On July 20th, TSMC held an online legal presentation for the second quarter of 2023, explaining its performance in the second quarter and releasing future prospects.

According to the data, TSMC's revenue and net profit attributable to the parent company declined by 10% and 23.3% respectively. TSMC said that the macro (environment) was weaker than previously thought. TSMC lowered its annual revenue forecast for 2023 for the second time - from the original expected decline of 4% -6% to a year-on-year decline of 10%. Wei Zhejia, president of TSMC, also said that even though the increase in AI related demand was not enough to offset the impact of the Business cycle, When the inventory is adjusted, everything depends on economic factors. In addition, the US factory has been postponed from 2024 to 2025 for production.

TSMC's performance reflects the current situation of the Semiconductor industry from the side. This article will briefly describe the key points of TSMC's performance in the second quarter of 2023, and look forward to the semiconductor market inventory and AI's demand for High-performance computing from TSMC's financial report.

TSMC's advanced manufacturing performance has improved compared to the previous quarter

TSMC's consolidated revenue in the second quarter was approximately NT $480.84 billion, a decrease of 10.0% year-on-year and 5.5% month on month. The net profit during the period was NT $181.8 billion, a year-on-year decrease of 23.3% and a month on month decrease of 12.2%; The operating Gross margin was 54.1%, down 5% year on year and 2.2% month on month. The shipment volume of wafers was 2916 thousand pieces, a year-on-year decrease of 23% and a month on month decrease of 9.6%. The inventory turnover cycle was extended to 99 days.

From the perspective of process composition, the 7nm and 5nm processes together account for 55% of TSMC's total revenue (5nm accounts for 30%, 7nm accounts for 23%), making them the main revenue drivers. Affected by weak global market demand, TSMC's advanced manufacturing revenue has been declining for two consecutive quarters, but the level of business decline has converged compared to the first quarter.

In addition, 16nm accounts for 11%, 28nm also accounts for 11%, and 20nm accounts for 1%. In high process chips, the proportions of 40/45nm and 65nm are 7%, 0.15/0.18um are 5%, 90nm and 0.11/0.13um are 2%, and 0.25um and above are 1%, respectively.

From a specific business perspective, except for the growth of automotive business and digital consumer electronics, all other businesses have declined. Among them, the High-performance computing business, which accounted for 44% of the revenue, declined 5%, the smartphone business, which accounted for 33% of the revenue, declined 9%, and the Internet of Things, which accounted for 8% of the revenue, declined 11%. The automotive business and digital consumer electronics, which achieved growth, contributed 8% and 3% of revenue respectively, achieving a growth of 3% and a growth of 25%.

This confirms Wei Zhejia's statement that "the increase in AI related demand is not enough to offset the Business cycle impact". Overall, although the revenue of multiple application market products has declined, the overall decline in revenue of each product line has converged compared to the first quarter of this year.

Meanwhile, TSMC is expected to have sales of 16.7 billion to 17.5 billion US dollars in the third fiscal quarter, an increase of 6.5% to 11.6% month on month, which is about 10% lower than market expectations. The Gross margin in the third fiscal quarter is estimated to be 51.5%~53.5%, lower than 54.1% in the second fiscal quarter; The estimated operating profit margin is 38% -40%, lower than the 42% in the second fiscal quarter.

In addition, TSMC's fourth quarter performance is expected to further rebound, but its US dollar revenue in the second half of the year will only increase by about 10% compared to the first half, which is not a small gap from the previously expected 20%. As a result, TSMC has once again lowered its annual operating target, and the decrease in US dollar revenue may expand to 10%.

Inventory reduction is on a gradual slope, while large factories are conservative and watching

According to the TrendForce Jibang consulting survey, affected by the continued weakness of terminal demand and the addition of off-season effects, the revenue of the world's top ten wafer OEMs fell by 18.6% in the first quarter, about $27.3 billion.

TrendForce Jibang Consulting expects that the output value of the top ten wafer OEMs in the second quarter will continue to decline, and the quarterly decline will converge from the first quarter. Although conforming to the demand of the peak season in the second half of the year, the supply chain should start stocking up in the second quarter in succession, but after the reversal of the market situation, the inventory of the supply chain has piled up and is currently going slowly. Most customers are still cautious about stocking up, which makes the production cycle of Foundry model in the second quarter more relaxed than before. There are only sporadic urgent orders such as TV SoC, WiFi6/6E, TDDI, etc., and the overall capacity utilization growth is limited.

Based on the financial reports of the aforementioned manufacturers in the past three years, the inventory amount and inventory weeks of the aforementioned manufacturers have increased since the beginning of 2021. Especially since the second quarter of 2022, the upward trend has been more obvious. At the same time, its capacity utilization rate has also shown a downward trend since the second quarter of 2022. Depending on the product structure, the decline in capacity utilization rate of each wafer factory from the third and fourth quarters of 2022 to the first quarter of this year ranges from single digits to over 20%.

