TSMC: iPhone lags behind, NVIDIA comes to the rescue

Taiwan Semiconductor Manufacturing Company (TSMC) released its first quarter financial report for 2024 before the US stock market on the afternoon of April 18, 2024 Beijing time, with the following key points:

Revenue: Seasonal impact weakened. TSMC's revenue in the first quarter of 2024 reached $18.9 billion, at the upper limit of the performance guidance range ($18-18.8 billion). Quarterly revenue decreased by 3.8%, with a +2.5% impact from shipment volume and a -6.1% impact from average selling price. Due to the decrease in the proportion of 3nm, the company's product average selling price declined, but shipment volume continued to grow.

Gross profit and gross margin: Maintaining a 50% gross margin. TSMC's gross margin in the first quarter of 2024 was 53.1%, in line with the expected range (52-54%). Although the average selling price of shipments fell this quarter, costs also decreased, resulting in a relatively stable gross margin. The increase in depreciation and amortization from the expansion of 3nm production has kept the gross margin at a relatively low level.

Wafer structure: AI is the structural demand. After the mass production of 3nm, TSMC's revenue from 7nm and below continued to account for 65%. Revenue from 3nm decreased this quarter, mainly due to weak demand for new Apple devices affecting shipments. However, there is still structural demand for data centers and AI chips, filling the capacity of 5nm. With downstream customers driving demand, revenue from the US region continued to account for around 70% this quarter.

TSMC's performance guidance: The expected revenue for the second quarter of 2024 is $19.6-20.4 billion (market expectation $19.26 billion) and a gross margin of 51-53% (market expectation 52.79%). Revenue is expected to grow by 3.9%-8.1% quarter-on-quarter, mainly driven by demand for high-performance computing. The gross margin will continue to be under pressure due to higher depreciation and amortization from 3nm production and increased electricity costs.

Dolphin's overall view:

TSMC's financial report this time overall met expectations. Since the company discloses operating data monthly, the performance on the revenue side was already anticipated. Therefore, the revenue performance exceeding expectations in data terms is not as important. The gross margin performance of 53.1% this quarter also basically met market expectations. With the mass production of 3nm, more depreciation and amortization have impacted the company's gross margin level Compared to the financial data, the company's guidance for the next quarter is not bad. In the second quarter, it is expected to achieve revenue of $19.6-20.4 billion (market expectation $19.26 billion) and a gross margin of 51-53% (market expectation 52.79%). Although the poor performance of Apple's new products has affected the release of 3nm production capacity, the revenue growth in the second quarter also demonstrates the sustainability of demand in the data center and AI fields. As for the gross margin, influenced by the increase in electricity prices, it is in line with market expectations.

Overall, due to the impact of insufficient downstream demand from multiple sources, the overall semiconductor cycle remains relatively weak. The company has lowered the global foundry industry's growth expectations from 20% to 10%. With its leading process capabilities, TSMC will benefit relatively from the demand driven by data centers and AI, and its overall growth rate will be better than the industry average, but this only accounts for a part of the company's revenue.

Therefore, Dolphin believes that TSMC's financial report this time overall meets expectations. Despite the poor demand from Apple, there is still demand for high-performance computing to fill the capacity, which aligns with the company's structural demand performance. Although the company's average selling price has declined slightly, the shipment volume continues to grow. As for the revenue guidance for the second quarter, it also implies the sustainability of AI chip demand. The recent rise in the company's stock price also reflects this expectation. However, there is no clear sign of exceeding expectations for AI demand from the company. To continue the upward trend in stock prices, more performance exceeding expectations is needed.

Here is Dolphin's specific analysis of TSMC:

Revenue: Seasonal impact weakened In the first quarter of 2024, TSMC achieved revenue of $18.87 billion, at the upper limit of the performance guidance range ($18-18.8 billion). The revenue for this quarter decreased by 3.8% compared to the previous quarter, although there were seasonal factors, the demand from data centers and AI filled some of the capacity.

TSMC's quarterly revenue, due to the disclosure of monthly operating indicators, has already been fully anticipated by the market. How did the prices and shipment volume change in TSMC's revenue this quarter?

Dolphin observes the main drivers of TSMC's first-quarter revenue growth from the dimensions of quantity and price:

Quantity: In 2024 Q1, TSMC's wafer shipments were 3,030 thousand pieces, a 2.5% increase compared to the previous quarter. The sequential growth in shipment volume is mainly driven by the demand for high-performance computing. Considering the capital expenditure, TSMC's capital expenditure for this quarter was $5.77 billion. In a situation where demand is weak in areas like smartphones, the company maintained a relatively low level of investment.

