Taiwan Semiconductor Manufacturing Co., Ltd. Q2 FY2024 earnings call

• Profitability: Second quarter gross margin slightly ahead of guidance; third quarter gross margin expected to increase to midpoint 54.5% due to higher utilization and cost improvements, offset by N3 ramp and other costs.
• Capital Budget: 2024 capital budget narrowed to $30-$32 billion, 70-80% for advanced processes, 10-20% for specialty, 10% for advanced packaging, etc.
• Demand Outlook: Strong demand for 3nm and 5nm; new definition of foundry industry includes packaging, etc., with industry growth forecasted.
• Technology Development: N2 and A16 technologies lead, with N2 expected to have higher tape-outs than N3/N5; N2P and A16 scheduled for production in 2026.

Second quarter revenue increased 13.6% sequentially in NT or 10.3% in U.S. dollars. Gross margin was 53.2%, operating margin 42.5%. 3-nanometer contributed 15% of wafer revenue, 5-nanometer 35%, 7-nanometer 17%; advanced technology (7-nanometer and below) accounted for 67%. HPC increased 28% QoQ to 52% of revenue, smartphone 33%, IoT 6%, automotive 5%, DCE 2%.

• Third Quarter Revenue: Expected $22.4-$23.2B USD, 9.5% QoQ growth.
• Gross Margin: 53.5%-55.5%, Operating Margin: 42.5%-44.5%.
• 2024 Capital Budget: Narrowed to $30-$32B, 70-80% for advanced processes.

• Cost Challenges: Rising process complexity, electricity costs, global expansion costs.
• Geopolitical Risks: Potential impacts on overseas fab expansion and operations.

Q: On AI accelerator and CoWoS capacity balance and expansion A: C.C. Wei said supply-demand balance not yet reached, continuing to increase CoWoS capacity, with next year likely more than doubling.

Q: Gross margin and subsidies A: Wendell Huang discussed gross margin factors, including N3 dilution, cost improvements, and overseas fab impact on margins.

Q: Pricing and leading-edge capacity A: C.C. Wei stated pricing is strategic, leading-edge capacity likely tight next year, enabling value selling.

Q: Geopolitical risk and overseas expansion A: C.C. Wei confirmed no change to overseas fab expansion plans, Wendell Huang noted no current tariff issues.

Q: Advanced packaging profitability and CoWoS supply A: C.C. Wei said advanced packaging margin approaching corporate average, working with OSAT partners to increase CoWoS supply.

Q: N2 revenue and margin dilution A: C.C. Wei and Wendell Huang discussed N2 revenue potential and margin improvement compared to N3.

Q: CoWoS technology and capacity A: C.C. Wei explained CoWoS capacity doubling, customer migration to advanced versions, and technical constraints.

Q: N2 revenue and margin vs N3 A: Wendell Huang said N2 revenue will be larger, margin dilution faster to corporate average.

Q: Smartphone/PC silicon content and AI impact A: C.C. Wei discussed AI-driven die size increases, tight N5/N3 capacity, and silicon content implications.

Q: AI demand reality and capacity planning A: C.C. Wei emphasized AI demand is more real, using disciplined capacity planning to avoid past mistakes.

Q: SPR technology and A16 bottlenecks A: C.C. Wei discussed SPR power savings, A16 benefits, and capacity expansion challenges.

Q: Computex and fan-out panel packaging A: C.C. Wei noted Computex announcements support value selling, and panel fan-out packaging under consideration for mid-term.