AI demand remains strong! Taiwan Semiconductor's Q3 performance significantly exceeds expectations, with a year-on-year net profit increase of 54% | Financial Report Insights

The demand for AI remains a major highlight, with strong performance in the third quarter, exceeding expectations in terms of revenue, net profit, and gross profit margin.

On Thursday, October 17th, global chip manufacturing giant Taiwan Semiconductor released its financial report for the third quarter of 2024. Specifically:

1) Key Financial Data

Revenue: Net revenue for Q3 was NT$759.69 billion, a 39% year-on-year increase, exceeding the estimated NT$751.06 billion;

Net Profit: Net profit for Q3 was NT$325.3 billion, surpassing the market expectation of NT$299.3 billion, a 54% year-on-year growth;

Gross Profit Margin: The gross profit margin for Q3 reached 57.8%, up 4.6 percentage points from the previous quarter, surpassing the expected 54.8%, with the second-quarter expectation at 51%-53%.

Operating Profit: Operating profit for Q3 was NT$360.77 billion, exceeding the estimated NT$330.82 billion, a 58% year-on-year increase;

Capital Expenditure: Capital expenditure for the third quarter was $6.4 billion, compared to $6.36 billion in the second quarter. TSMC raised its full-year revenue forecast in the previous quarter's earnings call and adjusted its capital expenditure plan for this year to $30 billion to $32 billion, up from the previous forecast of $28 billion to $32 billion.

2) Outlook

Revenue: Expected revenue for the fourth quarter is between $26.1 billion and $26.9 billion, with the market estimating $24.94 billion.

Operating Profit Margin: Expected operating profit margin for the third quarter is 46.5% to 48.5%, with the market estimating 44.3%.

Gross Profit Margin: Expected gross profit margin for the fourth quarter is 57% to 59%, with the market estimating 54.7%.

Following the financial report, the stock price decline of Japanese chip manufacturers, including Lasertec, narrowed, and trading began several hours later. TSMC's stock price has surged more than 70% this year, outperforming many large tech companies in Asia, reflecting high market expectations for its AI business.

Bloomberg analyst Charles Shum stated:

Despite ASML reporting that its third-quarter order volume was only half of the expected level, suggesting a potential slowdown in global chip manufacturing capacity growth, TSMC's short- to medium-term revenue outlook remains robust.

Strong demand from NVIDIA, AMD, Apple, and Qualcomm for TSMC's 2nm and 3nm technologies has offset this shortfall. TSMC's outstanding production yield, continuously improving EUV machine productivity, and leading position in 2.5D and 3D packaging further support sales.

Revenue Contribution from Advanced Processes Continues to Rise

Looking at the revenue side, TSMC's revenue from advanced processes in the third quarter increased compared to the previous quarter, with 3nm and 5nm processes collectively contributing 52% of the revenue in the third quarterAdvanced process (defined as 7 nanometers and more advanced technology) accounts for 69% of wafer revenue, up from 67% in the previous quarter, with 3 nanometers accounting for 20% of wafer revenue; 5 nanometers accounting for 32%; and 7 nanometers accounting for 17%.

HSBC previously stated that TSMC's narrative will shift to 2nm, with pricing for 2nm expected to be 33% higher than 3nm, coupled with higher utilization rates, which should help drive profit margin expansion in 2025 and 2026, thereby boosting earnings growth.

On the platform side, the AI chip foundry business continues to show strong momentum, while the smartphone business further recovers with the boost in iPhone shipments.

HPC (High-Performance Computing) platform revenue accounts for the highest proportion at 51%, but it has decreased compared to the previous quarter, with a sequential growth of 11%; smartphone business revenue accounts for 34%, automotive business for 5%, IoT for 7%, and DCE business for 1%.