TSM FY24 Result--top 10 Holding--best in class.

 TSM—FY24—top 10 position- Best in Class

The piece after the fh24 was quite detailed I will not repeat that information here.

Call Details

There was strong demand for our industry-leading 3-nanometer and 5-nanometer technologies. Gross margin is stronger, mainly reflecting a higher capacity utilization rate and productivity gains, partially offset by the dilution of the 3-nanometer ramp-up. While operating leverage improved the operating margin.

Revenues continue to migrate towards more complex and higher-priced technologies.

Overall, HPC (high-performance computing-AI) accounted for 51% of our 2024 revenue, Smartphones accounted for 35%, IoT accounted for 6%, and Automotive accounted for 5%.

Due to the strong demand for our 3-nanometer and 5-nanometer process technologies, we continued to outperform the foundry industry in 2024. Our revenue increased 30% in US dollar terms to $90 billion. Gross margin increased 1.7 percentage points to 56.1%, mainly reflecting improvements in overall capacity utilization, partially offset by 3-nanometer dilution and higher electricity costs. Overall, full-year EPS increased 39.9% to TWD45.25 and ROE increased 4.1 percentage points to 30.3%.

Q1 25 Guidance: we expect our first quarter revenue to be between $25 billion and $25.8 billion, which represents a 5.5% sequential decline, or a 34.7% year-over-year increase at the mid-point. GM is expected to be between 57% and 59%, operating margin between 46.5% and 48.5%. Our first quarter gross margin to decrease by 100 basis point to 58% at the mid-point. This is primarily due to ramp costs associated with N2 and CoWoS expansion, and the start of dilution from our overseas fabs

As a reminder, six factors determine TSMC's profitability. Leadership technology development and ramp-up, pricing, cost reduction, technology mix, capacity utilization and foreign exchange rate.

Looking at the full year 2025, given the six factors, there are a few puts and takes I would like to share. On the one hand, we are working hard to increase our value. The dilution impact from our N3 ramp is expected to gradually reduce and we expect our overall utilization rate to moderately increase in 2025. On the other hand, as we have said before, we forecast 2% to 3% margin dilution impact from the ramp-up of our overseas fabs, increasing throughout 2025. We also expect inflationary costs, including higher electricity prices in Taiwan to impact our gross margin by at least 1% in 2025. In addition, there are some ramp-up costs associated with N2 and further conversion of N5 to N3 capacity, which together we expect to impact our gross margin by about 1%.

Longer-term, we continue to forecast a long-term gross margin of 53% and higher is achievable.

At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. In 2024, we spent $29.8 billion, as we continue to invest to support our customers' growth. With our strong technology leadership and differentiation, we are well-positioned to capture the multi-year structure demand from the industry megatrends of 5G, AI and HPC.

In 2025, we expect our capital budget to be between $38 billion and $42 billion, as we invest to capture the future growth. Out of the $38 billion to $42 billion CapEx for 2025, about 70% of the capital budget will be allocated for advanced process technologies, about 10% to 20% will be spent on specialty technologies, and about 10% to 20% will be spent for advanced packaging, testing, mask making and others.

2024 was a mixed year of recovery for the global semiconductor industry. AI-related demand was strong while our other applications saw only a very mild recovery, as macroeconomic conditions weigh on consumer sentiment and end market demand. The Foundry 2.0 industry increased 6% year-over-year, slightly lower than our previous forecast, TSMC's revenue increased 30% year-over-year, outperforming the foundry industry growth.

We forecast the Foundry 2.0 industry to grow 10% year-over-year in 2025, supported by robust AI-related demand and a mild recovery in other end-market segments. We expect 2025 to be another strong growth year for TSMC and forecast our full-year revenue to increase by close to mid-20s per cent.

Revenue from AI accelerators, which we now define as AI GPU, AI ASICs and HBM controllers for AI training and inference in the data centre, accounted for close to mid-teens per cent of our total revenue in 2024. Even after more than tripling in 2024, we forecast our revenue from AI accelerator to double in 2025, as a strong surge in AI-related demand continues.

We now forecast the revenue growth from AI accelerators to approach a mid-40% CAGR for the five-year period, starting off the already higher base of 2024. We expect AI accelerators to be the strongest driver of our HPC platform growth and the largest contributor in terms of our overall incremental revenue growth in the next several years.

For the five-year period starting from 2024, we expect our long-term revenue growth to approach a 20% CAGR in US dollar terms, fuelled by all four of our growth platforms which are smartphone, HPC, IoT and automotive.

