Taiwan Semiconductor Manufacturing Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
July 17, 2025

Key Takeaways

  • Positive Sentiment: In Q2 2025, TSMC delivered 11.3% sequential revenue growth (17.8% in USD), exceeded guidance, and posted a 60.7% YoY EPS increase.
  • Positive Sentiment: Third quarter revenue is guided at US$31.8–33.0 billion (8% QoQ, 38% YoY), with gross margin of 55.5–57.5% and operating margin of 45.5–47.5%.
  • Positive Sentiment: Advanced nodes remain in strong demand, with 3 nm accounting for 24% of wafer revenue and next-gen processes (N2, N2P, A16, A14) on track for 2025–2028 ramp.
  • Positive Sentiment: TSMC plans a US$165 billion investment to build six Arizona fabs, two packaging plants, an R&D center, plus specialty fabs in Japan and Germany and expanded capacity in Taiwan.
  • Negative Sentiment: Unfavorable NT dollar appreciation and overseas-fab margin dilution cut Q2 gross margin by ~180 bp and are expected to reduce Q3 gross margin by ~260 bp.
AI Generated. May Contain Errors.
Earnings Conference Call
Taiwan Semiconductor Manufacturing Q2 2025
00:00 / 00:00

There are 13 speakers on the call.

Operator

Good afternoon, everyone, and welcome to TSMC's Second Quarter twenty twenty five Earnings Conference and Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. Today's event is being webcast live through TSMC'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.

Operator

The format for today's event will be as follows. First, TSMC's senior vice president and CFO, mister Wendell Huang, will summarize our operations in the second quarter two thousand twenty five followed by our guidance for the third quarter two thousand twenty five. Afterwards, mister Huang and TSMC's chairman and CEO, doctor C. C. Wei, will jointly provide the company's key messages.

Operator

Then we will open both the floor and the line for the question and answer session. 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 on our press release. And now I would like to turn the microphone over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.

Speaker 1

Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the second quarter twenty twenty five. After that, I will provide the guidance for the third quarter of twenty twenty five.

Speaker 1

Second quarter revenue increased 11.3% sequentially in NT as our business was supported by strong demand for our industry leading three nanometer and five nanometer technologies partially offset by an unfavorable foreign exchange rate. In US dollar term, revenue increased 17.8% sequentially to 30,100,000,000.0 and exceeded our second quarter guidance. Gross margin decreased 0.2 percentage points sequentially to 58.6 primarily due to an unfavorable foreign exchange rate and margin dilution from our overseas fabs, partially balanced by higher capacity utilization and cost improvement efforts. Due to operating leverage, operating margin increased 1.1 percentage points sequentially to 49.6%. Overall, our second quarter EPS was NT15.36 up 60.7% year over year, and ROE was 34.8%.

Speaker 1

Now let's move on to revenue by technology. Three nanometer process technology contributed 24% of wafer revenue in the second quarter, while five nanometer and seven nanometer accounted for thirty six percent and fourteen percent respectively. Advanced technologies defined as seven nanometer and below accounted for 74% of wafer revenue. Moving on to revenue contribution by platform. HPC increased 14% quarter over quarter to account for 60% of our second quarter revenue.

Speaker 1

Smartphone increased 7% to account for 27%. IoT increased 14% to account for 5%. Automotive stayed flat and accounted for 5%. And DCE increased 30% to account for 1%. Moving on to the balance sheet, we ended the second quarter with cash and marketable securities of NT2.6 trillion or US90 billion dollars On the liability side, current liabilities decreased by NT22 billion quarter over quarter mainly due to the decrease of NT38 billion in accrued liabilities and others.

Speaker 1

The decrease in accrued liabilities and others was mainly due to the payment of income tax. On financial ratios, accounts receivable turnover days decreased five days to twenty three days. The decrease in accounts receivable was mainly due to NT dollar appreciation as almost all of our accounts receivables are in US dollars. Days of inventory decreased seven days to seventy six days primarily due to higher n three and n five wafer shipments. Regarding cash flow and CapEx, during the second quarter, we generated about $497,000,000,000 NT in cash from operations, spent $297,000,000,000 in CapEx and distributed 117,000,000,000 for third quarter twenty four cash dividend.

Speaker 1

Taking the unfavorable exchange rate into consideration, our cash balance decreased NT30.3 billion to NT2.36 trillion at the end of the quarter. In US dollar terms, our second quarter capital expenditures totaled NT9.6 billion. I finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our third quarter revenue to be between 31,800,000,000.0 and 33,000,000,000 US dollars which represents an 8% sequential increase or a 38% year over year increase at the midpoint.

Speaker 1

Based on the exchange rate assumption of 1 US dollar to 29 NT, gross margin is expected to be between 55.557.5%. Operating margin between 45.547.5%. In addition, we maintain our 2025 capital budget to be between 38,000,000,042. This concludes my financial presentation. Now let me turn to our key messages.

Speaker 1

I will start by talking about our second quarter twenty five and third quarter twenty five profitability. Compared to first quarter, our second quarter gross margin slightly decreased to by 20 basis points sequentially to 58.6%. This was primarily due to an unfavorable foreign exchange rate and margin dilution from our overseas fabs, partially offset by higher than expected overall capacity utilization and cost improvement efforts. Compared to the first quarter, foreign exchange rate of $1 to 32.88 NT, the actual second quarter exchange rate was $1 to 31.05 NT. This created about 220 basis points margin headwind to our actual second quarter gross margin.

Speaker 1

We also experienced slightly more than 100 basis points impact from the ramp up of our overseas fabs mainly as the margin dilution from our Arizona fabs started to kick in. We have just guided our third quarter gross margin to decrease by 210 basis points to 56.5% at the midpoint primarily due to the continued unfavorable foreign exchange rate and more pronounced dilution from overseas fabs as we ramp up further in Kumamoto and Arizona. We continue to forecast the gross margin dilution from the ramp up of our overseas fabs in the next five years starting from 2025 to be between 2% to 3% every year in the early stages and widen to 3% to 4% in the latter stages. Despite the higher cost of overseas fabs, 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.

