Taiwan Semiconductor: Charging ahead with 3nm, Intel "gets a boost"

Taiwan Semiconductor (TSMC) released its fourth-quarter earnings report for 2023 (ending in December 2023) before the US stock market on the afternoon of January 18, 2024. The key points are as follows:

1. Revenue: Continues to rebound. In the fourth quarter of 2023, Taiwan Semiconductor achieved revenue of $19.6 billion, at the upper limit of the performance guidance range ($18.8-19.6 billion). Quarterly revenue showed a MoM growth, with a 1.9% impact from shipment volume and an 11.4% impact from average selling price. Driven by Apple's new devices using the 3nm process, the company achieved both volume and price increases this quarter.

2. Gross profit and gross margin: Still at a low level. In the fourth quarter of 2023, Taiwan Semiconductor's gross margin was 53%, in line with the expected range (51.5-53.5%). The average selling price continued to rise this quarter, but costs also increased. The expansion of the 3nm production brought about an increase in depreciation and amortization, keeping the gross margin relatively low.

3. Wafer structure: Fully transitioning to advanced processes. The release of Apple's new devices drove the mass production of the company's 3nm process, and the revenue share of chips below 7nm has increased to 67% this quarter. Both mobile chips and artificial intelligence chips are expected to transition to higher nodes. With increased demand from downstream customers, the revenue share from the US region has increased to over 70% this quarter.

4. Taiwan Semiconductor's performance guidance for the first quarter of 2024: Expected revenue of $18-19.8 billion (market expectation: $18.4 billion) and gross margin of 52-54% (market expectation: 51%). The revenue is expected to decline by 4.2%-8.3% MoM, mainly due to the seasonal slowdown in Apple's shipments. The gross margin will continue to remain low, mainly due to the higher depreciation and amortization caused by the mass production of the 3nm process, putting pressure on the gross margin.

Dolphin Research's overall view:

Taiwan Semiconductor's earnings report this time is in line with market expectations. Since the company discloses its operating data monthly, the performance on the revenue side was already anticipated. The market's main focus for this quarter's report was on the company's gross margin. Although Taiwan Semiconductor's gross margin for this quarter was 53%, which also met market expectations, the continuous decline in the company's gross margin is mainly due to the impact of the 3nm mass production on the cost side.

The company has provided guidance for the next quarter: expected revenue of $18-19.8 billion (a decline of 4.2%-8.3% MoM) and a gross margin of 52-54% (basically flat MoM). With the slowdown in Apple's shipments in the first quarter, there will be a seasonal decline in the company's revenue. The gross margin will continue to face certain pressure due to the impact of depreciation and amortization.In terms of earnings report, the company's data this time is basically in line with market expectations. However, compared to the past year, Dolphin Research believes that Taiwan Semiconductor's performance in 2024 will be better than in 2023. With the advancement of 3nm mass production, the company's revenue from advanced processes in 2024 will continue to increase. In addition, due to the company's long-term technological leadership, Intel has also become a customer of the company.

Although the expansion of 3nm production has to some extent affected the company's gross margin, the company's leading advantage in wafer manufacturing has also been further expanded. Overall, Taiwan Semiconductor's revenue in 2024 will steadily increase, with the gross margin still affected by the expansion, but with the volume of 3nm and high-performance computing, the company's performance and influence are overall stable and improving.

Here is Dolphin Research's specific analysis of Taiwan Semiconductor:

I. Revenue: Continues to rebound

Taiwan Semiconductor achieved revenue of $19.62 billion in the fourth quarter of 2023, at the upper limit of the performance guidance range ($18.8-19.6 billion). The revenue increased by 13.5% QoQ, thanks to the continuous mass production of 3nm, which drove the increase in wafer prices.

Taiwan Semiconductor's quarterly revenue has been fully anticipated by the market due to the monthly operating indicators. And this quarter, Taiwan Semiconductor's revenue started to rebound. Did the growth come from shipment volume or price?

Dolphin Research observes the main driving force behind the growth of Taiwan Semiconductor's revenue in the fourth quarter from the perspectives of volume and price:

1）Volume: In the fourth quarter of 2023, Taiwan Semiconductor's wafer shipments reached 2,957 thousand pieces, an increase of 1.9% QoQ. The QoQ shipment volume has improved, mainly driven by the mass production of Apple's new 3nm chips this quarter. Considering the capital expenditure, Taiwan Semiconductor's capital expenditure this quarter was $5.24 billion, which continued to decrease to a new low in the past 21 years under the overall weak demand (lower than the target of capital expenditure below $32 billion for the whole year)..

2) Revenue Dimension: In 2023Q4, Taiwan Semiconductor's wafer revenue (equivalent to 12-inch wafers) was $6,635 per wafer, a MoM increase of 11.4%. The wafer shipment price of Taiwan Semiconductor has significantly increased, mainly due to the mass production of 3nm. In this quarter, the proportion of revenue from processes below 7nm increased to 67%, driving up the average selling price of the company's products.

