TSMC: Capital expenditure will increase to $38-42 billion in 2025 (24Q4 conference call)

Taiwan Semiconductor Manufacturing Company (TSMC) released its Q4 2024 financial report (ending December 2024) before the U.S. stock market opened on January 16, 2025, Beijing time.

Below is the summary of TSMC's Q4 2024 financial report conference call. For the financial report interpretation, please refer to TSMC: The "Stabilizing Force" is Unbeatable?

1. $Taiwan Semiconductor(TSM.US) Core Information Review:

2. Detailed Content of TSMC's Financial Report Conference Call

2.1 Executive Statements on Core Information:

Business Progress

Summary of 2024 and Outlook for 2025

2024 Global Semiconductor Industry Situation: For the global semiconductor industry, 2024 is a year of mixed recovery. Affected by macroeconomic conditions, consumer sentiment, and end-market demand, other application demands, except for AI-related demands, only achieved a moderate recovery. The Foundry 2.0 industry grew by 6% year-on-year, slightly below previous forecasts.

TSMC's Performance in 2024: Benefiting from strong demand for advanced process technologies, TSMC's revenue in U.S. dollars grew by 30% year-on-year, surpassing the growth rate of the foundry industry.

Outlook for 2025

- It is expected that the inventory of fabless semiconductors will return to healthier levels in 2025 and exceed that of 2024.

- It is anticipated that the Foundry 2.0 industry will grow by 10% year-on-year, supported by strong AI-related demand and moderate recovery in other end markets.

- With its technological leadership and broader customer base, TSMC is confident in continuing to outpace industry growth, expecting 2025 to be another year of strong growth with annual revenue in U.S. dollars expected to increase by nearly 25%.

AI Demand and TSMC's Long-term Growth Prospects

2024 AI-related Revenue Situation: Revenue from AI accelerators (defined as AI GPUs, AI6, and HBM controllers used for data center AI training and inference) accounted for nearly 15% of total revenue. 2025 and Long-term AI Accelerator Revenue Forecast

Despite more than doubling in 2024, due to the continued strong growth in AI-related demand, it is expected that AI accelerator revenue will double again in 2025.

Starting from the already high base in 2024, the compound annual growth rate (CAGR) of AI accelerator revenue is expected to approach 40% over the next five years.

It is anticipated that AI accelerators will become the strongest driver of growth for HPC platforms and the largest contributor to overall incremental revenue growth in the coming years.

Value of Technology Platforms and Response Measures

As a key driver of AI applications, the value of its technology platform continues to rise as customers rely on TSMC to provide the most advanced process and packaging technologies at scale in the most efficient and cost-effective manner. TSMC closely collaborates with customers to plan capacity and invests in cutting-edge specialty processes and advanced packaging technologies to support growth.

At the same time, a rigorous capacity planning system is employed to assess market demand, ensuring sustainable healthy returns while meeting the high demand for AI-related businesses, bringing profit growth to shareholders.

Long-term Revenue Growth Expectations: Over the five-year period starting in 2024, the long-term revenue growth CAGR in USD is expected to approach 20%, driven by four growth platforms: smartphones, HPC, IoT, and automotive.

Global Manufacturing Layout Update

U.S. Layout: The first wafer fab in Arizona, based on the successful results of early engineering wafer production, has advanced its production schedule and is expected to enter mass production in the fourth quarter of 2024. The process technology yield is comparable to that of wafer fabs in Taiwan, and the ramp-up process is expected to go smoothly. Plans for the second and third wafer fabs are also progressing steadily, with more advanced technologies such as N3, N2, and A16 being adopted based on customer demand. TSMC will continue to support customer success and become a key partner in the U.S. semiconductor industry.

Japan Layout: Progress is smooth thanks to strong support from the central and local governments in Japan. The first specialty process wafer fab in Kumamoto Prefecture has begun mass production by the end of 2024, with good yields. The second specialty process wafer fab is planned to start construction this year.

Europe Layout: With firm support from the European Commission and the federal, state, and municipal governments of Germany, the plan to build a specialty process wafer fab in Dresden, Germany is progressing smoothly, focusing on automotive and industrial applications.

