TSMC: Surviving the "bottom of performance", 3nm begins.

TSMC (Taiwan Semiconductor) released its third-quarter earnings report for 2023 on October 19, 2023, before the US stock market opened. The key points are as follows:

Revenue: Bottoming out. In the third quarter of 2023, TSMC's revenue reached $17.3 billion, within the guidance range of $16.7-17.5 billion. Quarterly revenue showed a QoQ growth, with a -0.5% impact from shipment volume and a +10.7% impact from average selling price. The company's shipment volume slightly declined, while the price improved significantly due to the mass production of 3nm chips.

Gross profit and gross margin: Rebounding but still relatively low. TSMC's gross margin for the third quarter of 2023 was 54.3%, exceeding the upper limit of the guidance range (51.5-53.5%). The average selling price increased, but there was also a noticeable increase in costs. With the start of 3nm production, the gross margin slightly rebounded QoQ but remained relatively low.

Wafer structure: 3nm production begins. The release of new devices by Apple drove the mass production of TSMC's 3nm chips. The revenue share of chips below 7nm in this quarter also increased to 59%. Both mobile and AI chips are expected to transition to higher nodes. With the pull-in of downstream customers, the revenue share from the US region rebounded to nearly 70% this quarter.

TSMC's guidance for the fourth quarter of 2023: Expected revenue of $18.8-19.6 billion (market expectation: $18.2 billion) and a gross margin of 51.5-53.5% (market expectation: 52.4%). The QoQ revenue growth is projected to be 8.6%-13.3%, mainly driven by the continuous production of 3nm chips. The gross margin is slightly lower but in line with market expectations, partly due to higher depreciation and amortization from 3nm production, which puts pressure on the gross margin.

Dolphin Research's overall view:Taiwan Semiconductor's earnings report this time slightly exceeded market expectations. As the company discloses its operating data on a monthly basis, the performance on the revenue side was already anticipated. The market was mainly concerned about the company's gross margin in this quarter. Although Taiwan Semiconductor's gross margin in this quarter is still relatively low at 54.3%, it is better than market expectations. This is due to the mass production of 3nm in this quarter, which has driven up the average selling price of the company's products.

The company has provided guidance for the next quarter: it is expected to achieve revenue of $18.8-19.6 billion (an QoQ increase of 8.6%-13.3%) and a gross margin of 51.5-53.5% (an QoQ decrease of 0.8-2.8 percentage points). With the continued mass production of 3nm in the next quarter, the company's revenue is expected to continue to increase. However, the gross margin will be under pressure due to the impact of depreciation and amortization.

Although the company's earnings report this time slightly exceeded market expectations, it basically meets Dolphin Research's previous expectations. In Dolphin Research's analysis report for the second quarter, it was speculated that "Taiwan Semiconductor's quarterly revenue in Q3 and Q4 will be around $17-19 billion, and the current second quarter's revenue will be the lowest point of the year."

Dolphin Research believes that with the mass production of 3nm and the bottoming out of the consumer electronics market, Taiwan Semiconductor has already passed the "performance bottom". The better-than-expected performance will support the stock price in the short term. However, further upward potential still requires more-than-expected performance from the mobile phone market or AI demand.

Here is Dolphin Research's specific analysis of Taiwan Semiconductor:

1.Revenue: Bottoming out

Taiwan Semiconductor achieved revenue of $17.28 billion in the third quarter of 2023, which is within the range of the performance guidance ($16.7-17.5 billion). The revenue in this quarter increased by 10.2% QoQ, mainly due to the mass production of 3nm, which drove up the average selling price of the company's wafers.

Taiwan Semiconductor's quarterly revenue has been fully anticipated by the market due to the monthly disclosure of operating indicators. As the revenue in this quarter begins to rebound, is the growth driven by shipment volume or price?

Dolphin Research observes the main drivers of Taiwan Semiconductor's revenue growth in the third quarter from the perspectives of volume and price:

Volume: Taiwan Semiconductor's wafer shipments in Q3 2023 were 2,902 thousand pieces, a QoQ decrease of 0.5%, continuing the downward trend. The shipment volume did not show growth in this quarter. Taking into account the capital expenditure, Taiwan Semiconductor's capital expenditure in this quarter was $7.1 billion, which continued to decrease in the overall weak demand situation. The company's capital expenditure plan for 2023 is relatively conservative, lowered to $32 billion.

