TSMC Q3 results beat across the board, helped by strong demand for AI chips. Revenue grew 36% YoY to $23.5 billion and beat the management guide of $22.4 billion to $23.2 billion. The bottom line was even stronger, as EPS grew by 50.4% YoY to $1.94, beating analysts’ estimates by 8.6%. Management also raised the full-year revenue guidance from above mid-20% to close to 30%, primarily due to the robust demand for AI chips.
Revenue
Q3 revenue grew by 36% YoY and 12.9% QoQ to $23.5 billion, beating the management guide of $22.4 billion to $23.2 billion. The strong revenue growth was primarily helped by demand for AI and smartphone chips.
- Management guide for the next quarter is $26.1 billion to $26.9 billion, representing a YoY growth of 35.1% and 12.8% sequential growth at the mid-point.
- Management raised the full-year revenue guidance from above mid-20% to close to 30%. By calculating the Q4 guide, the FY 2024 revenue is expected to grow 29.4% YoY to $89.69 billion in US dollar terms.
C.C. Wei, Vice Chairman and CEO, said in the earnings call, “Moving into fourth quarter, we expect our business to continue to be supported by strong demand for our leading-edge process technologies. We continue to observe extremely robust AI-related demand from our customers throughout the second half of 2024, leading to increasing overall capacity utilization rate for our leading-edge 3-nanometer and 5-nanometer process technologies.”
Due to the technological leadership, the company is able to capture robust demand for the most advanced AI chips. The revenue contribution from server AI processors is expected to triple this year and will account for a mid-teens percentage of 2024 revenue. “At TSMC, we define server AI processor as GPUs, AI accelerators, and CPUs performing training and inference functions, and do not include networking, edge, or on-device AI. We now forecast the revenue contribution from server AI processors to more than triple this year and account for mid-teens percentage of our total revenue in 2024. Supported by our technology leadership and broader customer base, we are well-positioned to capture the industry's growth opportunities. We now forecast our full-year revenue to increase by close to 30% in U.S. dollar terms.”
Margins
Margins continue to expand due to cost controls, economies of scale, and better price negotiation with customers.
- Q3 gross margin was 57.8%, up from 54.3% in the same period last year and 53.2% in Q2. It beat the management guide of 53.5% to 55.5%. The strong gross margin was due to better capacity utilization and cost improvements.
- Management has guided Q4 gross margin to increase 20 basis points sequentially to 58% at the midpoint helped by higher capacity utilization, partially offset by dilution from N3 ramp, higher electricity prices in Taiwan, and N5 to N3 tool conversion cost.
- Operating margin improved to 47.5% from 41.7% in the same period last year and 42.5% in Q2 due to operating leverage. Management guide for Q4 is 47.5% at the midpoint.
- Net income grew by 52.4% YoY to $10.06 billion or 42.8% of revenue compared to 38.6% in the same period last year and 36.8% in Q2.
EPS
EPS grew by 50.4% YoY to $1.94, beating analysts’ estimates by 8.6% due to better capacity utilization, cost improvement and operating leverage.
- Analysts expect Q4 EPS to grow 35.4% YoY to $1.95 and 26.1% YoY to $1.74 in Q1 2025.
- EPS is expected to grow significantly. Analysts expect EPS to grow 26.8% YoY to $6.57 in 2024 and 29.2% YoY to $8.49 in 2025.
Cash Flows and Balance Sheet
The company’s financial stability is evident in its stable cash flow generation.
- Q3 operating cash flow was $12.13 billion or 51.6% of revenue compared to $9.31 billion or 54% of revenue in the same period last year and 56.1% in Q2.
- Free cash flow grew by 166% YoY to $5.72 billion or 24.4% of revenue compared to 12% of revenue in the same period last year and 25.5% of revenue in Q2. Capex was down (-9.9%) YoY to $6.4 billion.
- Management expects capex to be slightly higher than $30 billion for 2024, revised down slightly from the previous guide of $30 billion to $32 billion. As the company continues to invest due to the expected strong AI growth, capex is likely to increase next year, and management mentioned that they will provide more details during the January earnings call.
- Inventories were $9.26 billion compared to $8.39 billion in Q2. Inventory turnover days increased to 87 days from 83 days in Q2 due to the pre-build of N3 and N5 wafers.
- Cash and marketable securities were $68.5 billion, and debt of $30.6 billion, compared to $63.05 billion and $30.4 billion in Q2.
Revenue by Platform
As the leading foundry for AI accelerators, TSMC is riding the enormous wave of demand from Big Tech. The chipmaker’s high-performance computing (HPC) revenues rose 11% QoQ to $11.99 billion and accounted for 51% of revenue, surpassing the 50% mark for the second time.
