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Source: Times Finance Author: Wang Xia

Recently, TSMC (TSM.N) released its second quarter 2024 financial report.

In the second quarter, TSMC's performance blossomed across the board, with revenue of US$20.82 billion (approximately RMB 150.462 billion), a year-on-year increase of 32.8%; gross profit margin reached 53.2% (higher than the previous estimate of 51% to 53%), and net profit attributable to shareholders of the parent was US$7.66 billion (approximately RMB 55.37 billion), a month-on-month increase of 9.9%.

Before the release of this impressive financial report, there were reports that Apple and Nvidia had recently given TSMC "big gift packages".

In early July, according to media reports, Apple (AAPL.US) will receive the first large order for TSMC's most advanced process, namely the 2nm process, which will be used for the iPhone 17. TSMC's next-generation 3D advanced packaging SoIC is planned to be used for Apple's M5 chip, which is expected to be mass-produced in 2025.

At this earnings conference, TSMC officially announced that it will trial-produce 2nm process chips.

There are also reports that Nvidia has increased its 4nm process wafer input to TSMC by 25% to meet the strong production demand for its latest Blackwell platform architecture graphics processor.

Although no response was given to specific manufacturers’ orders, TSMC executives still answered key questions such as AI trends and capacity allocation at the earnings conference. According to reports, 70% to 80% of TSMC’s capital expenditures in 2024 will be allocated to advanced process technologies. TSMC CEO Wei Zhejia believes that “at TSMC, higher levels of capital expenditures are always associated with higher growth opportunities in the coming years.”

TSMC said it expects third-quarter revenue of $22.4-23.2 billion (US$17.3 billion in the same period last year). It expects gross margin to be 53.5-55.5% in the third quarter (53.2% in the second quarter). It expects operating profit margin to be 42.5-44.5% in the third quarter (42.5% in the second quarter).

Advanced process development

Advanced processes (7nm and below) remain TSMC's main revenue driver.

The financial report shows that TSMC's advanced process technology accounted for 67% of total wafer revenue in the second quarter, up 2% from the previous quarter. Among them, 3nm process technology contributed 15% of total wafer revenue (9% in the first quarter), while 5nm and 7nm accounted for 35% and 17% respectively.

Source: TSMC's second quarter 2024 corporate briefing briefing

In terms of customer type, revenue from North American customers remains the largest, accounting for 65% of total net revenue, followed by revenue from China, which accounts for 16%.

By industry, TSMC achieved month-on-month revenue growth in multiple terminal markets.

Source: TSMC's second quarter 2024 corporate briefing briefing

AI is the key word throughout TSMC's good performance report. TSMC's AI business is included in the two sectors of high-performance computing (HPC) and consumer electronics (DCE), which are also the two sectors with the largest growth, reaching 28% and 20% respectively.

The high-performance computing (HPC) platform includes personal computers, tablets, game consoles, servers, base stations, etc., and the corresponding products include CPUs, GPUs, AI accelerators, field programmable gate arrays (FPGAs), etc., which currently account for more than half of TSMC's revenue. The DCE business includes smart digital TVs, set-top boxes, AI embedded smart cameras, WLAN, PMIC, T-CON and other products.

"The fact that HPC demand growth ranks first shows that AI computing has a strong driving effect on chips in the field of cloud computing. The growth of DCE may come from AI embedded smart cameras or other end-side AI devices." said Chen Wei, former chief scientist of an artificial intelligence NLP company and chairman of Qianxin Technology.

Smartphones are the only segment of TSMC where revenue has declined. As one of TSMC's most important downstream demands, smartphone revenue accounts for 33%, but it fell 1% month-on-month in the second quarter.

However, Wei Zhejia said at the earnings conference that although there has not been a significant increase in the number, the AI ​​wave may boost the demand for the mobile phone sector. "Now everyone wants to integrate AI functions into edge devices, which may stimulate the shortening of device replacement cycles. Maybe in two years, you will see a big wave of growth in edge devices."

Data released by Canalys showed that in the second quarter of 2024, the global smartphone market grew for three consecutive quarters, with shipments increasing by 12% year-on-year to 288 million units.