Price: The average selling price of Taiwan Semiconductor's wafers (equivalent to 12-inch wafers) in Q3 2023 was $5,955 per piece, a QoQ increase of 10.7%. The wafer selling price of Taiwan Semiconductor has increased significantly, mainly due to the mass production of 3nm.In this quarter, the proportion of revenue from processes below 7nm has increased to 59%, driving up the average selling price of the company's products.

As Dolphin Research mentioned in the earnings report commentary for the previous quarter, "The second quarter's revenue will be the lowest point of the year."

Combining TSMC's guidance for the next quarter, it is expected that the revenue in the fourth quarter will reach $18.8-19.6 billion (an MQoQ increase of 8.6%-13.3%), with a gross margin of 51.5%-53.5% (an QoQ decrease of 0.8-2.8 percentage points). With the release of new Apple devices and the acceleration of 3nm mass production, the proportion of revenue is expected to become more significant in the next quarter.

Even though the current shipment volume of the company's products has not shown improvement, the drive from 3nm on the pricing side directly contributes to the increase in revenue.

2.Gross profit and gross margin: rebounding but still relatively low.

TSMC achieved a gross profit of $9.38 billion in the third quarter of 2023, an QoQ increase of 10.5%. The increase in gross profit mainly comes from the impact on the revenue side.

TSMC's gross margin in 2023Q3 was 54.3%, an QoQ increase of 0.2 percentage points. Although the gross margin is better than the market's expectation of 53%, it has significantly declined compared to the previous situation of over 60%.

In 2023Q3, TSMC's gross profit increased by 10.5% QoQ, with the impact from the revenue dimension contributing 10.2% and the gross margin dimension contributing 0.3%.

The two most important data that the market is concerned about for TSMC are revenue and gross margin. Since the monthly operating data is disclosed, the quarterly revenue is already expected by the market. The gross margin is one of the focal points in this quarterly report. Dolphin Research will analyze the main drivers behind the increase in gross margin this quarter:

"Gross profit = Wafer revenue - Fixed costs - Variable costs"

Wafer revenue (equivalent to 12 inches): In 2023Q3, TSMC's wafer revenue was approximately $5,955 per wafer, an QoQ increase of $577 per wafer, mainly due to the structural increase in average selling price brought by the start of 3nm mass production.

Fixed costs (depreciation and amortization): In 2023Q3, TSMC's average fixed costs were approximately $1,604 per wafer, an QoQ increase of $218 per wafer. The mass production of 3nm drives the increase in depreciation and amortization, thereby increasing the company's unit fixed costs.3) Variable Costs (Other Manufacturing Expenses): In 2023Q3, TSMC's average variable cost per wafer was approximately $1120, an increase of $38 compared to the previous quarter. The increase in variable costs per wafer is mainly due to the increase in manufacturing costs.

Taking all of the above into account, TSMC's gross profit per wafer in 2023Q3 was $3231, an increase of $321 compared to the previous quarter. There was a significant rebound in gross profit per wafer, with the unit price increasing by $577 and the unit cost increasing by $256.

The market had already anticipated TSMC's revenue performance, with gross profit margin being the main focus. Although the mass production of 3nm chips has driven up the average selling price, which has a positive impact on gross profit margin, the increase in costs has also suppressed the margin. Considering the company's guidance for the next quarter of 51.5-53.5%, TSMC's gross profit margin may continue to remain low in the next quarter. Dolphin Research believes that the mass production of 3nm chips will continue to put pressure on the company's gross profit margin, making it difficult to return to a level above 60% in the short term.

3. Wafer Structure: Entering the Era of 3nm

3.1 Wafer Revenue Composition (by Application Type)

Smartphones and HPC (High-Performance Computing) are TSMC's largest sources of revenue, accounting for a combined 81% and remaining the company's major downstream revenue sources.

Looking at the downstream applications in detail, the share of smartphone business has rebounded to 42%, driven by the seasonal release of new Apple devices and the mass production of 3nm chips. High-performance computing has remained relatively stable this quarter, maintaining a share of around 40%.

Dolphin Research believes that with the mass production of 3nm chips, Apple's chip manufacturing process will gradually shift from 5nm to 3nm. Additionally, high-performance computing is expected to start filling the capacity of 5nm, leading to continued growth in revenue for both the smartphone and high-performance computing businesses.

3.2 Wafer Revenue Composition (by Process Node)

In this quarter, the share of revenue from processes below 7nm continued to increase to nearly 60%, making advanced processes TSMC's largest source of revenue. Specifically, the revenue share of 3nm, which began mass production this quarter, reached 6%. The revenue share of 5nm also increased again, further shifting towards more advanced process technologies.

