TSMC Q3 2024 Earnings: Strong Results Driven by AI Demand, but Challenges Remain

October 17, 2024 – Taiwan Semiconductor Manufacturing Company (TSMC) today reported strong third-quarter 2024 earnings, exceeding guidance and fueled by robust demand for high-performance computing (HPC) chips, particularly in the artificial intelligence (AI) sector. However, the company also highlighted challenges related to inventory levels, rising costs, and the ramp-up of overseas fabs.

Key Financial Highlights:

• Revenue: USD 23.5 billion, exceeding guidance and representing a 12.8% sequential increase in New Taiwan Dollars (NTD).
• Gross Margin: 57.8%, a 4.6 percentage point sequential increase.
• Operating Margin: 47.5%, a 5 percentage point sequential increase.
• Earnings Per Share (EPS): TWD 12.54.
• Return on Equity (ROE): 33.4%.
• Cash and Marketable Securities: TWD 2.2 trillion (USD 69 billion) at the end of Q3 2024.
• Capital Expenditures (CapEx): USD 6.4 billion for Q3 2024.
• Cash Flow from Operations: TWD 392 billion for Q3 2024.

Revenue Breakdown:

The strong revenue performance was driven by significant demand for HPC chips, which accounted for 51% of revenue, with smartphone applications contributing 34%. Advanced technologies (7nm and below) constituted 69% of wafer revenue, with 3nm representing 20%, 5nm 32%, and 7nm 17%. This highlights TSMC’s leadership in cutting-edge semiconductor manufacturing. Demand for HPC chips tripled year-over-year, with AI server chips expected to comprise 14% to 16% of TSMC’s total revenue in 2024.

Outlook and Challenges:

TSMC provided optimistic guidance for Q4 2024, projecting revenue between USD 26.1 billion and USD 26.9 billion (a 13% sequential increase, and 35% year-over-year growth at the midpoint), and gross margin between 57% and 59%. However, the company acknowledged several challenges:

• Inventory: Inventory days increased to 87, primarily due to proactive wafer building for N3 and N5 technologies.
• Cost Pressures: Rising electricity prices in Taiwan and higher overseas fab costs are expected to impact gross margins. The company anticipates a 1% gross margin reduction due to electricity prices and a further 2%-3% reduction due to overseas fab ramp-up.
• Capacity Constraints: While TSMC plans to double CoWoS capacity, meeting the high demand remains a challenge.
• Overseas Fab Profitability: Initial profitability at overseas fabs (Arizona, Japan) is expected to be lower due to scale and cost factors. The Arizona fab will begin mass production in early 2025, with a second fab following in 2028. The first Japanese fab commenced production in Q3 2024, with a second planned for 2027. A European fab is slated for production in 2027.

Management Commentary:

TSMC CEO C.C. Wei emphasized the strong and sustainable nature of AI demand, describing it as “just the beginning.” He also highlighted the significant contribution of AI and machine learning to TSMC’s operational efficiency and productivity. While a specific long-term compound annual growth rate (CAGR) was not provided, management expects healthy growth over the next five years, with the potential for accelerated growth driven by continued robust AI demand. 2025 CapEx is expected to exceed the 2024 figure of over USD 30 billion.

Conclusion:

TSMC’s Q3 results demonstrate strong financial performance driven by the burgeoning AI market. While challenges related to costs and capacity remain, the company’s positive outlook and significant investments in advanced technologies and global capacity expansion position it for continued growth in the years to come. However, investors should remain aware of the potential impact of rising costs and the time required for new fabs to reach full profitability.