AI can't save TSMC, quarterly profit declines for the first time in four years, lowers full-year guidance

Author: Chang Jiashuai

The booming wave of AI has made TSMC, which is trapped in the headwind of the semiconductor industry, grasp the straw. In the past three months, the influx of AI-related orders has offset the impact of the downturn in the consumer electronics industry to a certain extent. However, in the short term, the new AI demand will still have a relatively limited boost to TSMC's performance.

On the afternoon of Thursday, July 20th, Beijing time, TSMC, the world's largest semiconductor manufacturer, announced its results for the second quarter ended June 30th.

The financial report shows that TSMC’s revenue this quarter was NT$480.84 billion, a year-on-year decrease of 10% (13.7% in US dollars), the first quarterly profit decline in four years, and revenue has declined for four consecutive months. Net profit for the quarter fell 23% year-on-year**, from NT$237 billion in the same period last year to NT$181.8 billion. From a quarter-on-quarter perspective, this quarter’s revenue fell by 5.5%, and net profit fell by 12.2%.

However, considering the downturn in the industry market, TSMC has shown its full ability to keep out the cold**. This quarter’s revenue is basically consistent with the previous performance guidance. Although the net profit has fallen sharply, it is better than Wall Street’s unanimous expectations. fell 27%**.

In terms of profit, the gross profit margin in this quarter was 54.1%, the operating profit margin was 42.0%, and the net profit margin was 37.8%, which were slightly lower than the previous quarter.

From the perspective of wafer manufacturing process, 5nm process shipments accounted for 30% of total wafer revenue this quarter; 7nm process accounted for 23%, and 7nm and above advanced process shipments accounted for 53% of total wafer revenue.

AI saves TSMC?

It is worth pointing out that some analysts believe that the decline in TSMC's performance this quarter was less than expected, mainly because it benefited from artificial intelligence.

OpenAI's chatbot ChatGPT triggered a wave of crazy AI hype in the first half of the year. If you want to train AI large models, Nvidia GPU is almost the only choice. **From cloud service providers such as Microsoft and Amazon to technology companies eager to enter AI, they have basically bought NVIDIA GPUs. **According to previous reports later, this year, the orders of only one company, ByteDance, may be close to the total number of commercial GPUs sold by Nvidia in China last year.

TSMC is the main contract manufacturer of Nvidia GPUs.

This is also reflected in the performance. In this quarter, TSMC’s revenue pillar, the high-performance computing (HPC) business where GPU foundry is located, fell by 5% from the previous quarter, a significant improvement from the -14% in the previous quarter.

In addition, according to Taiwan media Electronic Times, since the first quarter of this year, AI chip design companies in mainland China are expanding chip orders for TSMC's 7-nanometer process.

Mainland Chinese AI HPC chip suppliers have not been included in the export ban list, at least dozens of companies are continuing to invest, and two of the leading chip design companies have expanded orders for TSMC's 7nm chips since the first quarter of this year .

**Considering TSMC's almost unshakable status as a "shovel maker", Goldman Sachs and other Wall Street firms have successively raised TSMC's target price as early as early June, believing that the huge demand for AI chips will become TSMC's next 3-5 years. key growth engine. **

In the earnings conference call, ** TSMC CEO Wei Zhejia also faintly revealed that the current AI-related demand has "exploded", saying that the company will not be able to "completely solve" the supply shortage of AI chips until the end of 24. In addition, he also said that TSMC has already Incorporating AI into capital expenditures and long-term sales outlook, it is speculated that about 50% of the growth in the revenue forecast will come from the AI area. **

Consumer electronics market bottoming out?

As the world's largest semiconductor manufacturer, the downturn in the consumer electronics market has put pressure on TSMC's performance. **Despite the rapid increase in manufacturing orders related to AI chips, TSMC's performance this quarter was still dragged down by the weak performance of the smartphone market. **

According to the performance guidance released by Samsung Electronics this month, the company may experience the worst quarterly revenue decline since 2009 in the second quarter. Many institutions predict that the annual loss of Samsung Electronics’ semiconductor business will exceed 10 trillion won in 2023, showing that it has continued for a year. The winter of consumer electronics demand in 2019 is still not over.

Still, the consumer electronics market may be about to bottom out, according to research firm Canalys.

During the second quarter of this year, global smartphone shipments plummeted 11%, the sixth consecutive quarter of decline, the company said. But the backlog of unsold phones is dwindling. Le Xuan Chiew, an analyst at Canalys, noted that smartphone vendors are working hard to reduce inventories of older models to make room for the release of new models.

Lithography machine manufacturer ASML also recently stated that orders for lithography machines have rebounded in the second quarter. This may be an early sign of the consumer electronics market picking up.

However, at the earnings conference call, TSMC CEO Wei Zhejia said that future performance still mainly depends on the macroeconomic outlook.

Looking forward to the third quarter, TSMC’s guidance is relatively conservative. The company expects revenue to be between US$16.7-17.5 billion (NT$519.2-544.2 billion), which will rebound slightly from this quarter, but below market expectations. In addition, TSMC also further lowered its full-year revenue guidance to 10%, which was a single-digit decline in the previous guidance.

Bloomberg Intelligence analyst Charles Shum commented:

Smartphone demand proved more headwind than expected, weighing on strong growth in AI chip orders. While TSMC reported sales that topped consensus, its results were still in the midpoint of the guidance range when adjusted for currency. In my opinion, this highlights the impact of the weakness in the smartphone industry on its overall performance. ** Looking ahead, market conditions warrant close monitoring, especially for signs of a recovery in smartphone demand to assess its potential impact on earnings trajectory in the second half of the year.

Difficulties in building a factory in the United States: lack of skilled workers, delaying production until the next year

During the conference call, TSMC executives also stated that there are certain challenges in its overseas expansion plan. Due to the lack of skilled workers, the construction progress of the Arizona plant in the United States with an investment of up to 40 billion U.S. dollars has been delayed from the end of 2024. 2025

In February of this year, the New York Times reported that TSMC’s cost of building a factory in the United States was ten times that of its factory in Taiwan Province, and that TSMC was “unaccustomed” to using American workers. One Taiwanese engineer complained that some American workers would refuse to take on tasks if assigned multiple jobs, rather than "trying to do all the work," the report said.

Liu Deyin, chairman of TSMC, said in a conference call after the earnings report that he was trying to improve the situation by sending skilled workers from Taiwan to the United States.