TSMC - Profit beat expectations for Q1'23, but what's moving forward?

There were surprises and also concerns.

Profits beat expectations after its chip margins held up better than anticipated, assuaging concerns about fallout from a plunge in global electronics demand.

But, the outlook continues to be lowered.

So what could we deduce from its Q1'23 earnings?

Revenue corrected downwards -4.8% YoY on USD basis but grew by +3.6% on TWD basis.

Since TSMC is dual listed on the Taiwan stock exchange and also on the US, thus we can see how a stronger USD across the past 1 year affects its reporting.

Gross profit is down QoQ, in line with the revenue slump QoQ.

"Q1'23 business was impacted by weakening macroeconomic conditions and softening end market demand, which led customers to adjust their demand accordingly,” said Wendell Huang, VP, and Chief Financial Officer of TSMC.

Advanced technologies (7nm and below) have always accounted for more than 50% of TSMC's shipments. But for Q1'23, it can be observed that 7nm chip shipments dropped, possibly hinting that most of TSMC customers are switching over to 5nm.

By platform, HPC and Smartphone represented 44% and 34% of net revenue respectively, while IoT, Automotive, DCE, and Others each represented 9%, 7%, 2%, and 4%.

Having a great business model with high margins meant that TSMC always had great free cash flow.

But then again, the chip foundry business is one of the most capital-intensive businesses in the world.

As it triples down on its Arizona chip plant investment, higher CAPEX, together with a lower operating cash flow, saw its FCF drop YoY and QoQ.

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