TSMC Q1 2025 Financial Summary and Guidance

Overview of Forward-Looking Statements

• TSMC's discussions may include forward-looking statements that carry significant risks and uncertainties, potentially leading to actual results differing from projections.

• A reminder to refer to the Safe Harbor Notice in the press release for more details.

Financial Highlights for Q1 2025

• TSMC CFO Wendell Huang presents financial highlights, noting a 3.4% sequential revenue decrease in NT$ (5.1% in US$) due to smartphone seasonality, despite growth in AI demand.

• Revenue slightly exceeded guidance midpoint; gross margin decreased by 0.2% to 58.8%, impacted by an earthquake and overseas dilution effects, but offset by cost improvements.

• Operating margin fell 0.5% sequentially to 48.5%, with EPS at 13.94 NT and ROE at 32.7% for Q1 2025.

Revenue Breakdown by Technology

• The contribution of various technologies:

• 3nm process technology: 22%

• 5nm technology: 36%

• 7nm technology: 15%

• Advanced technologies (7nm and below) accounted for 73% of wafer revenue in Q1 2025, indicating a strong focus on cutting-edge processes.

Revenue Contribution by Platform

• HPC (High Performance Computing) increased by 7%, making up 59% of revenue.

• Smartphone revenues decreased by 22%, contributing only 28%.

• IoT revenues dropped by 9%, accounting for just 5%.

• Automotive sector grew by 14%, representing another steady area of growth at about 5%.

• DCE (Data Center Equipment) saw an increase of 8%, contributing minimally at around 1%.*

Balance Sheet Insights

• Cash and marketable securities totaled approximately 2.7 trillion NT (~81 billion USD).

• Current liabilities rose significantly due to accrual liabilities related primarily to income tax payables, increasing overall liabilities by 135 billion NT quarter-over-quarter.

Cash Flow and Capital Expenditures

• Generated about 626 billion NT from operations; spent 331 billion NT on capital expenditures (KPAC), with a dividend distribution of 104 billion NT planned for Q2 2024.

• Bond issuances raised an additional 16 billion NT, resulting in a cash balance increase of 267 billion NT to approximately 2.4 trillion NT at quarter-end.

Guidance for Q2 2025

• Expected revenue range between 28.4 billion USD and 29.2 billion USD, reflecting a projected sequential increase of 13% or 38% year-over-year at midpoint.

• Anticipated gross margin between 57%-59%; operating margin expected between 47%-49%.

Tax Rate Projections

• Second quarter tax rate anticipated around 20%, dropping back down to 14%-15% later in the year; full-year tax rate forecasted between 16%-17%.

Profitability Analysis

Gross Margin Trends

• First quarter gross margin slightly decreased due to earthquake impacts and dilution from new fabs; guided second quarter gross margin is expected to drop further due to Arizona FAP ramp-up effects.

Long-Term Margin Expectations

• Forecasting long-term gross margins above 53%, despite anticipated annual dilution from overseas fabs starting at 2%-3%, widening over time as operations scale up.

Capital Budget Outlook

Investment Strategy

• TSMC plans a capital budget ranging from 38 billion USD to 42 billion USD for 2025, correlating higher expenditures with growth opportunities aimed at supporting customer demands effectively.

This structured summary provides insights into TSMC's financial performance while highlighting key areas such as revenue contributions across platforms, balance sheet health, future guidance expectations, profitability analysis, and investment strategies moving forward.

Investment and Growth Strategies in Semiconductor Industry

Capital Budget Allocation for 2025

• About 70% of the capital budget will be allocated for advanced process technologies, with an additional 10-20% for specialty technologies.

• The remaining 10-20% will focus on advanced packaging, testing, mask making, and other areas. This aligns with a $100 billion investment plan to expand capacity in Arizona.

Commitment to Shareholders and Sustainable Growth

• Despite significant KPAC spending in 2025 aimed at future growth, there is a strong commitment to delivering profitable growth to shareholders.

• A sustainable increase in cash dividends per share is planned on both annual and quarterly bases.

Impact of Natural Disasters on Operations

• An earthquake of magnitude 6.4 occurred during the lunar New Year, impacting production but demonstrating operational resilience as much of the lost production was recovered.

• Recognition was given to employees and suppliers for their dedication during this challenging period. Customers were also thanked for their understanding and support.