From the perspective of public information, in the 2023Q1 quarter, the capacity utilization rates of TSMC, Liandian, Powerchip, Vanguard International Semiconductor Corporation, Semiconductor Manufacturing International Corporation and Huahong Group will be 75%, 70%, 60%, 59%, 68% and 85% respectively, which is significantly lower than the historical average of more than 80% in recent years. With the continuous decline in capacity utilization, some enterprises have experienced losses at one point.

According to Huang Renzhao from TSMC, the current inventory turnover time of TSMC has been extended to 99 days. TSMC's second quarter revenue was affected by global economic conditions, market demand was suppressed, and customers were more cautious. The current customer is undergoing inventory adjustments and will extend the inventory adjustment cycle to the fourth quarter of 2023. TSMC estimates that the revenue of wafer foundry industry this year may decrease by ten digit percentage (about 14% to 16%), which will be higher than the percentage of semiconductor industry excluding memory (about 4% to 6%).

In terms of grid core, in the past two years, it has also been continuously reducing capital expenditure and slowing down the expansion process. Previously, it stated that it would achieve a mild month on month growth in quarterly revenue for the entire year.

Recently, industry news spread that Liandian received an urgent order at 28nm. According to supply chain sources, the utilization rate of Liandian's 8-inch production capacity is still weak, currently maintaining around 50%. Liandian has previously stated on multiple occasions that the mobile phone market is in a downturn, and the previously better performing automotive and industrial markets have experienced a stagnation in demand after the inventory is fully established. Overall demand did not see a strong recovery in the third quarter. Overall, the company's revenue in the third quarter will remain relatively flat compared to the second quarter. Liandian will hold a legal briefing on July 26th, during which it is expected to have a more specific view on the market conditions and operations in the third quarter.

Vanguard International Semiconductor Corporation also pointed out that inflation and interest rate rise will affect the purchasing power and consumption intention of the terminal market. In the second half of the year, there will be a moderate recovery, and the warming power will be a little more variable than a few months ago. Vanguard International Semiconductor Corporation is expected to hold a French speaking meeting on August 1. Market expectation: China Unicom and Vanguard International Semiconductor Corporation are hardly optimistic about the future prosperity.

Powerchip also felt that the market demand peak season was not strong, and pointed out that there was no long-term demand signal at present, and there were no long-term orders more than the first quarter. The operating outlook for the third quarter was conservative, and the expected revenue would fluctuate slightly. The operating situation in the second half of the year would be similar to that in the second quarter.

The business prospect of High-performance computing is worth looking forward to, CoWoS packaging or demand exceeds supply

It is worth noting that Wei Zhejia is very optimistic about the prospect of High-performance computing business. "High-performance computing is on the track of long-term healthy growth, with large-scale structural growth. In the context of gradually increasing demand for computing power, it has high requirements for chip technology, which is the long-term driving force for TSMC's growth. Although 2023 is a challenging year, High-performance computing revenue is expected to see good growth, and will also be one of the most important revenue contributors in the future."

In this regard, Wei Zhejia said, "The demand for AI server processors (which we define as CPUs, GPUs, and AI accelerators that perform training and reasoning functions) accounts for about 6% of TSMC's total revenue. We expect that in the next five years, the CAGR (Compound annual growth rate) of this business will be close to 50%, accounting for about 10% of our revenue."

Although the current High-performance computing business has not played a leading role in TSMC's performance as expected, in the long run, the business is still eye-catching. This is also in line with AMD and Nvidia's forecast for AI growth.

AMD CEO Lisa Su said that by 2027, the AI chip market will reach 150 billion dollars, which is consistent with Nvidia CEO Jensen Huang's comments on data center infrastructure in the next few years at Nvidia's last financial report conference call.

Regarding AI chips, Wei Zhejia stated that the capacity of backend CoWoS chips will increase by about twice. TSMC predicts that some advanced packaging related to AI chips may remain in tight supply until the end of 2024. Therefore, demand may continue to exceed supply for a long time, because AMD and Nvidia will not be able to expand production to a certain point, although some 4nm and 5nm capacities are available.

According to Wei Zhejia, AI chips currently account for 6% of TSMC's total revenue. The industry indicates that there are indeed not many in terms of overall volume, but it should be noted that AI chips currently require advanced processes (7nm and below), which currently account for about half of TSMC's revenue. From two data points, it can be seen that AI chips have accounted for 10% to 12% of TSMC's advanced technology node revenue (including smartphones).

Conclusion

At the end of this article, it is also necessary to mention the IC design industry. From the perspective of the overall industry chain, TSMC's orders come from IC design factories. This time, TSMC will revise its annual outlook for the second half of the year, which shows its conservative expectations for the second half of the year. It can be seen that the performance trend of the IC design industry in the second half of the year may not be optimistic. The performance of IC design manufacturers such as MediaTek, Lianyong, and Ruiyu is about to be released, and the industry still needs to make good expectations.

Overall, we have seen some upward trends in TSMC's performance, which has slowed down compared to the high-speed decline in the first quarter. From the perspective of the entire industry, there have also been some new opportunities to look forward to in the storage and equipment industries. The industry believes that this downturn has been longer than expected, and we seem to need a longer time to get through this downturn cycle.