TSMC Q2 Profit Jumps 77% on Leading-Edge Chip Demand

What TSMC reported

TSMC, based in Hsinchu, Taiwan, is the world’s largest contract chipmaker, hired by other technology firms to manufacture the processors they design. For the quarter that ended June 30, TSMC reported revenue of NT$1,270.38 billion, or US$40.20 billion. Net income was NT$706.56 billion, or NT$27.25 a share, which works out to US$4.31 for each American depositary receipt. Revenue rose 36.0% from a year earlier, and net income rose 77.4%. TSMC reports its results in New Taiwan dollars.

TSMC occupies an unusual position in the technology industry. Most companies that design chips, from Nvidia to Apple, do not run their own leading-edge factories, and instead rely on TSMC to turn their designs into finished silicon. Because so much advanced computing depends on one manufacturer, its quarterly numbers are read as a gauge of demand across the sector.

Why profit grew faster than sales

One notable feature of the quarter is that profit grew faster than sales. Revenue rose 36.0% from a year earlier. Income from operations rose 65.4%, and net income rose 77.4%. The gap reflects TSMC’s margins. Gross margin reached 67.7% and operating margin 60.3%, high figures for a business that runs some of the most capital-intensive factories in the world. As more revenue comes from the newest and most expensive technologies, a larger share of each dollar of sales becomes profit. A 36% rise in revenue therefore produced a far larger rise in earnings.

Where the growth is coming from

The detail behind the numbers is the mix of manufacturing technologies, measured in nanometers, where a smaller number means a more advanced chip. In the second quarter, nodes of 7-nanometer and smaller made up 77% of wafer sales, the silicon discs on which chips are built. The 5-nanometer generation was the largest single contributor at 33% of wafer revenue. The 3-nanometer node was 30%, and the newest 2-nanometer technology reached 3% as its production began to ramp. Wendell Huang, TSMC’s chief financial officer, said the business was supported by strong demand for its leading-edge technologies. He added that the third quarter would bring a steep ramp-up of 2-nanometer production. For the current quarter, TSMC guided to revenue of US$44.6 billion to US$45.8 billion, a step up from the US$40.20 billion it just reported. It also expects a gross margin of 65% to 67%.

What to watch

1. Whether the third quarter meets guidance. TSMC pointed to revenue of US$44.6 billion to US$45.8 billion, above the US$40.20 billion it just reported. Hitting that range depends on the 2-nanometer ramp arriving on schedule. The next report will show whether the projected step up held.

2. What the ramp does to margins. TSMC guided to a gross margin of 65% to 67% for the third quarter, slightly below the 67.7% it just posted. New process generations are expensive to start, so that guidance implies some near-term pressure. The question is how quickly 2-nanometer production becomes as profitable as the nodes before it.

3. How fast the mix shifts. The 2-nanometer generation was just 3% of wafer sales in its early ramp. How quickly that share climbs will matter, as will whether 5-nanometer and 3-nanometer hold their place. Together they will show how durable the current wave of leading-edge demand really is.