Taiwan Semiconductor Manufacturing Q3 2025 Earnings Call Transcript

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Provided by Quartr
October 16, 2025

Key Takeaways

  • Positive Sentiment: Third quarter 2025 revenue rose 10.1% sequentially to $33.1 B, gross margin improved 90 bps to 59.5%, and EPS increased 39% YoY, slightly above guidance.
  • Positive Sentiment: TSMC now expects full year 2025 revenue growth of close to the mid-30s % YoY, driven by robust AI demand and mild recovery in non-AI segments though mindful of tariff risks.
  • Positive Sentiment: 2025 capital expenditures are narrowed to $40–42 B, with about 70% allocated to advanced processes, reaffirming commitment to profitable growth and steady dividend increases.
  • Negative Sentiment: Ramp-up of overseas fabs will dilute gross margin by about 1–2% in 2025 (down from prior 2–3%), but remains a headwind as TSMC expands globally.
  • Positive Sentiment: 2 nm (N2) is on track for volume production later this quarter, with extensions N2P and S16 planned for H2 2026, positioning TSMC for long-lasting leading-edge growth.
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Earnings Conference Call
Taiwan Semiconductor Manufacturing Q3 2025
00:00 / 00:00

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Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Good afternoon, everyone, and welcome to TSMC's Third Quarter 2025 Earnings Conference call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. TSMC is hosting our earnings conference call via live audio webcast through the company's website at www.tsmc.com, where you can also download the earnings release materials. If you are joining us through the conference call, your dial-in lines are in listen-only mode. The format for today's event will be as follows. First, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the third quarter 2025, followed by our guidance for the fourth quarter 2025. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. C.C. Wei, will jointly provide the company's key messages. We will open the line for Q&A.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our press release. I would like to turn the call over to TSMC CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.

Wendell Huang
Wendell Huang
CFO and SVP at TSMC

Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the third quarter 2025. After that, I will provide the guidance for the fourth quarter 2025. Third quarter revenue increased 6% sequentially in NT, as our business was supported by a strong demand for our leading-edge process technologies. In U.S. dollar terms, revenue increased 10.1% sequentially to $33.1 billion, slightly ahead of our third quarter guidance. Gross margin increased 0.9% percentage point sequentially to 59.5%, primarily due to cost improvement efforts and a higher capacity utilization rate, partially offset by an unfavorable foreign exchange rate and dilution from our overseas fabs. Accordingly, operating margin increased 1.0 percentage point sequentially to 50.6%. Overall, our third quarter EPS was TWD 17.44, up 39% year-over-year, and ROE was 37.8%. Now, let's move on to revenue by technology.

Wendell Huang
Wendell Huang
CFO and SVP at TSMC

3 nm process technology contributed 23% of wafer revenue in the third quarter, while 5 nm and 7 nm accounted for 37% and 14% respectively. Advanced Technologies defined as 7 nm and below accounted for 74% of wafer revenue. Moving on to revenue contribution by platform, HPC remained flat quarter-over-quarter to account for 57% of our third quarter revenue. Smartphone increased 19% to account for 30%. IoT increased 20% to account for 5%. Automotive increased 18% to account for 5%. DCE decreased 20% to account for 1%. Moving on to the balance sheet, we ended the third quarter with cash and marketable securities of TWD 2.8 trillion, or $90 billion. On the liability side, current liability decreased by TWD 101 billion, quarter-over-quarter, mainly due to the decrease of TWD 112 billion in accrued liabilities and others, as we paid out 2025 provisional tax of TWD 136 billion.

Wendell Huang
Wendell Huang
CFO and SVP at TSMC

In terms of financial ratios, accounts receivable turnover days increased two days to 25 days. Days of inventory decreased two days to 74 days due to strong shipment in N3 and N5. Regarding cash flow and CapEx, during the third quarter, we generated about TWD 427 billion in cash from operations, spent TWD 287 billion in CapEx, and distributed TWD 117 billion for Q2 2024 cash dividend. Overall, our cash balance increased TWD 106 billion to TWD 2.5 trillion at the end of the quarter. In U.S. dollar terms, our third quarter capital expenditures totaled $9.7 billion. I have finished my financial summary. Now, let's turn to our current quarter guidance. Based on the current business outlook, we expect our fourth quarter revenue to be between $32.2 billion and $33.4 billion, which represents a 1% sequential decrease or a 22% year-over-year increase at the midpoint.

Wendell Huang
Wendell Huang
CFO and SVP at TSMC

Based on the exchange rate assumption of $1 to TWD 30.6, gross margin is expected to be between 59% and 61%. Operating margin between 49% and 51%. This concludes my financial presentation. Now, let me turn to our key messages. I will start by talking about our third quarter 2025 and fourth quarter 2025 profitability. Compared to the second quarter, our third quarter gross margin increased by 90 basis points sequentially to 59.5%, primarily due to cost improvement efforts and a higher overall capacity utilization rate, partially offset by margin dilution from our overseas fabs and an unfavorable foreign exchange rate. Compared to our third quarter guidance, our actual gross margin exceeded the high end of the range provided three months ago by 200 basis points, mainly as the actual third quarter exchange rate was $1 to TWD 29.91, compared to our guidance of $1 to TWD 29.

