TSMC once again reported strong results led by robust AI chip demand. Q4 revenue grew by 37% YoY and 14.4% QoQ to $26.88 billion, beating the midpoint guide of $26.5 billion. The bottom line was even stronger, as EPS grew by 55.6% YoY to $2.24, beating analysts’ estimates by $0.01. Management also expects 2025 to be a strong year and expects revenue to grow close to mid-20s percent, led by strong AI demand.
Revenue
Q4 revenue grew by 37% YoY and 14.4% QoQ to $26.88 billion, driven by strong AI demand. Revenue came at the higher end of the guidance of $26.1 billion to $26.9 billion, beating the midpoint guide of $26.5 billion.
- Management guide for the next quarter is $25 billion to $25.8 billion, representing YoY growth of 34.6% and down (-5.5%) QoQ at the midpoint. The sequential decline in the first quarter is due to smartphone seasonality.
“Our business in the fourth quarter was supported by strong demand for our industry-leading 3nm and 5nm technologies,” said Wendell Huang, CFO of TSMC. “Moving into first quarter 2025, we expect our business to be impacted by smartphone seasonality, partially offset by continued growth in AI-related demand.”
- 2024 revenue grew by 30% YoY to $90 billion, driven by robust AI-related demand. Revenue from AI accelerators, which they define as AI GPU, AI ASICs and HBM controllers for AI training and inference in the data center, accounted for close to mid-teens percent in 2024.
- AI revenue tripled in 2024 and management expects it to double in 2025, as strong AI-related demand will continue in 2025. For the full year 2025, management expects total revenue to grow close to mid-20s percent in US dollar terms.
- Management expects AI accelerators to grow mid-40% CAGR for the next five years and expects AI accelerators to be the strongest driver of the HPC platform growth and the largest contributor in terms of the overall incremental revenue growth in the next several years.
- For the long term, management expects total revenue growth to grow 20% CAGR, driven by growth in all four platforms: smartphone, HPC, IoT, and automotive.
Margins
Margins continue to expand due to cost controls, higher capacity utilization rates, economies of scale, and better price negotiation with customers.
- Q4 gross margin was 59%, up from 53% in the same period last year and 57.8% in Q3. The strong gross margin was driven by a higher capacity utilization rate and productivity gains, partially offset by the dilution of 3-nanometer ramp-up.
- Management has guided gross margin to decrease 100 bps sequentially to 58% at the mid-point, primarily due to ramp-up costs associated with N2 and CoWoS expansion, and the start of dilution from the overseas fabs. However, gross margin is expected to be up from 53.1% in the same period last year.
- Operating margin improved to 49% from 41.6% in the same period last year and 47.5% in Q3. It beat the midpoint guide of 47.5% driven by operating leverage. Management guide for next quarter is 47.5%, up from 42% in the same period last year.
- Net income grew by 54.7% YoY to a record $11.6 billion or 43.1% of revenue compared to 38.2% in the same period last year.
- Return on equity improved to 36.2% from 28.1% in the same period last year.
- 2024 gross margin improved to 56.1% from 54.4% in 2023, driven by cost controls, improvements in overall capacity utilization, and partially offset by 3-nanometer dilution and higher electricity costs.
- 2024 operating margin improved to 45.7% from 42.6% in 2023, which was helped by operating leverage.
- Management expects inflationary cost pressures and higher electricity prices in Taiwan will negatively impact the gross margin by at least 1% in 2025. In addition, the ramp-up costs associated with N2 and further conversion of N5 to N3 capacity will negatively impact the gross margin by about 1%. Also, the overseas fabs are expected to have 2% to 3% margin dilution every year. Management is working with its customers to negotiate better prices to improve the margins; along with it the dilution from the N3 ramp is expected to gradually reduce in 2025 and the overall utilization rate to moderately increase in 2025.
- Over the long term, management has reiterated that a 53% or higher gross margin is achievable.
EPS
EPS grew by 55.6% YoY to $2.24, beating estimates by $0.01, driven by cost controls, higher capacity utilization rate, and economies of scale.
- Analysts expect Q1 EPS to grow 49.5% YoY to $2.06 and Q2 EPS to grow 44.6% YoY to $2.14.
- Looking further out, analysts expect 2025 EPS to grow 32.1% YoY to $9.27 and 16.1% YoY to $10.76 in 2026.
Cash Flows and Balance Sheet
The company’s financial stability is evident in its stable cash flow generation.
- Q4 operating cash flow was $19.2 billion or 71.4% of revenue compared to 63.1% in the same period last year.
- Q4 free cash flow was $8.0 billion or 29.8% of revenue compared to $7.05 billion or 35.9% in the same period last year. Capex increased 114.3% YoY to $11.23 billion.
- The company spent $29.8 billion in capex in 2024, down (-2.3%) YoY. However, due to strong AI demand, capex is expected to increase in 2025 to $38 billion to $42 billion, up 34.4% at the midpoint.
- Cash and marketable securities were $73.9 billion and debt of $30.1 billion compared to $68.5 billion and $30.6 billion at the end of Q3.
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 19% QoQ to a record $14.25 billion and accounted for 53% of revenue, surpassing the 50% mark for the third time. Management expects AI accelerators to be the strongest driver of the HPC platform growth in the next several years.