Dolphin Research believes that based on the guidance provided by the company for the next quarter, TSMC's performance in 2023Q4 will continue to benefit from the demand for new Apple devices. Historically, the capacity for 3nm is expected to continue to climb to double digits. The company's revenue structure will further shift towards process nodes below 7nm.

3.3 Revenue Proportion of Wafer (by Region)

In terms of revenue from different regions, North America remains the largest source of revenue for TSMC. This is because North America has major clients such as Apple, Qualcomm, NVIDIA, AMD, etc., which creates a strong business relationship between TSMC and the United States. In this earnings report, the revenue proportion from North America continues to rise, mainly due to the release of new iPhones by Apple, which resulted in additional orders in this quarter.

Apart from North America, China and the Asia-Pacific region are the other two major sources of revenue, accounting for 8% and 12% respectively in this quarter. However, the proportion of customers from China has experienced a certain decline.

Considering the situation of various companies and the industry chain, Dolphin Research believes that with the release of new iPhones and the depletion of Android industry chain inventory, there is hope for a recovery in the orders from smartphone customers, and a shift towards the new 3nm node. Customers such as NVIDIA are also expected to gradually transition from 7nm to 5nm for AI applications, filling up the 5nm capacity. Overall, there is an expectation for orders from customers to shift to higher nodes.

In the long term, North America, with its numerous major clients, accounts for nearly 70% of the company's revenue and is of utmost importance to the company.

Dolphin Research's analysis report on TSMC and the wafer manufacturing industry

TSMC

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

July 20, 2023 earnings report review: "TSMC: NVIDIA Comes to the Rescue, AI Supports the 'Cyclical' Bottom"

April 20, 2023 conference call: "Clear Bottom in the Second Quarter, Mass Production of 3nm Imminent (TSMC 23Q1 Conference Call)"

April 20, 2023 earnings report review: "TSMC: The Strongest King, Yet Difficult to Escape the Cyclic Rise and Fall"

January 12, 2023 conference call: "Inventory Adjustment to Last Half a Year, Growth to Wait Until the Second Half (TSMC 22Q4 Conference Call)"2023 年 1 月 12 日财报点评《台积电的雷，巴菲特加仓也压不住》

2022 年 10 月 13 日台积电电话会《纵然财报亮眼，台积电也避不开行业衰退（三季度电话会）》

2022 年 10 月 13 日财报点评《台积电：暗夜里的 “孤勇者” 到底能挺多久？》

2022 年 7 月 14 日台积电电话会《半导体周期下行，台积电如何持续增长？（台积电电话会）》

2022 年 7 月 14 日财报点评《台积电：砍单潮中的 “另类” 傲骨》

2022 年 4 月 14 日台积电电话会《2nm 上日程（台积电电话会）》

2022 年 4 月 14 日台积电财报点评《台积电：强势 “信仰”，无关周期》

2022 年 4 月 8 日台积电个股深度《台积电（下）：价格打折，信仰没折》

2022 年 3 月 16 日台积电个股深度《市场暴跌之后，再谈骨灰级代工王台积电》

2022 年 1 月 13 日台积电电话会《给出季度强势指引后，台积电管理层聊了啥？》

2022 年 1 月 13 日台积电财报点评《台积电太能打，“周期” 见了绕道走》

2021 年 10 月 14 日台积电财报点评《[台积电：一哥打头阵，风头依旧](https://longbridgeapp.com/topics/1205997?

Semiconductor/Wafer Manufacturing Industry

December 29, 2022 Semiconductor Industry Overview: "Semiconductor Avalanche? Real Resilience Only After the Most Brutal Decline" (source)

June 24, 2022 Semiconductor Industry Overview: "Order Cancellations, Is the Semiconductor Industry Really Going to 'Change Its Fate'?" (source)

September 3, 2021 Wafer Manufacturing Industry Overview: "Improved Performance vs. Decreased Stock Price: Should SMIC and Others Be 'Killed' or 'Wrongly Killed'?" (source)

July 16, 2021 In-depth Analysis of SMIC Stock: "SMIC (Part 2): The Undervalued Chinese 'Core'" (source)

July 9, 2021 In-depth Analysis of SMIC Stock: "SMIC (Part 1): The Strategy of a Leading 'Core'" (source)

Risk Disclosure and Statement for this Article: Dolphin Research Disclaimer and General Disclosures