Global FABs

Building on the successful result of our earlier engineering wafer production, we were able to pull ahead the production schedule of our first fab in Arizona. Our first fab has already entered high-volume production in 4Q 2024 utilizing N4 process technology with a yield comparable to our fabs in Taiwan. We expect a smooth ramp-up process and with our strong manufacturing capability and execution, we are confident to deliver the same level of manufacturing quality and reliability from our fab in Arizona as from our fab in Taiwan. Our plans for the second fab and the third fab in Arizona are also on track. These fabs are utilizing even more advanced technologies, such as N3, N2, and A16 based on our customers' needs.

Our first specialty technology fab in Kumamoto Japan started volume production at the end of 2024 with a record yield. Construction of our second fab, a specialty fab, is scheduled to begin this year.

We are progressing smoothly with our plans to build a specialty technology fab in Dresden, Germany, focusing on automotive and industrial applications.

We are also expanding our advanced packaging facilities, 3 and 2 nanometers across several locations in Taiwan.

Overseas FABs are higher cost, and TSM aims to be the best operator in each jurisdiction. Note the dilution over 5 years is due to the build-out of multiple FABs, staggered over 5 years.

N2 A16

N2 is well on track for volume production in the second half of 2025 as scheduled, with a ramp profile similar to N3. We also introduced N2P as an extension of N2 family, and volume production is scheduled for the second half of 2026.

A16 is best suitable for specific HPC products. Volume production is scheduled for second half 2026. We believe N2, N2P, A16 and its derivatives will further extend our technology leadership position and enable TSMC to capture the growth opportunity well into the future.

Question-and-Answer Session

Moving advanced processes into overseas FABs is constrained, due to complexity, by production requiring to be close to R&D.

High utilization in the last cycle drove the very high GMs.

The US fab cost is more expensive, mainly because of several reasons. Number one, the smaller scale; number two, the higher price in the supply chain; and number three, the very early stage of the ecosystem. So if you add all these up, 2% to 3% dilution from our overseas fabs every year in the next five years. it implies very low initial GM in overseas FABs.

TSM believe as 2nm technology enters smartphones and PCs, the amount of silicon required will increase and the replacement cycle will shorten. From 2026.

US-imposed Chinese restrictions are manageable. TSM are applying for a special permit, and we believe that we have confidence that they will get some permission so long as they are not in the AI area, especially automotive and crypto mining.

ASIC demand through AVGO is expected to be very strong. CoWoS demand is all focussed on AI, at the moment, broadening demand is expected over time, CPO (co-packaged optics) and server chip. Edge AI is expected to require 5-10% more silicon in devices using newer nodes, but the replacement cycle will shorten and this is the bigger demand mover. In both smartphones and PC’s.

TSMC’s CoWoS (chip-on-substrate-on-wafer) packaging capability has grown into the critical backbone of AI developments recently. The technology is essentially what allows the many layers of memory and processing power components needed for AI applications to be glued into one scalable processor.

Advanced packaging will be about 10% of revenue in 2025, GM is improving but still below the corporate average.

 

CONCLUSION

TSMC is an outstanding business, looking at its growth prospects, being a dominant leader in a critical industry. Almost all financial metrics are good or very good (B/s, cash conversion etc).

The progression in the uses of higher margin nodes is occurring, maybe better than expected, and the overseas FABs are progressing without significant mishaps. These outcomes are a testament to management execution.

Importantly, the growth outlook is based on continuing demand in the AI space. Driven mainly by the Hyperscalers at this stage. The timing of the broadening of demand by user and product is uncertain. Certainly, growth in AI usage and devices is expected to occur but the profile may not be smooth. TSM is building ahead of strong demand. The main risk is an air pocket in demand that could occur for many reasons, such as Hyperscalers pausing growth at some stage, which would send a shudder down the semiconductor supply chain. Other industries may also take longer to adopt the technology.

Valuation $207 TTM PE 29x, assuming 18% 5Y eps growth and exit PE of 21X gives a 10% return (not including dividends). At these assumptions, TSM is a buy now. If we temper eps growth to a still good but slower 13%, which TSM has done previously, we get a $170 entry price for a 10% return. Adding near the $170 level on growth question marks looks reasonable.

As a top 10 position, any weakness could be used to increase the position.

 PLEASE NOTE DISCLAIMER

Appendix

Market share is dominant

 

Note TSM admit to ineffective N3 pricing, N2 will not see the same mistake.

But another reason is that we set the pricing of N3 very early, several years ahead of production. However, we experienced a lot of cost inflation pressures in the following years. So as a result, N3 will take a longer time than N5 and N7 to reach the corporate average gross margin. For N2, based on what we can see so far is that we are doing a better job in cost and selling our value, and we expect N2 to have a better margin profile than N3.

Source: TSMC 1Q24 Earnings Call Transcript.