Price: In 2024 Q1, TSMC's wafer revenue per wafer (equivalent to 12-inch wafers) was $6,228 per wafer, a 6.1% decrease compared to the previous quarter. The wafer shipment price of TSMC has declined, mainly due to the decrease in the proportion of 3nm in this quarter The proportion of revenue from processes below 7nm in the company for this quarter remains at 65%.

Combining the guidance provided by TSMC for the next quarter, the expected revenue for the second quarter is $19.6-20.4 billion (a quarter-on-quarter growth of 3.9%-8.1%), with a gross margin of 51-53% (a slight decrease quarter-on-quarter). Revenue in the second quarter is expected to reach a new quarterly high, mainly driven by the growth in demand for high-performance computing.

II. Gross Profit and Gross Margin: Maintaining a 50% Gross Margin

TSMC achieved a gross profit of $10.01 billion in the first quarter of 2024, a decrease of 3.8% compared to the previous quarter. The decrease in gross profit was mainly influenced by the revenue side. In 2024 Q1, TSMC's gross margin was 53.1%, a 0.1 percentage point increase compared to the previous quarter, in line with market expectations.

The 3.8% quarter-on-quarter decrease in gross profit for TSMC in 2024 Q1 was mainly driven by the revenue side, while the gross margin remained relatively stable quarter-on-quarter.

The two key data points that the market is most concerned about for TSMC are revenue and gross margin. Since monthly operating data is disclosed, quarterly revenue is already largely anticipated by the market. Gross margin, on the other hand, is one of the focal points of this quarterly report. Here are the main drivers analyzed by Dolphin Jun for the increase in gross margin this quarter:

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

Wafer Revenue (equivalent to 12 inches): In 2024 Q1, TSMC's wafer revenue was approximately $6,228 per wafer, a decrease of $407 per wafer compared to the previous quarter. With the decline in 3nm shipments in the first quarter, the structural decrease in the average price of the company's products occurred;

Fixed Costs (depreciation and amortization): In 2024 Q1, TSMC's average fixed cost was approximately $1,671 per wafer, an increase of $73 per wafer compared to the previous quarter. The mass production of 3nm drove the increase in the total amount of depreciation and amortization, leading to an increase in unit fixed costs;

Variable Costs (other manufacturing expenses): In 2024 Q1, TSMC's average variable cost was approximately $1,252 per wafer, a decrease of $266 per wafer compared to the previous quarter. The decrease in variable costs per wafer was mainly due to a reduction in manufacturing costs;

Taking the above breakdown into account, in 2024 Q1, TSMC's gross profit per wafer was $3,305, a decrease of $214 per wafer compared to the previous quarter. The decrease in gross profit per wafer was attributed to a $407 decrease in unit price and a $193 decrease in unit cost.

TSMC's revenue performance has been in line with market expectations, with gross margin being the main focus. Although the mass production of 3nm chips has driven the company's average selling price to increase (currently above $6,000), which has a positive impact on gross margin, the increase in costs also affects gross margin. Looking at the company's guidance for the next quarter of 51-53%, TSMC's gross margin is expected to remain low in the next quarter. Additionally, the increase in electricity costs in the second quarter will also impact the company's gross margin. Dolphin believes that the mass production of 3nm chips will increase the company's depreciation and amortization expenses, putting pressure on the company's gross margin, making it difficult for the company's gross margin to return to the 60% level in the short term.

III. Wafer Structure: AI is the Structural Demand

3.1 Wafer Revenue Composition (by Application Type)

Smartphones and HPC are TSMC's largest sources of revenue, accounting for a total of 84%, which is still the largest source of downstream revenue for the company.

Looking at the downstream segmented applications, the proportion of smartphone business in this quarter has dropped below 40% again, mainly due to the continued soft demand in the smartphone market. The share of high-performance computing has reached a new high of 46%. From the downstream perspective, the company's business still shows structural characteristics, mainly driven by the demand from data centers and AI.

Dolphin believes that with the mass production of 3nm chips, Apple's chip production will gradually shift from 5nm to 3nm. However, it should not be overlooked that the insufficient demand in the smartphone market will still affect the company. Fortunately, the demand for high-performance computing has filled some of the capacity, maintaining a good performance on the company's revenue side.

3.2 Wafer Revenue Composition (by Process Node)

The proportion of revenue from nodes below 7nm remained at 65% this quarter, with revenue from advanced processes already being the company's main source. Specifically, this quarter, the proportion of revenue from 3nm chips fell to 9%. Meanwhile, the proportion of revenue from 5nm chips continued to remain above 30%.

Dolphin believes that the demand for this round of new Apple devices did not surge, affecting the pace of TSMC's 3nm chip production. Although the demand for high-performance computing is good, the current capacity is still mainly focused on the 5nm process. Therefore, TSMC's revenue from 3nm chips significantly declined this quarter, while revenue from 5nm chips continued to perform well.