Speaker 1

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 the impact of foreign exchange rate on TSMC's revenue and profitability. NT dollar is the reporting currency of our financial statements. Nearly all of our revenue is in US dollars, while about 75% of cost of goods sold is in NT. Therefore fluctuations in the exchange rate between US dollar and NT will have a sizable impact to our reported revenue and gross profit margin.

Speaker 1

The sensitivity of the revenue to dollar NT exchange rate is nearly 100%. That is every 1% appreciation of NT against US dollar will reduce our reported NT revenue by 1%. The sensitivity of our gross margin to the same 1% exchange rate change is about 40 basis points. That is if NT appreciate 1% against the dollar, our gross margin will come down by about 40 basis points. Compared with our second quarter exchange rate guidance of $1 to NT32.5 provided on April 17, the NT dollar has appreciated by an average of about 4.4% sequentially, which negatively impacted our second quarter revenue by about 4.4% in NT and our gross margin by about 180 basis points.

Speaker 1

For third quarter of twenty five, based on the current exchange rate of $1 to 29 NT, the average NT dollar will appreciate by another 6.6% sequentially, which will negatively impact our third quarter revenue by 6.6% in NT and reduce our gross margin by about two sixty basis points. As a reminder, six factors determine TSMC's profitability. Leadership technology development and ramp up, pricing, capacity utilization, cost reduction, technology mix, and foreign exchange rate which is not in our control. When the foreign exchange rate is unfavorable as it is currently, we will focus on the fundamentals of our business and lean on the other five factors to manage through it and we have successfully done in the past. Thus, even with the unfavorable foreign exchange rate, we believe a long term gross margin of 53% and higher remains well achievable.

Speaker 1

Now let me turn the microphone over to Cici.

Speaker 2

Thank you, Wendell. Good afternoon, everyone. First, let me start with our near term demand outlook. We concluded our second quarter with revenue of 30,100,000,000.0 in US dollar above our guidance in US dollar term, mainly due to continue the robust AI and HPC related demand. Moving into the third quarter twenty twenty five, we expect our business in the third quarter to be driven by strong demand for our leading edge process technologies.

Speaker 2

Looking to second half of twenty twenty five, we have not seen any change in our customers' behavior so far. However, we understand there are uncertainties and risk from the potential impact of tariff policies especially on consumer related and the price sensitive end market segment. While we observe rebate program in China are stimulating some near term demand upside, we believe this is a short term in nature and continue to expect a mild recovery in overall non AI end market segment in 2025. Having said that, we believe the demand for semiconductor is very fundamental and will continue to be robust. Recent developments are also positive to AI's long term demand outlook.

Speaker 2

The explosive growth in token volume demonstrate increasing AI model usage and adoption, which means more and more computation is needed leading to more leading silicon demand. We also see AI demand continuing to be strong, the rising demand from sovereign AI. Therefore, we now expect our full year 2025 revenue to increase by around 30% in US dollar term supported by strong demand for our industry leading three nanometer and five nanometer technologies underpinned by growth in our HPC platform. Amidst the uncertainties, we will remain mindful of the potential tariff related impact and be prudent in our business planning going into second half twenty twenty five and 2026 while continuing to invest for the future megatrend. We will also focus on the fundamentals of our business, technology leadership, manufacturing excellence, and customer trust to further strengthen our competitive position.

Speaker 2

Next, let me talk about TSMC's global manufacturing footprint update. All our overseas decision are based on customers' need, the value some geographic flexibility, and the necessary level of government support. This is also to maximize the value of our shareholders. With a strong collaboration and support from our leading US customers and the US federal state and city government, we announced our intention to invest a total of US 165,000,000,000 in advanced semiconductor manufacturing in The United States. This expansion includes plans for six advanced wafer manufacturing fab in Arizona, two advanced packaging fabs, and a major r and d center to support the stronger multiyear demand from our customers.

Speaker 2

Our first fab in Arizona has already successfully entered into high volume production in 4Q twenty twenty four utilizing n four process technology with a yield comparable to our fab in Taiwan. The construction of our second fab, which will utilize three nanometer process technology, is already complete. We are seeing strong interest from our leading US customers and are working on speeding up the volume production schedule by several quarters to support their need. Construction of our server, which will utilize two nanometer and the a 16 process technologies has already begun, and we will look into speeding up the production schedule as well based on the strong AI related demand from our customers. Our first wave were utilized n two and the a 16 process technology, and our fifth and sixth fab will use even more advanced technologies.

Speaker 2

The construction and ramp schedule for those fabs will be based on our customers' need. Our expansion plan will enable TSMC to scale up to a Gigafab cluster in Arizona to support the needs of our leading edge customers in smartphone, AI, and HPC applications. We also plan to build two new advanced packaging facilities and establish an r and d center to complete the AI supply chain. After completion, around 30% of our two nanometer and more advanced capacity will be located in Arizona, creating an independent leading semiconductor manufacturing cluster in the in The US. Thus, TSMC continued to play a critical and integral role in enabling our customers' success.

Speaker 2

We'll also maintain a key partner and enabler of The US semiconductor industry. Next, in Japan, thanks to the strong support from the Japan Central Prefecture and Local Government, our first specialty technology fab in Kumamoto has already started volume production in late twenty twenty four with very good yield. The construction of our second specialty fab is scheduled to start later this year subject to the readiness of the local infrastructure. The ramp schedule will be based on our customers' need and market conditions. In Europe, we have received strong commitment from the European Commission and the German federal, state, and city government and are progressing smoothly with our plans to build a specialty technology fab in Dresden, Germany.

