TSMC Q2 Earnings Review：AI Strength Overcomes Macro Headwinds
Key Financial Highlights
$Taiwan Semiconductor Manufacturing(TSM)$
– In U.S. dollar terms, Q2 revenue was $30.07 billion (+44% YoY, +18% QoQ), exceeding the guidance range of $28.4-$29.2 billion and setting a new record high. Net profit was $12.83 billion (+67% YoY, +17% QoQ), significantly above the guidance of $11.1-$11.4 billion and also an all-time high.
– In New Taiwan Dollar (NTD) terms, Q2 revenue reached NT$937.8 billion (+39% YoY, +11% QoQ), a new record. Net profit was NT$397.5 billion (+61% YoY, +10% QoQ), also a record high.
– Despite significant foreign exchange (FX) headwinds, the gross margin was 58.6%, landing in the upper end of the 57%-59% guidance range. The operating margin was 49.6%, exceeding the guidance of 47%-49%.
– Shipments for the quarter reached 3.718 million 12-inch equivalent wafers (+19% YoY), another record high.
Q2 Revenue Breakdown by Platform
The High-Performance Computing (HPC) platform, driven by AI chips from clients like $NVIDIA (NVDA.US)$ , $Broadcom (AVGO.US)$ , and $Advanced Micro Devices (AMD.US)$ , contributed 60% of total revenue. This was an increase of 1 percentage point quarter-over-quarter (QoQ) and 8 percentage points year-over-year (YoY), solidifying its position as TSMC's largest revenue source.
The Smartphone platform, led by clients such as $Apple (AAPL.US)$ and $Qualcomm (QCOM.US)$ , accounted for 27% of revenue. This represents a decline of 1 percentage point QoQ and 6 percentage points YoY, marking the second consecutive quarter its revenue contribution has fallen.
The Automotive segment contributed 5% of revenue, remaining nearly flat both quarter-over-quarter and year-over-year.
The Internet of Things (IoT) segment also accounted for 5% of revenue, flat quarter-over-quarter but down 1 percentage point year-over-year.
AI Demand Remains Strong as Sovereign AI Emerges
The High-Performance Computing (HPC) business, driven by AI chip foundry services, has now surpassed the traditional core smartphone business in revenue contribution for the sixth consecutive quarter, reaching a record 60% in Q2. Driven by AI, revenue from advanced process technologies (7nm and below) accounted for 74% of total revenue in Q2. This comprised 24% from the 3nm node, 36% from 5nm, and 14% from 7nm.
For the first time on this quarter's earnings call, TSMC management mentioned the emergence of demand from "Sovereign AI" initiatives. This is leading the company to utilize some of its 7nm capacity to support 5nm demand, as 5nm capacity is extremely tight, with many AI chips still being produced on the 4nm node (part of the 5nm family).
Commentary on H20 and Foreign Exchange Issues
Regarding the recent reversal of the ban on Nvidia's H20 and AMD's MI308 chips, TSMC management called it "good news" for the company, given the size of the mainland China AI market. However, this factor has not yet been incorporated into near-term financial guidance. The company is maintaining its forecast for AI-related revenue (including GPU, ASIC, and HBM controllers) to double in 2025, with a projected CAGR in the mid-40s percent range from 2024 to 2029.
As for the impact of foreign exchange on profitability—a key market concern pre-earnings—management acknowledged the significant effect of the NTD's appreciation. They reiterated that for every 1% the NTD strengthens against the USD, revenue in NTD terms falls by 1%, and gross margin declines by 0.4 percentage points. The current exchange rate is expected to create a 2.6 percentage point drag on Q3 gross margin, though the company aims to mitigate this through efficiency improvements.
Full-Year Guidance Raised, But Cautious on Q4 Consumer Electronics
TSMC forecasts Q3 revenue of $31.8-$33.0 billion (representing 35%-40% YoY growth), with a gross margin of 55.5%-57.5% and an operating margin of 45.5%-47.5%. Due to continued robust AI demand, management has upgraded the full-year revenue growth guidance (in USD terms) from the mid-20s percent range to the low-30s percent range.
While the Q3 forecast appears optimistic, the full-year guidance implies a significant slowdown in Q4, with revenue growth projected in the 6%-21% range. Management cited potential impacts on the consumer electronics market from uncertainties like tariffs, and now expects only a mild recovery for the overall non-AI end-market in 2025.
It is worth noting that TSMC's management has a history of providing relatively conservative guidance. Based on the current guidance, TSMC's 2025 net profit is projected to be between $47-$50 billion. At its current stock price, this corresponds to a P/E multiple of 24x-26x, placing it in the mid-range of the company's historical valuation.
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