The chart below also shows that HPC revenue reached a record $14.25 billion – its largest sequential increase to date at ~$2.26 billion.
Smartphone grew by 17% sequentially to account for 35% of revenue from 34% of revenue in Q3.
The IoT decreased (-15%) sequentially to account for 5% of revenue. Automotive increased 6% to account for 4% of revenue. Digital Consumer Electronics decreased (-6%) to account for 1% of revenue. Others increased 2% and accounted for 2%.
Revenue by Technology
TSMC’s Advanced nodes are defined as 7-nanometer and below. These nodes accounted for 74% of wafer revenue compared to 69% in Q3.
- In Q4 2024, 3-nanometer process technology contributed to 26% of wafer revenue, while 5-nanometer and 7-nanometer accounted for 34% and 14%, respectively.
- In Q3 2024, 3-nanometer process technology contributed 20% of wafer revenue, while 5-nanometer and 7-nanometer accounted for 32% and 17%, respectively.
Earnings Call: AI Accelerator Contribution, Margin Headwinds Discussed
TSMC’s management provided optimistic long-term growth and AI revenue forecasts on the earnings call, while also updating on international expansion efforts, some margin headwinds and capex.
Commenting on the broader industry, CEO C.C. Wei said that he expects the foundry industry to “grow 10% year-over-year in 2025, supported by robust AI-related demand and a mild recovery in other end market segments.” He believes TSMC can once again outperform the industry’s growth due to its broad customer base and technological leadership, forecasting revenue growth in USD close to the mid-20% range. This came in line with some analyst forecasts for 20% to 25% growth in 2025. Management provided some thin details on the segment breakdown for the year, saying that 2025 is “still a mild growth 2026 for PC and smartphone, but everything is AI-related.”
AI accelerators are playing an increasingly large role in TSMC’s long-term growth – TSMC forecast AI accelerator revenue growth at a 40% CAGR from 2024 to 2029, expecting it to be the strongest driver of HPC growth as well as the “largest contributor in terms of our overall incremental revenue growth in the next several years.”
Though margins were arguably very strong in Q4 – gross margin at the high end of the guided range and operating margin above the guided range – management discussed margin headwinds as Q1 is set to see some slight sequential contraction.
Management explained that they have guided Q1 gross margin to decrease 100 bp to 58% at midpoint due to “ramp costs associated with N2 and CoWoS expansion, and the start of dilution from our overseas fabs.” They clarified that these are a few of six significant factors that determine margins: tech development and ramp-up, cost reduction efforts, platform mix, pricing, capacity utilization, and forex.
For the full year, management said there were a few “puts and takes.” One of the primary headwinds includes 2% to 3% dilution impacts from ramping up production at the Arizona and Kumamoto fabs throughout the year, while other headwinds include at least a 1% impact from electricity price hikes in Taiwan, and a 1% impact from retooling from 5nm to 3nm capacity and some additional 2nm ramp. However, offsetting these headwinds are gradual reduction in dilution from the 3nm ramp this year (3nm now accounts for 18% of revenue), and utilization rate moderately increasing in 2025.
Capex was also discussed, with TSMC seeing 2025’s capex slightly ahead of estimates to support demand and capacity expansion plans. For 2024, capex totaled $29.8 billion, with management guiding for capex of $38 billion to $42 billion, or ~34% growth at midpoint; this compares to the $38 to $40 billion estimated by analysts. Of this budget, “about 70% of the capital budget will be allocated for advanced process technologies, about 10% to 20% will be spent for specialty technologies, and about 10% to 20% will be spent for advanced packaging, testing, mask making and others.”
TSMC was rather tight lipped about capacity expansion plans for CoWoS despite multiple analysts asking for more details about its capacity, ramp and revenue contribution. Management simply said that they have “very tight capacity and cannot even meet customers' needs” and they are working “very hard” to increase CoWoS capacity.
On the advanced node front, the 2 nanometer node is “well on track” for volume production in the second half of this year as previously scheduled, with TSMC expecting it to ramp similarly to the 3nm node. However, management added that the tape out in the first two years is expected to be higher than both 3nm and 5nm in their respective ramps due to the strong customer interest and demand for the new node.
Additionally, management shared some updates on international fab expansion, noting that its first fab in Arizona entered high volume production in Q4 with yields comparable to Taiwan. They expect the 4nm node there to ramp smoothly, with construction on the second and third fab in Arizona (set to produce 3nm, 2nm and A16), on track. Japan’s Kumamoto fab began volume production with “record yield”, while the second specialty fab in Japan is expected to break ground this year. TSMC also shared that they are smoothly progressing with plans to build a specialty automotive and industrial-focused fab in Dresden, Germany.
Conclusion
The company’s strong results showed its resilience in capturing the demand for advanced chips due to its technological leadership. Management was optimistic on the long-term forecast for AI revenue growth over the next few years supported by high demand from customers. Strong top-line growth, along with the bottom-line strength, distinguishes TSMC from other companies that are struggling in the current tough macro environment.
I/O Fund Equity Analysts Royston Roche and Damien Robbins contributed to this article.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
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