Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC) released its first quarter financial report for 2024 (ending April 2024) before the U.S. stock market opens on the afternoon of April 18, 2024, Beijing time. The key points are as follows:
1. Income: Seasonal impact weakens. In the first quarter of 2024, TSMC’s revenue reached US$18.9 billion, which is at the upper limit of the performance guidance range (US$18.0-18.8 billion). Quarterly revenue fell 3.8% quarter-on-quarter, of which the dimension of shipments had an impact of +2.5%, and the dimension of average shipment price had an impact of -6.1%. Affected by the decline in the share of 3nm, the average price of the company's products has declined, but shipments are still growing;
2. Gross profit and gross profit margin: maintain 50% gross profit margin. TSMC's gross profit margin in the first quarter of 2024 was 53.1%, in line with the guidance range expectation (52-54%). The average shipment price fell back this quarter, but the cost side also decreased, and the final gross profit margin was basically the same. The expansion of 3nm production has brought about an increase in depreciation and amortization, keeping the gross profit margin at a relatively low level;
3. Wafer structure side: AI is the structural demand. After the mass production of 3nm, the company's revenue proportion below 7nm continued to remain at 65% this quarter. 3nm has fallen back this quarter, mainly because the demand for new Apple machines is not strong, which affects the purchase of new products. There is still structural demand for data centers and AI chips, filling the 5nm production capacity. With downstream customers pulling in goods, the U.S. revenue share continued to remain at around 70% this quarter.
4. TSMC performance guidance: Expected revenue in the second quarter of 2024 is US$19.6-20.4 billion (market expectation is US$19.26 billion) and gross profit margin is 51-53% (market expectation is 52.79%). The revenue side increased by 3.9%-8.1% month-on-month, mainly due to the demand for high-performance computing. The gross profit margin continues to remain low, mainly because 3nm mass production brings higher depreciation and amortization and an increase in electricity costs, which puts pressure on the gross profit margin.
Mr. Dolphin’s overall opinion:
TSMC’s financial report was generally in line with expectations. Since the company discloses operating data every month, the performance on the revenue side is already expected. Therefore, the revenue-side data exceeding expectations is actually not that important. The gross profit margin for this quarter was 53.1%, which was basically in line with market expectations. In the case of 3nm mass production, it will bring more depreciation and amortization, affecting the company's gross profit margin level.
Compared with the financial report 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 U.S. dollars (market estimate of 19.26 billion U.S. dollars) and gross profit margin of 51-53% (market estimate of 52.79%). Although Apple’s new machine is not good, it affects the release of 3nm production capacity. However, the revenue growth in the second quarter also shows the persistence of demand in the data center and AI fields. As for the gross profit margin, it is in line with market expectations under the influence of rising electricity prices.
Overall, the overall semiconductor cycle is still relatively weak due to insufficient demand from multiple downstream sectors. The company lowered its growth forecast for the global foundry industry from 20% to 10%. Due to its leadership in process capabilities, TSMC will benefit relatively from the demand for data centers and AI, and its overall growth rate will be better than that of its peers. However, after all, this only accounts for a part of the company's revenue.
Therefore, Mr. Dolphin believes that TSMC’s financial report is generally in line with expectations. Apple's demand is not good, but there is still demand for high-performance computing to fill production capacity, which is in line with the company's structural needs. Although the company's average shipment price has declined, shipment volume continues to grow. As for the revenue guidance for the second quarter, it also implies the persistence of demand for AI chips. The rise in the company's stock price some time ago also included this part of the expectation. As for the demand for AI, the company also gave signs that it clearly exceeded expectations. As for the continued rise in stock prices, it still needs to be driven by more-than-expected performance.
The following is Dolphin’s specific analysis of TSMC
1. Income: Seasonal impact weakens
TSMC will achieve revenue of US$18.87 billion in the first quarter of 2024, which is at the upper end of the performance guidance range (US$18.0-18.8 billion). Revenue in this quarter fell 3.8% quarter-on-quarter. Although there were seasonal factors, demand for data centers and AI filled part of the production capacity.
TSMC's quarterly revenue has been fully anticipated by the market due to the release of monthly operating indicators. How have prices and shipments changed in TSMC's revenue this quarter?
Dolphin Jun will observe the main driving forces of TSMC’s revenue growth in the first quarter from the dimensions of volume and price:
1) Volume dimension: TSMC’s wafer shipments in Q1 2024 were 3,030,000 pieces, a month-on-month increase of 2.5%. Quarter-on-quarter shipments continued to grow, mainly driven by demand for high-performance computing. Combined with capital expenditures, TSMC’s capital expenditures this quarter were US$5.77 billion. With weak demand for mobile phones and other products, the company maintained a low investment level.
2) Dimension of price: In 2024Q1, TSMC’s single-wafer revenue (equivalent to 12-inch wafer) was US$6,228/piece, down 6.1% from the previous quarter. TSMC's wafer shipment prices have declined, mainly due to the decline in the proportion of 3nm in this quarter. This quarter, the company's revenue share for processes below 7nm remained at 65%.
Combined with the next quarter guidance given by TSMC, the revenue in the second quarter is expected to be US$19.6-20.4 billion (a quarter-on-quarter increase of 3.9%-8.1%), with a gross profit margin of 51-53% (a quarter-on-quarter decrease). Revenue in the second quarter is expected to hit a quarterly high, mainly due to increased demand for high-performance computing.