Wendell Huang
Wendell Huang
CFO and SVP at TSMC

In addition, we also delivered better than expected cost improvement efforts. We have just guided our fourth quarter gross margin to increase by 50 basis points to 60% at the midpoint, primarily driven by a more favorable foreign exchange rate, partially offset by continued dilution from our overseas fabs. While the cost of overseas fabs remains higher, thanks to the company's overall larger scale, we now expect the gross margin dilution from the ramp-up of our overseas fabs to be closer to 2% in the second half of 2025. For the full year 2025, we now expect it to be between 1%-2% as compared to 2%-3% previously.

Wendell Huang
Wendell Huang
CFO and SVP at TSMC

Looking ahead, we continue to forecast the gross margin dilution from the ramp-up of our overseas fabs in the next several years to be 2%-3% in the early stages and widen to 3%-4% in the latter stages. We will leverage our increasing size in Arizona and work on our operations to improve the cost structure. We will also continue to work closely with our customers and suppliers to manage the impact. Overall, with our fundamental competitive advantages of manufacturing technology leadership and large-scale production base, we expect TSMC to be the most efficient and cost-effective manufacturer in every region that we operate. Now, let me make some comments on our 2025 CapEx. As the structured AI-related demand continues to be very strong, we continue to invest to support our customers' growth.

Wendell Huang
Wendell Huang
CFO and SVP at TSMC

We are narrowing the range of our 2025 CapEx to be between $40 billion and $42 billion, as compared to $38 billion-$42 billion previously. About 70% of the capital budget will be allocated for advanced process technologies. About 10%-20% will be spent for specialty technologies. About 10%-20% will be spent for advanced packaging, testing, mask making, and others. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. Even as we invest for the future growth with this higher level of CapEx spending in 2025, we remain committed to delivering profitable growth to our shareholders. We also remain committed to a sustainable and steadily increasing cash dividend per share on both an annual and quarterly basis. Now, let me turn the microphone over to C.C.

Che-Chia Wei
CEO and Chairman at TSMC

Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. We concluded our third quarter with revenue of $33.1 billion, slightly above our guidance in U.S. dollar terms, mainly due to the strong demand for our leading-edge process technologies. Moving into the fourth quarter 2025, we expect our business to be supported by continued strong demand for our leading-edge process technologies. We continue to observe robust AI-related demand throughout 2025, while the non-AI end market segment has patterned out and is seeing a mild recovery. Supported by our strong technology differentiation and broad customer base, we now expect our full-year 2025 revenue to increase by close to mid-30% year-over-year in U.S. dollar terms.

Che-Chia Wei
CEO and Chairman at TSMC

While we have not observed any change in our customers' behavior so far, we understand there are uncertainties and risks from the potential impact of tariff policies, especially in the consumer-related and price-sensitive end market segments. As such, we will remain mindful of the potential impact and be prudent in our business planning going into 2026 while continuing to invest for the future megatrend. Amidst the uncertainty, we will also continue to focus on the fundamentals of our business, that is technology leadership, manufacturing excellence, and customer trust, to further strengthen our competitive position. Next, let me talk about the AI demand outlook and TSMC's capacity planning process disciplines. Recent developments in the AI market continue to be very positive. The explosive growth in token volume demonstrates increasing consumer AI model adoption, which means more and more computation is needed, leading to more leading-edge silicon demand.

Che-Chia Wei
CEO and Chairman at TSMC

Companies such as TSMC are leveraging AI internally to drive greater productivity and efficiency to create more value. As such, enterprise AI is another source of demand. In addition, we continue to observe the rising emergence of sovereign AI. We are also happy to see continued strong outlook from our customers. In addition, we directly receive very strong signals from our customers' customers, requesting the capacity to support their business. Thus, our conviction in the AI megatrend is strengthening, and we believe the demand for semiconductors will continue to be very fundamental. As a key enabler of AI applications, TSMC's biggest responsibility is to prepare the most advanced technologies and necessary capacity to support our customers' growth. To address the structural increase in the long-term market demand profile, TSMC employs a disciplined and robust capacity planning system.

Che-Chia Wei
CEO and Chairman at TSMC

Externally, we work closely with our customers and our customers' customers to plan our capacity. We have more than 500 different customers across all the end market segments. In addition, as process technology complexity increases, the engagement lead time with customers is now at least two to three years in advance. Therefore, we probably get the deepest and widest loop possible in the industry. Internally, our planning system involves multiple teams across several functions to assess and evaluate the market demand from both top-down and bottom-up approaches to determine the appropriate capacity to build. This is especially important when we have such high forecasted demand from AI-related businesses. As the world's most reliable and effective capacity provider, we will continue to work closely with our customers to invest in leading-edge specialty and advanced packaging technologies to support their growth.

Che-Chia Wei
CEO and Chairman at TSMC

We will also remain disciplined and robust in our capacity planning approach to ensure we deliver profitable growth for our shareholders. Now, let me talk about TSMC's global manufacturing footprint update. All our overseas decisions are based on our customers' needs, as they value some geographic flexibility and the necessary level of government support. This is also to maximize the value for our shareholders. With a strong collaboration and support from our leading U.S. customers and the U.S. federal, state, and city governments, we continue to speed up our capacity expansion in Arizona. We are making tangible progress and executing well to our plan. In addition, we are preparing to upgrade our technologies faster to end-to-end and more advanced process technologies in Arizona, given the strong AI-related demand from our customers.

