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TSMC is a great benchmark for the health of the semiconductor industry considering it manufactures 70% of all key smartphone chipsets. The company posted record earnings in Q2 2022 with growing advanced semiconductor content in processing (AI, GPU, SoC) and connectivity (5G) being the key factors.

Key financial highlights:

• Net revenue increased 37% YoY to $18.2 billion driven by high-performance computing (HPC), IoT and automotive-related demand.
• Gross margin and operating margin were at 59.1% and 49.1% respectively, up 3.5 percentage points on a favorable foreign exchange rate, cost improvement and value selling.
• From the geographical perspective, North America accounted for the highest share (64%) of total net revenue.

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N2 and N3 updates

• N2 node will implement the platform scaling concept wherein benefits of power delivery schemes, advanced packaging and chiplet will be utilized to control cost and have an overall advantage.
• N3 node will be the longest node to be used before migrating to N2 due to the introduction of TSMC N3 FinFlex architectural innovation, which offers flexibility to customers to create designs precisely tuned for their needs with functional blocks implementing the best-optimized fin configuration and integrated into the same chip.
• The introduction of 3nm nodes will begin in H2 2022 and adoption by customers and revenue contribution will start in Q1 2023. The introduction of 3nm nodes will lower the gross margin by 2%-3% in 2023.
• While the capex is growing, some of it will be spread out over quarters with the WFE vendors struggling with backlogs as building fab equipment also requires semiconductors! This will help TSMC realize healthy margins for the coming quarters and offset any gross margin decline due to N3 introductions.

Key takeaways

• TSMC’s net revenue will cross $75 billion in 2022, which means it will surpass Intel’s revenues.
• HPC (High Performance Computing) will drive TSMC’s revenue growth in the long term and achieve a 15%-20% CAGR.
• 3D IC design solution System on Integrated Chips (SoIC) will account for a significant share of revenue in the long term due to its extensive application in HPC.
• Efforts to resolve tool delivery schedule challenges in advanced and mature nodes through discussions with entire supply chain partners remains a top priority.
• Growing silicon content, shipments and ASP will drive revenue growth in the long term.
• Inventory adjustment will continue till Q1 2023 and ease off by H2 2023. However, long-term semiconductor demand will be firm.

For more details, review the latest Counterpoint report. TSMC’s Official Q2 2022 Financial Results report can be found here. Their press release for Q2 2022 can be read here.

The point that struck me most in this Counterpoint report was that the introduction of 3nm nodes will begin in H2 2022 and adoption by customers and revenue contribution will start in Q1 2023. Apple will be introducing something new for the iPhone 14. They’ll be launching four iPhone 14 models.

You have to wonder if the iPhone 14 Pro models, the only ones that will sport the A16 chip, will be introduced at the September event but only ship in Q1 2023 so as to launch with TSMCs new 3nm chip.

Considering that Apple is TSMC’s top customer for smartphones, it’s hard to believe that Apple’s competitors would have access to the latest TSMC 3nm chip for their smartphones ahead of Apple.

Shipping the iPhone 14 Pro models in Q1 2023 would also counter Samsung’s latest Galaxy smartphone that traditionally ship in early to mid-Q1 every year.

Could this actually happen? Unless TSMC can ship the 3nm for Apple exclusively for Q4 2022 sales, then it could be a long shot possibility. I just can't see Apple's iPhone 14 Pro not being first smartphone with TSMC's most advanced 3nm chip.