2. Gross profit and gross profit margin: maintain 50% gross profit margin
TSMC achieved a gross profit of US$10.01 billion in the first quarter of 2024, a decrease of 3.8% from the previous quarter. The month-on-month decline in gross profit was mainly due to the impact on the revenue side. TSMC's gross profit margin in 2024Q1 was 53.1%, an increase of 0.1pct from the previous quarter, in line with market expectations.
In 2024Q1, TSMC's gross profit fell by 3.8% month-on-month, which was basically brought by the revenue side, and the gross profit margin was basically the same month-on-month.
The two data that the market is most concerned about TSMC are revenue and gross profit margin. Due to the release of monthly operating data, quarterly revenue has basically been expected by the market. The gross profit margin is one of the focuses of the market's attention in this quarterly report. Mr. Dolphin will analyze the main driving forces for the improvement of gross profit margin in this quarter:
"Gross profit = revenue per wafer - fixed cost - variable cost"
1) Single wafer revenue (equivalent to 12 inches): TSMC’s single wafer revenue in 2024Q1 was approximately US$6,228/piece, a decrease of US$407/piece from the previous quarter. Entering the first quarter, 3nm shipments fell back, structurally lowering the average price of the company's products;
2) Fixed costs (depreciation and amortization): TSMC’s average fixed costs in 2024Q1 were approximately US$1,671/piece, an increase of US$73/piece from the previous quarter. The mass production of 3nm has led to an increase in the total depreciation and amortization, which has led to an increase in unit fixed costs;
3) Variable costs (other manufacturing expenses): TSMC’s average variable cost in 2024Q1 was approximately US$1,252/piece, a decrease of US$266/piece from the previous quarter. The decrease in single-chip variable costs is mainly due to the reduction in manufacturing costs;
Based on the above splits, TSMC's single-chip gross profit in 2024Q1 was US$3,305/piece, a decrease of US$214 from the previous quarter. Single-chip gross profit declined, with the unit price decreasing by US$407 and the unit cost decreasing by US$193.
The performance of TSMC's revenue has been expected by the market, and gross profit margin is the main focus. Although the mass production capacity of 3nm has driven the company's average shipment price to increase (the current average price has increased to more than 6,000 US dollars), it has a positive effect on gross profit margin. But at the same time, the increase in costs also affected gross profit margins. Based on the company's guidance for the next quarter of 51-53%, TSMC's gross profit margin will continue to remain low in the next quarter. In addition, the increase in electricity costs in the second quarter will also have an impact on the company's gross profit margin. Dolphin believes that the mass production of 3nm will increase the company's depreciation and amortization, thereby putting pressure on the company's gross profit margin. The company's gross profit margin will be difficult to return to the 60% level in the short term.
3. Wafer structure end: AI is the structural demand
3.1 Wafer revenue share (by application type)
Smartphones and HPC are TSMC's largest sources of revenue. Their combined share still accounts for 84%, making them the company's largest source of downstream revenue.
Looking at downstream segmented applications, the proportion of smartphone business fell back to less than 40% this quarter, mainly because demand in the mobile phone market remains weak. The company's high-performance computing share reached a new high, reaching 46%. Looking at the downstream situation, the company's current business still shows structural characteristics, mainly driven by the demand for data centers and AI.
Dolphin believes that with the mass production of the 3nm process, the manufacturing process of Apple mobile phone chips will gradually shift from 5nm to 3nm. But what cannot be ignored is that deficiencies in the demand side of the mobile phone market will still have an impact on the company. Fortunately, the demand for high-performance computing has filled part of the production capacity, and the company's revenue side has maintained good performance.
3.2 Wafer revenue share (by process node)
This quarter, the proportion of revenue below 7nm remained at 65%, and revenue from advanced processes has become the company's main source. Specifically, the company's 3nm revenue share fell back to 9% this quarter. The revenue share of 5nm continues to remain above 30%.
Mr. Dolphin believes that the demand for Apple’s new phones has not exploded this time, which will affect TSMC’s 3nm ramp-up pace. Although demand for high-performance computing is good, current production capacity is still mainly concentrated on the 5nm process. Therefore, TSMC’s 3nm revenue dropped significantly this quarter, while 5nm revenue still performed well.
Judging from the company's guidance for the next quarter, the company's performance in 2024Q2 will still benefit from the growth in demand in the high-performance computing field. Although the demand for mobile phones is still insufficient, as the high-performance computing process shifts to 3nm and then fills the relevant production capacity, the company's revenue share below 7nm is expected to further increase.
3.3 Wafer revenue share (by region)
From the perspective of revenue by region, North America is still TSMC's largest source of revenue, accounting for nearly 70% of revenue. This is because there are major customers in North America such as Apple, Qualcomm, Nvidia, and AMD, which creates a strong commercial relationship between TSMC and the United States. In this financial report, the revenue share of North America has declined. This is mainly due to the slowdown in the purchase of 3nm chips after the demand for new Apple machines.
In addition to North America, China and the Asia-Pacific region are the remaining two major sources of revenue, accounting for 9% and 12% respectively in this quarter. Among them, the proportion of customers in China continues to fall, which is also in line with the operations of mainland foundries such as SMIC. Condition.
Based on the situation of various companies and the industrial chain, Dolphin believes that although the current mobile phone and PC markets are recovering, the demand side is still insufficient. The current demand in the semiconductor market still shows structural characteristics. Among the company's customers, it mainly benefits from the purchase of high-performance computing customers such as NVIDIA and AMD. The company's business focus will also continue to focus on large customers in North America, and its revenue share is expected to remain at 70% or above.