Looking at the guidance provided by the company for the next quarter, in 2024 Q2, the company's performance will continue to benefit from the growth in demand in the high-performance computing sector. Although there is still insufficient demand in the smartphone sector, with the shift of high-performance computing to the 3nm process and the subsequent filling of related capacity, the proportion of revenue from nodes below 7nm is expected to further increase. 3.3 Proportion of Wafer Revenue (by Region)

In terms of revenue from different regions, North America remains the largest source of revenue for TSMC, accounting for nearly 70%. This is due to major clients such as Apple, Qualcomm, NVIDIA, AMD, etc., creating a strong business relationship between TSMC and the United States. In this financial report, the proportion of revenue from North America has declined, mainly due to a slowdown in 3nm chip shipments after the demand for new Apple devices.

Apart from North America, China and the Asia-Pacific region are the other two major sources of revenue, accounting for 9% and 12% respectively this quarter. The proportion of clients in China continues to decline, aligning with the operational situation of mainland foundries such as SMIC.

Considering the situations of various companies and the industry chain, it is believed that while the mobile phone and PC markets are showing signs of recovery, demand still appears insufficient. The semiconductor market continues to exhibit structural characteristics in demand, with major benefits from clients in the high-performance computing sector such as NVIDIA and AMD. The company's operational focus will continue to revolve around major clients in North America, with the revenue proportion expected to be maintained at 70% or above.

Research on TSMC and the Wafer Manufacturing Industry by Dolphin

TSMC

January 18, 2024 Conference Call "AI, the Strongest Driving Force for Future Growth (TSMC 4Q23 Conference Call)"

January 18, 2024 Financial Report Review "TSMC: Charging Forward with 3nm, Intel 'Bringing Spring'"

October 20, 2023 Conference Call "Ramping Up 3nm, Planning to Enter 2nm (TSMC 3Q23 Conference Call)"

October 20, 2023 Financial Report Review "TSMC: Surviving the 'Performance Bottom', 3nm Battle Begins"

July 20, 2023 Conference Call "TSMC: AI Boosting Wildly, 3nm Finally Landing (2Q23 Conference Call)"

July 20, 2023 Financial Report Review "TSMC: NVIDIA Rescues, AI Supports the 'Cycle' Bottom" April 20, 2023 Conference Call "Clear Bottom in the Second Quarter, 3nm Mass Production Imminent (TSMC 23Q1 Conference Call)"

April 20, 2023 Financial Report Review "TSMC: The Strongest King, Yet Hard to Escape the Cycle of Ups and Downs"

January 12, 2023 Conference Call "Inventory Adjustment to Continue for Six Months, Growth to Wait Until the Second Half (TSMC 22Q4 Conference Call)"

January 12, 2023 Financial Report Review "TSMC's Thunder, Even Buffett's Increased Holdings Can't Hold It Down"

October 13, 2022 TSMC Conference Call "Despite Bright Financial Reports, TSMC Can't Avoid Industry Decline (Third Quarter Conference Call)"

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

July 14, 2022 TSMC Conference Call "Semiconductor Cycle Downturn, How Will TSMC Sustain Growth? (TSMC Conference Call)"

July 14, 2022 Financial Report Review "TSMC: 'Alternative' Backbone in the Wave of Order Cuts"

April 14, 2022 TSMC Conference Call "On Schedule for 2nm (TSMC Conference Call)"

April 14, 2022 TSMC Financial Report Review "TSMC: Strong 'Faith', Irrelevant to the Cycle"

April 8, 2022 TSMC Stock In-Depth "TSMC (Part 2): Price Discounted, Faith Unwavering"

March 16, 2022 TSMC Stock In-Depth "After the Market Plunge, Revisiting the Ashes-to-Ashes Contract Manufacturing King TSMC" January 13, 2022, TSMC conference call "What did TSMC management talk about after giving strong quarterly guidance?" Link

January 13, 2022, TSMC financial report review "TSMC is too good at it, 'cycles' take the long way around" Link

October 14, 2021, TSMC financial report review "TSMC: Leading the way, still in the limelight" Link

Semiconductor/Wafer Manufacturing Industry

December 29, 2022, Semiconductor Industry Overview "Semiconductor avalanche? Real resilience only after the most brutal decline" Link

June 24, 2022, Semiconductor Industry Overview "Cancellations, cancellations, cancellations, is the semiconductor industry really about to 'change'?" Link

September 3, 2021, Wafer Manufacturing Industry Overview "Performance up vs. stock price down: SMIC and others, 'deserved' or 'mistaken' targets?" Link

July 16, 2021, SMIC Stock In-depth Analysis Part 2 "SMIC International (Part 2): The underestimated Chinese 'core'" Link

July 9, 2021, SMIC Stock In-depth Analysis Part 1 "SMIC International (Part 1): On the strategy of the leading 'core'" Link

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