Speaker 2

The ramp schedule were also based on our customers' need and market conditions. In Taiwan, we support from the Taiwan government. We plan to build 11 wafer manufacturing fab and four advanced packaging facility over the next several years. We are preparing for multiple phases of two nanometer fab in both Xinzhou and Gauchon Science Park to support the strong structural demand from our customers. 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 IC industry for years to come while delivering profitable growth for our shareholders.

Speaker 2

Now let me talk about our n two and a 16 status. Our n two and a 16 technologies lead the industry in addressing the incessable demand for energy efficient computing, and almost all the innovators are working with TSMC. We expect the number of new tape outs for two nanometer technology in the first two years to be higher than both three nanometer five nanometer India first two years, fueled by both smartphone and HPC applications. And to what deliver for node performance and power benefit with 10 to 15 speed improvement at the same power or 20 to 30% power improvement at the same speed and more than 15% chip density increase as compared with a n three e. N two is well on track for volume production in the 2025 as scheduled with a ramp profile similar to n three.

Speaker 2

With our strategy of continuous enhancement, we also introduced n two p as an extension of our n two family. N two p features a further performance and power benefits on top of n two, then volume production is scheduled for second half twenty twenty six. We also introduced a 16 featuring our best in class superpower rail or SPR. Compared with a n two p, a 16 provides a four to eight to 10% speed improvement at the same power or 15 to 20% power improvement at the same speed and additional seven to 10% chip density gain. A 16 is best suitable suited for specific HPC products with complex signal route and dense power delivery network.

Speaker 2

Volume production is on track for second half twenty twenty six. We believe n two, n two p eight sixteen, and its derivatives will fuel our n two family to be another large and long lasting node for TSMC. Finally, let me talk about our a 14 status. Featuring our second generation nanosube transistor structure, a 14 watt deliver another four node stride from n two with performance and power benefits to address the increasing structural demand for high performance and energy efficient computing. Compared with the n two, a 16 will provide 10 to 15 speed improvement at the same power or 20 to 30% power improvement at the same speed and about 20% chip density gain.

Speaker 2

Our a 14 technology development is on track and progressing well with device performance and year improvement on or ahead of schedule. Volume production is scheduled for 2028. We will continue our strategy of continuously enhancement with a 14 including a superpower rail offering planned for 2029. We believe a 14 and its derivative will further extend our technology leadership position and enable TSMC to capture the growth opportunities way into the future. This concluding our key message, and thank you for your attention.

Operator

Thank you, Cici. This, does conclude our prepared statements. So before we begin the question and answer session, I would like to remind everybody to please limit your questions to two at a time so that we can allow, all the participants an opportunity to ask their questions. Questions will be taken both from the floor and from the call. Should you wish to raise your question in Chinese, I will translate it to English before our management answers your question.

Operator

For those of you on the call, if you'd like to ask a question, please press the star then one on your telephone keypad now. If at any time you'd like to remove yourself from the questioning queue, please press star then 2. So now let's begin the q, question and answer session. We'll take the first few questions from the floor, then we'll, flip and alternate, to those on the line. Maybe we'll go left, center, and then, right sort of a sequence.

Operator

And we'll start, here with Gokul Hariharan from JPMorgan.

Speaker 3

Thanks, Jeff, and good afternoon, Sisi and Wendell. First question on demand. I think, Sisi, you mentioned data center AI demand definitely looks better than maybe three months back. Last quarter, you also mentioned CoVOS capacity will probably come into balance by 2026. Is that still our view, or you think that the capacity now starts to look tighter?

Speaker 3

Second, I think you talked about on device AI as a potential future driver. Are you seeing more development on the on device AI part? Is it better compared to maybe three, six months back? And lastly, near term, your 4Q looks like you're expecting revenue to decline. Is that based on what your customers are telling, especially on the consumer side, or is it just TSMC being cautious and conservative, in terms of the guidance?

Operator

Okay. Gokul, thank you. Again, for the benefit of those, of course, here in person and on the line, please allow me to summarize your questions. So maybe we'll take them one by one. His first, question is on the demand, particularly data center and AI related demand.

Operator

As we as CeCe said in his remarks, it is certainly still, even stronger. So his question is about, the advanced packaging and COWAS demand into 2026. How do we see the supply demand gap narrowing, or becoming more balanced for COWAS specifically?

Speaker 2

Koku, the demand from the AI getting stronger and stronger if you pay attention to what the, for treating companies, the CEO said. And so the makeup trend for the AI is continue to be strong and so is the cohorts. And so now we are again, we are in a in a in a mode try to narrow the gap. I don't want to use a balance. The last time you guys misunderstood what I said, you thought it's a bad wording.

Speaker 2

So I wanna say we try to narrow the gap. Alright. So momentum is still there and very healthy.

Operator

K. And then the second, question or second part is on on device or edge AI. Gokul wants to know how is the development of customers to work on on device AI compared to for maybe three to six months ago. What is the interest or activity level, and how do we see this?

Speaker 2

As the last time I say it, I say that it takes one to two years for my customer to complete the new design on the product. The moment is still going. They are still continue to, as time goes by, as I said, the increase on the edge device, the number of the units is actually mild. But then the die size increase. We continue to see that.

Speaker 2

And the die size increased by about five to 10%, and that kind of trend continued. Okay. So, you had to wait around probably six months or to one year to see a explosion.

Operator

Okay. And then, go with the second question or the final part on the near term. I think, Oko, your question is with our third quarter guidance, implies, fourth quarter, is there any particular reason, or any comment that we want to make about the implied fourth quarter, business momentum?

Speaker 2

I think you did not mention Goku's comments or you are become conservative. That company is more real. We are we are a company that but we say we are achieved and achieved the high target. So your calculation, I think, Charlie also is nothing. So a lot of you is calculating our reported numbers so that you can easily see that our fourth quarter is decreasing.