Taiwan Layout: Continuous support from the government in Taiwan has led to investments and expansions in advanced technology and packaging capacity. In light of strong multi-year demand for 3-nanometer technology, TSMC continues to expand 3-nanometer capacity in the Taiwan Science Park. Preparations are also underway for multi-phase construction of 2-nanometer wafer fabs in Hsinchu Science Park and Kaohsiung Science Park to meet strong structural demand from customers. Advanced packaging facilities are also being expanded at multiple locations in Taiwan.

Overseas Wafer Fab Cost Situation: In the current fragmented global environment, overseas wafer fab costs are generally high, including for TSMC and other semiconductor manufacturers. However, TSMC maintains efficient and cost-effective manufacturing capabilities in operational regions, leveraging its leading manufacturing technology and fundamental competitive advantage of large-scale manufacturing bases while supporting customer growth N2 and A16 Technology Introduction

N2 Technology

2-nanometer technology leads the industry in meeting computing demands, with nearly all innovators collaborating with TSMC.

Driven by smartphone and HPC applications, the number of new wafers for 2-nanometer technology in the first two years is expected to exceed that of 3-nanometer and 5-nanometer technologies during the same period.

Compared to N3E, N2 offers a speed improvement of 10-15% at the same power consumption, or a power reduction of 20-30% at the same speed, with a density increase of over 15%. Mass production is planned for the second half of 2025, with a rental model similar to N3.

Through continuous improvement strategies, N2P is launched as an extension of the N2 family, further enhancing performance and power consumption on the basis of N2. N2P will support smartphone and HPC applications, with mass production planned for the second half of 2026.

A16 Technology:

TSMC SPR is an innovative industry-leading backside power delivery solution, adopting a new backside metal scheme for the first time in the industry, maximizing product benefits while maintaining gate density and device flexibility.

Compared to N2P, A16 further improves speed by 8-10% at the same power consumption, or reduces power consumption by 15-20% at the same speed, with an additional chip density increase of 7-10%. It is best suited for specific HPC products with complex signal routing and dense power delivery networks, with mass production planned for the second half of 2026.

Financial Performance

Q4 2024 Financial Highlights

Revenue: Driven by strong demand for industry-leading 3-nanometer and 5-nanometer technologies, revenue increased 14.3% quarter-over-quarter (New Taiwan Dollar).

Gross Margin: Increased by 1.2 percentage points to 59% quarter-over-quarter, mainly due to improved capacity utilization and productivity, although the dilution effect of 3-nanometer technology mass production partially offset this growth.

Operating Expenses and Profit Margin: Due to operational leverage, total operating expenses accounted for 10% of net revenue, with operating profit margin increasing by 1.5 percentage points to 49% quarter-over-quarter.

Earnings Per Share (EPS) and Return on Equity (ROE): EPS for the fourth quarter was NTD 14.45, with ROE at 36.2%.

Revenue by Technology

3-nanometer process technology accounted for 26% of wafer revenue in the fourth quarter.

5-nanometer and 7-nanometer accounted for 34% and 14%, respectively.

Advanced technologies (7-nanometer and below) contributed 74% of wafer revenue.

Revenue by Platform

High-Performance Computing (HPC): Increased by 19% quarter-over-quarter, accounting for 53% of fourth-quarter revenue Smartphones: Growth of 17%, accounting for 35% of fourth-quarter revenue.

Internet of Things (IoT): Decrease of 15%, accounting for 5% of fourth-quarter revenue.

Automobiles: Growth of 6%, accounting for 4% of fourth-quarter revenue.

Data Center Equipment (DCE): Decrease of 6%, accounting for 1% of fourth-quarter revenue.

Balance Sheet

Cash and cash equivalents: At the end of the fourth quarter, held cash and cash equivalents of NT$ 2.4 trillion (USD 74 billion).

Liabilities: Current liabilities increased by NT$ 184 billion, mainly due to accounts payable increasing by NT$ 71 billion and accrued liabilities and others increasing by NT$ 99 billion.

Financial Ratios

Days sales outstanding decreased by 1 day to 27 days.

Inventory days decreased by 7 days to 80 days, mainly due to shipments of 3nm and 5nm wafers.

Cash Flow and Capital Expenditure (Capex)

Fourth-quarter operating cash flow was approximately NT$ 620 billion, capital expenditure was NT$ 362 billion (USD 11.2 billion), and cash dividend distribution for the first quarter of 2024 was NT$ 104 billion. Cash balance at the end of the quarter increased by NT$ 241 billion to NT$ 2.1 trillion.

