ASML leading AI to a breakthrough? TSMC is here to dominate the scene!

Taiwan Semiconductor (TSMC) released its third-quarter financial report for 2024 on the afternoon of October 17, 2024, before the U.S. stock market opened, with the following key points:

1. Revenue: Volume and price both increased, reaching a new high. In the third quarter of 2024, TSMC's revenue reached $23.5 billion, setting a new record slightly above the upper limit of the performance guidance range ($22.4-23.2 billion). Revenue in this quarter increased by 12.9% compared to the previous quarter, with shipments contributing +6.8% and average selling price contributing +5.7%. Driven by demand for new Apple devices and AI, the company achieved a simultaneous increase in volume and price this quarter;

2. Gross Profit and Gross Margin: Leveraging 3nm technology to rebound. TSMC's gross margin in the third quarter of 2024 was 57.8%, significantly higher than the guidance range (53.5-55.5%). With the increase in 3nm production capacity, the company raised product prices and reduced unit costs this quarter, leading to a significant increase in gross margin and a rebound from the previous low point;

3. Wafer Fabrication: Strong demand for advanced processes. The growth this quarter mainly came from new Apple devices and high-performance computing. TheiPhone 16 series, equipped with 3nm chips**, drove the 3nm revenue to 20% this quarter. Currently,revenue from processes below 7nm accounts for 69%, driven by strong demand for advanced processes. With the support of customers like Apple and NVIDIA, the revenue share from North America increased to 71% this quarter.

4. TSMC's Performance Guidance: Expected revenue for the fourth quarter of 2024 is $26.1-26.9 billion (market expectation $24.9 billion) with a gross margin of 57-59% (market expectation 54.7%). Revenue is expected to grow by 11.1%-14.5% compared to the previous quarter, mainly driven by new Apple devices and high-performance computing demand. Gross margin continues to rise due to the increasing share of 3nm, leading to structural improvement in the company's gross margin.

Dolphin's overall view: TSMC's financial report this time is quite good.

$Taiwan Semiconductor(TSM.US) Both revenue and gross margin for this quarter exceeded market expectations. Especially, the gross margin returning to around 58% is significantly higher than market expectations (54.8%). This is mainly due to the boost from new Apple devices and AI demand, the continuous increase in 3nm production, driving up product prices and gross margin for the company Compared to the financial data, what's even more surprising is TSMC's "greatly exceeding expectations" guidance. The company expects to achieve revenue of $26.1-26.9 billion in the fourth quarter of 2024 (market expectation $24.9 billion) and a gross margin of 57-59% (market expectation 54.7%). From the guidance, it can be seen that the company's revenue will increase by about $3 billion quarter-on-quarter. Dolphin believes that this is mainly driven by two factors: 1) In the smartphone sector, Apple's new models will enter the peak shipping season in the fourth quarter, directly boosting chip demand. At the same time, as the entire iPhone 16 series is equipped with 3nm process chips, it will further enhance the performance of the company's 3nm production capacity; 2) In the high-performance computing sector, Nvidia's Blackwell and other AI chips will also bring additional volume in the fourth quarter.

Unlike ASML, which previously caused disruptions in the industry chain, TSMC's current financial report will bring confidence to the industry. This is mainly because the semiconductor industry currently shows clear structural characteristics, with sectors such as smartphones and PCs slowly recovering, while the unique AI industry chain demonstrates relatively strong demand. As TSMC currently derives nearly 70% of its revenue from high-end processes, it directly benefits from this wave of AI, while ASML is more affected by the entire semiconductor industry.

Overall, Dolphin believes that TSMC's recent performance is relatively secure. On one hand, the transition of Apple's new models from using the 3nm process in high-end models last year to the entire iPhone 16 series using 3nm chips this time has already brought significant incremental revenue to TSMC; On the other hand, due to the company's leading technological capabilities, it has taken on the majority of the incremental AI chip orders from clients such as Nvidia. Driven by these two factors, even if Apple shifts some demand from 5nm to 3nm, the company still has enough orders to fill the 5nm gap, leading to a continuous increase in revenue share below 7nm. TSMC is undoubtedly the "compass" in this wave of AI.

