Shares of Taiwan Semiconductor (TSM -4.67%) were heading lower today after the world’s largest semiconductor manufacturer posted strong results in the first quarter but offered a cautious outlook due to weakness in the smartphone and PC markets.

As a result, the stock was down 3.1% as of 11:19 a.m. ET on Thursday.

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TSMC returns to profit growth, but it’s not enough

The sell-off in TSMC, as the company is also known, comes after the stock has surged along with the AI boom, so elevated expectations have been baked into the stock.

Nonetheless, the first-quarter results beat Wall Street estimates. Revenue rose 16.5% in local currency and 12.9% in dollars to $18.87 billion, which topped expectations at $18.4 billion.

Gross margin in the quarter fell from 56.3% a year ago to 53.1%, and operating margin dipped by a similar rate, falling from 45.5% to 42%.

TSMC continued to see more of its revenue come from advanced technologies with 5-nanometer and 3nm wafers making up 46% of revenue, and high-performance computing, which includes artificial intelligence (AI), remained strong as well.

Chief financial officer Wendell Huang said, “Our business in the first quarter was impacted by smartphone seasonality, partially offset by continued HPC (high-performance computing) related demand.”

He also said smartphone headwinds would continue into the second quarter, though demand for its 3nm and 5nm chips remains strong.

What’s next for Taiwan Semi

Looking ahead to the second quarter, the company expects revenue of $19.6 billion to $20.4 billion, ahead of the consensus at $19.3 billion, and a 28% increase at the midpoint.

Management called for a gross margin of 51% to 53% and an operating margin of 40% to 42%, showing slightly lower profitability than in the first quarter.

While those are solid numbers, especially for the accelerating revenue forecast, the stock was still down on the news due to the strong gains so far this year and the weakness in the smartphone market.

Still, TSMC’s future continues to look bright, especially as AI demand grows.