Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) Q4 2023 Earnings Call Transcript

Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) Q4 2023 Earnings Call Transcript January 18, 2024

Taiwan Semiconductor Manufacturing Company Limited beats earnings expectations. Reported EPS is $1.45, expectations were $1.36.

Jeff Su: Good afternoon, everyone, and welcome to TSMC’s Fourth Quarter 2023 Earnings Conference and Conference Call. It’s great to see everyone in person once again. This is Jeff Su, TSMC’s Director of Investor Relations and your host for today. Today’s event is being webcast live through TSMC’s website at www.tsmc.com, or you can also download the earnings release materials. [Operator Instructions]. The format for today’s event will be as follows. First, TSMC’s Vice President and CFO, Mr. Wendell Huang, we’ll summarize our operations in the fourth quarter 2023 and full year of 2023, followed by our guidance for the first quarter 2024. Afterwards, Mr. Huang, TSMC’s CEO, Dr. C. C. Wei, and TSMC’s Chairman, Dr. Mark Lu, will jointly provide the company’s key messages.

Then TSMC’s Chairman, Dr. Mark Lu, will host the Q&A session, where all three of our executives will take your questions. As usual, I’d like to remind everybody that today’s discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the Safe Harbor notice that appears on our press release. And now I would like to turn the microphone over to TSMC’s CFO, Mr. Wendell Huang for the summary of operations and the current quarter guidance.

Wendell Huang : Thank you, Jeff. Happy New Year, everyone. Thank you for joining us today. My presentation were start with financial highlights for the fourth quarter and a recap of full year 2023. After that, I will provide the guidance for the first quarter 2024. Fourth quarter revenue increased 14.4% sequentially in NT dollar or 13.6% in U.S. dollars. as our fourth quarter business was supported by the continued strong ramp of our industry leading 3-nanometer technology. Gross margin decreased 1.3 percentage points sequentially to 53%, primarily due to margin dilution from 3-nanometer ramp. Operating margin decreased 0.1 percentage points sequentially to 41.6%, slightly ahead of our guidance, mainly due to operating leverage on higher revenue.

Overall, our fourth quarter EPS was NT$9.21 and ROE was 28.1%. Now let me move on to revenue by technology. 3-nanometer process technology contributed 15% of wafer revenue in the fourth quarter, while 5-nanometer and 7-nanometer accounted for 35% and 17%, respectively. Advanced Technologies defined as 7-nanometer and below, accounted for 67% of wafer revenue. On a full-year basis, 3-nanometer revenue contribution came in at 6% of 2023 wafer revenue. 5-nanometer was 33% and 7-nanometer was 19%. Advanced Technologies accounted for 58% of total wafer revenue, up from 53% in 2022. Moving on to revenue contribution by platform. HPC increased 17% quarter-over-quarter to account for 43% of our fourth quarter revenue. Smartphone increased 27% to account for 43%.

IoT decreased 29% to account for 5%. Automotive increased 13% to account for 5% and DCE decreased 35% to account for 2%. On a full-year basis, Smartphone, IoT, DCE decreased 8%, 17%, and 16% respectively. HPC remained flat while automotive increased 15% in 2023. Overall, HPC accounted for 43% of our 2023 revenue. Smartphone, 38%, IoT, 8%, and automotive, 6%. Moving on to the balance sheet. We ended the fourth quarter with cash and marketable securities of NT$1.7 trillion or US$55 billion. On the liabilities side, current liabilities decreased by NT$56 billion mainly due to the decrease in accounts payable. On financial ratios, accounts receivable days decreased four days to 31 days, while days of inventory also declined 11 days to 85 days, primarily due to a higher 3-nanometer wafer shipment.

