Following the release of ASML's disappointing third-quarter earnings, the focus turned to TSMC (TSM, Financial) as the company announced its Q3 financial results. TSMC reported consolidated revenue of over $230 billion, fueled by strong demand for its 3nm and 5nm chips, primarily from AI and smartphone sectors. The net profit soared past $100 billion, marking a 54.2% year-over-year increase.
TSMC achieved consolidated revenue of $235.04 billion, a 39.0% year-over-year and 12.8% sequential growth. The company's net profit reached $100.58 billion, exceeding market expectations of $93.3 billion predicted by analysts, and marking a 31.3% sequential increase. Operating profit stood at $111.62 billion with a gross margin increase to 57.8%, up from the previous quarter's 53.2%.
The company's increased gross margin was attributed to improved capacity utilization and strengthened cost management. TSMC anticipates its Q4 gross margin to reach 58%, driven by high capacity utilization, albeit offset by higher electricity costs.
The contribution of advanced processes to revenue continues to rise, with 3nm processes accounting for 20% and 5nm for 32% of the total wafer revenue in Q3. Advanced processes (7nm and more sophisticated) constituted 69% of total wafer revenue, amounting to approximately $162.18 billion. TSMC expects the utilization rate for 3nm and 5nm process technologies to enhance in the latter half of 2024.
AI and smartphone-related demand were key revenue drivers this quarter, with IoT showing the fastest growth. High-Performance Computing (HPC) accounted for 51% of revenue, growing by 11% year-over-year, while smartphones made up 34%, up 16%. IoT contributed 7%, with a significant 35% year-over-year growth. The digital consumer electronics segment was the only one to decline, dropping by 19%.
Addressing concerns about an AI bubble, TSMC management affirmed that AI demand is genuine and just beginning to burgeon. The company expects revenue from AI server processors to triple this year.
Capital expenditure for Q3 was $6.4 billion, slightly higher than the preceding quarters. TSMC forecasts annual capital spending to exceed $30 billion in 2024, with 70%-80% allocated to advanced technology, 10%-20% to other specialized technologies, and around 10% towards packaging, testing, and mass production.
TSMC's global manufacturing expansion includes plants in Arizona, USA, two plants in Kumamoto, Japan, and a newly announced facility in Dresden, Germany. The Arizona plant is expected to commence volume production in 2025, although overseas facilities currently yield lower profitability than those in Taiwan due to smaller scales and higher initial costs. Management also noted that Taiwan's electricity prices are the highest among all operating regions, posing a 1% impact on gross margin due to inflation-related costs.
Looking ahead, TSMC remains optimistic about Q4, projecting sales between $26.1 billion and $26.9 billion, with a midpoint reflecting a 13% sequential and 35% year-over-year increase. The gross margin is expected to range between 57% and 59%, and sales calculated in USD are anticipated to grow nearly 30% this year.
