Q1 2024 Summary
Published Feb 18, 2025, 5:24 PM UTC- Demand for TSMC's advanced packaging, particularly CoWoS, is extremely high, with capacity expected to more than double this year compared to last year, yet still not enough to meet customer demand. TSMC is increasing capacity and leveraging partners to fulfill customer needs, highlighting their critical role in AI applications.
- TSMC expects that revenue from their 2-nanometer technology (N2) in its first two years will be higher than both 3-nanometer (N3) and 5-nanometer (N5) in their respective first two years, driven by strong AI-related demand from both smartphone and HPC customers. This indicates significant future growth potential.
- AI-related data center demand is very, very strong, and TSMC is capturing most of the semiconductor content in AI servers, such as GPUs and networking processors. As the budget of hyperscalers shifts from traditional servers to AI servers, this shift is favorable for TSMC, supporting healthy growth expectations.
- Higher electricity costs in Taiwan are expected to reduce TSMC's gross margin. TSMC stated that electricity prices increased by another 25% starting April 1 this year, following a 17% increase last year. This is expected to reduce gross margin by 70 to 80 basis points in Q2 and 60 to 70 basis points in the second half of 2024. Additionally, higher electricity costs are expected to indirectly lead to higher material, chemical, and other variable costs, further impacting profitability.
- Capacity constraints in advanced packaging (CoWoS) may limit TSMC's ability to meet strong AI-related demand. Despite doubling capacity this year, TSMC acknowledges that it is still not enough to meet customers' demand, and they are leveraging OSAT partners to complement capacity. This shortage could lead to potential loss of business if customers seek alternative suppliers.
- Reduction in automotive segment demand compared to previous expectations. TSMC noted that three months ago, they projected the automotive platform would increase this year, but now they expect it to decrease. This shift negatively impacts TSMC's growth prospects in the automotive semiconductor market.
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AI Demand and CapEx Planning
Q: Will AI demand increase CapEx and capital intensity?
A: TSMC expects strong AI-related demand to impact future CapEx planning. While capital intensity will remain around the mid-30% level this year and in the next several years, TSMC will invest accordingly if future opportunities arise. They will work closely with customers to plan appropriate capacity, ensuring they support the AI growth. -
Gross Margin Trends for N3 and N2 Nodes
Q: Is N3's gross margin drag more severe than past nodes?
A: Yes, N3 is taking 10–12 quarters to reach corporate average gross margin, longer than N5 or N7's 8–10 quarters, due to increased process complexity and cost inflation. For N2, TSMC expects a better margin profile than N3, as they're managing costs more effectively and selling their value. -
Pricing Strategy and Selling Value
Q: Will TSMC raise prices to share higher costs?
A: TSMC seeks to sell their value and expects customers to share some higher costs, such as those from overseas fabs and inflation. They've begun discussions with customers about sharing incremental costs, especially when customers request certain locations, to maintain strong gross margins. -
CoWoS Capacity Allocation for AI Customers
Q: How will TSMC allocate tight CoWoS capacity?
A: Facing extremely high demand for CoWoS, TSMC is doubling capacity this year and leveraging OSAT partners, but it's still insufficient. Their priority is to support all customers, including smaller or strategic ones, to help them succeed in their markets, rather than focusing on market share. -
Ramp-up and Revenue Timing for N2 Node
Q: When will N2 generate meaningful revenue?
A: N2 production starts in late 2025, with meaningful revenue expected by early 2026. The ramp profile is similar to N3, and TSMC anticipates N2 will be a very significant node due to higher tape-outs and adoption by customers needing improved energy efficiency. -
Edge AI Impact on TSMC
Q: How will edge AI adoption affect TSMC?
A: On-device AI increases die size, which TSMC observes happening now. This trend may accelerate smartphone and PC replacement cycles in the future, positively impacting TSMC by capturing a larger market share. -
Dividend Policy and Potential Increases
Q: Will TSMC increase dividends given strong cash flow?
A: TSMC aims to pay 70% of annual free cash flow as dividends. With capital intensity stabilizing and harvesting past investments, they expect to shift from sustaining to steadily increasing dividends in the coming years. -
Advanced Packaging and 3DIC Adoption
Q: What's the progress on 3DIC technology?
A: 3DIC packaging is complex, but customers are starting to adopt it, especially in HPC products. TSMC expects growth to begin this year, with adoption depending on customer product requirements between technologies like hybrid bonding or TSV. -
Converting N5 Capacity to N3
Q: Will TSMC convert N7 capacity to meet demand?
A: TSMC can convert capacity between nodes when fabs are adjacent, like N5 to N3. However, they don't plan to convert N7 capacity, as they expect demand for N7 to pick up in the next couple of years, avoiding potential shortages like with 28nm in the past. -
Mature Node Overcapacity Concerns
Q: Is TSMC worried about overcapacity in older nodes?
A: TSMC is less exposed to potential overcapacity at mature nodes due to their strategy of working closely with strategic customers on specialty technology solutions. They believe their utilization and profitability on mature nodes can be well protected despite sluggish demand.