As Dolphin Research mentioned in the previous earnings report review "Taiwan Semiconductor: NVIDIA Saves the Day, AI Supports the 'Cyclical' Bottom," "The second quarter's revenue will be the lowest point of the year." However, entering the second half of the year, Taiwan Semiconductor's revenue has shown significant improvement.

Combining the guidance provided by Taiwan Semiconductor for the next quarter, the expected revenue for the first quarter is $18-18.8 billion (a QoQ decline of 4.2%-8.3%), with a gross margin of 52-54% (roughly flat QoQ). The recovery in performance in the second half of the year is mainly due to the boost in 3nm production capacity from Apple's new devices, while the first quarter will also experience a seasonal decline.

II. Gross Profit and Gross Margin: Still at a Low Level

In the fourth quarter of 2023, Taiwan Semiconductor achieved a gross profit of $10.41 billion, a MoM increase of 11%. The improvement in gross profit is mainly driven by the impact on the revenue side. The gross margin of Taiwan Semiconductor in 2023Q4 was 53%, a MoM decrease of 1.3%, in line with market expectations.

In 2023Q4, the MoM increase in gross profit for Taiwan Semiconductor was 11%, with revenue contributing +13.5% and gross margin contributing -0.2%.

The two key data points that the market is most concerned about for Taiwan Semiconductor are revenue and gross margin. Since monthly operating data is disclosed, quarterly revenue is already expected by the market. Gross margin, on the other hand, is one of the focal points in this quarterly report. Dolphin Research will analyze the main drivers behind the increase in gross margin this quarter:

"Gross Profit = Wafer Revenue - Fixed Costs - Variable Costs"

1) Single wafer revenue (equivalent to 12 inches): In 2023Q4, Taiwan Semiconductor's single wafer revenue is approximately $6,635 per wafer, with a MoM increase of $681 per wafer. This is mainly due to the mass production of 3nm technology, which has led to a structural improvement in average selling price.

2) Fixed costs (depreciation and amortization): In 2023Q4, Taiwan Semiconductor's average fixed costs are approximately $1,598 per wafer, with a MoM decrease of $6 per wafer. The mass production of 3nm technology has driven an increase in the total amount of depreciation and amortization, resulting in a slight decrease in the cost per wafer.

3) Variable costs (other manufacturing expenses): In 2023Q4, Taiwan Semiconductor's average variable costs are approximately $1,518 per wafer, with a MoM increase of $398 per wafer. The increase in variable costs per wafer is mainly due to the increase in manufacturing costs.

Taking all of the above into account, Taiwan Semiconductor's gross profit per wafer in 2023Q4 is $3,519, with a MoM increase of $288. The gross profit per wafer has shown a significant rebound, with the unit price increasing by $681 and the unit cost increasing by $392.

The market has already anticipated the performance of Taiwan Semiconductor's revenue, with gross profit margin being the main focus. Although the mass production of 3nm technology has driven up the average selling price, it has also led to an increase in costs, which has put pressure on the gross profit margin. Looking at the company's guidance for the next quarter, which is 52-54%, Taiwan Semiconductor's gross profit margin is expected to remain low. Dolphin Research believes that the mass production of 3nm technology will increase the company's depreciation and amortization, putting pressure on the gross profit margin, making it difficult to return to a level above 60% in the short term.

III. Wafer Structure: A comprehensive shift towards advanced processes

3.1 Wafer revenue composition (by application type)

Smartphones and HPC (High-Performance Computing) are Taiwan Semiconductor's largest sources of revenue, accounting for a combined 86% of downstream revenue.

Looking at the downstream applications, the revenue share of the smartphone business and high-performance computing has both increased to 43% this quarter. The recovery in the smartphone business is mainly driven by Apple's new devices and the mass production of 3nm technology. High-performance computing, on the other hand, continues to benefit from increased demand for data centers and AI from downstream clients.

**Dolphin Research believes that with the mass production of 3nm technology, Apple's smartphone chips will gradually transition from 5nm to 3nm. High-performance computing is expected to start filling the existing 5nm capacity, and revenue from the smartphone and high-performance computing businesses is expected to continue to grow.

3.2 Revenue Proportion by Wafer (by Process Node)

In this quarter, the proportion of revenue from wafer sizes below 7nm continued to increase to 67%. Taiwan Semiconductor's advanced process node revenue has become the main factor for the company. Specifically, since the mass production of 3nm, the revenue proportion has continued to increase to 15%. The revenue proportion of 5nm remains above 30%.

Dolphin Research believes that based on the guidance provided by the company for the next quarter, the company's performance in 2024Q1 will still benefit from the shipment of new Apple devices, but the shipment volume will decline compared to the previous quarter. Historically, the production capacity of 3nm is expected to continue to rise. The revenue structure of the company will further shift towards process nodes below 7nm.

