Taiwan Semiconductor Manufacturing Company’s Q1 2023 revenue declined by (4.8%) YoY to $16.72 billion. The revenue came at the lower end of the management guidance of $16.7 billion and $17.5 billion. It missed analyst revenue estimates by 1.6%.
EPADR (Earnings per American Depository Receipt) came at $1.31 and beat estimates by $0.12 (9.7% beat). The Q2 revenue guidance was lower. However, there is scope for a better bottom line than expected in H2 due to the better utilization rate and cost controls.
TSM will be able to better withstand the macro challenges and the company’s long-term growth opportunities are still strong due to the leadership position in the advanced nodes. The recent generative AI trend is another tailwind for the company.
Financials:
Revenue declined by (4.8%) YoY to $16.72 billion and missed estimates by 1.6%. The company released its monthly revenue figures earlier this month. The softness in the revenue was expected and we have covered in our pre-ER here.
The guidance for the next quarter is $15.2 billion to $16 billion based on the exchange rate of $1= NT$30.4. This represents a YoY decline (14.1%) at the mid-point of the guidance. It missed estimates by 4% as the inventory adjustments are expected to continue due to the challenging macro environment and slowing end-market demand.
Wendell Huang, VP and CFO of TSMC, said, “Our first quarter business was impacted by weakening macroeconomic conditions and softening end market demand, which led customers to adjust their demand accordingly.” He further added, “Moving into second quarter 2023, we expect our business to continue to be impacted by customers’ further inventory adjustment.”
Gross profit declined by (3.6%) YoY to $9.42 billion. The gross margin was 56.3% compared to 55.6% in the same period last year. The gross margin was expected to be lower due to lower capacity utilization. The gross margin was higher than the management guidance of 53.5% to 55.5%. The management guidance for Q2 is 52% to 54%. The next quarter’s gross margin will be negatively impacted by lower capacity utilization and higher electricity costs in Taiwan. The higher electricity costs will negatively impact the gross margins by 0.60% in Q2 and by about 0.50% for the full year 2023.
The operating income declined by (5%) YoY to $7.6 billion. The operating margin was 45.5% compared to 45.6% in the same period last year. The operating margin was also higher than the management guidance of 41.5% to 43.5%. The company’s cost control efforts led to a reduction in operating expenses and improvement in the margins. Wendell Huang, CFO of the company, said in the earnings call, “Total operating expenses accounted for 10.8% of net revenue, which is lower than the 12% implied in our first quarter guidance mainly due to stringent expense control and lower employee profit sharing.mainly due to stringent expense control and lower employee profit sharing. The management guidance for Q2 is 39.5% to 41.5%.
We had also highlighted in our pre-ER about the margins, “So, we understand that the margins will be lower due to higher R&D expenses along with lower utilization due to inventory adjustments, ramp-up, overseas fab expansion, and inflationary pressures.”
The net profit declined by (6.3%) YoY to $6.8 billion. The net profit margin was 40.7% compared to 41.3% in the same period last year. The GAAP EPADR (Earnings per American Depository Receipt) came at $1.31 and beat estimates by $0.12. Return on Equity was 27.5% compared to 36.2% in the same period last year.
The free cash flow was $2.72 billion compared to $3.94 billion in the same period last year. The free cash flow margin was 16% compared to 22% in the same period last year. The company has a stable balance sheet. The company had cash and marketable securities of $52.24 billion and debt of $28.16 billion at the end of the March quarter.
Capex increased by 6.1% YoY to $9.94 billion. The management has reiterated the full year Capex guidance of $32 billion to $36 billion.
Smartphone declined (27%) QoQ and accounted for 34% of revenue. HPC declined (14%) QoQ and accounted for 44% of revenue. IoT declined (19%) QoQ and accounted for 9% of revenue. Automotive increased 5% QoQ and accounted for 7% of revenue. Digital Consumer Electronics decreased (5%) QoQ and accounted for 2%. Others decreased by (18%) QoQ and accounted for 4% of revenue.
