TSMC surpasses revenue and profit projections for the first quarter due to robust demand for AI chips.

‍KEY POINTS‍

1. TSMC exceeds revenue and profit forecasts for Q1 driven by robust demand for AI chips.
2. TSMC, the leading manufacturer of advanced processors globally, serves clients like Nvidia and Apple.
3. The surge in demand for AI chips is fueled by the growing prevalence of large language models like ChatGPT and their Chinese counterparts.‍

Taiwan Semiconductor Manufacturing Company (TSMC) exceeded revenue and profit expectations for the first quarter, driven by strong demand for advanced chips, particularly those utilized in AI applications. Here are the first-quarter results compared to LSEG consensus estimates:

• Net revenue: 592.64 billion New Taiwan dollars ($18.87 billion), surpassing the expected NT$582.94 billion
• Net income: NT$225.49 billion, higher than the anticipated NT$213.59 billion

TSMC reported a 16.5% year-on-year increase in net revenue to NT$592.64 billion and an 8.9% rise in net income to NT$225.49 billion. The company provided guidance for first-quarter revenue to range between $18 billion and $18.8 billion.

As the world's largest producer of advanced processors, TSMC serves clients such as Nvidia and Apple. CFO Wendell Huang noted during the earnings call that for the second quarter of 2024, the business anticipates strong demand for industry-leading 3-nanometer and 5-nanometer technologies, partially offset by continued smartphone seasonality.

CEO C.C. Wei expressed optimism about 2024 being a "healthy" growth year, supported by the company's technological leadership and broad customer base. He highlighted TSMC's collaboration with AI innovators to meet the increasing demand for energy-efficient computing power. Additionally, Wei mentioned the expectation of server AI processor revenue contribution more than doubling this year.

TSMC anticipates its second-quarter revenue to range between $19.6 billion and $20.4 billion. The company is presently manufacturing 3-nanometer chips and plans to initiate mass production of 2-nanometer chips in 2025. Typically, chips with smaller nanometer sizes offer enhanced performance and efficiency.

The robust demand for AI chips, driven by the widespread adoption of large language models such as ChatGPT and Chinese variants, has propelled TSMC's shares to surge by 56% over the past year.

"TSMC is well-positioned for strong performance based on key industry trends. The sustained demand for advanced chips, particularly those utilized in AI applications, bodes well for both the short and long term. Additionally, the focus on advanced chip development, including the transition to 3nm technology, is a significant driver of TSMC's long-term growth," remarked Brady Wang, associate director at Counterpoint Research, ahead of the results

In the fourth quarter, TSMC accounted for 61% of global foundry revenue, according to data from Counterpoint Research, with Samsung Foundry following behind at 14%.

"TSMC’s net profit margin continues to be one of the highest in the company’s history at 40%, against an industry average of 14%, demonstrating TSMC’s strong competitive position. The high margin is the result of an increased share of sales of 7nm and smaller chips, which have significantly higher margins," remarked Grzegorz Drozdz, market analyst at Conotoxia, last week.

TSMC faced challenges last year due to macroeconomic headwinds and inventory adjustments. Surplus inventories arose as smartphone and PC manufacturers stockpiled chips during the pandemic, leading to decreased demand in the Covid-era.

In April, Taiwan experienced its strongest earthquake in 25 years. While TSMC's construction sites were initially inspected and found to be normal, workers at some fabs were briefly evacuated. However, they soon returned to their workplaces without any significant damage reported.

Despite this, some wafers were affected by the earthquake and had to be discarded, according to CFO Huang. Nevertheless, TSMC expects to recover most of the lost production in the second quarter with minimal impact on revenue.

"We have just guided our second-quarter gross margin to decline by 1.1 percentage points to 52% at the midpoint, primarily due to the impact from the earthquake on April 3, as just discussed, and higher electricity costs in Taiwan," Huang informed investors and analysts on Thursday.

Furthermore, TSMC's Arizona subsidiary received preliminary approval from the U.S. for government funding worth up to $6.6 billion to develop the world’s most advanced semiconductors. Additionally, TSMC is eligible for about $5 billion in proposed loans.

Source: CNBC‍