Amid chaotic tariff battles, TSMC still has a rock-solid business outlook and remains unruffled

Taiwan Semiconductor Manufacturing Company (TSMC) released its Q1 2025 financial report (ending March 2025) before the US stock market opened on April 17, 2025, Beijing time. The key points are as follows:

1. Revenue: Remains robust. In Q1 2025, $Taiwan Semiconductor(TSM.US) achieved revenue of $25.5 billion, in line with the guidance range ($25-25.8 billion). This quarter's revenue decreased by 5% quarter-on-quarter, with a shipment volume impact of -4.7% and an average selling price impact of -0.4%. The quarter-on-quarter decline was influenced by seasonal factors and damage from earthquakes, but the average product price remained at a solid level above $7,800 per wafer.

2. Gross profit and gross margin: Maintained at a high level. TSMC's gross margin for Q1 2025 was 58.8%, close to the upper limit of the guidance range (57-59%). Although the company's gross margin slightly declined quarter-on-quarter due to seasonal factors in the smartphone business and a decrease in the proportion of 3nm products, it still remained at a relatively high level.

3. Wafer structure: Strong demand for advanced processes. The combined revenue from smartphones and high-performance computing (HPC) has reached 87%. Due to seasonal factors, the smartphone business saw a decline this quarter. AI demand remains strong, with its proportion of total revenue further increasing to 59%. Driven by robust demand for advanced processes, the revenue proportion from 7nm and below maintained above 70%. With the push from HPC customers, the revenue proportion from North America continued to rise to 77%.

4. TSMC performance guidance: For Q2 2025, expected revenue is $28.4-29.2 billion (market expectation: $27.2 billion) and gross margin is 57-59% (market expectation: 58.2%). Revenue is expected to grow 11.4%-14.5% quarter-on-quarter, mainly driven by the Apple iPhone 16e and AI demand; gross margin is expected to remain relatively stable.

Dolphin Research overall view: The data is overall good, and the "hardcore guidance" is even more reassuring.

TSMC's revenue and gross margin this quarter are quite good. Although part of the company's capacity was affected by earthquakes in Q1, the two core metrics still reached the previous guidance. Based on industry information, the impact from the earthquake on TSMC in Q1 was approximately $1 billion. Without this impact, the company's revenue this quarter could have exceeded the previous upper guidance limit. The gross margin this quarter remained close to the upper guidance limit, mainly driven by AI demand and full production of advanced processes Compared to this quarter, the market is more focused on the company's guidance. The company has provided a revenue guidance for the next quarter indicating a double-digit growth on a quarter-over-quarter basis, which directly boosts market confidence. Dolphin Research believes that the growth in the next quarter will mainly be driven by the demand for Apple's iPhone 16e and high-performance computing. In addition, the company has clarified its goal to maintain an annual revenue growth target of around 25% and an annual capital expenditure target of $38-42 billion, which also demonstrates the management's confidence in the company's operations.

Recently, due to factors such as tariffs, the market has expressed some concerns about the company and the semiconductor industry. A clear and relatively positive guidance will serve as a "stabilizer" for the market. Compared to ASML's weak performance yesterday, TSMC's guidance is definitely a stabilizing stone. Although both are giants in the semiconductor industry, there are still significant differences at this stage:

1) Business Structure: The current incremental demand for semiconductors mainly comes from the AI sector. TSMC's revenue from high-performance computing has increased to about 60%, and the company directly engages in chip manufacturing, allowing it to directly enjoy the industry's growth dividends. In contrast, ASML still relies on equipment procurement from chip manufacturers like TSMC, benefiting indirectly;

2) Customer Situation: Since TSMC directly connects with AI chip customers, its customer structure is better. The company's main clients include NVIDIA, AMD, and Broadcom, all of which have significant demands for AI and advanced processes; the core behind this is that TSMC not only directly enjoys the 5-7nm opportunities brought by the AI sector but also additional benefits from storage Cowos packaging; as Windows + Intel transitions to Windows + ARM, the competitiveness of foundries is still improving, capturing market share from Samsung and Intel.

On the other hand, among ASML's customers, although TSMC and SK Hynix are increasing capital expenditures, Intel and Samsung are cutting back on capital expenditures. Essentially, while AI demand is strong, traditional semiconductors continue to be weak.

3) Production Line Layout: TSMC has already begun building factories in the United States and announced in March that it would add an investment of $100 billion. The layout of production lines in the U.S. can increase the proportion of domestic chip production, which helps alleviate market concerns about the continuous escalation of tariffs.

In summary, TSMC's operational certainty at this stage is clearly better than ASML's, which also gives the company's management the confidence to provide clear guidance. Furthermore, the growth in demand from Qualcomm and Intel's product outsourcing are expected to bring more incremental benefits to the company. With TSMC's current "voice" position in the supply chain, the company's operations will be more relatively certain, which can also instill more confidence in the market.

Dolphin Research also noticed a very interesting point: TSMC announced a long time ago that it would invest $100 billion in the U.S., and it is very likely to assist the struggling Intel, so TSMC's performance is as solid as a rock, and its guidance reveals a sense of unwavering confidence.