Below is Dolphin's specific analysis of TSMC:

I. Revenue End: Volume and Price Rise Together, Setting a New Record

TSMC achieved revenue of $23.5 billion in the third quarter of 2024, setting a new historical high, slightly exceeding the upper limit of the performance guidance range ($22.4-23.2 billion). The quarter-on-quarter revenue growth was 12.9%, mainly driven by the demand increase from Apple's new models and high-performance computing.

TSMC's quarterly revenue, due to the disclosure of monthly operating indicators, has been fully anticipated by the market. So, how did the prices and shipment volumes change in TSMC's revenue this quarter?

Dolphin observes the main drivers of TSMC's revenue growth in the third quarter of 2024 from the dimensions of volume and price:

1) Volume Dimension: TSMC's wafer shipments in 2024 Q3 were 3,338 thousand pieces, a 6.8% increase quarter-on-quarter. The continued growth in shipment volume is mainly driven by the demand from Apple's new models and high-performance computing. Although the shipment volume is increasing, the company's capital expenditure has not shown a significant increase TSMC's capital expenditure for this quarter is $6.4 billion, and the company's capital expenditure for this quarter remains relatively low. Considering TSMC's annual plan, Dolphin believes that the company's capital expenditure will see significant growth in the fourth quarter.

2) Price Dimension: In 2024Q3, TSMC's wafer revenue (equivalent to 12-inch wafers) is $7,040 per wafer, a 5.7% increase from the previous quarter. The increase in wafer shipment prices at TSMC is mainly attributed to the continued increase in the proportion of 3nm wafers. The revenue share of processes below 7nm has already increased to 69% this quarter.

Based on TSMC's guidance for the next quarter, the expected revenue for the fourth quarter is $26.1-26.9 billion (a 7.7%-11.5% increase from the previous quarter), significantly better than market expectations ($24.9 billion). The fourth-quarter revenue will reach a new high, mainly driven by the growth in shipments of products from customers like Apple and NVIDIA.

II. Gross Profit and Gross Margin: Empowered by 3nm, Emerging from the Downturn

TSMC achieved a gross profit of $13.59 billion in the third quarter of 2024, a 22.8% increase from the previous quarter. The significant increase in gross profit is mainly driven by the growth in revenue and gross margin. In 2024Q3, TSMC's gross margin was 57.8%, a 4.6 percentage point increase from the previous quarter, far exceeding market expectations (54.8%), mainly due to the increase in 3nm shipments.

The two key data points that the market is most concerned about regarding TSMC are revenue and gross margin. Since monthly operating data is already public, quarterly revenue is generally anticipated by the market. Gross margin, on the other hand, is one of the focal points in this quarterly report. Dolphin will analyze the main drivers behind the increase in gross margin this quarter:

"Gross Profit = Wafer Revenue - Fixed Costs - Variable Costs"

1) Wafer Revenue per Wafer (equivalent to 12-inch): In 2024Q3, TSMC's wafer revenue is approximately $7,040 per wafer, an increase of $378 per wafer from the previous quarter. With the increase in shipments for Apple smartphones and high-performance computing, the proportion of 3nm wafers significantly increased this quarter, leading to an increase in average product prices;

2) Fixed Costs (Depreciation and Amortization): In 2024Q3, TSMC's average fixed cost is around $1,559 per wafer, a decrease of $75 per wafer from the previous quarter. Although the total depreciation and amortization increased, the rapid increase in production volume continues to drive down unit fixed costs;

3) Variable Costs (Other Manufacturing Expenses): In 2024Q3, TSMC's average variable cost is approximately $1,410 per wafer, a decrease of $76 per wafer from the previous quarter. Under the influence of economies of scale, the company's unit variable costs also decreased this quarter;

Combining the above breakdown, TSMC's single-chip gross profit in 2024Q3 was $4072 per chip, an increase of $529 compared to the previous quarter. With the dual drive of rising product prices and decreasing unit costs, the company's gross profit per chip significantly increased this quarter, with unit prices increasing by $378 and unit costs decreasing by $151.

