TSMC Says They Will Sidestep The Recession – 2023 Outlook, Q4 2022 Earnings
Soaring wafer pricing, capital intensity, Capex breakdown, revenue estimate, and hyperscale silicon
TSMC held its Q4 2022 earnings call and shared its outlook for 2023. The report was less negative than the buyside Wall Street consensus expectations. Before we get to the future outlook, let’s discuss 2022. In short, 2022 was quarter after quarter of record-breaking numbers and ended up being a record-breaking year, with full-year revenue up 33.5% to US$75.88 billion. 2022 marks TSMC having officially passed Intel in revenue for the first time in its history.
It’s not all sunshine and rainbows, of course. The 4th quarter was generally great on the leading edge of 5nm, but there was a major sore spot. As we first reported months ago, TSMC is experiencing a tremendous slowdown on 7nm orders due to weakness in PC and smartphones. Those two segments are more than half of TSMC’s business, so it’s no surprise that the weakness in the consumer economy showed up.
Assuming that TSMC’s 7nm fabs were at 100% utilization in Q3 2022, then in Q4 2022, TSMC fell to ~83% utilization rates on the 7nm node. TSMC earned about ~$900M less revenue from the 7nm process technology in Q4 vs. Q3. Every process node at TSMC was down for quarterly revenue, except for 16nm and 5nm, which continued to grow. 7nm experienced the most significant decline on a $ and % basis.
Despite troubles with 7nm, TSMC’s gross margins soared to 62.2%. Most of the increase from the prior quarter’s 60.4% was due to changes in exchange rates. The year-on-year increase from 52.7% also had significant currency impacts, but it also greatly improved due to price increases.
TSMC essentially guided for three straight quarters of revenue declines through Q2 2023 due to high inventories at their customers.
Wafer shipments fell significantly due to weakness at 7nm and trailing edge nodes. The revenue per wafer continued to climb due to 5nm strength and lower trailing edge node shipments. Despite the drop in Q4, TSMC still shipped 7.4% more wafers year on year vs. 2021, achieving a total of 15.23M wafer shipments for the entirety of 2022. Furthermore, TSMC’s full-year average sales price was $4,408 per wafer, up 24% year on year.
The HPC segment (41% of revenue) finally eclipsed smartphones (39%) annually after lagging for over a decade. The HPC segment includes PC, networking, edge servers, datacenter, and PC.
TSMC guided their Q1 2023 revenue to $16.7B to $17.5B. This is a ~14.2% decline versus Q4 2022. The bad news didn’t stop there, though. Gross margins were also guided to fall from 62.2% in Q4 2022 to 53.5% to 54.5% in Q1 2023. Gross margins are taking a big hit due to lower utilization rates, the ramp of N3, which is rumored to have poor yields, more expensive overseas fabs, inflation, and 20% growth of R&D.
While these numbers seem horrible, the year’s guidance was better than Wall Street expected. Wall Street penned in TSMC’s 2023 to be down mid-single digits, but instead, they stated they would grow slightly.
For the full year of 2023, we forecast the semiconductor market, excluding memory, to decline approximately 4%, while foundry industry is forecast to decline 3%.
The impressive bit is that TSMC expects to grow, but they expect the rest of the industry to shrink. They can do this because of share gains from other foundries, IDMs, and firms like Analog Devices moving from IDM to fab-lite. TSMC expects unit volumes to be down for PCs and smartphones, yet they believe content will continue to grow to compensate for those losses.
We have confidence that in the second half, the business will rebound, but is that a very strong V-shape? We didn't know yet, but certainly, it's not a U-shape for the business to recover in the second half.
Based on TSMC’s guidance for growth and weakness expectations in Q2, it certainly seems like TSMC will have a U-shaped recovery. Q2 may have sequential growth over Q1, but given the weakness in end markets, we expect Q2 to be just as poor.
N3, N3E, the number of tape-outs more than double that N5 in the first and the second year. So, as a result, we expect the strong demand will continue in 2023, '24, '25, and beyond for our N3 technologies driven by both the HPC and smartphone applications.
TSMC should have a significant pick-up in revenue as N3-based designs from Apple and others ramp up in the 3rd and 4th quarters. It should be noted that the N3 ramp will be the slowest ramp for TSMC in many years in terms of wafer counts.
We expect the N3 to be fully utilized in 2023 with sizable entry revenue contribution, we expect to start in third quarter and N3 will contribute mid-single-digit percentage of our total wafer revenue in 2023. We expect the N3 revenue in 2023 to be higher than N5 revenue in its fourth year in 2020.
While this implies N3’s ramp is rapid, remember that N5 only started high-volume manufacturing in April 2020, part way through the year, and achieved ~$3.65B revenue in 2020 with lower relative wafer pricing. Meanwhile, N3 technically started high-volume manufacturing in the prior year. Despite this, we only 3nm to achieve ~$3.95B revenue, despite much higher wafer pricing.
The total number of N3 wafers shipped by TSMC in 2023 will be much lower than the total N5 wafers shipped in 2020, primarily driven by a much weaker Apple ramp due to being forced to go split SOC in the iPhone. Furthermore, other mobile vendors are tepid about picking up N3. There will be some relief from a firm’s N3 AI chip, but that will not earnestly be in mass production until 2024.
There was an interesting response to the question about the value of further process node shrinks, given the soaring costs of them.
Nowadays, we look at our technology value, not only geometry shrinkage actually. More important actually is the power consumption efficiency, and also, we try to help our customers with our advanced 3D IC Fabric technology to improve the system performance, and that's where it's important.
TSMC is getting some relief on tax from the Taiwanese government in the form of tax breaks, but they are smaller than previous tax breaks. In past years, TSMC’s tax rate was 11%. Now it is moving up to 15%.
Starting in 2023, certain tax exemptions from the Taiwan government have expired. However, the government has recently passed the amendments to the statute for industrial innovations. All things considered, we expect our effective tax rate in 2023 and beyond to be approximately 15%. Without the new amendments to this industrial innovation, the statute of industrial innovation, our tax rate would have become between 18% to 19%.
The second half of this report will discuss the 2023 Capex split by business segment, long-term capital intensity, European expansion plans, US cost differential, and TSMC pricing US wafers differently than Taiwan wafers. Furthermore, we discuss advanced packaging revenue growth and why it is a lagger versus silicon. Lastly, we will also discuss hyperscaler vs. in-house merchant silicon demand.
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One of the most important numbers is that TSMC said their capital spending in 2023 is $32B to $36B, down from $36.4B in 2022. We went further and did a breakdown by segment as follows.