Che-Chia Wei
CEO and Chairman at TSMC

Furthermore, we are close to securing a second large piece of land nearby to support our current expansion plans and provide more flexibility in response to the very strong multi-year AI-related demand. Our plan will enable TSMC to scale up to an independent gigafab cluster in Arizona to support the needs of our leading-edge customers in smartphone, AI, and HPC applications. Next, in Japan, thanks to the strong support from the Japan Central, Prefectural, and Local Government, our first specialty fab in Kumamoto has already started volume production in late 2024 with very good yield. The construction of our second fab has begun, and the ramp schedule will be based on our customers' needs and market conditions. In Europe, we have received strong commitment from the European Commission and the German federal, state, and city governments.

Che-Chia Wei
CEO and Chairman at TSMC

Construction of our specialty fab in Dresden, Germany, has also started, and we are progressing smoothly with our plans. The ramp schedule will be based on our customers' needs and market conditions. In Taiwan, with support from the Taiwan government, we are preparing for multiple phases of 2 nm fab in both Xinchu and Kaohsiung Science Parks. We will continue to invest in leading-edge and advanced packaging facilities in Taiwan over the next several years. By expanding our global footprint while continuing to invest in Taiwan, TSMC can continue to be the trusted technology and capacity provider of the global logic IC industry for years to come. Finally, let me talk about our N2 and S16 status. Our 2 nm and S16 technologies lead the industry in addressing insatiable demand for energy-efficient computing, and almost all innovators are working with TSMC. N2 is well on track for volume production later this quarter.

Che-Chia Wei
CEO and Chairman at TSMC

With good yield, we expect a faster ramp in 2026, fueled by both smartphone and HPC AI applications. With our strategy of continuous enhancement, we also introduce N2P as an extension of our N2 family. N2P features further performance and power benefits on top of N2 and volume production scheduled for the second half of 2026. We also introduced A16 featuring our best-in-class superpower rail, or SPR. A16 is best suited for a specific HPC product with a complex signal route and dense power delivery networks. Volume production is on track for the second half of 2026. We believe N2, N2P, A16, and its derivatives will propel our N2 family to be another large and long-lasting node for TSMC. This concludes our key message, and thank you for your attention.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Thank you, C.C. This concludes our prepared statements. Before we begin the Q&A session, I would like to remind everybody to please limit your questions to two at a time to allow all the participants an opportunity to ask their questions. Should you wish to raise your question in Chinese, I will translate it to English before our management answers your question. For those of you on the call, if you would like to ask a question, please press the star, then one on the telephone keypad now. If at any time you'd like to remove yourself from the questioning queue, please press star, then two. Now, let's begin the Q&A session. Operator, can we please proceed with the first caller on the line? Thank you.

Operator

Yes. First one, Gokul Hariharan, JPMorgan. Go ahead, please.

Gokul Hariharan
Gokul Hariharan
Analyst at JPMorgan

Yeah, thanks. Good afternoon, C.C., Wendell, and Jeff. Great result again. On the AI front, C.C., I think you have met with pretty much everybody who is driving the Gen AI revolution over the last couple of months. As you said, everybody seems to be a lot more positive. I think we gave a guidance of mid-40% data center AI growth CAGR earlier this year until 2029. Anything that you see which should kind of change that number? It definitely feels like the growth today seems to be much stronger. Related to that, you did talk about the very detailed capacity expansion planning that TSMC does. In past technology cycles, TSMC CapEx has gone up significantly to prepare for the next upgrade or next leading-edge node. In this cycle, TSMC revenues have grown 50% from the previous peak in 2022. CapEx has only grown about 10%.

Gokul Hariharan
Gokul Hariharan
Analyst at JPMorgan

How should we think about the CapEx over the next couple of years? I know that you're not giving numerical guidance yet, but I just wanted to understand, like are we looking at much higher CapEx in the next couple of years given all these conversations you've had? I had a follow-up after that. Thank you.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Okay. Gokul, first question. Sorry, Gokul. Let me summarize for everyone's benefit. Again, he wants to know firstly related to the AI-related demand that TSMC works with many, if not everyone, who is doing AI, and many of the customers seem to be even more positive today. I guess he would like to ask C.C., sort of what are we seeing or hearing from our customers? We had previously said that the next five years from 2024 to 2029, we expect AI accelerator to grow at a mid-40% CAGR. Is there any update to this? I think this is the first part. I'll get to the second part on CapEx.

Che-Chia Wei
CEO and Chairman at TSMC

Wow. That's a long question, isn't it? Gokul, the AI demand actually continues to be very strong. It's more strong than we thought three months ago. In today's situation, we have talked to customers, and then we talk to customers' customers. The CAGR we previously announced is about the mid-40%, but it's still a little bit better than that. We will update you probably in the beginning of next year. We have a more clear picture. Today, the numbers are incentive.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

The second part of Gokul's question related to CapEx, he notes that in the past, when TSMC sees opportunities for higher growth, past cycles or past instances, we would step up the CapEx significantly to prepare to drive the future growth. He notes this cycle, actually, though while CapEx is increasing, the revenue is increasing even faster. His question really, I think, is how do we see this playing out over the next few years, both in terms of the CapEx spend and the growth relative to the revenue growth?