The performance of TSMC's revenue was already anticipated by the market, with gross margin being the main focus. With the continued mass production of 3nm driving the rise in the company's average selling price, there will be a significant improvement in the company's gross margin. Looking at the company's guidance for the next quarter of 57-59%, TSMC's gross margin has already started to rise from this quarter and stabilize around 58%. Currently, 3nm accounts for around 20% of the production, and Dolphin believes that with the promotion of new Apple devices and AI products, the proportion of 3nm in the company's production is expected to further increase next quarter.

III. Wafer Structure End: Strong Demand for Advanced Processes

3.1 Wafer Revenue Distribution (by Application Type)

Smartphones and HPC are TSMC's largest sources of revenue, accounting for a combined 85% and being the largest sources of downstream revenue for the company.

In terms of downstream segmented applications, with the increase in Apple's new device stocking this quarter, the smartphone business proportion slightly increased to 34%.

The company's high-performance computing share remains the largest this quarter, reaching 51%. The company's revenue this quarter is mainly driven by these two, with smartphone business growing by 16.3% and high-performance computing growing by 10.7% compared to the previous quarter.

Dolphin believes that the revenue of the two major businesses will continue to grow in the fourth quarter. The smartphone business will mainly benefit from the promotion of new Apple devices, as the entire iPhone 16 series will adopt the 3nm node, achieving comprehensive chip iteration. In the field of high-performance computing, AMD has also released new 3nm products and NVIDIA's Blackwell will start mass production, further driving TSMC's revenue growth next quarter.

3.2 Wafer Revenue Distribution (by Process Node)

The revenue share of 7nm and below continued to increase to 69% this quarter, with revenue from advanced processes being the company's core source. Specifically, this quarter, the revenue share of 3nm increased to 20%, while the revenue share of 5nm slightly decreased to 32%.

This quarter, there was a significant increase in 3nm production, mainly driven by Apple's new devices and high-performance computing demand. Although Apple has iterated the entire iPhone 16 series to 3nm this time, the 5nm production capacity of the company is still full, mainly filled by orders from other customers. It can be seen that the current market demand for 3nm and 5nm production capacity remains strong, which has also significantly boosted the company's gross margin. Combining the company's guidance for the next quarter, the company's performance in the fourth quarter of 2024 will continue to benefit from the shipment of new Apple products and high-performance computing. With AMD chips advancing to 3nm and Nvidia's Blackwell entering mass production, they will all contribute to TSMC's performance growth.

3.3 Wafer Revenue Distribution (by Region)

In terms of revenue from various regions, North America remains the largest source of revenue for TSMC, accounting for 71% of the total revenue. This is due to major clients such as Apple, Qualcomm, Nvidia, and AMD in North America, creating a strong commercial relationship between TSMC and the United States. Apart from North America, China and the Asia-Pacific region are the other two major sources of revenue, accounting for 11% and 10% respectively this quarter. The revenue from North America saw a significant increase this quarter, mainly due to increased shipments to Apple, Nvidia, and others.

Considering the situations of various companies and the industry chain, Dolphin believes that the current semiconductor market demand still exhibits structural characteristics. Although the sales of the new iPhone are uncertain, Apple's full adoption of 3nm chips in this new lineup directly accelerates the company's process iteration. In addition, driven by demands such as AI, the continuous pull-in of high-performance computing customers like Nvidia and AMD also brings more demand for high-process chips. With the drive from these two major areas, the company's performance in the fourth quarter is expected to reach new heights.

Dolphin's Research on TSMC and the Wafer Manufacturing Industry

TSMC

July 18, 2024 Conference Call "TSMC: Annual Revenue Growth of Over 20% (24Q2 Conference Call Summary)"

July 18, 2024 Financial Report Review "ASML and Trump Consecutively 'Deceive' - What's TSMC Afraid of!"