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Q&A Session

Regarding cash flow and CapEx, during the fourth quarter, we generated about NT$395 billion in cash from operations, spent NT$170 billion in CapEx, and distributed NT$78 billion for the first quarter ’23 cash dividend. Overall, our cash balance increased NT$154 billion to NT$1.47 trillion at the end of the quarter. In U.S. dollar terms, our fourth quarter capital expenditures totaled NT$5.24 billion. Now let’s look at the recap of our performance in 2023. 2023 was a challenging year for the global semiconductor industry, but our technology leadership enabled TSMC to outperform the foundry industry. Our revenue decreased 8.7% in U.S. dollar terms to US$69 billion or decreased 4.5% in NT terms to NT$2.16 trillion. Gross margin decreased 5.2 percentage points to 54.4%, mainly reflecting lower overall capacity utilization and 3-nanometer ramp, partially offset by a more favorable foreign change rate.

To extend our technology leadership, we continue to expand our R&D investment in 3-nanometer and 2-nanometer development, despite a lower revenue base in 2023. Thus, operating margin decreased 6.9 percentage points to 42.6%. Overall, full-year EPS declined 17.5% to NT$32.34 and ROE was 26.2%. On cash flow, we spent US$30.45 billion or NT$950 billion in CapEx, while generating NT$1.7 trillion in operating cash flow and NT$292 billion in free cash flow. We also paid NT$292 billion in cash dividends in 2023. I have finished my financial summary. Now let’s turn to our current quarter guidance. We expect our business in the first quarter to be impacted by smartphone seasonality, partially offset by continued HPC-related demand. Based on the current business outlook, we expect our first quarter revenue to be between US$18 billion, and US$18.8 billion, which represents a 6.2% sequential decline at the midpoint.

Based on the exchange rate assumption of US$1 to NT$31.1, gross margin is expected to be between 52%, and 54%. Operating margin between 40%, and 42%. This concludes my financial presentation. Now let me turn to our key messages. I will start by making some comments on our fourth quarter ’23 and first quarter ’24 profitability. Compared to third quarter, our fourth quarter gross margin decreased by 130 basis points sequentially to 53%, primarily due to the margin dilution from the continued ramp-up of our 3-nanometer technology. We have just guided our first quarter gross margin to be flat sequentially at 53% at the midpoint, primarily as a less favorable foreign exchange rate assumption is offset by product mix changes due to smartphone seasonality.

Looking at full year 2024, given the six factors that determine our profitability, there are a few puts and takes I would like to share. On the plus side, we expect our utilization rate to rise in 2024 as our business recovers. However, as we move, as we have said before, and three is expected to dilute our gross margin by about 3 percentage points to 4 percentage points for the full year of 2024 as the revenue contribution will be much higher than in 2023. In addition, we have a strategy so that some of our N3 capacity can be supported by N5 tools, given the strong multiyear demand. Such a plan will enable higher capital efficiency in the mid to long-term but requires cost and effort in the near-term. Most of this conversion will occur in second half of 2024 and we expect it to dilute our gross margin by about 1 percentage point to 2 percentage points in second half of 2024.

Finally, we have no control over the foreign exchange rate, but that may be another factor in 2024. Long-term, excluding the impact of foreign exchange rate and considering our global manufacturing footprint expansion plans, we continue to forecast a long-term gross margin of 53% and higher is achievable. Next, let me talk about our 2024 capital budget and depreciation. Every year, our CapEx is spent in anticipation of the growth that will follow in future years. In 2023, we spent US$30.4 billion lower than our prior guidance of approximately US$32 billion as we continue to tighten up our capital spending where appropriate given the near-term uncertainties. In 2024, our capital budget is expected to be between US$28 billion and US$32 billion as we continue to invest to support customers’ growth.

Out of the US$28 billion to US$32 billion CapEx for 2024, between 70% and 80% of the capital budget will be allocated for the advanced process technologies. About 10% to 20% will be spent for specialty technologies and about 10% will be spent for advanced packaging, testing, mask making, and others. Our depreciation expense is expected to increase close to 30% year-over-year in 2024, mainly as we ramp up our 3-nanometer technologies. Finally, let me make some comments on our long-term CapEx and cash dividend distribution policy. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. In the past few years, we have sharply increased our CapEx spending in preparation to capture and harvest the growth opportunities from HPC, AI, and 5G megatrends.