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TSMC Earnings Surpass Expectations Driven by Robust AI Chip Demand and iPhone Sales, Indicating Accelerated Growth Ahead

AInvestThursday, Jul 18, 2024 4:04 am ET
3min read

ASML's disappointing guidance triggered a bloodbath in the chip sector on Wednesday, but TSMC's earnings came to the rescue. Strong demand for AI chips and a recovery in iPhone orders allowed TSMC's revenue and profits to easily surpass expectations. The advanced chip maker even projected further revenue acceleration for the next quarter, indicating a full-blown AI explosion.

Specifically, TSMC's second-quarter revenue reached $20.82 billion, up 33% year-over-year (calculated in USD, 40% in TWD), and a 10% increase quarter-over-quarter, topping the earlier guidance range of $19.6 billion to $20.4 billion. Net income stood at $7.66 billion (TWD 247.7 billion), a 29% year-over-year increase, and an acceleration from the single-digit growth of the previous quarter.

Rising Advanced Processes Boost Margins

With the rising proportion of high-end processes for AI and smartphone chips, TSMC's gross margin reached 53.2% this quarter, a 0.1 percentage point increase from the previous quarter. Given that major clients like NVIDIA and Qualcomm recently agreed to price hikes for advanced packaging, TSMC's profitability is poised for further enhancement.

AI Momentum and iPhone Demand Recovery: 3nm, 5nm, and 7nm Revenue Close to 70%

Discount promotions for iPhones in China for Q2 revived demand, pushing TSMC's 3nm chip revenue share to 15%, a 6-percentage point increase from the previous quarter. Much of this demand stemmed from the Chinese market, where iPhone shipments grew 40% year-over-year in May and 52% in April, benefiting TSMC, which manufactures Apple's smartphone chips. Additionally, with AI support, Apple raised its iPhone 16 series stocking target to 90 million units this year, a 10% increase over the 15 series. The increasing demand for 3nm technology is also expected to be bolstered by NVIDIA and Qualcomm.

As 3nm chip demand surged, the 5nm revenue contribution was compressed to 35%, a 2-percentage point drop quarter-over-quarter. This process is currently dominated by AI chips from NVIDIA, such as the H100 chip, keeping demand robust. The upcoming Blackwell architecture's B100, set for release later this year, will further support TSMC's business. The 7nm revenue contribution achieved 17%, a 2-percentage point decrease, driven by demand for NVIDIA A100 chip replacements and automotive-grade chips.

Overall, 3nm, 5nm, and 7nm processes accounted for 67% of total revenue, a 2-percentage point increase quarter-over-quarter and a 14-percentage point increase year-over-year. High-end smartphones and AI chips have propelled TSMC's advanced manufacturing processes, becoming key to enhancing gross margins. This creates a virtuous cycle: the more advanced the manufacturing process, the higher the demand, the higher the gross margin, and the greater the investment in R&D.

AI Demand Soars: HPC Chip Revenue Exceeds 50%

Even with the continuous recovery in smartphone demand, the importance of AI chips as a new growth area is becoming increasingly evident. On a platform basis, revenue from High-Performance Computing (HPC) chips contributed 52% this quarter, surpassing the 50% mark for the first time, and up 6 percentage points quarter-over-quarter. The ongoing boom in generative AI is accelerating the demand for computing power chips. Despite the significant increase in iPhone 15 shipments, revenue from smartphone chips contributed 33%, a 5-percentage point decrease from the previous quarter and flat year-over-year.

Furthermore, revenue from IoT chips (used in wearables and smart home devices) and automotive chips contributed 6% and 5%, respectively. Automotive chip revenue decreased by 1 percentage point quarter-over-quarter, likely due to a slight slowdown in global electric vehicle demand.

North America and China Lead Revenue Growth

Geographically, the North American market contributed 65% of TSMC's revenue in the second quarter, a 4-percentage point drop quarter-over-quarter, which is somewhat surprising and indicates that AI demand is not solely driving growth in North America. Revenue from China surged to 16%, a 7-percentage point increase quarter-over-quarter, likely buoyed by the rebound in demand for domestic smartphones and electric vehicles. Revenue from the Asia-Pacific region declined to 9%, while Japan remained steady.

Accelerated Growth and Investment in Advanced Processes for Q3

Looking ahead, TSMC expects third-quarter revenue to be between $22.4 billion and $23.2 billion, representing a 32% year-over-year growth at the midpoint. With the robust demand for AI and smartphone chips, TSMC has raised its 2024 sales growth guidance in USD terms to the mid-20% range. The company outlined plans to mass-produce 2nm (N2) chips by 2025, while current N3 chip demand remains exceptionally strong, suggesting that more N5 technology will likely transition to N3. As previously mentioned, continuously advancing chip manufacturing processes, meeting major chipmakers' needs, and raising prices creates a virtuous cycle. Seeing the sustained momentum in the chip industry, TSMC has increased its annual capital expenditure to $30 billion to $32 billion, fully committing to high-end processes.

A Major Beneficiary of the AI Wave

Overall, despite generative AI becoming a primary growth driver, the recovery in smartphone and PC demand, along with the AI-driven wave of new device upgrades, continues to fuel TSMC's growth. By continually advancing its manufacturing processes and enhancing its profitability, TSMC remains a significant beneficiary of the ongoing AI boom.

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