2024 Full-Year Financial Outlook

Revenue: Expected to grow 30% to USD 90 billion, and grow 33.9% to NT$ 2.89 trillion when calculated in New Taiwan Dollars.

Full-Year Revenue Situation

- 3nm revenue accounted for 18% of 2024 wafer revenue.

- 5nm accounted for 34%, and 7nm accounted for 17%.

- Advanced technology accounted for 69% of total wafer revenue, up from 58% in 2023.

Gross Margin: Increased by 1.7 percentage points to 56.1%, mainly due to overall capacity utilization improvement, but diluted by 3nm technology and rising electricity costs partially offsetting the growth.

Operating Margin: Increased by 3.1 percentage points to 45.7%.

Earnings Per Share (EPS) and Return on Equity (ROE): Full-year EPS increased by 39.9% to NT$ 45.25, and ROE increased by 4.1 percentage points to 30.3%.

Cash Flow: Capital expenditure of USD 29.8 billion (NT$ 956 billion), operating cash flow of NT$ 1.8 trillion, and free cash flow of NT$ 870 billion. Cash dividends paid in 2024 were NT$ 363 billion, a year-on-year increase of 24.5%.

2025 First Quarter Performance Guidance

Revenue: Expected to be affected by seasonal impacts on smartphones, but the continued growth in AI-related demand will partially offset this impact. Revenue is expected to be between USD 25 billion and 25.8 billion, with a midpoint calculation indicating a quarter-on-quarter decrease of 5.5% and a year-on-year increase of 34.7% Gross Margin and Operating Margin: Based on an exchange rate assumption of 1 USD to 32.8 New Taiwan Dollars, the gross margin is expected to be between 57% and 59%, while the operating margin is expected to be between 46.5% and 48.5%.

Tax Rate: The actual tax rate for 2024 is 16.7%, and it is expected to be between 16% and 17% in 2025.

Factors Affecting Profitability in 2025

Positive Factors: The dilution effect of 3-nanometer mass production is expected to gradually decrease, and the overall utilization rate is expected to moderately increase in 2025.

Negative Factors:

The mass production of overseas foundries is expected to generate a profit margin dilution effect of 2% to 3%, with the impact in the first quarter of 2025 being less than 100 basis points, and the annual impact increasing with the mass production of foundries in Kumamoto, Japan, and Arizona, USA;

Inflation costs (including rising electricity prices in Taiwan) are expected to impact the gross margin by at least 1% in 2025;

The ramp-up costs related to 2-nanometer technology and the capacity conversion from 5-nanometer to 3-nanometer are expected to impact the gross margin by about 1%;

Exchange rate factors may also have an impact.

In the long term, excluding exchange rate impacts and considering the global manufacturing layout expansion plan, a long-term gross margin of 53% and above is still achievable.

2025 Capital Budget and Depreciation

Capital Budget: The capital budget for 2025 is expected to be between 38 billion and 42 billion USD, with approximately 70% allocated to advanced process technology, 10% to 20% for special technologies, and 10% to 20% for advanced packaging, testing, mask manufacturing, etc.

Depreciation: Depreciation expenses in 2025 are expected to grow in the high single digits year-on-year, with new depreciation partially offset by other depreciation reaching maturity. While the company invests in capital expenditures for future growth, it is committed to achieving profit growth for shareholders and maintaining a sustainable and stable increase in cash dividends per share annually and quarterly.

2.2 Q&A Analyst Q&A

Q: What is TSMC's future strategy in the U.S.? Will it consider investing in the latest node technology in the U.S.? What feedback has been received from discussions with the incoming Trump administration? Additionally, last time it was mentioned that there was not much enthusiasm for taking over any IDM foundries; has this idea changed, especially considering TSMC's potential to become a stronger local manufacturing partner in the U.S.?

A: Regarding technology nodes: It is not that TSMC does not want to adopt the same technology in the U.S. as in Taiwan, but introducing new technology into the production process is complex and requires proximity to R&D personnel. Therefore, the initial mass production of new technologies usually occurs in foundries close to R&D, making Taiwan the preferred choice.

Regarding expansion strategy: Building factories overseas is based on customer demand. If customer demand is high, more foundries will be built with necessary government support. There is open and honest communication with both current and future governments.

