TSMC(US:TSM)2024-07-18 10:31Financial Data and Key Metrics - Q2 2024 revenue increased by 13.6% sequentially in NT, or 10.3% in USD, driven by strong demand for 3nm and 5nm technologies, partially offset by smartphone seasonality [4] - Gross margin increased by 10 basis points sequentially to 53.2%, mainly due to cost improvements and favorable foreign exchange rates, partially offset by N3 ramp dilution [4] - Operating margin increased by 0.5 percentage points sequentially to 42.5%, with operating expenses accounting for 10.5% of net revenue [4] - Q2 EPS was 9.56 NT, and ROE was 26.7% [4] - Q3 2024 revenue guidance is between $22.4 billion and $23.2 billion, representing a 9.5% sequential increase or 32% YoY increase at the midpoint [7] - Q3 gross margin is expected to be between 53.5% and 55.5%, and operating margin between 42.5% and 44.5% [7] Business Line Data and Key Metrics - 3nm process technology contributed 15% of wafer revenue in Q2, while 5nm and 7nm accounted for 35% and 17% respectively [5] - Advanced technology (7nm and below) accounted for 67% of wafer revenue [5] - HPC revenue increased 28% QoQ, accounting for 52% of Q2 revenue, surpassing 50% for the first time [5] - Smartphone revenue decreased 1% to account for 33%, IoT increased 6% to account for 6%, Automotive increased 5% to account for 5%, and DCE increased 20% to account for 2% [5] Market Data and Key Metrics - The company ended Q2 with cash and marketable securities of 2 trillion NT ($63 billion USD) [6] - Current liabilities increased by 23 billion NT, mainly due to a 16 billion NT increase in accounts payable, while long-term interest-bearing debt increased by 9 billion NT due to corporate bond issuance [6] - Accounts receivable turnover days decreased by 3 days to 28 days, and inventory days decreased by 7 days to 83 days, primarily due to higher N3 wafer shipments [6] - Q2 cash flow from operations was 378 billion NT, with 206 billion NT spent on CapEx and 91 billion NT distributed as dividends [6] Company Strategy and Industry Competition - The company is narrowing its 2024 capital budget to $30 billion - $32 billion, with 70%-80% allocated to advanced process technologies, 10%-20% to specialty technologies, and 10% to advanced packaging, testing, and mask making [9] - TSMC is expanding its definition of the foundry industry to include packaging, testing, mask making, and IDM (excluding memory), estimating the market size at $250 billion in 2023, up from $115 billion under the previous definition [11] - The company expects the foundry industry to grow close to 10% YoY in 2024, with TSMC's market share increasing due to strong technology leadership and a broad customer base [12] - TSMC is investing heavily in N2, N2P, and A16 technologies, with N2 on track for volume production in 2025 and A16 scheduled for the second half of 2026 [16][17] Management Commentary on Operating Environment and Future Outlook - Management highlighted strong demand for AI-related and high-end smartphone products, leading to increased capacity utilization for 3nm and 5nm technologies in H2 2024 [12] - The company expects 2024 to be a strong growth year, with revenue growth slightly above the mid-20s percentage range in USD terms [12] - TSMC is confident in achieving a long-term gross margin of 53% and higher, despite challenges such as N3 ramp dilution, higher electricity prices, and global manufacturing expansion [8] Other Important Information - TSMC introduced N2P, an extension of the N2 family, with volume production scheduled for H2 2026, and A16, featuring Super Power Rail (SPR), which offers significant power and performance improvements [17] - The company is working with OSAT partners to increase CoWoS capacity to meet customer demand, with advanced packaging margins approaching corporate averages [50] Q&A Session Summary Question: AI Accelerator and CoWoS Capacity - TSMC expects supply-demand balance for AI accelerators and CoWoS to be reached by 2025 or 2026, with CoWoS capacity growing at a 60% CAGR over the next few years [20][22] - The company plans to more than double CoWoS capacity in 2025, following a similar expansion in 2024 [23] Question: Gross Margin Outlook - Gross margins are expected to improve in H2 2024, with long-term gross margins achievable at 53% and higher, despite dilution from overseas fabs and cost inflation [24][26][29] - Subsidies and ITC credits will offset some costs, with $1.5 billion in subsidies received in 2023, mainly from Japan [31] Question: Pricing Strategy and Leading-Edge Demand - TSMC's pricing strategy is strategic and varies by customer segment, with HPC customers willing to pay more for leading-edge nodes compared to smartphone customers [33][35][38] - Leading-edge capacity is expected to remain tight through 2025, with strong demand for N3 and N5 technologies [38] Question: Geopolitical Risk and Overseas Expansion - TSMC is continuing its overseas expansion plans in Arizona, Kumamoto, and potentially Europe, with no changes to its strategy despite geopolitical risks [39][41] - The company does not anticipate tariffs on shipments to U.S. customers, as customers typically bear import tariffs [42] Question: Advanced Packaging Profitability - Advanced packaging margins are improving and approaching corporate averages, with TSMC working with OSAT partners to increase capacity [48][50] Question: N2 and A16 Capacity Planning - N2 and A16 are expected to be larger nodes than previous generations, with strong demand from AI customers migrating aggressively to these technologies [52][55] - N3E is expected to improve returns and gross margins as it ramps, with dilution from N3 expected to decrease over time [56][58] Question: Node-to-Node Conversion Strategy - TSMC may convert more N5 tools to N3 to meet strong demand, with tool commonality between N5 and N3 exceeding 90% [61][63] Question: CoWoS Technical Constraints - Migration from CoWoS-S to CoWoS-L and CoWoS-R may alleviate some capacity constraints, but overall CoWoS supply remains tight [64][67] Question: N2 Revenue Contribution and Margin Dilution - N2 revenue contribution in 2026 is expected to be larger than N3 at a similar stage, with faster gross margin dilution recovery [69][71] Question: Edge AI and Advanced Packaging - Edge AI customers are expected to adopt 3D IC or SoIC solutions in the next two years, with smartphone customers also considering these technologies [72][74] Question: Smartphone and PC Silicon Content - AI functionality is expected to increase die sizes by 5%-10%, with unit growth likely to accelerate in two years [76][78] Question: Demand Volatility and Capacity Planning - TSMC is managing demand volatility through a disciplined capacity planning process, with generative AI demand seen as more sustainable than previous cycles [80][84] Question: Super Power Rail (SPR) and Data Center Demand - SPR technology is expected to significantly reduce system-level power consumption, particularly for data center customers [86][88] Question: A16 Capacity Expansion Bottlenecks - Key bottlenecks for A16 capacity expansion include land, electricity, and talent availability [89][91] Question: Product Launch Cadence and Capacity Planning - TSMC is prepared for accelerated product launch cadences announced at Computex, with capacity planning aligned with customer needs [93][95] Question: Fan-Out Panel-Level Packaging - TSMC is exploring fan-out panel-level packaging, but the technology is not expected to mature for at least three years [96][99]