Taiwan Semiconductor Manufacturing released its Q4 2022 results on January 12th. Revenue grew by 26.7% YoY and declined 1.5% QoQ to $19.93 billion. It came in at the lower end of the management guidance of $19.9 billion to $20.7 billion. The company’s profits were strong. EPS came at $1.82 and beat the analyst’s estimate by $0.05. The market reacted positively to the company’s report.
Note: reference our previous deep dive from December here.
The company’s CFO, Wendell Huang said, “Our fourth quarter business was dampened by end market demand softness, and customers’ inventory adjustment, despite the continued ramp-up for our industry-leading 5nm technologies,” He further added, “Moving into first quarter 2023, as overall macroeconomic conditions remain weak, we expect our business to be further impacted by continued end market demand softness, and customers’ further inventory adjustment.”
The gross profit came in at $12.4 billion compared to $8.29 billion in the same period last year. Gross profit margin improved to 62.2% from 60.4% in Q3 2022 and 52.7% in Q4 2021. It was higher than the management guidance of 59.5% to 61.5%. It was higher due to cost improvements and favorable foreign exchange rate, partially offset by lower utilization rates. We had also noted the Morgan Stanley analyst note in our pre-earnings update. Morgan Stanley analyst Charlie Chan named TSMC as a "Catalyst Driven Idea" ahead of the company reporting Q4 results and providing Q1 guidance. Chan, who thinks gross margins may surprise to the upside given TSMC's wafer price hikes, kept an Overweight rating and NT$700 price target on TSMC shares into the results.TSMC's wafer price hikes, kept an Overweight rating and NT$700 price target on TSMC shares into the results.
The operating income was $10.36 billion compared to $6.56 billion in the same period last year. Operating margin improved to 52% from 50.6% in Q3 2022 and 41.70% in Q4 2021. It was higher than the management guidance of 49% to 51%.
The net income was $9.43 billion compared to $5.97 billion in the same period last year. Net profit margin improved to 47.30% from 45.8% in Q3 2022 and 37.90% in Q4 2021.
The EPADR (Earnings per American Depository Receipt) came at $1.82 compared to $1.79 for Q3 2022 and $1.15 for Q4 2021. It beat the analyst’s estimate by $0.05. Return on Equity was 41.7% compared to 42.9% in Q3 2022 and 31.3% in the same period last year.
The free cash flow was $4.78 billion with a free cash flow margin of 24%, compared to a free cash flow of $4.84 billion (free cash flow margin 24%) in Q3 2022 and $5.12 billion (free cash flow margin of 33%) in Q4 2021. The company has a stable balance sheet. The company had cash & marketable securities of $50.84 billion and debt of $27.8 billion.
The advanced technologies, which are defined as 7-nanometer and below accounted for 54% of Q4 wafer revenue, with 5-nanometer process technology accounting for 32% and 7-nanometer process technology accounting for 22%. In Q3, 5-nanometer accounted for 28% and 7-nanometer accounted for 26%. This means 5nm is gaining market share sequentially.
Smartphone declined 4% QoQ and accounted for 38% of revenue. HPC increased 10% QoQ and accounted for 42%. IoT declined 11% QoQ and accounted for 8%. Automotive increased 10% QoQ and accounted for 6%. Digital Consumer Electronics accounted for 2% and others accounted for 4% of revenue.
For the full-year 2022 revenue grew by 33.5% YoY to $75.88 billion. The company’s CFO, Wendell Huang, said in the earnings call, “To recap our performance in 2022, we had a strong growth in 2022 as our technology leadership position enabled us to capture the industry’s megatrends of 5G and HPC.” technology leadership position enabled us to capture the industry’s megatrends of 5G and HPC.” The gross margin improved to 59.6% from 51.6% in the previous year. Similarly, the operating margin improved to 49.5% from 40.9% in 2021. The company generated free cash flow of $17.7 billion (23% of revenue) compared to $9.8 billion (17% of revenue) in 2021.
The company spent $36.3 billion in Capex in 2022 and plans to spend $32 billion to $36 billion in 2023. Wendell Huang said in the earnings call, “As I have stated before, given the near-term uncertainties, we continue to manage our business prudently and tighten up our capital spending where appropriate. That said, our commitment to support customers’ structural growth remains unchanged and our disciplined CapEx and capacity planning remains based on the long-term market demand profile.”
3-nanometer process technology update
The company has started mass production of N3 chips. The CEO, C.C.Wei, said in the earnings call, “Our N3 has successfully entered volume production in late fourth quarter last year as planned with good yield. We expect a smooth ramp in 2023 driven by both HPC and smartphone applications. As our customers’ demand for N3 exceeds our ability to supply, we expect the N3 to be fully utilized in 2023. Sizable N3 revenue contribution, we expect to start in third quarter ‘23 and N3 will contribute mid single-digit percentage of our total wafer revenue in 2023. We expect the N3 revenue in 2023 to be higher than N5 revenue in its fourth year in 2020.” We expect a smooth ramp in 2023 driven by both HPC and smartphone applications. As our customers’ demand for N3 exceeds our ability to supply, we expect the N3 to be fully utilized in 2023. Sizable N3 revenue contribution, we expect to start in third quarter ‘23 and N3 will contribute mid single-digit percentage of our total wafer revenue in 2023. We expect the N3 revenue in 2023 to be higher than N5 revenue in its fourth year in 2020.”
He further added, “Our 3-nanometer technology is the most advanced semiconductor technology in both PPA and transistor technology, thus, we expect customers a strong demand in 2023, 2024, 2025 and beyond for our 3-nanometer technologies and are confident that our N3 family will be another large and non-large node for TSMC.”
Guidance:
The guidance for the Q1 is $16.7 billion to $17.5 billion, representing a YoY decline of 2.7% at the mid-point of the guidance. Gross margin to be between 53.5% to 55.5%. Operating margin is expected to be between 41.5% to 43.5%.
Wendell Huang, said in the earnings call “We have just guided our first quarter gross margin to be 54.5% at the midpoint mainly due to a lower capacity utilization rate as customers further adjust their inventory levels and a less favorable foreign exchange rate. In 2023, our gross margin faces challenges from lower capacity utilization due to semiconductor cyclicality, the ramp-up of entry, overseas fab expansion and inflationary cost.” However, the management is confident to achieve the long-term gross margin as he said “Excluding the impact of foreign exchange rate, we continue to forecast a long-term gross margin of 53% and higher is achievable.”
C.C. Wei said in the earnings call, “Entering 2023, we continue to observe softness in consumer end market segment, while other end market segments such as data center related have softened as well.” They expect revenue to decline mid-to high single digit percentage in the 1H of 2023 and expect revenue to increase in the 2H of 2023.
Even though 2023 will be a challenging year, the company will continue to grow faster than the industry. “For the full year of 2023, we forecast the semiconductor market, excluding memory, to decline approximately 4%, while foundry industry is forecast to decline 3%. For TSMC, supported by our strong technology leadership and differentiation, we will continue to expand our customer product portfolio and increase our addressable market and we expect 2023 to be a slight growth year for TSMC in U.S. data terms.”
Conclusion
The overall results are good particularly the margins have been strong. The management has given a cautious outlook for 2023. However, the company is expected to grow faster than the industry particularly due to its technological leadership. The management expects strong demand for the 3-nanometer chips in the coming years which is positive.
For more information regarding TSM’s products and our investment thesis, please reference this analysis from December