Wendell Huang
Wendell Huang
CFO and SVP at TSMC

Okay. Gokul, every year we spend the CapEx based on the business opportunity in the following few years. As long as we believe there are business opportunities, we will not hesitate to invest. If we do our job right, the growth of our business or of our revenue should outpace the growth of the CapEX. That is what we have been delivering in the past few years. Now, going forward, assuming we're still doing a very good job, we will continue to see that happening again. A company of our size, the CapEx number, it's unlikely to suddenly drop significantly in any given year. When we continue to invest and our growth is outpacing our CapEx growth, you'll see the growth like what we have done in the past few years.

Gokul Hariharan
Gokul Hariharan
Analyst at JPMorgan

Understood. I know that it is unlikely to drop, but it is also likely to grow quite a bit given what C.C. Wei mentioned in terms of every customer asking you and every customer's customer requesting you for capacity addition, right?

Wendell Huang
Wendell Huang
CFO and SVP at TSMC

Yeah, as I said, a higher level of CapEx is always going to be correlated with a higher growth opportunity. As C.C. said, next year looks to be a healthy year and that we are confident on the megatrend, then we'll continue to invest.

Gokul Hariharan
Gokul Hariharan
Analyst at JPMorgan

Okay, got it. Yeah.

Gokul Hariharan
Gokul Hariharan
Analyst at JPMorgan

Yeah, maybe one more follow-up question from me, C.C. I think last year also you gave us an indication of how much CoWoS capacity you would be building. I think you talked about 2x of doubling the CoWoS capacity. It clearly feels like even that is not enough. Could you give us some idea about how much capacity you would be building next year just to get some idea about what you are seeing in terms of AI demand? Also, just to get some understanding of TSMC's data center AI exposure, I think last year we talked about mid-teens revenues. Where do we end up this year? Do we end up close to like 30% of revenues coming from AI?

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Okay. Gokul, your second question really, he wants to understand, can we provide any detail or colors on the CoWoS capacity plan for 2026 in terms of year-on-year increase? Also, in terms of our definition of AI accelerator revenue, the narrow definition, how much will it contribute for 2025 revenue? Is it 30%?

Che-Chia Wei
CEO and Chairman at TSMC

Gokul, this is C.C. Wei again. Talking about the CoWoS capacity, all I can say is continuing the three months ago, we are working very hard to narrow the gap between the demand and supply. We are still working to increase the capacity in 2026. The real number, we probably update you next year. Today, all I want to say about the AI, everything related, like the front-end and back-end capacity, is very tight. We are working very hard to make sure that the gap will be narrow, but all I can say is we are working very hard.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Okay. Thank you, Gokul. I think we need to move on in the interest of time. Operator, can we move to the next participant, please?

Operator

Yes. Next one, Charlie Chan, Morgan Stanley. Go ahead, please.

Charlie Chan
Charlie Chan
Analyst at Morgan Stanley

Thanks for taking my question. Again, congratulations for very strong results, C.C., Wendell, and Jeff. My first question is really about your leading-edge demand. As C.C. just mentioned, your front-end demand is also very strong into next year. One of your major customers just said that more so is that. I think his point is that by doing maybe system-level innovation in the thermal, etc., can boost up more kind of performers. Just a kind of dumb question. How do we reconcile your very, very strong leading-edge demand and that customer continue to migrate to your most advanced nodes and also you continue to reflect value, whereas the customer continues to think that more so is that? Can we get some clarification from TSMC?

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

All right. Charlie's question is very specific, although he wants us to comment on a customer saying more so is that. How do we reconcile this with a very strong leading-edge demand into 2026 and also with system-level innovations?

Che-Chia Wei
CEO and Chairman at TSMC

Okay. Charlie, this is C.C. Wei. Yeah, one of my customers, very important customer, say more so is that. What he means is it's not only relying on the chip technology anymore. Now we have to focus on the whole system's performance. He wants to emphasize the whole system's performance rather than just talking about the more so, which is not enough to meet his requirement. We work very closely with his people to design our technology, both in front-end and back-end, and also in all the packagings to meet his requirement. That's all I can say.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Okay. Thank you, C.C.

Che-Chia Wei
CEO and Chairman at TSMC

Sure.

Charlie Chan
Charlie Chan
Analyst at Morgan Stanley

Thanks, CC.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Do you have a second question, Charlie?

Charlie Chan
Charlie Chan
Analyst at Morgan Stanley

Yes, I do. Thanks, Jeff. I would interpret that as Foundry 2.0, that your co-COO, Mr. Cliff, also kind of shared during the SEMICON Taiwan. Thanks, C.C., for your commentary. My second question is actually a follow-up from last quarter's same question. Back then, I consulted you about the China AI GPU demand, right? Whether you can seize the market opportunity because China says VDL is setting their AI infrastructure very rapidly. Given the recent kind of back and forth between the U.S. and China, whether China can really impose this NVIDIA GPU, would that kind of discount your potential long-term growth of the AI CAGR? Is that something that TSMC would worry about?

