TSMC's Margins in Uncharted Territory

66.2% in the weakest quarter of the year. The biggest sequential jump on record. And 10 points above the long-term target they just raised.

TSMC reported a 66.2% gross margin in Q1, historically its weakest quarter. That result sits well above seasonality and marks the widest spread to its stated long-term margin target on record:

Will this hold? Officially in the AI supercycle? Let’s dig in and think through the implications.

From the earnings call:

Wendell Huang: In US dollar terms, revenue increased 6.4% sequentially to $35.9 billion, slightly ahead of our first quarter guidance. Gross margin increased 3.9 percentage points sequentially to 66.2%, primarily due to cost improvement efforts, a high capacity utilization rate, and a more favorable foreign exchange rate.

Q1 is usually the quarter when margins decline as smartphone sales slow after the holidays, and thus fabs run a little cooler and gross margin gives back 100 to 300 basis points. We can even see that was true this quarter for smartphones, down 11% QoQ: