The CAGR of capacity is hard to predict. Supply will remain tight until 2025, and we hope for some relief in 2026.

【Q】Will the capacity double next year?

We previously mentioned doubling this year, and now it is more than doubling. If we say it will double next year, it is estimated that it will more than double next year as well. We are working very hard on this.

【Q】Regarding gross margin, the gross margin in H2 is better than expected. Despite the improvement in gross margin under the sell value situation, how do you see the gross margin in the coming years? Will it reach the high 50s?

The gross margin has both positive and negative impacts. Positively, there is the N3 ramp-up dilution, sell value, and cost reduction, as we are very good at reducing costs. In addition, for example, the transition from N5 to N3, we do not rule out the possibility of more transitions in the future. We see strong demand for N3. If we do this, we see a strong demand for N3. If we do this, There will be negative impacts in the future. But in the next few years, this is a good thing. There will also be impacts such as electricity prices. We are also starting to invest in overseas factories, with two next year, one in phase 1 Arizona and another in Japan, which will dilute our gross margin by 2-3% in the coming years. However, overall, considering our cost management and factory capabilities, we are confident of achieving a gross margin of 53% or even higher. If we achieve a very high utilization rate, reaching the gross margin of 22 is also possible.

【Q】Will different government incentives and subsidies affect the company's CAPEX?

When subsidies are received, they can be seen in the cash flow statement and also in the balance sheet, with different governments having different methods. In our financial reports, we have received subsidies in the past few quarters. For example, in 23, we received subsidies slightly higher than $1.5 billion, mainly from Japan.

【Q】Regarding selling the value, how is the current situation? Will advanced process technology become a bottleneck in the next few years, allowing the company to sell more value?

Pricing strategy is very strategic, and the current situation is still very good. This is an ongoing process, we continue to sell value, our customers are also doing well, and we should also be able to do well.

【Q】HPC customers are doing well, while smartphone customers are more cost-sensitive. Will there be differences in price increases?

Pricing is strategic and not the same for every product category. Our customers are looking for advanced process capacity, and we cooperate with them. Currently, we support them as much as possible in terms of price and capacity.

【Q】Regarding Trump's statements, how is the company responding? Will overseas production capacity be expanded?

So far, we have not made any changes to our overseas expansion plans. We will continue to expand in Arizona and Japan, and may also expand in Europe in the future. If there is a tariff increase, customers will be responsible.

【Q】The company has been talking about selling the value for some time. Why hasn't there been an increase in the long-term gross margin target?

We cooperate with customers, and pricing is a strategic issue. Of course, we hope to sell value. If we were to change the gross margin target now, we would emphasize 53% or even higher. We will not change the specific numbers now. After more communication with customers, we may inform them of specific higher levels.

【Q】Regarding advanced packaging, the margin of advanced packaging is lower than the company's average. Will the gross margin of cowos be higher? Will the company collaborate with more partners to provide cowos supply?

The gross margin of advanced packaging used to be much lower than the company's average gross margin, but now it is approaching it, mainly due to economies of scale and cost reduction. The gross margin is continuously increasing, and we are collaborating with our partners. The supply of cowos is currently insufficient, limiting the growth of our customers. So we are collaborating with partners to provide more capacity to our customers, and we can sell more wafers 【Q】Regarding the capacity of the company's next-generation process, AI customers are actively hoping to migrate to the most advanced support, mainly due to energy consumption reasons. Will N2 and A16 be larger processes than the previous process?

Indeed, all customers hope to migrate to a more energy-efficient process to reduce power consumption. Many customers hope to migrate quickly. We are working hard to build capacity, and currently, capacity is still very tight. We hope that in the next few years, we can support the demand. We are indeed working hard to support them, but currently, the capacity is insufficient.

【Q】Regarding the gross margin situation, what is the level of N3 now? Has N3E improved the gross margin of N3?

We do not differentiate the gross margin of the same process. Overall, N3 needs more time to reach the company's gross margin, in the past it was 8-10 quarters, N3 may be 10-12 quarters, but it is currently improving, and we expect it to continue to improve.

【Q】From the perspective of the company's process conversion strategy, the company has always emphasized the flexibility of the process. Has this been done in the past, and is N5, N3 a major process?