Speaker 2

We take into the consideration of the possible impact of tariff and a lot of other uncertainties. So we become more conservative. That's our current attitude. But I guarantee you with our technology leadership position and excellent manufacturing, if there are any opportunities we will catch and be expected that we are achieve our high end target. Okay.

Operator

Okay. Thank you, Cici. Thank you, Coco. Yeah. Sorry.

Operator

Let let's go one by one. Second question, then maybe Charlie Chan from Morgan Stanley.

Speaker 4

Thanks for taking my question. Good afternoon, Cici, Wendell, Jeff. So first of all, congrats for very strong results, and especially on the gross margin side, a very good execution indeed. So my first question is really also on the gross margin because the accumulated effect in pay is almost like 4.4 percentage points. Right?

Speaker 4

It's too big to ignore. So when TSMC consider your 2,026 wafer pricing, so called reflecting your value, would you consider this FX impact? And is company confident to keep your margin similar to this year's level. I I feel like 53% is a low bar. So just want to remain a little bit high and see if that FX impact can be considered to, reflect to your value.

Speaker 4

Thank you.

Operator

Okay. So Charlie's first question is on, margin and, I guess, pricing. He notes, obviously, as Wendell said, the big move in the exchange rate and, therefore, a big impact to our profitability and gross margin. So his question is, looking ahead to 2026, can we reflect or earn our value, from the including the FX impact into the pricing? And therefore, what is our confidence level on the gross margin for next year?

Operator

Can it keep a similar level as this year?

Speaker 2

Well, let me assure you that, yes, the impact from the exchange rate is huge. But you try to imply that whether we are still our value. Let me answer that. We are working on it. And we have confidence that the 53% gross margin and higher, I still want you guys to pay more attention to and higher.

Speaker 2

Okay. Thank you.

Speaker 4

Okay. Thanks. Hopefully, it will work out well. My second question is also a very hot topic recently about the h 20 chip shipping to China. I remember three months ago, there was another question on this matter.

Speaker 4

Right? Meaning, that back then, I I I believe that chip was suspend, but you're still very confident about your mid 40% CAGR for cloud semi growth in the coming five years. Right? Now China becomes your addressable market again. Do you think that mid 40% CAGR target can be revised up?

Operator

Okay. Thank you, Charlie. So Charlie's second question is, around the AI accelerator demand. He notes, of course, our customers' product, h 20, recently, is now seems to be able to ship to China versus three months ago, it was not. So his question really is our long term AI accelerator growth CAGR to grow close to mid forties.

Operator

Can it be higher? Do we think it will be higher? Is there upside to this?

Speaker 2

Charlie, the h 20 now is, according again, according to the four trading companies CEO, you know, we did not receive the signal yet. So it's too early to give you an estimate. But certainly, it is a good news. Right? I mean, that's a China is a big market, and my customer can still continue to supply the chip to the big market.

Speaker 2

And it's a very positive news for them. And in return, it's a very positive news to TSMC. Whether we are ready to increase our forecast, not yet. Another quarter probably will be more appropriate to answer your question.

Speaker 4

Sure. Thanks for your comments. Very helpful. Thanks.

Operator

Thank you, Charlie. Okay. Then we'll move on to the right side of the room for us, Bruce Lu from Goldman Sachs.

Speaker 5

Thank you for taking my question. I think Charlie already asked the profitability question already. So I just move on to your end to rep. So what's the revenue contribution we can expect for the N2 ramp for next year? I'm a little bit surprised to hear that the N2 ramp is similar rate with N3.

Speaker 5

With N2, you do have like both HPC and smartphone customer ramping on the same stage, or in the first slide, year one or year two, right? Can we expect like 15% revenue contribution coming from N2 for next year or a similar level, you know, compared to n two, which is around, like, 11% for the year two.

Operator

Okay. Bruce's first question is around the N two ramp. He his question is about the ramp, and the ramp profile because we said the N 2 ramp profile is similar to N 3. So what does that mean? And then also, of course, what, revenue contribution do we expect or can we share for n two in 02/1926?

Speaker 2

Bruce, you have a good argument. Usually, we ramp up a new node using the smartphone. You knew that. Everybody knew it. Now it's not only a smartphone but also HPC product.

Speaker 2

However, the ramping profile I just reported say similar to three nanometer. It's limited by our capability to build a new fab to ramp it up. And, also a little bit is straightforward is constrained by the capacity. So, we say the ramp profile is similar to N 3, but the revenue contribution certainly will be bigger because you don't expect our N2 is the same price as N3, right? Of course.

Speaker 2

Good. Thank you.

Speaker 5

If that is the case, we should assume that in 2027, the N2 ramp up will be faster, right? Because you take twelve, eighteen months for you to build new fab. You should be able to to achieve the even higher growth in N 2 in '27. Right?

Operator

So so Bruce is asking if the revenue contribution is much is higher in 2026, then should it be even greater in 2027?

Speaker 2

We will answer that question in 2026. Thank you.

Speaker 5

Okay. The next question is for N5 and N3, right? So I want to understand the supply demand for N5 and N3 in the coming two years. So most of the AI will migrate to N3 next year. But it seems to me that the N5 conversion is mostly done N5, N3 conversion is mostly done.

Speaker 5

And we don't really see like greenfield capacity expansion on N3. So it becomes like super, like, tightness for the N3 for the coming years. So does that mean that N5 will be lower utilized or we try to build more N3 in the future? Or what kind of or we should see, we can sell out more value for N3 and N5 next year?

Operator

Okay. Bruce's second question is around N5 and N3. He wants to know what is the outlook, the supply demand at these, two advanced nodes the coming two years. His observation, AI products will migrate to n three, and the n five, n three conversion is mostly done. So his question is, will three nanometer supply be very tight the next few years?

Operator

And I think the last part, therefore, can we earn our value or price for that tightness? And then on the flip side, what about five nanometer? Will it become a lower utilization?