April 18, 2024 Conference Call "TSMC: Capital Expenditure Unchanged, Maintaining Original Plan (FY23Q4 Conference Call Summary)"

April 18, 2024 Financial Report Review "TSMC: iPhone Slows Down, Nvidia Comes to the Rescue"

2024 年 1 月 18 日电话会《 [AI, the Strongest Driving Force for Future Growth (TSMC 23Q4 Conference Call)]》

2024 年 1 月 18 日财报点评《 TSMC: Charging Forward with 3nm, Intel "Sending Spring Breeze"》

2023 年 10 月 20 日电话会《 Scaling Up to 3nm, Planning to Enter 2nm (TSMC 23Q3 Conference Call)》

2023 年 10 月 20 日财报点评《 TSMC: Surviving the "Performance Bottom", 3nm Battle Song Begins》

2023 年 7 月 20 日电话会《 TSMC: AI Boosting Wildly, 3nm Finally Landing (2Q23 Conference Call)》

2023 年 7 月 20 日财报点评《 TSMC: NVIDIA Coming to the Rescue, AI Holding Up the "Cycle" Bottom》

2023 年 4 月 20 日电话会《 Clear Bottom in the Second Quarter, Mass Production of 3nm Coming Soon (TSMC 23Q1 Conference Call)》

2023 年 4 月 20 日财报点评《 TSMC: The Strongest Champion, Yet Hard to Escape the Cycle's Ups and Downs》

2023 年 1 月 12 日电话会《 Inventory Adjustment for Another Six Months, Growth Will Have to Wait Until the Second Half of the Year (TSMC 22Q4 Conference Call)》

2023 年 1 月 12 日财报点评《 TSMC's Thunder, Even Buffett's Increased Holdings Can't Hold it Down》

2022 年 10 月 13 日 TSMC 电话会《 Despite Bright Financial Reports, TSMC Can't Avoid Industry Decline (Third Quarter Conference Call)》

2022 年 10 月 13 日财报点评《 TSMC: How Long Can the "Lone Warrior" Last in the Dark Night?》

July 14, 2022 TSMC Conference Call "Semiconductor Cycle Downturn, How Will TSMC Sustain Growth? (TSMC Conference Call)"

July 14, 2022 Financial Report Review of TSMC "TSMC: 'Alternative' Backbone in the Wave of Order Cuts"

April 14, 2022 TSMC Conference Call "On Schedule for 2nm (TSMC Conference Call)"

April 14, 2022 Financial Report Review of TSMC "TSMC: Strong 'Faith', Irrelevant to the Cycle"

April 8, 2022 TSMC Stock In-depth Analysis "TSMC (Part 2): Price Discounted, Faith Unwavering"

March 16, 2022 TSMC Stock In-depth Analysis "After the Market Plunge, Revisiting the Graveyard Shift King TSMC"

January 13, 2022 TSMC Conference Call "After Providing Strong Quarterly Guidance, What Did TSMC Management Discuss?"

January 13, 2022 Financial Report Review of TSMC "TSMC Strikes Hard, Avoids the 'Cycle' Route"

October 14, 2021 Financial Report Review of TSMC "TSMC: Leading the Pack, Still in the Limelight"

Semiconductor/Wafer Manufacturing Industry

December 29, 2022 Overview of the Semiconductor Industry "Semiconductor Avalanche? True Resilience Only After the Most Brutal Decline"

June 24, 2022 Overview of the Semiconductor Industry "Order Cuts, Order Cuts, Order Cuts, Is the Semiconductor Industry Really About to 'Change'?"

Overview of the wafer manufacturing industry on September 3, 2021: "Performance Up vs. Stock Price Down: Is SMIC Worth Killing or Mistakenly Killed?"

In-depth analysis of SMIC's individual stock on July 16, 2021: "SMIC (Part 2): The Undervalued Chinese 'Chip'"

In-depth analysis of SMIC's individual stock on July 9, 2021: "SMIC (Part 1): The Art of Leading 'Chip' Attack"

Risk disclosure and statement of this article: Dolphin Research Disclaimer and General Disclosure