12, 16 are indeed a large family, but 5, 3 are not a large family. At the same time, the similarity of the processes is relatively high, with a 90% similarity between N5 and N3, both in Tainan, so it is easy to migrate capacity.

【Q】Regarding cowos, does the company's cowos capacity more than double in 25 years? Will customers migrating from cowos-s to cowos-L/R, where L/R do not require TSV and large Interposer, alleviate the shortage of capacity? When will it reach a balance in 25, 26 years?

Cowos-L/R/S are all based on customer needs. For the same customer, different products also have different technologies. We double the capacity, which is the sum of different versions of cowos. We hope to double not only this year but also from this year to next year. We also need to cooperate with all partners to support our customers. Different versions of cowos require different tool sets, some tools can be used by all versions, but different versions still have different requirements.

【Q】Regarding advanced processes, looking at the migration to the 2nm process, will the revenue share of 2nm in 26 be larger than N3? Is the dilution of N2's gross margin shorter than N3?

In terms of revenue, it will be larger. The dilution of the gross margin will reach the company's average gross margin faster.

【Q】Regarding packaging, has the company seen the use of 3D SOIC and similar technologies for edge AI starting in the next two years? Will more smartphone customers start using info first packaging?

Our customers entering N2, A16 need to adopt a chiplet solution, which requires advanced packaging. HPC customers migrate faster, with higher requirements for latency, smartphone customers have demands for footprint and functionality improvements. Our major customers have been using INFO for several years, with no other usage, and are now starting to catch up 【Q】How do you see the shipment volume of smartphones and PCs in the next few years with the tight capacity of 5nm and 3nm processes? Does the company have enough capacity to support device upgrades? What is the impact of AI on the silicon content of smartphones?

In terms of silicon content, all customers now hope to incorporate AI on the edge side, increasing die size to varying degrees for different customers. Overall, a 10% growth is quite common. We have not seen a sudden increase in quantity, but we expect AI features to stimulate a shorter device upgrade cycle, possibly visible around 2 years from now, in devices on the edge side such as PCs and smartphones. As for capacity, it is indeed tight, and we are working hard to expand production support from now until 2026.

【Q】Demand was very high in 2021, and customers had aggressive forecasts. How does the company manage demand fluctuations? How does the company plan its capacity?

We have disciplined planning in place, unlike in 2021 and 2022. We have observed many forecasts from our customers, and we are also using AI and machine learning to enhance productivity, which has proven to be very effective. We also need our customers' products. We believe that the current demand for AI is more realistic than it was two to three years ago when concerns about shortages were different. AI is now becoming a very useful tool for humanity and is needed in various industries. Even so, we conduct thorough checks from top to bottom to ensure that customers are more realistic when providing forecasts.

【Q】Regarding the SPR solution, achieving good power consumption at the chip level, what impact does it have on system-level efficiency? Do customers save more money the more they buy?

Indeed, the more wafers customers purchase from TSMC, the more money they save. A 20% reduction in chip-level power consumption may not translate to a 20% reduction at the system level. For the entire system, including connections, networks, and processors, unless all parts are reduced by 20%, the system will not decrease by 20%. Processors are the main power-consuming part of the system, and even if the system does not see a 20% reduction, it still accounts for a significant portion. Therefore, customers prefer to use advanced processes and migrate to 2nm.

【Q】What is the biggest bottleneck in expanding production for the A16 process?

When expanding production, we need land, electricity, and talent.

【Q】During COMPUTEX, many companies mentioned accelerating product launches. What impact does this have on the company?

We welcome this trend. We are very advanced in advanced processes, and each product design requires 1.5 to 2 years. We have known about this for a long time. Our customers are happy, and so are we. We are prepared, and we have communicated with them early on to be ready for such changes.

【Q】Regarding AI chips, as die sizes increase, will the company focus on fan-out panel level packaging in the long term?

Indeed, we are considering panel-level packaging, but it is not yet a solid plan. We believe it will be around three years from now. Within the next three years, we will not have anything very solid with a 10 times reticle size increase; currently, it is around 5 to 6 times Three years ago, our panel began to introduce, and we were ready