Speaker 2

I like your comment on that. We have to share our value because of very tight, in n three capacity. It will be continued for couple of years, very tight. And in fact, n five also very tight. The demand is high because of a lot of AI product still in the four nanometer technology node, and they will transition to three nanometer probably in next two years.

Speaker 2

So in meanwhile, n five are still very tight in capacity. N three even tighter. And so we are working hard. One

Speaker 6

of

Speaker 2

the TSMC's advantage is that we have kick off a cluster. And so we have between n seven, n five, n three, even the future n two, we have almost for each node, we have about 85 to 90% common tools. So it's it's not free, but it's much easier for TSMC to adjust or convert the capacity between those node. And today, let me share with you. We are using the n seven capacity to support n five because n five is too tight.

Speaker 2

And then we are converting n five to n three as you just pointed out. We'll continue to do that. And so, today, we are our leading edge technology is a capacity. We define n seven and below are all very tight. And seeing that, we are working very hard to, again, using my my sentence, narrow the gap between the demand and the capacity.

Operator

Okay. Thank you, Bruce. Let's go, to the participants online. Well, maybe we'll take two questions from the online, and then we'll come back to the floor. Thank you.

Operator

Operator?

Speaker 7

Yes. Now asking question, Brett Simpson, Arete.

Speaker 8

Yes. Thanks very much. I had a question for Wendell on gross margins. And it's always helpful you've laid out a framework for some of the puts and takes to TSMC's gross margins. But my question is really, some of these headwinds like FX and the dilution from overseas fabs are more structural cost increases?

Speaker 8

And to what extent can TSMC adjust wafer pricing higher to neutralize these cost increases in your business? And I guess secondly, on this point, how much economic benefits are you seeing from applying AI across the fabs? I mean, I think NVIDIA has mentioned that they're working with TSMC closely, strategically in areas like computational lithography to try to drive further fab efficiencies. So can you maybe just give us some examples where you're seeing real gains in your cost structure? And are we at a point where you're starting to see several points of gross margin benefit from AI efficiencies?

Speaker 8

Thanks.

Operator

All right, Brett. So Brett's first question is little bit involved, looking at our gross margin and profitability, He notes that the unfavorable exchange rate and the dilution from the overseas due to the higher cost, these are structural headwinds. So his question is, can we, how can we or can we, earn our value or adjust our wafer price to help, offset some of these? And, also, how much, we've talked about before about using AI ourselves in our operations, how much economic benefit are we deriving from things such as CU lethal with our customers, such as, and are there other examples of using AI where it's helping our cost structure, and can we quantify that quantify the benefit? Sorry.

Operator

That's your question. Right? Brett?

Speaker 8

That's right. Thanks. Thanks, Jeff.

Speaker 1

Okay, Brett. The first question, gross margin. That's the reason why we've been talking about the six factors affecting our profitability. This I I don't think I need to repeat those six factors. But whenever, for example, using foreign exchange rate as example, a few years ago, there were also periods of time that foreign exchange rates were against us.

Speaker 1

So we are able to lean on the other factors to help us mitigate the negative impact from certain factors and therefore still achieve our gross margin targets. And you specifically asked about, ASP, raising the price, but the price is just one of the factors. And I believe, Cici just, elaborate a lot on earning our value. And at the same time, are other factors that we can leverage on. So all in all, that's why we're saying 53% and higher and higher gross margin is still achievable.

Speaker 1

Your second question on AI benefits. I think we also talked about that before. We use that in operation, in manufacturing. We also use that in R and Ds. And just think about if we are able to produce 1% of productivity gains in a company of our size that equals to US1 billion dollars So that's the number we can share with you without going into too much other details.

Operator

Does that answer your question, Brett? Okay. Yeah.

Speaker 8

Yeah. Great. Thanks very much, Wendell. I guess my follow-up question, I guess just digesting your prepared remarks, SCC, you mentioned 11 fabs in Taiwan. I think I count eight fabs for overseas that you're planning that aren't commercially online yet.

Speaker 8

Can you maybe just talk a bit about I mean, I've never seen that type of construct know, like, that that type of road map before from TSMC. It's it's it's quite big. Can you maybe share with us if you're planning a bigger expansion of new capacity next year? And I say this because in the last few months, we've seen so many gigawatts data center announcements. I think this week, we had one from Meta that was significant.

Speaker 8

So are you, the demand looks very strong, and I'm just wondering whether you have enough capacity to satisfy demand, next year, whether you plan to convert further five nanometer to three nanometer, and and how how you how you see the the, n two capacity, plans for 2026. Thank you.

Operator

Okay. Brett's second question, he notes that we are building, many fabs both in Taiwan and also overseas. He's never seen this, size or scale of capacity expansion from TSMC before. So it's very and he also notes that the demand, you know, from data centers continues to be very strong. So his question is basically very simply, do we have enough capacity, to support the strong demand, specific to next year and also very specifically to two nanometer?

Operator

And will we further also convert more five nanometer to three? That's, I think, all of his question. Brett?

Speaker 8

Thank you.

Speaker 2

Your observation is right. Recently, we saw a lot of announcement of the AI data center all over the world. And the demand on three nanometer, actually on five nanometer, three nanometer, and the future two nanometer are very high. And we did not see this kind of a strong demand for a long time, but what be enough to support them, I still want to use my word, say that we try very hard to narrow the gap between the demand and the supply. We're working very hard.

Operator

K. Thank you, Brett. Let's go to the next participant on the call.

Speaker 7

Now it's Arthur Lai from Macquarie. Your line is open now. Hi. Thank you, C. C, Window, and Jess, Arthur Lai from Macquarie.

Speaker 7

Again, congrats on a strong result. I would like to follow-up on the N2. I think as a CTE highlight, this is a very exciting note we are all hurt. And then I want to follow on the return on investment. Can you compare to the N2 and N3, the return on investment and then give us some more color?