3.3 Revenue Proportion by Wafer (by Region)

In terms of revenue by region, North America remains the largest source of revenue for Taiwan Semiconductor, accounting for over 70% of the total. This is due to the presence of major customers such as Apple, Qualcomm, NVIDIA, and AMD in North America, which creates a strong commercial relationship between Taiwan Semiconductor and the United States. In this earnings report, the revenue proportion from North America continues to rise, mainly due to the release of new Apple devices, which resulted in additional orders in this quarter.Apart from North America, China and the Asia-Pacific region are the other two major sources of revenue, accounting for 11% and 8% respectively this quarter. However, the proportion of customers in China has declined to some extent.

Considering the situation of various companies and the industry chain, Dolphin Research believes that with the release of new Apple devices and the clearance of Android industry chain inventory, the company's mobile phone orders are expected to rebound, and there will be a strong push for the expansion of the 3nm process. Customers such as NVIDIA are also expected to gradually transition from 7nm to 5nm for AI applications, filling the capacity of the 5nm process. Overall, the company's customer orders are expected to shift to higher nodes.

In the long term, North America, which has numerous major customers, will still account for more than 70% of the company's revenue and remain a top priority.

Dolphin Research's related studies on Taiwan Semiconductor and the semiconductor manufacturing industry

Taiwan Semiconductor

October 20, 2023 conference call: "3nm Mass Production, Planning to Enter 2nm (Taiwan Semiconductor 23Q3 Conference Call)"

October 20, 2023 earnings report review: "Taiwan Semiconductor: Surviving the 'Performance Bottom', Starting the Battle of 3nm"

July 20, 2023 conference call: "Taiwan Semiconductor: AI Boosting, 3nm Finally Landing (2Q23 Conference Call)"

July 20, 2023 earnings report review: "Taiwan Semiconductor: NVIDIA Comes to the Rescue, AI Supports the 'Cycle' Bottom"

April 20, 2023 conference call: "Clear Bottom in the Second Quarter, Mass Production of 3nm Imminent (Taiwan Semiconductor 23Q1 Conference Call)"

April 20, 2023 earnings report review: "Taiwan Semiconductor: The Strongest King, Yet Unable to Escape the Cycle's Ups and Downs"Conference Call on January 12, 2023: "Inventory Adjustment Will Continue for Six Months, Growth Will Have to Wait Until the Second Half of the Year (Taiwan Semiconductor 22Q4 Conference Call)"

Financial Report Review on January 12, 2023: "Taiwan Semiconductor's Thunder, Even Buffett's Increased Holdings Can't Suppress It"

Conference Call on October 13, 2022: "Despite Impressive Financial Report, Taiwan Semiconductor Can't Avoid Industry Downturn (Q3 Conference Call)"

Financial Report Review on October 13, 2022: "Taiwan Semiconductor: How Long Can the 'Lone Warrior' Last in the Dark Night?"

Conference Call on July 14, 2022: "How Can Taiwan Semiconductor Sustain Growth in the Semiconductor Downturn? (Taiwan Semiconductor Conference Call)"

Financial Report Review on July 14, 2022: "Taiwan Semiconductor: The 'Alternative' Backbone in the Wave of Order Cancellations"

Conference Call on April 14, 2022: "On Schedule for 2nm (Taiwan Semiconductor Conference Call)"

Financial Report Review on April 14, 2022: "Taiwan Semiconductor: Strong 'Belief' Unaffected by the Cycle"

In-depth Analysis of Taiwan Semiconductor on April 8, 2022: "Taiwan Semiconductor (Part 2): Price Discounts, Unwavering Belief"March 16, 2022, Taiwan Semiconductor in-depth analysis: After the market crash, let's talk about the top-tier foundry king Taiwan Semiconductor

January 13, 2022, Taiwan Semiconductor conference call: What did the Taiwan Semiconductor management discuss after giving strong quarterly guidance?

January 13, 2022, Taiwan Semiconductor earnings report review: Taiwan Semiconductor is unstoppable, "cyclical" takes a detour

October 14, 2021, Taiwan Semiconductor earnings report review: Taiwan Semiconductor leads the way, still in the spotlight

Semiconductor/Wafer Manufacturing Industry

December 29, 2022, Semiconductor industry overview: Semiconductor avalanche? Real resilience comes after the most severe decline

June 24, 2022, Semiconductor industry overview: Order cancellations, is the semiconductor industry really going to "change"?

September 3, 2021, Wafer manufacturing industry overview: Performance improvement vs. stock price decline: Are companies like SMIC "deserved to be killed" or "wrongly killed"?

July 16, 2021, China's SMIC in-depth analysis: SMIC (Part 2): The underestimated Chinese "core"

July 9, 2021, China's SMIC in-depth analysis: SMIC (Part 1): The strategy of the industry leader

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