Accounting question re: profitability analysis of foundries like TSMC, UMC: how do operating costs change between leading edge & mature nodes?

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I've been looking through TSMC's financial statements recently trying to learn things, and I'm wondering if there are any clues as to how to understand profitability ratio depends on technology node.

This type of question has come up before here:
- Do wafer costs decline as a node matures?
- (comments on TSMC gross margin)

But I wanted to look at it from an accounting point of view, and wondered if anyone might be able to shed some light on this.

Source:
- TSMC 2022Q2 financial statement, unaudited (this comes out when they present quarterly results, like the 2022Q3 results that were announced last week)
- TSMC 2022Q2 financial statement, reviewed by auditors (this comes out later; TSMC's website doesn't make it so easy to find)

A couple of things worth pointing out for the 2022Q2 results: (screenshots below support this)

- TSMC revenue from 5nm and 7nm nodes makes up just over half of TSMC's wafer revenue, and 45.6% of total revenue
- cost of revenue is 40.9% (59.1% gross margin)
- operating expenses are 10% of revenue (49.1% operating margin)
- interest/income tax etc. adjustments are 4.7% of revenue, mostly due to income tax (44.4% net margin) -- income tax looks to be about 10% of income before income tax
- depreciation recognized in cost of revenue was NT$103.8 B (93.5% of total depreciation; most of the rest was recognized as operating expenses) which is 47.5% of the total cost of revenue

Assumption: bulk of the depreciation comes from 5nm and 7nm nodes; the older nodes don't see it, so we can guess at a rough gross margin as follows:
- Revenue on 5nm and 7nm = NT$243.6B (from statement); revenue for everything else = NT$290.5B (math)
- Cost of revenue due to depreciation = NT$103.8B (from statement), other than depreciation = NT$114.9 (math)
- Allocate revenue cost other than depreciation proportional to % of revenue, that is, 45.6% of the NT$114.9 = NT$52.4B is allocated to 5nm and 7nm, the other NT$62.5B is allocated to everything else
- Allocate entire revenue cost of depreciation to 5nm and 7nm = NT$103.8B
- Total revenue cost of 5nm and 7nm = NT$52.4B from other costs besides depreciation, NT$103.8B from depreciation = NT$156.2B -> gross profit = NT$87.4B (gross margin = 35.9%)
- Total revenue cost aside from 5nm and 7nm = NT$62.5B -> gross profit = NT$228B (gross margin = 78.4%)

It might be more even than this --- e.g. 45% gross margin for 5nm and 7nm, 70.8% for everything else --- but it's not likely to be more skewed.

So here's my question. How are operating costs (R&D, general & administrative expenses, marketing) likely to be allocated between advanced node revenue (5nm+7nm) vs revenue from other sources? Split proportional to revenue? or skewed towards the more advanced nodes?

I'm trying to get some guesses as to how profit margin can vary by node.

 

[hist78]

Some additional considerations.

1. By now the first batch of N7 equipment is reaching the final year of depreciation if it hasn't completed the 5-year equipment depreciation schedule already. But over the past several years TSMC added more equipment to increase the N7 capacity due to the market demand. It's unknown for the amount invested in that area.

2. Most TSMC's equipment related to nodes older than N7 already fully depreciated. Supposedly N5 and newer nodes should contribute a lot more share in the TSMC overall depreciation expenses. But during the past two years and in the coming years TSMC is adding more capacity to its specialty nodes (>N7). The >N7 related depreciation expenses should be going up in the absolute amount but not in the share of overall depreciation due to the expensive N5, N3, and N2 implementation.

3. Although N3 was not in volume production until the third quarter 2022, some equipment depreciation might started 1 to 2 year earlier due to the risk production and long equipment setup and tune-up time.

This situation may apply to N2 and any enhanced nodes. It means there are some depreciations that link to insignificant amount of revenue or no revenue at all.

 

[VCT]

profitability ratio on technology node depends on competition. If TSMC feels providing more value i.e. less long term competition, TSMC will raise profit margin.
Although New node such as N3 looks less profit margin in the begin, it the long term I believe the margin will goes up.

 

[jms_embedded]

profitability ratio on technology node depends on competition. If TSMC feels providing more value i.e. less long term competition, TSMC will raise profit margin.
Although New node such as N3 looks less profit margin in the begin, it the long term I believe the margin will goes up.

OK but I'm trying to understand how operating costs might get allocated among TSMC processes. (Cost of revenue, on the other hand, has a fairly rigid meaning; companies are supposed to track how much of their expenses came from different sources. Operating costs are about the rest of their expenses that can't be directly tied to specific manufactured goods.)