Speaker 7

Second one is the reason we ask this question is because the cap cap test per area actually n two is higher. Right? And then we also heard from industry like the the companies yield on the n two is also pretty good. So, can you give us some put and take on how we think of the, n two's future development? Thank you.

Operator

Okay. So, Arthur's question, both questions, I think, are around n two. N two, as he said, is a very exciting note. He wonder who would like to know understand, what is the return or the return on investment, that we see from n two, compared to n three? And, also, can we talk a little bit n two?

Operator

The CapEx, is higher, but the yield is still very good. What is the developments that we're seeing for two nanometer? I think that's is that your question, Arthur?

Speaker 7

Yes. Yes. Yeah. Exactly.

Speaker 1

K, Arthur. N two return. As we said before, n two, the profitability is better than N three. Now there were questions asking how many quarters to catch up with the corporate before and N three was it took N three longer. But for n two, we think it will be back to the old days.

Speaker 1

Having said that, I I need to remind everyone that in the old days, we're talking about corporate average of say 50% gross margin. Nowadays, we're talking about 53% gross margin. So it becomes less meaningful to talk about how much time it takes to catch up with corporate nowadays. But having said that, structurally, N2 does have a better profitability than N3. Okay.

Speaker 1

And N2 development is right on track. We're ramping it in the second half of this year. We expect the revenue to come up in the first half of next year.

Operator

Okay. Thank you, Wendell. Thank you, Arthur. Let's come back to the floor. We'll go left, middle, right.

Operator

So maybe Sunny Lin from UBS.

Speaker 9

Good afternoon. Thank you for taking my question. Very good results, congrats. So my first question is a follow-up on CapEx. So obviously, full year sales guidance is stronger.

Speaker 9

You are turning more constructive on high performance compute and AI. Yet you are keeping your CapEx guidance. So is it fair to assume that you are considering some conservatism for CapEx for this year given the ongoing macro uncertainty? Or is it because in the short term, your capacity expansion is somewhat constrained by the ability that you can ramp up more capacity? And therefore, maybe in 2026 and 2027, we should expect some accelerations of your CapEx spending.

Operator

Okay. So Sunny's first question is around CapEx. She notes, of course, that, we, raised our 2025, revenue guidance this year, and we certainly still see a very robust demand from AI, yet we keep kept our CapEx guidance in the same range of '38 to '42. So she wants to understand why. Is it because of macro uncertainty?

Operator

Is it because of constraints in the construction? And her other part of this question is what is the CapEx outlook for '26 and '27, I guess.

Speaker 1

K. Sunny, the CapEx, as as we said before, the CapEx invested in a given year is for the business opportunities in the following years. And as long as there are business opportunities, we will not hesitate to invest. Having said that, nowadays, as CeCe also said, with all these macro uncertainties, we are mindful of these uncertainties. So we also take that into considerations in our capacity and CapEx plan.

Speaker 1

Going forward, it's too early to talk about future years CapEx, but I can share with you a company of our size. It's unlikely that you see CapEx dollar amount suddenly drop a lot in any given years. That's all I can share with you.

Speaker 9

Got it. Sounds like CapEx could be going higher in the coming years. My second question is on Cloud AI. And so you things like earlier attribute most of the sales upside for 2025 to Cloud AI. And therefore, I wonder if you have an update on the Cloud AI growth in 2025, which you guided before to be about 100% for 2025?

Speaker 9

And the implication to your CoS capacity expansion, would you be are you able to maybe expand a bit more CoS capacity for this year to stronger to support a stronger Cloud AI growth for this year? And any early insights that you could share with us for your CoWASP capacity expansion for 2026? Thank you.

Operator

Okay. So Sunny's second question is asking about our AI. Well, she says cloud AI, basically our AI accelerator growth in 2025 and related the COWAS capacity. So her question is, what is the AI accelerator revenue growth we expect in 2025? And then what is our COWAS capacity expansion plan for 2025?

Operator

And she asked a similar question to Charlie or someone earlier. What is the plan for COWAS capacity in 2026?

Speaker 2

Well, my answer stay the same. We are trying very hard to narrow the gap. For now, you know, for 2026, the demand, the momentum are very healthy and very strong. And so we we are building many new facilities in the back end to increase the AI increase the co op's capacity to support our customer. AI demand is very strong And so this cohort's capacity, the demand is very strong.

Operator

Okay. Thank you, Sunny. Then we'll move on to, Laura Chen from Citi.

Speaker 10

Okay. Thank you for taking my question, and congrats for the good result and outlook. My question is also about the AI chip. Siti, you mentioned that AI chip is getting bigger and bigger and also the power consumption is getting much more. So I'm just wondering that among like your advanced technology including like the advanced node, we are also noted that during the symposium, TSMC also announced some of the new technology in advanced packaging as well.

Speaker 10

So I'm just wondering, how do you kind of prioritize your, leading edge advanced packaging? During the symposium, we see that system now wafer, that kind of a new design. Do you have any, like, plan or, like, timeline for the new technology? And should we think about that, that should be kind of aligned with our most advanced node process like n two or, x 16 going forward?

Operator

Okay. So Laura's first question is, on advanced packaging. She notes AI. The die sizes are increasing. The need for power consumption or energy efficiency is rising.

Operator

So she wants to understand how our strategy for advanced packaging along with the advanced node development. Are there any specific packaging solutions that we're prioritizing? What about the timeline and road map? How does that match up with our, advanced node, road map?

Speaker 2

Laura, I think, TSMC's philosophy to develop a technology is working with customer. The customer has such demand. We develop the technology. We increase the capacity for them. So priorities, every customer is important to TSMC.

Speaker 2

So and in the advanced packaging side, a lot of customer using the different approaches. So, we are developing a variety of different, back end packaging advanced technology for all the customers. Whether it's related to the advanced leading edge technology, the answer is yes. Okay. So we have a system integration.

