Taiwan Semiconductor Manufacturing Co., Ltd. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Profitability: Third quarter gross margin was 57.8%, up 4.6 percentage points sequentially. Operating margin was 47.5%, up 5 percentage points sequentially. Fourth quarter gross margin is expected to be between 57% and 59%, with operating margin between 46.5% and 48.5%.
• CapEx: 2024 CapEx is expected to be slightly higher than $30 billion U.S. dollars. Between 70% and 80% of the capital budget will be allocated for advanced process technologies, about 10% to 20% for specialty technologies, and about 10% for advanced packaging, testing, mass making, and others.
• Global Manufacturing Footprint: In Arizona, the first fab entered engineered wafer production in April with 4-nanometer technology, with volume production starting in early 2025. In Japan, the first specialty technology fab has completed process qualification and will start volume production this quarter, with the second specialty technology fab in Kumamoto starting construction in fourth quarter 2025. In Europe, a specialty technology fab in Dresden, Germany, held a groundbreaking ceremony in August with volume production scheduled for end-2027.

Segment Performance

• Revenue by Technology: In the third quarter, 3-nanometer process technology contributed 20% of wafer revenue, 5-nanometer accounted for 32%, 7-nanometer for 17%. Advanced technologies (7-nanometer and below) made up 69% of wafer revenue.
• Revenue Contribution by Platform: HPC increased 11% quarter-over-quarter to account for 51% of third quarter revenue. Smartphone increased 16% to 34%, IoT 35% to 7%, Automotive 6% to 5%, and DCE decreased 19% to 1%.

Guidance

• Fourth Quarter Revenue: Expected to be between $26.1 billion and $26.9 billion U.S. dollars, representing a 13% sequential increase or a 35% year-over-year increase at the midpoint.
• 2024 CapEx: 2024 CapEx is expected to be slightly higher than $30 billion U.S. dollars, with allocation to advanced processes, specialty technologies, and advanced packaging.

Risks

• Overseas Fab Dilution: Overseas fabs (e.g., Arizona, Japan) will have lower profitability initially, expected to dilute gross margin by 2-3% in 2025.
• Electricity Costs: Taiwan electricity prices have doubled in recent years, expected to impact gross margin by at least 1% in 2025.
• Foreign Exchange: Exchange rate movements can impact gross margin, with a 1% movement in dollar-NT rate affecting gross margin by 40 basis points.

Question and Answer

Q: How does TSMC view the sustainability of AI demand and the duration of the semiconductor cycle?

A: C.C. Wei believes AI demand is real, driven by customer usage and productivity gains, and expects it to be a long-term growth cycle.

Q: What is the outlook for CapEx growth in the coming years?

A: Wendell Huang stated that 2025 CapEx is likely to be higher than 2024, with updates to be provided in January.

Q: What are the key factors affecting gross margin outlook for 2025?

A: Factors include dilution from N3 ramp, overseas fab ramp, electricity costs, and foreign exchange movements.

Q: How does TSMC address antitrust concerns and its pricing strategy?

A: C.C. Wei stated TSMC works with customers and suppliers as partners, not a monopoly concern, and pricing is set for sustainable growth.

Q: How does TSMC plan for long-term AI demand beyond 2025?

A: TSMC works with customers on a rolling basis, using a disciplined system to plan capacity to support long-term demand.

Q: What is the outlook for cash dividends and capital allocation?

A: Dividends will increase steadily with free cash flow, balancing shareholder returns and investment in advanced technologies.

Q: What is the current status of CoWoS capacity?

A: CoWoS demand far exceeds supply, with capacity being increased but still insufficient to meet demand.