Regarding IDM foundries: IDM manufacturers are important customers, and TSMC's strategy is not based on the status of IDM competitors Q: Regarding gross margin, the current gross margin is close to 60%, and the peak in the previous cycle was also around this level. Based on guidance for improvements in both AI and non-AI sectors, the cycle is expected to be stronger. How should we view the gross margin in this cycle? Is it realistic to reach above 60%? Additionally, what are the key factors affecting the dilution situation of U.S. wafer fabs? Since the yield rate is close to that of Taiwanese wafer fabs, is it a longer cycle time or higher costs?

A: Regarding gross margin: There are 6 factors affecting profitability, with different factors playing roles each year. If utilization is extremely high, as in the last cycle, reaching above 60% is not impossible.

Regarding U.S. wafer fab costs: The costs of U.S. wafer fabs are higher primarily due to smaller scale, higher supply chain prices, and the ecosystem being in an early stage. Over the next 5 years, overseas wafer fabs will bring a dilution impact of 2% - 3% annually.

Q: TSMC updated its long-term compound annual growth rate (CAGR) to nearly 20%. Besides strong AI demand, what is the outlook for growth in traditional applications like PCs and smartphones, especially this year (2025)?

A: This year, PCs and smartphones will still see moderate growth. However, due to AI factors, smartphones will incorporate AI features, increasing silicon content, shortening replacement cycles, and adopting more advanced technologies. Even if unit growth is in the low single digits, the growth from silicon content, replacement cycles, and technology migration will exceed the adjusted unit growth, and the same applies to PCs.

Q: Regarding AI, can you provide more recent information on HBM-related business opportunities by including HBM controllers in the definition of AI business revenue? Previously, TSMC announced cooperation with major global memory suppliers; can you provide more details on the progress of this cooperation?

A: TSMC collaborates with all memory suppliers because its chip or logic technology is advanced and meets customer needs. Some products have been launched, but mass production and significant contributions to revenue may still take another six months.

Q: The U.S. seems to be introducing a new framework of restrictions on Chinese AI businesses. What impact will this have on TSMC's business in China, and how should it respond? For some mid-to-high-end chips, such as those for cryptocurrency mining and autonomous driving, are there any cloud AI-related situations, and can TSMC continue to serve Chinese customers?

A: Preliminary analysis shows that the impact is not significant and is controllable. Customers are applying for special permits, and it is believed that as long as they are not in the AI field (especially in automotive, industrial, or even cryptocurrency mining), they will receive certain permits.

Q: Regarding CPO, main partner James Ng (from Taiwan) may meet with TSMC to facilitate the supply chain. Based on recent technical seminars, the optical engine is ready, but can the talent supply chain support CPO development? Additionally, for TSMC's foundry services, is there significant room for growth in the migration of optical networks to CPO, as some traditional products like optical transceiver DSPs may be replaced? A: TSMC is conducting research in silicon photonics and has achieved good results, but mass production may still take 1 to 1.5 years, with initial results satisfying customers.

Q: Regarding the Arizona project, Wendell mentioned a larger scale; can you update on the progress of Phase 2 (P2)? Additionally, how is the pricing for wafers in the U.S. planned? Will there be U.S. prices and Taiwan prices, or a global unified price?

A: On pricing: Due to the value of geographical flexibility and the premium for U.S. manufacturing, U.S. wafer prices will be slightly higher, which has been discussed and agreed upon with customers.

On project progress: The first wafer fab has entered mass production, the construction of the second wafer fab is nearly complete, and installation of facilities has begun, with tools expected to be moved in this year. The third wafer fab is planned to start soon and will be announced.

Q: Qualcomm's CEO recently outlined a huge market for custom silicon for AI hyperscale data centers, with each customer expected to have millions of accelerated clusters in the next 2 to 3 years. What is TSMC's view on this, and how confident are you about this scale?

A: We do not respond to specific numbers, but whether it's ASICs or graphics chips, cutting-edge technology is required, and we are collaborating with TSMC. The demand mentioned by customers is strong.

Q: It is surprising that the long-term gross margin target has not changed. It is believed that TSMC's value goes beyond just passing on costs and requires significant R&D investment to maintain its leading position. The gross margin target was raised in 2022, and now that price negotiations are complete, why not raise the profit target?

A: There are 6 factors affecting profitability, with different weights each year. Starting this year, the expansion of overseas wafer fabs will impact profitability by 2 to 3 percentage points each year for the next 5 years; macroeconomic uncertainties may affect global economy and end-market demand. The industry is capital-intensive, and healthy returns are needed to continue investing in support of customer and shareholder profit growth. In 2022, the long-term gross margin was raised to 53% and above, and a high level has been achieved since then, so we believe that 53% and above is still achievable, and we strive for higher.