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Okay. Charlie's second question is related around AI demand and specific to China. With the sort of the export control and restriction, his question is, does that impact our ability to address the market opportunity? Will this impact our AI CAGR growth if we're not allowed to fully serve China?

Charlie Chan
Charlie Chan
Analyst at Morgan Stanley

I think there will be both sides, meaning restriction from the U.S., but also China government's kind of discouragement to procure a U.S. chip. Sorry for the interruption.

Che-Chia Wei
CEO and Chairman at TSMC

Charlie, to speak the truth, I have a confidence in my customers. Both are in GPU or in ASIC. They all perform very well. If the China market is not available, I still think the AI's growth will be very dramatic and, as I said, very positive. I have confidence that our customers' performance and they will continue to grow, and we will support them.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Thank you, C.C.

Charlie Chan
Charlie Chan
Analyst at Morgan Stanley

Even with a limited opportunity from China for the time being, you are still confident that a 40% CAGR or even higher can be achieved in the coming years?

Che-Chia Wei
CEO and Chairman at TSMC

You are right.

Charlie Chan
Charlie Chan
Analyst at Morgan Stanley

Okay, great. Thank you.

Charlie Chan
Charlie Chan
Analyst at Morgan Stanley

Okay.

Charlie Chan
Charlie Chan
Analyst at Morgan Stanley

Thanks, gentlemen.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Thank you, Charlie. Operator, can we move on to the next participant, please?

Operator

Yes. Next one, Sunny Lin, UBS. Go ahead, please.

Sunny Lin
Sunny Lin
Analyst at UBS

Thank you very much. Good afternoon. Congrats on the very strong gross margin. My first question is, how should we think about 2026? I understand we should get better color maybe into January, but just want to get some directional major puts and takes for gross margin trending going into 2026. Especially, how should we think about the gross margin impact from 2 nm ramp for 2026?

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Okay. Sonya's first question is regarding gross margin. She would like to know directionally how do we see the gross margin for next year, 2026, in terms of certain puts and takes, and also if Wendell is able to comment specifically. Sunni, sorry if I heard you right, on the N2 dilution impact, correct?

Sunny Lin
Sunny Lin
Analyst at UBS

Yeah, that's right. Thank you.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Okay. That's her first question.

Wendell Huang
Wendell Huang
CFO and SVP at TSMC

Okay, Sunni. Yeah, it's too early to talk about 2026. You already mentioned about the N2 dilution. As all the new nodes, when they just come out, the N2 will have dilution in our gross margin in 2026. At the same time, the N3 dilution is gradually coming down. We expect the N3 to catch up to the corporate average sometime in 2026. The other factors include overseas fabs dilution, which will continue, and which we said that it will be about 2%-3% dilution in the early stage of the next several years. That will also be there. We all saw the dramatic foreign exchange rate movement in the earlier part of this year. There's no control. We don't know where that will be. Every percentage move of dollar against TWD will affect our gross margin by 40 basis points. That just gives you some rough idea.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Okay, thank you.

Sunny Lin
Sunny Lin
Analyst at UBS

Got it. Sunni, if I may, a very quick follow-up. On 2 nm, would the typical 2%-3% dilution by new node for the first seven to eight quarters of mass production be a good reference for two-nanometer as well for 2026?

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Okay. Sunni, a quick follow-up. She wants to know for the 2 nm dilution if we're able to provide any detail. Can she still think about it in terms of seven to eight quarters or six to eight quarters dilution to reach the time, sorry, to reach the corporate average?

Wendell Huang
Wendell Huang
CFO and SVP at TSMC

Yeah, Sunni, let me share with you. N2 structure profitability is better than N3. Now, secondly, it's less meaningful nowadays to talk about how long it will take for a new node to reach the corporate average in terms of profitability. That's because the corporate profitability, the corporate gross margin moves, and generally, it has been moving upwards. Less meaningful to talk about that.

Sunny Lin
Sunny Lin
Analyst at UBS

Got it. No problem. That's very helpful. My second question is maybe for C.C. Thanks a lot for sharing with us the details on how you think about the capacity expansions and planning. My question is, now Cloud AI is ramping a lot faster than the prior opportunities like smartphones and PCs. I think the demand for Cloud AI is also maybe harder to forecast. I just want to maybe get a bit more color from you. Compared to the prior rounds of capacity expansions, what is TSMC doing differently versus before? How do you ensure that while you are ramping up the capacities more quickly, you are still having a good risk control? Thank you.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Thank you, Sunni. Sonia's second question is regarding capacity planning and expansion in a capital-intensive business. She notes this is very important. In the past, smartphone and PC megatrends, today it's AI and Cloud AI. She's wondering, does that make this planning process more difficult to forecast? What are we doing differently? How do we forecast this to make sure that we are investing appropriately?

Che-Chia Wei
CEO and Chairman at TSMC

Sunni, indeed, right now, because I believe we are just in the early stage of the AI application, it is very hard to make a right forecast at this moment. What do we do differently? There's a big difference because right now we pay a lot of attention to our customers' customers. We talk to and then discuss with them and look at their applications, be it in the search engine or in social media applications. We talk with them and see how they view the AI application to those functions. Then we make a judgment about what the AI is going to grow. This is quite different as compared with before. We only talked to our customers and had an internal study. This is different. Did I answer your question?

