Taiwan Semiconductor Manufacturing Co., Ltd. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Fourth Quarter 2024 Profitability: Gross margin increased 1.2 percentage points sequentially to 59% in Q4 2024 due to higher capacity utilization and productivity gains, partially offset by 3 nanometer ramp-up dilution. Operating margin rose 1.5 percentage points to 49%.
• 2025 Capital Budget: TSMC expects 2025 capital expenditures to be between $38 billion and $42 billion, with approximately 70% allocated to advanced process technologies, 10-20% to specialty technologies, and 10-20% to advanced packaging, testing, and mask making.
• Global Manufacturing Footprint: Arizona fab entered high-volume production in 4Q 2024 using N4 process. Plans for second and third fabs in Arizona are on track. Japan's first specialty tech fab in Kumamoto started volume production in late 2024, with a second fab under construction. A specialty tech fab in Dresden, Germany, is progressing. Taiwan continues to expand 3 nanometer capacity and prepare for 2 nanometer fabs.
• Technology Developments: N2 and A16 technologies are in development. N2P will support smartphone and HPC applications, while A16 is for specific HPC products, both scheduled for volume production in 2026.

Segment Performance

• Revenue by Technology: In Q4 2024, 3 nanometer contributed 26% of wafer revenue, 5 nanometer accounted for 34%, and 7 nanometer for 14%. Advanced technologies (7nm and below) made up 74% of wafer revenue. For full-year 2024, 3 nanometer accounted for 18% of wafer revenue, 5 nanometer 34%, 7 nanometer 17%, with advanced technologies (7nm and below) totaling 69% of total wafer revenue.
• Revenue Contribution by Platform: In Q4 2024, HPC accounted for 53% of revenue, smartphone 35%, IoT 5%, automotive 4%, and DCE 1%. For full-year 2024, HPC made up 51% of revenue, smartphone 35%, IoT 6%, and automotive 5%.

Guidance

• First Quarter 2025: TSMC expects Q1 2025 revenue to be between $25 billion and $25.8 billion (5.5% sequential decline, 34.7% YOY mid-point). Gross margin is forecasted to be 57%-59%, and operating margin 46.5%-48.5%.
• 2025 Effective Tax Rate: The effective tax rate for 2025 is expected to be between 16% and 17%.
• Long-Term Outlook: TSMC forecasts a long-term revenue CAGR of approximately 20% in USD, driven by HPC, smartphone, IoT, and automotive segments.

Risks

• Overseas Fab Dilution: Approximately 2-3% margin dilution annually from overseas fabs (e.g., Arizona, Kumamoto) due to higher costs, smaller scale, and early ecosystem stages.
• Macro Uncertainty: Impact on global economy and end-market demand could affect TSMC's performance.
• Inflationary Costs: Higher electricity prices in Taiwan may impact gross margin by at least 1% in 2025.

Question and Answer

• Q: Gokul Hariharan from JP Morgan on TSMC's US future strategy, including node ramping, discussions with US administration, and IDM fab takeover.

A: C.C. Wei noted Taiwan will always be first for ramping new nodes due to proximity to R&D. Ongoing frank communication with US administration, and no change in strategy to take over IDM fabs as they are important customers.

• Q: Laura Chen from Citigroup on AI-related revenue, including HBM controllers and memory partner progress.

A: TSMC is working with all memory suppliers, and HBM controller opportunities are emerging, though high volume contribution is expected in the next 1-2 years.

• Q: Charlie Chan from Morgan Stanley on US export restrictions on China and CPO supply chain.

A: Initial analysis shows no significant impact, with manageable restrictions. CPO supply chain is being facilitated, but large volume contribution expected in 1.5 years.

• Q: Brett Simpson from Arete Research on Arizona fab progress and AI ASIC demand.

A: Arizona second fab construction progressing, with tools to be moved in 2025. TSMC sees strong AI ASIC demand from hyperscalers, with tight capacity to meet needs.

• Q: Bruce Lu from Goldman Sachs on CoWoS capacity and long-term gross margin.

A: CoWoS capacity is highly concentrated in AI, but non-AI adoption is coming. Long-term gross margin of 53% and higher is achievable despite overseas fab dilution and macro uncertainties.

• Q: Arthur Lai from Macquarie on overseas fab cost mitigation and margin dilution breakdown.

A: TSMC is working to mitigate cost gaps in overseas fabs, with both variable and fixed costs contributing to dilution, but aiming to be the best fab overseas.

• Q: Robert Sanders from Deutsche Bank on HBM constraint and SoIC adoption.

A: TSMC is focused on meeting AI demand, with no comment on other suppliers' constraints. SoIC adoption in smartphones is coming but currently AI-focused.

• Q: Sunny Lin from UBS on cloud growth and Edge AI.

A: Cloud growth expected to continue strongly, with Edge AI seeing increased neural processor content and potential replacement cycle shortening.

• Q: Brad Lin from Bank of America on CoWoS margin and IDM support.

A: CoWoS accounted for over 8% of revenue in 2024, with margin below corporate average but improving. IDM partners are important long-term growth partners.