Q: TSMC is actively expanding CoWoS capacity, but currently, applications are highly concentrated in AI, which poses certain volatility risks. When can we expect to see non-AI applications (such as servers, smartphones, etc.) adopting CoWoS capacity?

A: Currently, CoWoS capacity is tight, and focusing on AI demand is difficult to meet, but the adoption of this method for other products is a future trend, which will be reflected in CPU and server chips.

Q: Regarding overseas (U.S. and Japan) expansion, is there an operational strategy to mitigate the cost gap between overseas wafer fabs and Taiwan wafer fabs? How to reduce costs while maintaining high yield?

A: We will replicate improvements from Taiwan to the U.S., but it will not be static every year; we will continue to improve and optimize the cost structure between Taiwan and the U.S., and we are still trying new methods to narrow the cost gap.

Q: The 2% - 3% profit margin dilution from overseas wafer fabs, can you further break down whether it is variable costs or fixed costs that are causing this, and which part has a higher proportion? A: No specific segmented data is provided, but both have high costs.

Q: Can you share your views on the global semiconductor revenue forecast for this year, especially the driving factors by application? Can the growth of the Foundry 2.0 market be used as a proxy indicator for global semiconductors (excluding memory)?

A: The memory business will see significant growth this year, with HBM growing rapidly; other memory types are not commented on due to their small scale. A 10% year-on-year growth for Foundry 2.0 has been predicted, and the growth of the Foundry 2.0 market can be used as a proxy indicator for global semiconductors (excluding memory).

Q: Regarding the ramp-up of CoWoS and SOI capacity, there have been many rumors about order increases and decreases in the market recently. What is the situation this year?

A: Market rumors are unreliable; TSMC is working hard to meet customer demands, and orders will not be reduced but will continue to increase as capacity is being ramped up.

Q: In terms of AI demand, is there a situation where HBM is more limiting to demand than CoWoS?

A: While I do not know the situation of other suppliers, TSMC is under pressure to support AI demand, and we are continuously working with customers to meet that demand.

Q: There has been increased discussion in the market about smartphone customers adopting SOIC. Is there an application turning point in the PC or smartphone fields, or is it still mainly focused on the data center field?

A: Currently, SOIC is still mainly focused on AI applications. Trends for applications in the PC or other fields may emerge, but not at this time.

Q: Regarding the growth of cloud business in 2025, there is potential demand for technology in the long term, but there may be uncertainties due to macro spending or supply chain challenges in 2025-2026. Management expects AI-related business sales to double this year. What is the upside and downside potential for growth in 2025, and how do you view the demand situation for this and next year? The mid-term expectation is a 40% long-term growth forecast for the coming years. How do you view the growth trajectory? This year has strong growth; will there be a temporary slowdown followed by a rebound?

A: We hope for upside potential, and the team will work hard to provide sufficient capacity support. Based on the high base in 2024, the forecast for the next five years is a compound growth rate of around 40%, which can be estimated accordingly. It is too early to discuss the situation in 2026.

Q: Last year, management believed that mid-2025 would be a turning point for more content in edge AI. Based on current visibility, will customers increase edge AI products in the second half of this year? Previously, it was mentioned that edge AI might increase chip size by 5% - 10%. Is this a one-time increase or a sustainable increase?

A: Customers are beginning to incorporate more neural processing capabilities into devices, and it is estimated that they will use 5% - 10% more silicon. Maintaining a 5% - 10% growth each year is unlikely; as technology migrates to the next node, it will shorten the replacement cycle, which is beneficial for TSMC, and the overall impact will be greater than a 5% increase.

Q: It has been observed that the profit margin for advanced packaging has increased. Can you tell us the contribution of CoWoS last year, and after reflecting its value this year, will the profit margin approach or even exceed the average level? **

A: Without segmenting the different parts of advanced packaging, overall, advanced packaging accounted for more than 8% of revenue last year, and this year it will exceed 10%. The gross profit margin is better than before, but still below the company's average level.

Q: As IDMs increasingly rely on TSMC, does the IDM business still support TSMC's long-term growth?

A: IDMs are important partners, and we hope to maintain a long-term cooperative relationship to support long-term growth.

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