Sunny Lin
Sunny Lin
Analyst at UBS

Got it. Thank you very much, C.C. Yeah, and looking forward to the [KPAC sky] in January. Thank you.

Che-Chia Wei
CEO and Chairman at TSMC

You're welcome.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

All right. Thank you, Sunni. Operator, can we move on to the next participant, please?

Operator

Next one, Bruce Lu, Goldman Sachs. Go ahead, please.

Bruce Lu
Bruce Lu
Analyst at Goldman Sachs

Hello. Thank you for taking my question. I think Jensen talked about like $3 trillion-$4 trillion AI infrastructure opportunities by 2030, right? This compared to like $600 billion CapEx recent of this year implies for about 40% CAGR. This is similar to TSMC guidance for the AI growth, right? For me, first of all, what I want to know is what's the TSMC view for the AI infrastructure growth for the next five years? What's TSMC's forecast for the token growth rate in the next few years? TSMC used to provide the same industry growth, foundry growth, and how much TSMC can outperform the industry, right? Given the context, can we assume like TSMC AI-related revenue can track or will track with the CapEx growth of AI or the major cloud service provider?

Bruce Lu
Bruce Lu
Analyst at Goldman Sachs

Should we expect an even higher growth rate for TSMC, considering you're potentially getting more value out of it?

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Okay. Let me try to summarize your question, Bruce. He notes that one of our customers has highlighted a $3 trillion-$4 trillion infrastructure opportunity over the next few years compared to $600 billion current CapEx, implying a 40-something % CAGR growth rate, which is similar to ours. Bruce's question is he wants to know what is TSMC's forecast or view for AI infrastructure growth. He would also like to know what is TSMC's forecast or view for the token growth? What is TSMC's AI-related revenue growth? Can it track that of the cloud service providers? His question is, should it be even higher? Shouldn't it be even higher given the value that we capture? That's actually several questions, but is that correct, Bruce?

Bruce Lu
Bruce Lu
Analyst at Goldman Sachs

That's right. Thank you.

Che-Chia Wei
CEO and Chairman at TSMC

Bruce, essentially just want to know how accurate that we can predict that the AI is in demand. We give you a number, roughly 40% in the mid-40s is a CAGR, not including all the infrastructures built up and also aligned with our major customers' forecasts or their view. More than that, I think if we are talking about the tokens, the number of tokens increase, it's exponential. I believe that almost every three months, it will be exponentially increased. That's why we are still very comfortable that the demand on leading-edge semiconductors is real. As I continue to say, we look at all the demand and look at our capacity expansion, we need TSMC to work very hard to narrow the gap. That's what we are doing right now.

Che-Chia Wei
CEO and Chairman at TSMC

Exactly the number that we probably will share with you in next year so that when we have a very better clear picture.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Thank you, C.C.

Bruce Lu
Bruce Lu
Analyst at Goldman Sachs

I think the question is that the token growth seems to be substantially higher than the AI-related revenue guidance from TSMC, right? The gap is actually enlarging if you compound in the outer years, right? That's why that's the difference between what we see for the current TSMC outlook and the potential token consumptions, right? The gap is continuing to see an enlarging. How do we solve this? Do we really see that as a major issue as well?

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Okay. Bruce's second question, which is a follow-on from his first, is that the token growth is growing at a much higher rate or exponentially than TSMC's AI revenue growth. This gap will only widen in the next few years. He wants to know, Bruce, basically, what's the implication to TSMC or how do we see this? Is that correct?

Che-Chia Wei
CEO and Chairman at TSMC

Okay. Okay, Bruce. You are right. You are right. The tokens and the number of tokens that increase exponentially is much, much higher than TSMC's CAGR as we forecasted. Let me tell you that first, our technology continues to improve. Our customer is moving from one node to the next node so that they can handle much more tokens' number in their basic fundamental calculation. That's one thing. You know we progress very well from one node to the other node. Our customer is working with TSMC to continuously improve their performance. That's why when we say that we have about 40%, 45% CAGR, the token number exponentially increases because of our customer and TSMC's technology combined that can handle much more or much efficiently than before. Did I answer your question?

Bruce Lu
Bruce Lu
Analyst at Goldman Sachs

I see.

Bruce Lu
Bruce Lu
Analyst at Goldman Sachs

You believe your node migration plus your customer design change can fulfill or can meet the exponential growth for the token consumption?

Che-Chia Wei
CEO and Chairman at TSMC

Exactly.

Bruce Lu
Bruce Lu
Analyst at Goldman Sachs

Is that the conclusion?

Che-Chia Wei
CEO and Chairman at TSMC

Yes.

Bruce Lu
Bruce Lu
Analyst at Goldman Sachs

I understand.

Bruce Lu
Bruce Lu
Analyst at Goldman Sachs

Okay. Quick follow-up for the market.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Bruce, that was your second question. Operator, we need to move on. Thank you, Bruce.