Chen Wei believes that although mobile phone shipments increased significantly in the second quarter, it will take some time for the effect to be transmitted to smartphone chips. "Considering the stocking period before Christmas in North America and New Year in other regions, there is a high probability that strong demand will appear in the third quarter."

Expanding 3nm/2nm productionProcess

TSMC has repeatedly responded to the expansion of 2nm and 3nm advanced processes at its earnings conference. A study pointed out that TSMC's single-wafer revenue reached a record high of approximately US$6,662 per piece in Q2 2024, mainly benefiting from the increase in the proportion of 3nm revenue.

In June this year, market news came out that TSMC's 3nm process capacity has been fully utilized until 2026. At the performance report meeting, Wei Zhejia mentioned that the demand for 3nm process is very strong, and it is not ruled out that more 5nm processes will be converted to 3nm in the future.

Chen Wei told the Times Finance reporter that the current driving force for process conversion mainly comes from industry competition in smartphones. "In 2023, Apple placed a large order with TSMC. Driven by Apple, Qualcomm's mobile phone chips also adopted 3nm this year." He predicts that in the first half of next year, a large number of mobile phones using the 3nm process will be lined up to enter the market.

Previously, Tianfeng International Securities analyst Ming-Chi Kuo also stated that Qualcomm transferred its foundry orders to TSMC due to mass production yield issues with Samsung Electronics' 3nm process.

Image source: Tuchong Creative

At present, TSMC has won many major customers such as Apple, Nvidia, and AMD.

Earlier in July, media reported that Nvidia increased its 4nm process wafer input to TSMC by 25% to meet the strong production demand for its latest Blackwell platform architecture graphics processor.

The Blackwell architecture GPU is known as the "most powerful AI chip on earth". It has 208 billion transistors and is manufactured using TSMC's customized 4nm process. This GPU connects the GPU dies into a unified GPU through 10TB/s inter-chip interconnection. It can implement AI training and real-time large language model inference on models with up to 10 trillion parameters.

The industry believes that this may be one of the most expensive chips manufactured by TSMC. When Nvidia released its first quarter financial report, it revealed that Blackwell was in short supply and the market was enthusiastic.

Apple is TSMC's largest customer to date, with Nvidia also ranked second last year. Financial analyst Dan Nystedt estimates that in 2023, Apple accounted for 25% of TSMC's revenue and paid TSMC $17.52 billion. In 2023, business revenue from Nvidia accounted for 11% of TSMC's revenue.

TrendForce research points out that TSMC's annual growth rate will be significantly higher than the industry average thanks to the steady orders for advanced processes.

Correspondingly, at the earnings briefing, TSMC also gave a fairly optimistic forecast for its third-quarter performance.

TSMC expects revenue of $22.4-23.2 billion in the third quarter (US$17.3 billion in the same period last year). It expects gross margin of 53.5-55.5% in the third quarter (53.2% in the second quarter). It expects operating profit margin of 42.5-44.5% in the third quarter (42.5% in the second quarter).

Among them, the annual capital expenditure plan, which has attracted much attention from the market, has also been raised from the previous forecast of US$28 billion to US$32 billion to US$30 billion to US$32 billion.

According to TSMC CEO Wei Zhejia, 70% to 80% of capital expenditures will be allocated to advanced process technologies. About 10% to 20% will be used for professional technology, and about 10% will be used for advanced packaging, testing, mask manufacturing, etc.

At present, advanced packaging integration technology represented by CoWoS will also become a major growth point for TSMC.

"We are not yet able to achieve supply and demand balance. Currently, production capacity has been continuously increasing, and we hope to achieve balance sometime in 2025 or 2026." In the conference call, Wei Zhejia responded to the question of when the CoWoS advanced packaging capacity will reach supply and demand balance. He said that from last year to now, TSMC has more than doubled its CoWoS production capacity. Next year, the company's production capacity may double again.

Brady Wang, deputy director of research at Counterpoint, expects TSMC to offset profit pressure by raising prices. “Since high-performance computing (HPC) suppliers have higher profit margins and require CoWoS support, their wafer price increases will be higher than those of smartphone and PC suppliers.”