The Formation of a Semiconductor Supercycle.

TSMCs Stellar Result and What It Means to the Semiconductor Industry

For Semiconductor nerds, the TSMC call is like Christmas morning; I can't wait to see the results. The Taiwanese giant is dominant in the foundry industry and, considering the depth of artificial upcycling's impact, is the canary in the coal mine for the entire semiconductor industry. This will be covered in the manufacturing and capacity section.

While we do not have all the juicy details yet, the investor call had plenty of interesting information.

The least surprising part of the call was the revenue result, as it had already been established through monthly revenues. The Q4 revenue was $26.9B, or 2.3% above the guidance. This represents a strong QoQ growth of 14.3% and a YoY of 37.1%.

TSMC's profitability results were even stronger, with operating profits growing by 18% QoQ and 62% YoY. The gross profit margin increased from 57.8% to 59%, well above TSMC’s long-term target of 53%.

In a response to a question, TSMC stated that Gross margins could increase above the 60% mark but would be dependent on a number of key factors. Apart from pricing, exchange rates and material costs, the profitability is also influenced by:

Technology Development: The leading edge nodes are what is driving TSMC’s revenue and gross profit growth

Technology Ramp-up: In the early stages of a introducing a new technology, it represents a drag on margins because of the higher costs of equipment and materials combined with the lower yields.

Capacity Utilisation: High capacity utilisation rates lead to better absorption of fixed costs, improving profitability. TSMC expects further increases in utilisation in 2025, aiding margin expansion.

Overseas Expansion: While a strategic imperative for TSMC, the expansion will cause a 2-3% annual margin dilution over the next five years. This dilution is attributed to the maller scale of overseas fabs compared to those in Taiwan. Also higher supply chain costs due to less mature ecosystems in new locations has an impact.

Even though the expansion is a drag on TSMC, there are many good reasons to want to have fabs outside Taiwan. TSMC is committed to expanding its global manufacturing footprint, with new fabs under construction in the US, Japan, and Europe. This expansion is driven by a desire to meet growing customer demand, particularly in key markets like the US, and to address geopolitical considerations.

Analysing TSMC revenue by country makes it clear how dominant the US business is for TSMC and it only goes one way.

Not only are allmost all of TSMC’s AI customers US based also Apple takes a big chunk of silicon from TSMC.

The expansion into the US is of utmost importance for TSMC not just from a business perspective but also as a political investment.

Operational expenses

While not much was disclosed about the Operating Expenditures, the current trend of lower R&D share and higher SG&A costs continued.

While it is not surprising that TSMC can leverage its scale and drive operating efficiency. As revenue increases, the proportion of OPEX as a percentage of revenue tends to decrease, leading to improved operating margins. What is more surprising is that the company is leaning more towards Sales and Administrion cost maybe as a result of the expansion into other regions. TSMC has not given any good explanation.

The investment situation

Since the US chips act was ratified, TSMC has significantly lowered its capital expenditures until now. While this sounds counterintuitive it is still a direct result of the chips act as TSMC changed invesment plans to get access to subsidies. The construction of fabs is a lot cheaper than the phase of installing expensive Semiconductor manufacturing equipment.

TSMC has now entered this phase in several of its CapEx projects and the CapEx catapulted to $11.5B in Q4-24, up 78% over last quarter.

The low CapEx of the prior period have had it is impact on the PPE Value that got close to $100B and then declined. While this is not the same as declining capacity, a CapEx below maintenance level will sooner or later have an impact on capacity.

Overall the CapEx forecast for 2025 will be 40B$, up 33.3% on 2024. This will be good news for the tools manufactureres and we are likley to see some good results from them within the next couple of weeks.

TMSC maintains its CapEx strategy with 70% of CapEx is going to advanced nodes and the rest is shared by mature nodes and advanced packaging.

The key projects are Expansion of 3nm Capacity in the Tainan Science Park to address the robust demand for this advanced node. Preparations are underway for multiple 2nm fabs in both the Hsinchu and Kaohsiung Science Parks. TSMC is also expanding its advanced packaging facilities in several locations across Taiwan. Finally the Overseas Fab Expansions including Arizona (Phase 2 and 3) and Kumamoto (second fab).

Short and Long term outlook

TSMC guided Q1-25 revenue down 1.5% in to $26.3B citing seasonality in its smartphone business.

As the Revenue by market shows, although still important, the Smartphone share of Revenue is declining and is currently at 35%.

There is indeed a seasonal decline in mobile business in Q1. Last Q1 the decline was 1.3B$ or 15% of the mobile business. As the computing business grew by $2.2B in Q4 and as most of it isn’t seaonsal, it looks like the Taiwanese poker players have a better hand that they are letting us know. The Q4 upside over guidance was another 600M$ so it looks like revenue will increase in Q1-25 despite the carefull guidance.

The longer term outlook however is quite bullish.

Despite mild growth for PC and smartphone in 2025, TSMC’s outlook for the longer term is quite bullish. TSMC expects its long-term revenue growth to approach a 20% CAGR in US dollar terms over the five-year period starting in 2024. AI accelerator growth is expected to be 40% CAGR and will be the dominat driver.

TSMC predicts a 10% year-on-year growth for the foundry industry in 2025, which is somewhat in contrast to the TSMC growth rate. If both are supposed to be true, the other foundries are going to decline in revenue but I will leave that comment for later analysis.

Manufacturing and Capacity Analysis.

Everything looks great on the surface, but what is happening in the machine room? It is time for a deeper dive.