Other important earnings call updates:
The management had mentioned in the previous earnings call that 2023 will be a slight growth year for the company. However, the recovery is taking longer than expected due to inventory adjustments expected to continue due to the challenging macro environment and slowing end-market demand. So, the company expects 2023 revenue to decline low to mid-single digit in U.S. dollar terms. Revenue in the 1H is expected to decline by 10% YoY and the H2 revenue is expected to be better than the 1H. The key takeaway is that the company will perform better than the industry.
C.C. Wei, CEO of the company, said in the earnings call. “3 months ago, we said we expect fabless semiconductor inventory to start gradually reducing 4Q 2022 and we forecast a sharper reduction throughout the first half of 2023. However, due to weakening macroeconomic conditions and softening end market demand fabless semiconductor inventory continued to increase in the fourth quarter and exited 2022 at a much higher level than we expected. In addition, the recovery in end market demand from channels reopening is also lower than our expectation. Therefore, the fabless semiconductor inventory adjustment in first half '23 is taking longer than our prior expectation. It may extend into third quarter this year before rebalancing to a healthier level.”fabless semiconductor inventory adjustment in first half '23 is taking longer than our prior expectation. It may extend into third quarter this year before rebalancing to a healthier level.”
“For the full year of 2023, we do our forecast for the semiconductor market, excluding memory, to decline mid-single-digit percent while foundry industry is forecast to decline high single-digit percent. We now expect our full year 2023 revenue to decline low to mid-single-digit percent in U.S. dollar terms and our business to do better than both semiconductor ex memory and foundry industries, supported by our strong technology leadership and differentiation.”We now expect our full year 2023 revenue to decline low to mid-single-digit percent in U.S. dollar terms and our business to do better than both semiconductor ex memory and foundry industries, supported by our strong technology leadership and differentiation.”
Management comments on N7 recovery. “It will be recovered but slowly. As I said, most of the N6 and N7's technology loading still in HPC and smartphone. However, looking into the future, some of the specialties such as RF, connectivity, WiFi, all those kind of things will start to build up the loading their demand. And we expect in the long term, 7-nanometers loading will become more healthier.”
The demand for N3 chips are strong. C.C. Wei said in the earnings call, “Our 3-nanometer technology is the first in the semiconductor industry to high-volume production with good yield. As our customers' demand for N3 exceeds our ability to supply, we expect N3 to be fully utilized in 2023 supported by both HPC and smartphone applications. Sizable N3 revenue contribution is expected to start in third quarter and N3 will contribute mid-single-digit percentage of our total wafer revenue in 2023.”Our 3-nanometer technology is the first in the semiconductor industry to high-volume production with good yield. As our customers' demand for N3 exceeds our ability to supply, we expect N3 to be fully utilized in 2023 supported by both HPC and smartphone applications. Sizable N3 revenue contribution is expected to start in third quarter and N3 will contribute mid-single-digit percentage of our total wafer revenue in 2023.”
Analyst Notes:
Susquehanna upgraded TSMC to Positive from Neutral with a $126 price target. The analyst says a "worst-case earnings scenario" is now reflected in investor expectations. The ramp of new products is helping with modest revenue improvement for TSMC in the second half of 2023 following a severe wafer shipment decline in the first half of the year, the analyst tells investors in a research note. With the utilization rate rebounding in fiscal Q3, the company's earnings should rebound at a faster pace than revenue, a trend that should gain momentum in 2024 as new product ramp.
Conclusion
TSM’s results are good taking into consideration the tough macro environment. The revenue guidance is lower. However, the bottom-line beat was the main highlight of the report. The company’s cost control efforts helped to improve the margins. Even though the recovery has been delayed, the company’s long-term growth outlook is still positive due to its leadership position in producing advanced chips that will be used in HPC and smartphones.
Recommended Reading:
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