Source: Wall Street News Author: Li Xiaoyin

Boosted by strong demand for AI chips, the world's largest chip foundry$Taiwan Semiconductor (TSM.US)$Net profit for the first quarter was better than expected, achieving the first increase in a year.

On Thursday, April 18, TSMC announced its results report for the first quarter of 2024 ending March 31. According to financial reports, TSMC's net profit for the first quarter was NT$225.5 billion (US$6.976 billion), estimated at NT$214.91 billion, up 8.9% year on year; sales for the first quarter were NT$592.64 billion (US$18.333 billion), up 17% year on year, and estimated at NT$583.46 billion. Operating profit for the first quarter was NT$249.02 billion (approximately US$7.7 billion), up 7.7% year-on-year, and is estimated at NT$24.87 billion.

The report also showed that in the first quarter, TSMC's net revenue for shareholders of the parent company was NT$22.549 billion, net profit margin was 38%, earnings per share (EPS) was NT$8.70, return on net assets (ROE) was 25.4%, and gross margin for the first quarter was 53.1%, up 0.1 percentage points from month to month, slightly exceeding expectations of 53%.

According to some analysts, since TSMC is still facing weak chip demand in 2023, part of the reason for the strong year-on-year revenue growth was the lower base of the previous year.

TSMC President Wei Zhejia pointed out in a subsequent conference call that in the current market, demand for AI is strong, demand for smartphones is gradually recovering, and demand in the PC market has bottomed out. However, demand for traditional servers is still relatively weak, and estimates for automotive chips have also changed from “growth” in the previous quarter to “decline.”

Given TSMC's key role in the chip manufacturing industry, the company's profits are largely seen as a weather vane for global chip demand. Next, TSMC said it will continue to take advantage of its large-scale production to focus on R&D breakthroughs in advanced process technology.

Conotoxia's market analyst Grzegorz Drozdz told the media last week:

“TSMC's net profit margin of 40% continues to be one of the highest in the company's history, while the industry average reached 14%, which indicates TSMC's strong competitive position. The high profit margin is the result of an increase in sales share of 7nm and smaller chips, which have significantly higher profit margins.”

The share of advanced process revenue has declined, and N3's revenue is expected to double this year

Looking specifically at the revenue level, financial reports show that revenue from advanced manufacturing processes (including 7 nm and more advanced processes) reached 56% of wafer sales in the whole quarter, down from 67% in the previous quarter. Among them, 5 nm (N5) process shipments accounted for 37%, and 3 nm (N3) process shipments accounted for 9%, which is less than 15% of the previous quarter.

Among them, as TSMC's most advanced chip process technology, the 3 nm process is an important factor driving growth potential. Counterpoint Research's Deputy Director Brady Wang said on Monday:

“Based on key industry trends, TSMC is well-positioned to achieve strong results. The continued demand for advanced chips, particularly those used in artificial intelligence applications, is a positive sign in both the short and long term. The focus on advanced chip development, such as the shift to 3nm technology, is another factor driving TSMC's long-term growth.”

In response to media interviews, TSMC said that due to the complexity of the manufacturing process and pricing being affected earlier by inflation, compared to N7 and N5 process technology, the 3-nm process (N3) often takes longer to reach the average profit margin at the group level. It is expected that N2's revenue contribution will exceed N3 in the future, achieving better profit margins than N3.

Meanwhile, TSMC revealed that market demand for N3 continues to show an “upward” trend, and N3's revenue contribution this year is expected to double that of the previous year.

At the platform level, HPC (High Performance Computing) platforms account for the highest share of revenue, at 46%, while smartphone platforms account for 38%.

TSMC said during the earnings call that AI processors will gradually become the strongest driving force for the growth of HPC platforms, but it may take some time for the AI PC market to recover.

Specifically, the revenue contribution of AI processors is expected to increase by more than half this year, reaching a level of about 10% of total annual revenue in 2024. The average compound annual growth rate for the next five years will reach 50%, accounting for more than 20% of revenue by 2028.

Regarding the future development trend of AI, TSMC management said that it is expected that the smartphone and PC replacement cycle will accelerate in the future. Based on a good market share, device-side AI is a good growth opportunity for TSMC.

Revenue is expected to increase by 20% this year, lowering the growth forecast for the global wafer foundry industry

In terms of performance guidance, TSMC said that it expects sales of 19.6 billion to 20.4 billion US dollars in the second quarter, that is, revenue will increase by about 30% year over year, and the market is expected to be around 19.1 billion US dollars. The gross margin for the second quarter was 51% to 53%, in line with expectations of 52.8%. The operating margin for the second quarter was 40% to 42%, and the expected value was 41.3%.

This indicates that demand for AI chips is beginning to offset the impact of the decline in the smartphone market, and the artificial intelligence development boom will continue to boost demand for advanced chips from downstream companies such as Nvidia.

During the earnings call, TSMC said that the increase in gross margin in the first quarter was mainly due to adjustments in the smartphone product portfolio and seasonal effects, while the main reason for the decline in gross margin guidelines in the second quarter was the impact of the April 3 earthquake in Taiwan, China and the impact of high electricity costs.

From a long-term perspective, TSMC expects capital expenditure in 2024 to be between 28 billion and 32 billion US dollars, of which 70%-80% will be used for advanced process R&D, 10% to 20% for mature and special process technology, and 10% for advanced packaging testing and mask production. It also promised shareholders that long-term gross margin would reach 53% or more, and ROE would reach 25% or more.

TSMC expects demand for 3 nm and 5 nm processes to continue to support second-quarter results, and the semiconductor market without memory will recover moderately in 2024:

“2024 will be a year of healthy growth, and overall revenue is expected to grow by around 20% in 2024.”

However, Wei Zhejia lowered its growth forecast for the global wafer foundry industry, lowering the global wafer foundry industry output value growth forecast from 20% estimated in January to between 14% and 19% this year.

In terms of pricing, TSMC revealed that considering high electricity prices, inflation, and rising costs for foreign fabs, it has discussed with customers to share the pricing pressure.

According to previous media reports, TSMC and the US Department of Commerce have reached a preliminary agreement to build a third chip factory in Phoenix, Arizona, increasing its total investment in Arizona to 65 billion US dollars. TSMC responded:

“We have now received strong support and commitment from our US customers and are planning to build three fabs, which are expected to create greater economies of scale. Each fab in Arizona is more than twice the size of a typical fab.”

“The first fab has already entered the engineering process of wafer production in April of this year, and mass production is expected to be completed in the first half of 2025; the second fab will mainly use a 2 nm process, combined with the 3 nm process to support strong AI requirements, and mass production is expected to begin in 2028.”

edit/lambor