Speaker 2

We have a that's a terminology. We have a lot of different name that I cannot even remember, but it's a lot of, varieties, and we work with our customer to meet their demand. That I can answer you.

Speaker 10

Is that easy to kind of leverage or transfer different kind of, technology from your perspective?

Operator

So Laura is asking how, fungible are these different packaging technologies? How interchangeable or easy to transfer the technology between different packaging solution?

Speaker 2

Of course. There are some similarities in between. Otherwise, we are going take too much of the effort and then did not get the return. Yes. There's a lot of similarities, but a lot of varieties also.

Speaker 10

Okay. Thank you. And my second question is, we know that, obviously, the AI demand, advanced node, advanced, leading edge, packaging is very tight. And, but I'm just wondering that industry wise, we still see probably overcapacity in mature node. Yet TSMC also have, like, a, more mature 16 or or, nanometer or more above that kind of process.

Speaker 10

So can we kind of consolidate our mature nodes to kind of make better efficiency and probabilities to enhance the like, those capacity to fulfill the demands across the board? Yeah.

Operator

Okay. So Laura's second question is on mature nodes. She notes there there's a overcapacity on the industry wide in older nodes. So she wants to understand for TSMC specifically, if we take, for example, 16 nanometer and older nodes, what is our strategy? Can we consolidate, amongst the different nodes?

Operator

How do we protect our profitability?

Speaker 2

Good question. If you read the newspaper, there are so much of, mature node capacity. But TSMC's strategy actually is on the mature node technologies, we develop kind of specialties. For example, that RF technology or CMOS sensor or the high voltage. So we develop the technology at the request of our customer.

Speaker 2

So we don't worry too much about, what do you say, the overcapacity. If it is really overcapacity, we will not build a fab in Japan. We will not build a fab in Germany. So it's not overcapacity. It's all related to customers' need, customers' demand, and those are all specialty technologies.

Speaker 2

Did I answer your question?

Speaker 10

Very clear. Thank you.

Operator

Okay. Thank you, Laura. I think in the interest time, we'll go to, Brad Lin from, Bank of America. Then we'll take one more from the line, and then if there's one more from the floor.

Speaker 11

Thank you for taking my question. I have two questions. My first one is on the human robot. So we have learned that, humanoid robot started to contribute to TSMC, and it is gaining momentum as the next frontier of the AI hardware. How does TSMC evaluate the market size of humanoid robot in the semiconductor and in terms of the potential market TAM, compute and also sensor requirements?

Speaker 11

And do you think that might be another driver potentially for mature nodes too? Thank you.

Operator

Okay. Thank you, Brad. So Brad's first question is around humanoid robots. We're starting to see some contribution. He he wants to understand how do we evaluate the market size?

Operator

What is the, addressable opportunities for TSMC, in the long term, at the leading edge and also on the mature nodes with certain type of specialty.

Speaker 2

Brett, it's too early. Actually, it's too early to say the human know is a robot will play a role in this year. Next year, probably still too early because of it's so complicated. You know that the human know is a robot. What we most of the time will be used.

Speaker 2

I think the first one will be used in in medical industry to taking care of the people getting old like me. And, you know, I, probably some days I needed some human noise, robot to help me. But, you know, it's very complicated because in that, we are talking about the brain only. Actually, you are talking about a lot of sensor, sensor technology. That's the image sensor, the pressure sensor, the temperature sensor, and all the feedback to the CPU.

Speaker 2

And so it's very complicated. And since it's dealing with human being directly has to be very, very careful. But then once he start to fly, he was a big, big plus. I talked to one of my customer, and he say that the EV car is nothing. His his robot will be 10 times of that.

Speaker 2

I'm waiting for that. Okay. Did that answer your question?

Speaker 11

Yes. Yes. I believe the the client definitely owns EV cars and robots too, so he knows it well. So my second question will be on the potential point ahead of the so called reflecting the value into 2026. So we know well, normally, we continue to reflect the value into our pricing.

Speaker 11

So given the potentially higher pricing into 2026, are you observing any signs of demand pulling from the customers in the second half of the year? And potentially, well, given the tight pipeline of n '3 and five, which we see a continuous strength into 4Q, even though we already guided potential decline. But, yeah, any point potentially. Thank you.

Operator

Okay. Brad, second question very specifically. He's asking, as we Cici talked about that we will continue to earn our value, do we see any customers trying to pull in their demand ahead of 2026, into the second half of this year? And do we have any additional comments to offer on the fourth quarter besides what we have already shared?

Speaker 2

Well, the answer is no. We did not see any, different customers' behaviors so far. Okay. But let me share with you. I add more color.

Speaker 2

If you are talking about the three nanometers, demand, for example, in the cycle time is here, What takes about the four months? So just no way you can pull in anything. I mean, that's a yeah. And we have a as I said, our capacity is very, very tight. So, we already have all the schedules.

Speaker 2

And so we need a room for pull in. Let me say that. Even they want it, but no. Answer is no. So 2026 is 2026.

Speaker 2

We will share with you.

Speaker 11

Yeah. Thank you very much.

Operator

Thank you, Cece. Thank you, Brad. Alright. Operator, let's go to the we'll take questions from the last participant on the line. What

Speaker 7

Yes. The last one to ask question, Madhee Hussaini from SIG.

Speaker 12

Hey, sir. Thanks for taking my question. The first one has to do with capital intensity. When I look at the past five years when you were ramping n three and n five, the capital intensity was at or above 40%. And you also highlighted how n two takeout is tracking better than n three and n five combined.

Speaker 12

Does that imply that the capital intensity would need to go back up to 40%? In other words, an initial investment for n two to accommodate these tape outs. Is that the level of thinking about how the investment plan is gonna play out and how to follow-up?

Operator

Okay, Madhee. Sorry. We couldn't hear you exactly clearly. Let me try to summarize your question, alright, which is Madhee's question is around capital intensity. He notes that in the past, when we, invest in new nodes or or structural, the megatrends like we have with n three and n five, our capital intensity has jumped up to greater than 40.