First Quarter Results Overview

• The first quarter concluded with revenue of $25.5 billion; however, business was affected by smartphone seasonality despite growth in AI-related demand.

• Expectations for the second quarter include strong support from advancements in sweet nanometer and five nanometer technologies amidst projected industry growth driven by AI demand recovery across various segments.

Revenue Projections Amid Tariff Uncertainties

• There are concerns regarding potential tariff policies; however, customer behavior remains unchanged so far, leading to expectations of mid-20% revenue increases year-over-year through 2025.

• Continuous monitoring of market demand impacts is emphasized while focusing on core business fundamentals such as technology leadership and manufacturing excellence.

AI Demand Outlook

• Robust AI-related demand is anticipated from customers throughout 2025, with projections indicating that revenue from AI accelerators could double within the year due to increased efficiency from new models like DeepSick driving broader adoption of AI technologies.

Capacity Planning Enhancements

• TSMC has implemented a disciplined capacity planning system to address structural increases in long-term market demand driven by AI-related businesses while collaborating closely with customers for effective capacity management strategies.

Expansion Plans in Arizona

• TSMC's additional $100 billion investment plan aims at expanding semiconductor manufacturing capabilities based on customer needs and government support, bringing total investments in the U.S. to $165 billion across multiple facilities including wafer manufacturing firms and R&D centers.( t =959 s)

TSMC Expansion and Technology Updates

Overview of Construction Waves

• The construction of the second wave utilizing three nanometer process technology is complete, with efforts underway to accelerate volume production due to strong customer demand.

• For the third and fourth waves, N2 and A16 process technologies will be employed, with construction expected to begin later this year pending necessary permits.

• The fifth and sixth waves will incorporate even more advanced technologies, with construction schedules driven by customer demand.

New Facilities and R&D Initiatives

• Plans are in place to build two new advanced packaging facilities and establish an R&D center in Arizona aimed at enhancing AI capabilities.

• TSMC's expansion strategy includes scaling up to a giga-fab cluster in Arizona to support leading-edge customers in smartphone, AI, and HPC applications. This investment does not involve any joint ventures or technology transfers with other companies.

Semiconductor Manufacturing Cluster Development

• Upon completion of current projects, approximately 30% of TSMC's two nanometer capacity will be based in Arizona, fostering a robust semiconductor manufacturing ecosystem within the US. This move aims to enhance economies of scale.

• TSMC emphasizes its critical role in supporting customer success while being a key partner for the US semiconductor industry's leadership.

Global Expansion Efforts

Japan

• In Japan, TSMC's first specialty technology fab in Kumamoto has commenced production as of late 2024 due to strong governmental support.

• Construction for a second specialty fab is set to start later this year, contingent on local infrastructure readiness.

Europe

• Strong commitments from the European Commission and German authorities have put TSMC on track for building a specialty technology fab in Germany (JSON).

Taiwan

• With backing from the Taiwanese government, plans include constructing an 11-wave manufacturing fab along with four advanced packaging facilities over several years; production for N2 is anticipated by late 2025.

Future Technology Developments

• The introduction of two nanometer (N2) and A16 technologies addresses energy-efficient computing needs; significant interest from innovators is noted as they expect higher adoption rates compared to previous generations (3nm & 5nm).

• N2 offers performance improvements: 10–15% speed increase at constant power or 20–30% power savings at equivalent speeds compared to N3E; density increases exceed 15%. Production ramp-up is scheduled for late 2025 alongside N3 levels.

Advanced Technology Extensions

• An extension called N2PE introduces further performance enhancements over N2; volume production also slated for late 2025 alongside A16 features designed specifically for high-performance computing products requiring complex signal routing capabilities.

Performance Metrics Comparison

• Compared with N2PE, A16 provides additional benefits: an extra 8–10% speed improvement at constant power or a reduction of power consumption by up to 20%, along with increased chip density gains between 7–10%. Production is also planned for late 2025.

Conclusion

AI Demand and TSMC's Capacity Strategy

Overview of AI-Related Demand

• Goku raises concerns about the current state of AI-related demand, referencing recent discussions on co-vots and order cuts. He seeks clarification from CC regarding TSMC's strategy to double co-vots capacity this year.

Supply vs. Demand Dynamics

• Goku inquires whether demand continues to exceed supply for co-vots, particularly looking ahead to 2026. He asks CC for insights into the expected balance between supply and demand during that period.