 

[nghanayem]

I've been looking through TSMC's financial statements recently trying to learn things, and I'm wondering if there are any clues as to how to understand profitability ratio depends on technology node.

This type of question has come up before here:
- Do wafer costs decline as a node matures?
- (comments on TSMC gross margin)

But I wanted to look at it from an accounting point of view, and wondered if anyone might be able to shed some light on this.

Source:
- TSMC 2022Q2 financial statement, unaudited (this comes out when they present quarterly results, like the 2022Q3 results that were announced last week)
- TSMC 2022Q2 financial statement, reviewed by auditors (this comes out later; TSMC's website doesn't make it so easy to find)

A couple of things worth pointing out for the 2022Q2 results: (screenshots below support this)

- TSMC revenue from 5nm and 7nm nodes makes up just over half of TSMC's wafer revenue, and 45.6% of total revenue
- cost of revenue is 40.9% (59.1% gross margin)
- operating expenses are 10% of revenue (49.1% operating margin)
- interest/income tax etc. adjustments are 4.7% of revenue, mostly due to income tax (44.4% net margin) -- income tax looks to be about 10% of income before income tax
- depreciation recognized in cost of revenue was NT$103.8 B (93.5% of total depreciation; most of the rest was recognized as operating expenses) which is 47.5% of the total cost of revenue

Assumption: bulk of the depreciation comes from 5nm and 7nm nodes; the older nodes don't see it, so we can guess at a rough gross margin as follows:
- Revenue on 5nm and 7nm = NT$243.6B (from statement); revenue for everything else = NT$290.5B (math)
- Cost of revenue due to depreciation = NT$103.8B (from statement), other than depreciation = NT$114.9 (math)
- Allocate revenue cost other than depreciation proportional to % of revenue, that is, 45.6% of the NT$114.9 = NT$52.4B is allocated to 5nm and 7nm, the other NT$62.5B is allocated to everything else
- Allocate entire revenue cost of depreciation to 5nm and 7nm = NT$103.8B
- Total revenue cost of 5nm and 7nm = NT$52.4B from other costs besides depreciation, NT$103.8B from depreciation = NT$156.2B -> gross profit = NT$87.4B (gross margin = 35.9%)
- Total revenue cost aside from 5nm and 7nm = NT$62.5B -> gross profit = NT$228B (gross margin = 78.4%)

It might be more even than this --- e.g. 45% gross margin for 5nm and 7nm, 70.8% for everything else --- but it's not likely to be more skewed.

So here's my question. How are operating costs (R&D, general & administrative expenses, marketing) likely to be allocated between advanced node revenue (5nm+7nm) vs revenue from other sources? Split proportional to revenue? or skewed towards the more advanced nodes?

I'm trying to get some guesses as to how profit margin can vary by node.



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If I properly understand the question, the variable costs for cutting edge nodes will be MUCH higher than it will be for trailing edge nodes. Modern nodes have more layers and a greater degree of multi patterning that necessitates a greater number of process steps (more chemicals, water, electricity, staff, higher DD, and lower throughput per fab). Another thing worth considering is the increasing etch times as more complex structures are formed. Finfets and GAA transistors have shapes that require you to get around and under various surfaces. This necessitates more aggressive etch chemistries that can clean these surfaces faster (and potentially etch away material you don't want) or longer etch times with less aggressive chemistries to make sure you've etched everything you wanted. Both of these can harm economics.

Hope I understood the question and that this helped!

 

[hskuo]

My inputs:
1. As mentioned by tsmc in the earnings call, their leading nodes typically take 6-8 quarters to reach corporate gross margin level.
2. It could be fair to following tsmc CapEx weighting(70% advanced nodes, 10% specialty, 10-20 mask and package) to allocate RD cost.
3. As I remembered tsmc and UMC use different equipment depreciation model(5 years vs. 10 years?).
Hope it help!

 

[jms_embedded]

My inputs:
1. As mentioned by tsmc in the earnings call, their leading nodes typically take 6-8 quarters to reach corporate gross margin level.
2. It could be fair to following tsmc CapEx weighting(70% advanced nodes, 10% specialty, 10-20 mask and package) to allocate RD cost.
3. As I remembered tsmc and UMC use different equipment depreciation model(5 years vs. 10 years?).
Hope it help!

1. -- that's interesting! Which earnings call?
2,3. -- thanks.

 

[hskuo]

1. -- that's interesting! Which earnings call?
2,3. -- thanks.

tsmc CFO said that several times in the previous earnings calls. You might find it in Q&A session.