In contrast, NVIDIA recently announced that due to the need for a license for H20 sales, it would immediately recognize a $5.5 billion inventory provision for the quarter, and its $500 billion AI infrastructure investment, which shows loyalty to the U.S., was also stated after receiving the U.S. government's licensing requirements. **

One speculation is that TSMC may be the most stable one in this round of the tariff war. However, the market is concerned about the management's views on capacity layout and tariffs. Please pay attention to Dolphin Research's follow-up conference call minutes.

Here is Dolphin Research's specific analysis of TSMC:

1. Revenue side: Still robust

TSMC achieved revenue of $25.53 billion in Q1 2025, in line with guidance ($25-25.8 billion). This quarter's revenue decreased by 5% quarter-on-quarter, as Q1 is traditionally a low season, affected by the seasonal decline in smartphone business.

In addition, some production lines in Taiwan were affected by an earthquake, leading to some capacity damage. Based on market information, the earthquake roughly impacted the company by $1 billion. If not for the earthquake, the company's Q1 revenue should have exceeded the upper limit of guidance. Despite the earthquake's impact, the company's revenue still reached the previous guidance, which is quite good.

TSMC's quarterly revenue has been fully anticipated by the market due to the monthly operational indicators released. How did the price and shipment volume change in TSMC's revenue this quarter?

Dolphin Research observes the main drivers of TSMC's revenue growth in Q1 from the dimensions of volume and price:

1) Volume dimension: In Q1 2025, TSMC's wafer shipment volume was 3,259 thousand pieces, a decrease of 4.7% quarter-on-quarter. The quarter-on-quarter shipment volume declined mainly due to seasonal factors affecting smartphone demand and the impact of the earthquake. Although the shipment volume has decreased, the company remains confident in its operations. TSMC's capital expenditure this quarter was $10.06 billion, which is significantly better than past Q1 performances. Additionally, the company further reiterated its annual capital expenditure target of $38-42 billion, nearly a 30% increase compared to last year, indicating the company's optimistic outlook on the recovery of demand in the AI and semiconductor sectors.

2) Price dimension: In Q1 2025, TSMC's revenue per wafer (equivalent to 12-inch wafers) was $7,834 per piece, a decrease of 0.4% quarter-on-quarter. The average selling price of TSMC's wafers slightly declined, mainly due to the impact of the earthquake and other factors, with a structural impact on the company's average selling price due to a decrease in the proportion of 3nm products. Under the influence of product price increases and AI demand, the company's revenue per wafer still maintained a high level above $7,800 this quarter.

Combining TSMC's guidance for the next quarter, the expected revenue for Q2 2025 is $28.4-29.2 billion (an increase of 11.4%-14.5% quarter-on-quarter), mainly driven by the new Apple iPhone 16e and AI demand. Currently, the company's advanced process capacity remains fully utilized II. Gross Profit and Gross Margin: Maintaining High Levels

In the first quarter of 2025, TSMC achieved a gross profit of $15 billion, a quarter-on-quarter decline of 5.4%. The quarter-on-quarter decline in gross profit is mainly due to the seasonal decline in revenue. In Q1 2025, TSMC's gross margin was 58.8%, a quarter-on-quarter decline of 0.2 percentage points, better than market expectations (58.1%). The slight decline in gross margin this quarter is mainly affected by the decrease in the proportion of 3nm and the earthquake. However, achieving nearly 59% in the first quarter is still quite good, mainly due to the "full" state of advanced process capacity and the company's price increases on some related products, which kept the overall gross margin at a high level.

The two most concerning data points for the market regarding TSMC are revenue and gross margin. Due to the monthly release of operating data, quarterly revenue has basically been anticipated by the market. The gross margin, however, is one of the focal points of this quarterly report. Dolphin Research will analyze the main drivers for the increase in gross margin this quarter:

“Gross Profit = Revenue per Wafer - Fixed Costs - Variable Costs”

1) Revenue per Wafer (equivalent to 12 inches): In Q1 2025, TSMC's revenue per wafer was approximately $7,834 per wafer, a quarter-on-quarter decrease of $31 per wafer. Although revenue per wafer declined this quarter, it remains relatively high due to price increases on some products and the boost from advanced processes;

2) Fixed Costs (Depreciation and Amortization): In Q1 2025, TSMC's average fixed cost was approximately $1,635 per wafer, a quarter-on-quarter increase of $92 per wafer. Under the influence of increased capital expenditures, the total amount of depreciation and amortization continued to rise, leading to an increase in unit fixed costs;

3) Variable Costs (Other Manufacturing Expenses): In Q1 2025, TSMC's average variable cost was approximately $1,594 per wafer, a quarter-on-quarter decrease of $88 per wafer. As the capacity of advanced processes reached a "full" state, the company's unit variable costs also declined.

In summary, in Q1 2025, TSMC's gross profit per wafer was $4,605 per wafer, a quarter-on-quarter decrease of $34. The increase in unit fixed costs and the decrease in unit variable costs largely offset each other. The decline in unit gross profit was mainly influenced by unit revenue, but the company's gross margin also saw a slight quarter-on-quarter decline.