Operator

Yes. Next one, Laura Chen, Citi. Go ahead, please.

Laura Chen
Laura Chen
Analyst at Citi

Yeah. Thank you very much for taking my questions. I appreciate C.C. sharing your view on TSMC's strategy on the AI capacity planning. I think along with the very strong advanced node demand, I believe that advanced packaging like CoWoS is also one of the focuses for your AI clients they are now looking for. I recall that TSMC previously also planned to expand advanced packaging in Arizona. Can you give us updates here? Also, for the time being, the very stretched demands at the moment, would TSMC work more closely with your OSAT partner to fulfill the strong demand at the same time? That's my first question. Thank you.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Thank you, Lora. Her first question is on capacity planning. We have talked earlier on the call about the planning for leading nodes. She wants to understand also on the cohort capacity, and specifically, I guess, advanced packaging in Arizona. How do we work with our all-set partners?

Che-Chia Wei
CEO and Chairman at TSMC

Okay. We have announced our plan to build two advanced packaging fabs in Arizona to support our customers. At the same time, right now we are working with one all-set big company and our good partner, and they are going to build their fab in Arizona. We are working with them because they are already breaking ground, and the schedule is earlier than TSMC's two advanced packaging fabs. We are working with them. Our main purpose is to support our customers, so we can marry in the U.S.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Laura, do you have a second question?

Laura Chen
Laura Chen
Analyst at Citi

Yes, yes, certainly. I mean, obviously, we see that the advanced node, advanced packaging is quite strong. Also, at the same time, we are also seeing that the migration is also happening for N2 and N3. Just wondering, from the revenue growth perspective, I know it's still early to predict next year based on your guidance. I'm just wondering, will it be more driven by the ASP increase because of the technology migration? TSMC will be able to sell in your value or more that will be driven by the capacity or volume growth on both N2 ramp-up? Also, C.C, you mentioned some of the mild silico recovery. That may also drive some of the volume growth into next year. Just wondering, if you look at the growth outlook, would that be more driven by the technology upgrade ASP increase or also more like a volume?

Laura Chen
Laura Chen
Analyst at Citi

That's my second question. Thank you.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Okay. Laura's, again, second question is looking at 2026. She would like to understand what will be the key drivers of the growth. Is it more from the technology mix migration, things like N2? Is it more from ASP upgrade, or is it more from just pure wafer volume growth?

Che-Chia Wei
CEO and Chairman at TSMC

Laura, all the above. All right?

Laura Chen
Laura Chen
Analyst at Citi

Okay. Okay.

Che-Chia Wei
CEO and Chairman at TSMC

You knew it, right? I mean, that's it.

Che-Chia Wei
CEO and Chairman at TSMC

It's growing.

Laura Chen
Laura Chen
Analyst at Citi

Yeah.

Laura Chen
Laura Chen
Analyst at Citi

There are also follow-ups because we see that actually N3 is very tight. At the same time, we are also kind of expanding on N2. C.C., you previously mentioned that you will migrate some of the even N7, N6, and also N5 to like N3. Specifically on N3, do we also need to add more capacity into next year for newly added capacity?

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Laura, if I understand correctly, will we need to add new capacity? Will we continue to do conversion? What will we do to support the very strong demand we see at leading edge next year?

Laura Chen
Laura Chen
Analyst at Citi

Yes, thank you.

Wendell Huang
Wendell Huang
CFO and SVP at TSMC

Let me answer that question. We continue to optimize the N5, N3 capacity to support our customer. For the new building for the N3 capacity to expand, we put the new building for the N2 technology. That's today's plan.

Laura Chen
Laura Chen
Analyst at Citi

Okay.

Wendell Huang
Wendell Huang
CFO and SVP at TSMC

Okay?

Laura Chen
Laura Chen
Analyst at Citi

Okay. Thank you. Thank you. Very clear.

Wendell Huang
Wendell Huang
CFO and SVP at TSMC

Thank you.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Thank you, Laura. Operator, in the interest of time, we'll take the questions from the last two participants, please. Thank you.

Operator

Yes. Next one, Krish Sankar, TD Cowen. Go ahead, please.

Krish Sankar
Krish Sankar
Analyst at TD Cowen

Yeah, hi. Thanks for taking my question. My first one is C.C. About 10 years ago, back in the smartphone days, TSMC would talk about the revenue opportunity for TSMC per phone. I was wondering, in today's world, can you talk about how much one gigawatt of AI data center capacity could translate in terms of wafer demand or revenue for TSMC? I have a follow-up.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Okay. Krish's first question, you noted in the past in the smartphone megatrend, we talked about the content per phone opportunity for TSMC. Now with AI, is there a way to frame or quantify one gigawatt of data center capacity? What is the revenue opportunity for TSMC?

Che-Chia Wei
CEO and Chairman at TSMC

Recently, as I said, the AI demand continues to increase. My customers say that 1 GW, they need to invest about $50 billion. How much of TSMC is a wafer inside? We are not ready to share with you yet because of different approaches. Okay?

Krish Sankar
Krish Sankar
Analyst at TD Cowen

No worries. A quick follow-up.

Che-Chia Wei
CEO and Chairman at TSMC

Excuse me. I just want to say that you know right now it's not only one chip. Actually, it's many chips together to form a system. All right?