The chart below also shows that HPC revenue reached a record $11.99 billion in Q3.
Smartphone grew by 16% sequentially and accounted for 34% of revenue from 33% of revenue in Q2.
Internet of Things revenue grew by 35% sequentially and accounted for 7% of revenue.
Automotive revenue grew by 6% sequentially and accounted for 5% of revenue. Digital Consumer Electronics decreased by 19% and accounted for 1% of revenue; others grew by 8% to account for 2% of revenue.
Revenue by Technology
The Advanced nodes are defined as 7-nanometer and below. It accounted for 69% of wafer revenue in Q3 compared to 67% in Q2.
- In Q3 2024, 3-nanometer process technology contributed 20% of wafer revenue, while 5-nanometer and 7-nanometer accounted for 32% and 17%, respectively.
- In Q2 2024, 3-nanometer process technology contributed 15% of wafer revenue, while 5-nanometer and 7-nanometer accounted for 35% and 17%, respectively.
Earnings Call
“AI Demand is Real”
The management clarified in the earnings call to allay fears about the AI opportunity, stating that the demand is real and the return on investment from AI is high.
Question
Gokul Hariharan (Analyst)
“My first question is on the AI investments and the growth that you see. Recently, obviously, there's been a lot of questions about ROI of Gen AI investments, whether this could end up being a bubble. How does TSMC view this trend as you're making your capacity plans given you are enabling pretty much the processing capacity for pretty much everybody?”
Answer
C. C. Wei (Executive)
“Okay Gokul, let me answer your question. Simply, whether this AI demand is real or not, okay? And my judgement is real. We have talked to our customer all the time, including our hyperscaler customers who are building their own chips. And almost every AI innovator is working with TSMC. And so we probably get the deepest and widest look of anyone in this industry.
And why I say it's real, because we have our real experience. We have using the AI and machine learning in our fab and R&D operations. By using AI, we are able to create more value by driving greater productivity, efficiency, speed, qualities.
And think about it, let me use you know 1% productivity gain, that was almost equal to about 1 billion to TSMC. And this is a tangible ROI benefit. And I believe we cannot be the only one company that has benefited from this AI application. So I believe a lot of companies right now are using AI for their own improving productivity, efficiency, everything. So I think it's real.”
PC and Smartphone demand
The management expects healthy growth in the PC and Smartphone demand due to the increasing content due to AI.
Krish Sankar (Analyst)
“Yes, hi. Thanks for taking my question. The first one I had was, I'm kind of curious on the non-AI demand. How do you look at your wafer demand for PC and mobile into calendar ‘25, and have you seen any meaningful revision upwards or downwards on that?
C. C. Wei (Executive)
Okay, Krish. The unique growth of PC and smartphone is still in a low single digit, but the more important is the content. The content now we put more AI into their chip, and so the silicon area increase faster than the unique growth. So again, I would like to say that for this PC and smartphone business, not only — is gradually increased, and we expect it to be healthy in the next few years because of AI-related applications.”
Advanced Packaging
Advanced Packaging demand is strong and will account for high single-digit of revenue this year.
Krish Sankar (Analyst)
“How do you think about that advanced packaging revenue growth over the next few years, and do you think at some point in the next couple of years, advanced packaging can reach corporate-level growth margins, or would it always be below that?
Wendell Huang (Executive)
Yes, Krish, advanced packaging in the next several years, let's say five years, will be growing faster than the corporate average. This year, it accounts for about high single-digit of our revenue. In terms of margins, yes, it is also improving. However, it's still approaching corporate, but not there yet.
Rick Hsu (Analyst)
All right. Thank you so much. A little question as a follow up, the second one. Can you share with us your CoWoS capacity buildup for this year and next year? I know you guys seem to have revised it up several times, so can you share the latest one?
C. C. Wei (Executive)
Okay, Rick. In fact, we are putting a lot of effort to increase the capacity of the CoWoS. Roughly, let me share with you, today's situation is our customers' demand far exceeds our ability to supply. So even we work very hard and increase the capacity by about more than twice, more than two times as this year compared with last year, and probably double again, but still not enough. But anyway, we are working very hard to meet the customers' requirement.”
Conclusion
The company beat across the board and showed its resilience in capturing the demand for advanced chips due to its technological leadership. The top-line growth, along with the bottom-line strength, distinguishes TSMC from other companies that are struggling in the current tough macro environment. The company is the denominator to the biggest AI winners as it supplies to Nvidia, Apple, AMD, Marvell, Intel, and Qualcomm. We look forward to adding this stock to our portfolio.
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Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.