Operator

So if I heard you correctly, Madi, your question is this time we talked about the strong demand for two nanometer multiyear upcoming. What is our expectation on capital intensity? Is that correct, Mehdi?

Speaker 12

Yeah. That's correct.

Speaker 1

Okay. Okay. Mehdi, let me answer this question. As we just said, the capital expenditure invested in any year is the future growth opportunities. So if we do our job right, the growth in the next few years is likely to exceed the growth in CapEx dollars even though as I said, if CapEx dollars is unlikely to drop significantly in every given year.

Speaker 1

So you see a higher growth in revenue than the growth in capital expenditure then you don't have it such a high capital intensity. We actually demonstrated that in the past few years. And also let me just share with you that because of this, we're not operating setting a capital intensity as a goal. It's the dollar amount invested is really on the structure demand growth in the following years. So talking about capital intensity is also less meaningful than before.

Speaker 12

Thank you. Thank you. And a follow-up for me. You highlighted, n two p. I'm I'm sorry.

Speaker 12

You highlighted n 16, which will be very applicable for high performance compute. Is that is that the node where AI and HPC would actually be at par with a smartphone as an end market that would drive demand for the most illuminated node?

Operator

Sorry, Madi. Again, I apologize. We apologize. I could not hear you clearly, but I think his question is about, on a 16 where we said it's more for a specific HPC related offering. So his question is, I think, Madhee, your question is, is that where the AI, demand also comes in for the two nanometer family?

Speaker 12

Yes. And then I answered because so far, AI has been n plus one, n plus two. Is that node n six two, the first node where AI, would move to the leading edge?

Operator

Okay. His question okay. Maybe let me, rephrase it. I think I understand better. His question is really about, AI adoption of the leading edge node, the end node.

Operator

You know, we see smartphone. We see HPC. His question very specifically, how do we see the AI adoption of the most leading node for TSMC? He observes in the past it has generally been, one, node behind. So how do we see that going forward with things such as a 16?

Speaker 2

Well, Marty, you are right. Thank you, James. Usually, the HPC's customer always one step behind using m plus one or m plus two technologies. Now because of AI demand is so strong, that's one thing. But the most important thing is they need some kind of performance, but the power consumption is very, very important.

Speaker 2

And when we talk about a 16, we have another, power efficiency improvement across to 20%. That's a big value for all the AI, data centers applications. So that, help my customer moving faster because of, every time when we talk about AI data center, if you notice that, the first thing they talk about is power supply, electricity. Right? So they did not tell you say, the power efficiency is very important, but they tell you that we are to build a very big electricity power plant to support the AI data center.

Speaker 2

So that tell you how important it is. And TSMC is a technology, by the way. On a 16 is a a further improvement of the n two node. So it's not a surprise for TSMC to expect, for those people, in, AI data centers industry, they want to use in a 16. K?

Operator

K. Thank you, Cici. Thank you, Madi. We'll take the last question from the floor. We have one participant here, Felix Pan from KGI.

Speaker 6

Hi. Thanks,

Speaker 12

Jeff.

Speaker 6

Afternoon, Cici and Wendell. I only have one question about the overseas expansion. I think Cici earlier mentioned that the second fab for the industry, there's a strong demand, so you guys need to speed up several quarters for that. Together with, I think, the U. S.

Speaker 6

Government also raised the investment tax credit cap for next year. So I wonder how this shape or how this speed up your ramping schedule for the second fab? And how this impact to the overseas, fab dilution for, the the the guidance, windows, given

Operator

earlier? Okay.

Speaker 12

Yeah. Sorry.

Speaker 6

Yeah. And and I think, the follow-up question will be, if you guys speed up The U. S. Investment, how you is that impact to other regional investment like the Japan and Germany as well? And lastly, is that possible to break down the overseas CapEx and domestic CapEx going forward?

Speaker 6

Yeah. That's all my questions. Thanks.

Operator

Okay. That's, yeah, that's pretty much, two questions. But, okay. So but, Felix's question on our overseas expansion plans, he notes that, yes, CC said we're speeding up the schedule for the second fab in The US. So how and he also notes the recent passage of The US, ITC, bill.

Operator

So how does this impact or or, affect our ramp pro schedules in our US expansion? And what is the implication or impact to the overseas dilution? That's number one. Yeah.

Speaker 2

Wow. That's two questions.

Speaker 9

Okay.

Speaker 2

Let me share with you about our ramp up schedule. It's totally because of our customers' demand. And we appreciate the US government increase the ITC from 25% to 35%. We appreciate that. It help.

Speaker 2

But the real schedule is because of our customers' demand. So we have to prepare the capacity to meet their demand. That's the number one consideration. Margin? Yeah.

Speaker 1

The margin impact, it is positive, although not that significant in the five year period. Think about this. The ITC is used to offset the asset value and the benefit comes when depreciation starts. So it gets amortized. Okay.

Operator

And then Felix's second question is how does the ramp and speed up of The US expansion cluster expansion, how is this impacting our expansion plans in Japan and Europe, if it does at all?

Speaker 2

Well, you think about, TSMC expansion, the oversea fab. In The US, it's a leading edge. In Japan, it's a specialty technology. To be specific, most of the time, it's for the CMOS image sensor. For Germany, it's automotive industry.

Speaker 2

So they are all not, in the same field. So, actually, it's not affect the investment in The US or invest on the leading edge does not affect the investment in Japan or in Germany.

Operator

Thank you, Cece. Thank you, Felix. Okay, everyone. So this concludes our question and answer session. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within thirty minutes from now.

Operator

The transcript will become available twenty four hours from now, and both are going to be available through TSMC's website at www.tsmc.com. So thank you very much for joining us today. We hope everyone continues to stay well, and we hope you will join us again next quarter. Goodbye, and have a good day. Thank you.

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