Krish Sankar
Krish Sankar
Analyst at TD Cowen

Got it. Very helpful for that. A little quick follow-up. You know, obviously, you folks forecast long-term trends and then build capacity towards that. I'm kind of curious, when you look at the AI demand over the next several years, from a TSMC angle, does it matter whether that demand is coming through a GPU or an ASIC? Does it have an impact on your revenue or gross margin mix?

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Thank you, Krish. His second question is, again, with our business outlook. We forecast the long-term trends. We plan our capacity, as C.C. said, in a thorough and disciplined manner. His question is, what are the implications, for example, of, I believe you said GPU versus ASIC in terms of the AI market? Do we have a preference or is there a difference for TSMC? Is that correct, Krish?

Krish Sankar
Krish Sankar
Analyst at TD Cowen

That's right. The impact to revenue and gross margin, whether it's a GPU or an ASIC.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Right. Okay.

Che-Chia Wei
CEO and Chairman at TSMC

Krish, no matter if it's a GPU or it's an ASIC, it's all using our leading-edge technologies. From our perspective, we are working with our customer, and we all know that they are going to grow strongly in the next several years. There is no differentiation in front of TSMC. We support all kinds of types.

Krish Sankar
Krish Sankar
Analyst at TD Cowen

Thank you very much.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Thank you. Operator, can we take?

Krish Sankar
Krish Sankar
Analyst at TD Cowen

Thank you.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Thank you, Krish. We'll take the question from the final participant, please.

Operator

Yes. Last one off the line, Macquarie. Go ahead, please.

Arthur Lai
Arthur Lai
Analyst at Macquarie

Hi, C.C., Wendell, and Jeff. Congrats on a strong outlook. Asalai from Macquarie. My question is about competition. C.C., you define the Foundry 2.0 market. I wonder what's the strategic initiative that TSMC is undertaking to further strengthen your competitive landscape and also in this broader ecosystem? For some context, I got the question from the U.S. investor as your clients announced they invest in Intel. Thank you.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Okay. Arthur's question is around competition. In the Foundry 2.0 landscape, what strategic initiatives, what things are TSMC focusing on to further strengthen our competitive advantage? I think the last part, Arthur, you're asking in the environment where one of our competitors in the U.S., how do we focus on the competition? Is that correct?

Arthur Lai
Arthur Lai
Analyst at Macquarie

Yes. Thank you, Jeff.

Che-Chia Wei
CEO and Chairman at TSMC

Okay. Let me answer that one. When we introduce Foundry 2.0, we set the purpose that, as I said, one of my customers said that the system performance is very important in these days, not only a single chip. Also, let me share with you that our advanced packaging revenue is approaching close to 10%. It's significant in our revenue, and it's important for our customer. That's why we introduce Foundry 2.0 to categorize this foundry business, not as usual. Previously, we only looked at the front-end portion. Now it's the whole thing, the front-end, the back-end, and also important for our customer. That's why we introduce 2.0. Talking about our competition in the U.S., that competitor happens to be our customer, a very good customer. In fact, we are working with them for their most advanced product. Other than that, I don't want to make any more comments.

Arthur Lai
Arthur Lai
Analyst at Macquarie

Yeah. Thank you, C.C. Can I ask one more question?

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Yes, you have two. Your second question, sure.

Arthur Lai
Arthur Lai
Analyst at Macquarie

Yeah. My second question is very quick on the end demand. Recall, C.C., you last time mentioned that we should also monitor and worry about the prebuilt, especially in the consumer electronics. This quarter, our numbers suggest that there's a QoQ 19% growth in the smartphone. My question is, do you still worry about the prebuilt? Thank you.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Okay. Arthur, the second question is on smartphone. Are we concerned about prebuilt or sort of, I guess, pulling prebuilt from customers in that regard?

Che-Chia Wei
CEO and Chairman at TSMC

No. We don't worry about the prebuilt because when you have a prebuilt, you have an inventory. These days, the inventory already goes to the very seasonal level and very healthy. So no prebuilt.

Arthur Lai
Arthur Lai
Analyst at Macquarie

Thank you very much.

Jeff Su
Jeff Su
Director of Investor Relations at TSMC

Okay. Thank you, C.C. Thank you, Arthur. Thank you, everyone. This concludes our Q&A session. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within 30 minutes from now. The transcript will become available 24 hours from now. Both are going to be available through TSMC's website at www.tsmc.com. Thank you, everyone, for joining us today. We hope you all continue to stay well, and we hope you will join us again next quarter in early 2026. Thank you and have a good day.

Analysts
    • Gokul Hariharan
      Analyst at JPMorgan
    • Jeff Su
      Director of Investor Relations at TSMC
    • Charlie Chan
      Analyst at Morgan Stanley
    • Sunny Lin
      Analyst at UBS
    • Bruce Lu
      Analyst at Goldman Sachs
    • Wendell Huang
      CFO and SVP at TSMC
    • Che-Chia Wei
      CEO and Chairman at TSMC
    • Arthur Lai
      Analyst at Macquarie
    • Laura Chen
      Analyst at Citi
    • Krish Sankar
      Analyst at TD Cowen
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