For the next quarter, the company has provided a gross margin guidance of 57-59%. Driven by the demand for Apple's iPhone 16e and AI, the capacity of the company's advanced processes will continue to remain "full," which also ensures that the company can maintain a relatively high gross margin level 3. Wafer Structure End: Strong Demand for Advanced Processes

3.1 Wafer Revenue Share (by Application Type)

Smartphones and HPC are TSMC's largest sources of revenue, accounting for a combined 87%, making them the biggest source of the company's downstream revenue.

Looking at downstream sub-applications, affected by seasonal factors, the smartphone business share fell to 28% this quarter. The company's HPC (High-Performance Computing) share remains the largest this quarter, further increasing to 59%, which is also the company's largest source of growth this quarter.

The company's guidance for a double-digit quarter-on-quarter revenue growth next quarter is mainly driven by the demand from Apple's iPhone 16e and AI, thus both the smartphone business and high-performance computing share are expected to increase next quarter.

3.2 Wafer Revenue Share (by Process Node)

This quarter, the revenue share from below 7nm remains at 73%, with revenue from advanced processes already being the core source for the company. Specifically, the revenue share from 3nm this quarter is 22%, while the revenue share from 5nm further increased to 36%.

Some production areas of the company were affected by earthquakes in the first quarter, which impacted some of the advanced process capacity, thus affecting the shipment situation this quarter. From a supply-demand perspective, the company's advanced process capacity is still in a relatively "full" state, mainly driven by AI demand.

Currently, the company has secured major clients in the downstream high-end chip sector, possessing significant bargaining power in the industry chain. Increased demand from Qualcomm and Intel's product outsourcing will provide more incremental demand for advanced processes. Therefore, even with ongoing tariff adjustments, the company still maintains its annual revenue growth target of around 25%.

3.3 Wafer Revenue Share (by Region)

From the revenue perspective by region, North America remains TSMC's largest source of revenue, with the revenue share increasing to 77%. This is due to major clients such as Apple, NVIDIA, AMD, and Qualcomm in North America, creating a strong commercial binding relationship between TSMC and the United States. Aside from North America, China and the Asia-Pacific region are the other two major sources of revenue, accounting for 7% and 9% this quarter, respectively. With the increase in demand from Qualcomm and Intel's product outsourcing, there is potential for further growth in the revenue share from North America.

In summary, although TSMC's main production lines are currently still in Taiwan, the binding relationship with North American customers and the company is continuously strengthening. Under the influence of trade frictions and tariff adjustments, the company will also increase its investment in building factories in the United States. The company announced in March that it will add an investment of $100 billion in the U.S. to establish new production lines, which is expected to further increase the proportion of domestic semiconductor production in the U.S.

As for the impact of tariffs, the direct effect on TSMC is relatively small, but if downstream customers bear more, it may affect the end market, thereby indirectly impacting the company. From the current market demand and customer situation, the company's operations remain relatively stable, and it has maintained its previous annual revenue target.

Dolphin Research on TSMC

TSMC

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October 17, 2024 Conference Call: TSMC: No Intention to Acquire Intel (FY24Q3 Conference Call Minutes)

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October 20, 2023 Conference Call: 3nm Volume Production, Planning to Enter 2nm (TSMC 23Q3 Conference Call)

October 20, 2023 Financial Report Review: TSMC: Survived the "Performance Bottom," 3nm Battle Song Begins

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April 20, 2023 Conference Call: Clear Bottoming in Q2, 3nm Mass Production Imminent (TSMC 23Q1 Conference Call)

April 20, 2023 Financial Report Review: TSMC: The Strongest King, Yet Hard to Escape Cycle Fluctuations

January 12, 2023 Conference Call: Inventory Will Adjust for Another Six Months, Growth to Wait Until Second Half (TSMC 22Q4 Conference Call)

January 12, 2023 Financial Report Review: TSMC's Thunder, Even Buffett's Increased Holdings Can't Suppress

October 13, 2022 TSMC Conference Call: Even with Bright Financial Reports, TSMC Can't Avoid Industry Recession (Third Quarter Conference Call)

October 13, 2022 Financial Report Review: TSMC: How Long Can the "Lone Brave" in the Dark Hold On?

July 14, 2022 TSMC Conference Call: How TSMC Continues to Grow Amid Semiconductor Cycle Downturn? (TSMC Conference Call) July 14, 2022 Financial Report Review: TSMC: An "Alternative" Stubbornness Amid Order Cuts

April 14, 2022 TSMC Conference Call: 2nm on the Agenda (TSMC Conference Call)

April 14, 2022 TSMC Financial Report Review: TSMC: Strong "Faith," Irrelevant to Cycles

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March 16, 2022 TSMC Stock Deep Dive: After the Market Crash, Discussing the Legendary Foundry King TSMC

January 13, 2022 TSMC Conference Call: What Did TSMC Management Discuss After Providing Strong Quarterly Guidance?

January 13, 2022 TSMC Financial Report Review: TSMC is Too Strong, "Cycles" Take a Detour

October 14, 2021 TSMC Financial Report Review: TSMC: The Leader Takes the Lead, Still in the Spotlight

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