TSMC Sees Smartphone Revenue Drop, 2-nanometer Production On Track

Ramish Zafar
Image: Ann Wang/Reuters

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The Taiwan Semiconductor Manufacturing Company (TSMC) reported its earnings results for the fourth quarter of last year earlier today in Taiwan. The results came as an industry slowdown hammered the semiconductor industry, and TSMC cautioned that for the first quarter of this year, its revenue might either remain flat annually or drop by a billion dollars. At the same time, during Q4 2022, TSMC's revenue grew by a strong 42%, with a stronger U.S. dollar culling this growth down to 26.7% in U.S. dollar terms. Shipments of the firm's 5-nanometer semiconductor products grew to represent 32% of the revenue pie during the quarter, while 7-nanometer chips dropped down to make up 22% of the total shipments.

TSMC Maintains 2-nanometer Production Timeline As It Aims At Mass Production In 2025

During the fourth quarter, TSMC brought in NT$625 billion in revenue and NT$295 billion in net income, which translated into $19.9 billion in revenue through an exchange rate of 1$ being worth NT$31.86. This exchange rate is crucial, as TSMC's earnings guidance for the current quarter assumes an exchange rate of one U.S. dollar equalling NT$30.7, implying that the firm is expecting the dollar to weaken by March end. Last year's earnings for the first quarter saw TSMC estimate a NT$28.8 exchange rate for its second quarter results.

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Crucially, while 2022 was marked by high inflation and rising costs for businesses all around, TSMC saw its gross margins improve during the fourth quarter. Gross margins are the percentage of the firm's post direct cost profits to its total sales, and higher margins imply strong pricing power. For the fourth quarter, TSMC's gross margin stood at 62.2%, topping the high end of its guidance, posting an approximate 10% improvement annually and a 1.8% improvement sequentially.

In terms of product mix, smartphone and internet of things (IoT) revenue dropped during the quarter, which sales for high performance computing (HPC) products grew by 10%. As of now, TSMC is earning more from HPC products than smartphones, with HPC representing 41% of the revenue pie in 2022, and outpacing smartphones' 28% growth rate with a 59% growth rate of its own. In comparison, smartphones had represented 44% of TSMC's revenue while HPC represented 37% last year.

TSMC's revenue breakdown for the full fiscal and calendar year 2022

During the earnings call, TSMC's chief Dr. C.C. Wei shared important details for the firm's 2-nanometer manufacturing processes and his take on the current state of the semiconductor industry. According to the executive, 2-nanometer progress is ahead of schedule, and the process will enter risk production in 2024 and then mass production a year later. This matches estimates provided by Dr. Wei during TSMC's earlier investor calls, and commenting on the demand for TSMC's 3-nanometer technology he shared that both smartphones and HPC account for 3-nanometer orders. Additionally, he outlined that while smartphone shipments will drop this year, TSMC will still be relatively buffered from the impact since the semiconductor content in the devices will increase.

Sharing his opinion on the chip sector, Dr. Wei outlined that he believes that the non-memory semiconductor sector will drop by 4% this year and the foundry sector will decrease its revenues by 3%. He also commented on the reduction in 7-nanometer sales to share that demand for these products had soared in the aftermath of the coronavirus pandemic, and and the drop appears to be because of inventory adjustment. He also cautioned that while the growth his company witnessed due to the pandemic is unlikely to be replicated, TSMC will nevertheless target high market share with its 5-nanometer and 3-nanometer process technologies.

TSMC's management also commented on the freshly passed Taiwan Chips Act, which is a bill aiming to stimulate advanced industries in the region. The firm believes that without the bill, its average tax rate will stand around 18% to 19% and with it it can drop to 15%.

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