Taiwan Semi (TSM +11%) is looking chipper today after the company reported robust Q4 results and provided upside guidance for Q1. As the world's largest contract chipmaker, and because TSM serves a broad range of end market applications, TSM is followed closely by the market during earnings season; its report provides a window into conditions in the overall semiconductor space.

The upside was significant and was exhibited across the board in terms of the key metrics. EPS jumped 23% yr/yr to NT$5.51, which was a NT$1.01 beat. Of note, TSM posted greater than a NT$1.00 EPS beat in each quarter in 2020. Revenue rose 22% yr/yr and 4.4% sequentially to US$12.68 bln, which was at the high end of prior guidance of US$12.4-12.7 bln. Gross margin (54.0% vs 51.5-53.5% prior guidance) and operating margin (43.5% vs 40.5-42.5% prior guidance) were also both better than expected.

Chips for smartphones are TSM's largest market, representing about half of revenue. This segment saw a 13% sequential revenue increase in Q4. While not mentioned by TSM, we suspect Apple's (AAPL) 5G iPhone rollout had a lot to do with that. Offsetting that a bit was a 14% sequential decline in its second largest segment, HPC (high performance computing), which accounts for about a third of revenue. Automotive makes up just 3% of sales, but sales here jumped 27% sequentially.

So, what are the key takeaways here?

• This report is great news for the semiconductor space generally. It shows that the shift to remote working and learning is leading to a surge in demand for advanced chips.
• TSM's robust guidance for Q1 is a clear sign that the good times are expected to continue. TSM expects Q1 to be aided by HPC-related demand, recovery in the automotive segment, and milder smartphone seasonality than in recent years. Also, recall that last month, Nikkei Asia reported that Apple is planning to produce up to 96 mln iPhones in 1H21, a nearly 30% yr/yr increase. This guidance seems to support that reporting.
• As important as TSM's headline numbers were for Q4 and guidance for Q1, we would argue that its robust 2021 capital budget of US$25-28 bln may be even more important in terms of gauging management's view going forward. Clearly, TSM management feels a need to expand its production capacity to keep up with robust demand.

Overall, this Q4 report was great news for TSM and for the semiconductor industry generally, given TSM's huge size. This report is likely to raise the expectations bar as chip names report Q4 results in the coming weeks.