Current Capacity Challenges

• CC acknowledges rumors surrounding co-vots but emphasizes that previous demand was significantly higher than their capacity could handle, although conditions have improved slightly since then. He stresses the need for substantial capacity building to meet ongoing demand.

Future Expectations

• When asked about expectations for 2026, CC expresses a commitment to balancing demand with capacity, indicating efforts are underway to ensure that future demands do not far exceed available resources.

US Investment and Reshoring Strategies

Engagement with US Government

• Goku questions CC about TSMC's interactions with the US government regarding reshoring semiconductor manufacturing capabilities in light of new policies and customer demands over the next few years.

Expansion Plans in Arizona

• CC explains that TSMC’s investment in Arizona is driven by strong customer requests due to high AI demand from major clients like Apple and Qualcomm, necessitating an expansion of their US-based manufacturing capabilities.

Permitting Process Insights

• The company is actively seeking assistance from the US government to expedite necessary permits for construction at their Arizona facility, which will play a crucial role in meeting future production needs.

Pricing Strategy Amidst Geopolitical Risks

Impact of Geopolitical Factors

• Bruce Liu raises concerns about geopolitical risks affecting TSMC’s focus and production planning following recent bans impacting operations in China (specifically H20). He queries how these developments might influence long-term strategies and customer relationships moving forward.

Customer Demand Considerations

Growth Outlook and Capacity Planning

Addressing Customer Concerns

• Bruce inquires about the impact of customer-specific product considerations on growth outlook. The response emphasizes that while specific customers are not targeted, their four-year growth outlook has taken various factors into account.

Long-term Capacity Planning Insights

• Bruce seeks clarification on the sensitivity analysis regarding capacity planning and utilization moving forward. The speaker acknowledges speculation but reassures that they are monitoring potential impacts from recent tariff announcements closely.

Current Market Behavior

• Despite concerns over tariffs, there have been no observed changes in customer behavior thus far, allowing the company to maintain its forecasts confidently.

Mature Node Expansion Strategy

Questions on Capacity Expansion

• Bruce questions whether the company plans to slow down capacity expansion in Japan or Europe due to underutilization of mature nodes and suggests relocating equipment instead of building new facilities.

Management's Position on Expansion

• The management firmly states they will not slow down expansions in Japan or Germany, citing demand for specialty technology in mature nodes as a competitive advantage despite current underutilization concerns.

Tariff Implications for Semiconductor Industry

Involvement in Tariff Negotiations

• Charlie asks if TSMC is involved in tariff negotiations between Taiwan and the US government regarding semiconductor tariffs. The response clarifies that TSMC, as a private entity, does not participate in these discussions.

Investment Commitments Amid Tariffs

• Charlie queries whether TSMC believes its $165 billion investment could be exempt from semiconductor tariffs. The speaker indicates optimism about potential exemptions but reiterates that tariff decisions are ultimately governmental responsibilities.

Revenue Guidance and Market Demand

Analyzing Revenue Projections

Growth Drivers and Market Dynamics

Strong Demand for Advanced Technologies

• The second quarter growth is primarily attributed to robust demand for three-nanometer and five-nanometer technologies, supported by the expansion of the High-Performance Computing (HPC) platform.

Customer Behavior and Tariff Impact

• There have been no observed changes in customer behavior regarding order pulling or tariffs; further inquiries should be directed to customers themselves. The guidance suggests limited half-on-half growth, raising questions about potential tariff impacts on consumer demand.

Year-over-Year Growth Projections

• Despite uncertainties surrounding tariffs, the company maintains a year-over-year growth projection close to mid-20%, consistent with previous quarters. This indicates stability amidst external pressures.

Margin Dilution Concerns

Clarification on Margin Dilution

• Questions arise regarding the clarity of margin dilution explanations, particularly concerning a 2-3% expected dilution from overseas staff that appears to be widening. This may relate to U.S.-FAB expansion costs or pricing strategies compared to earlier assessments.

Drivers of Widening Dilution

• The widening gross margin dilution projected for later periods is mainly driven by inflation in costs and potential increases related to tariffs, indicating significant external economic influences on profitability.

U.S. Expansion Plans

Fair Treatment in Subsidies

• TSMC emphasizes the importance of fairness in treatment regarding subsidies; if any entity receives incentives, all should receive equal treatment—either everyone gets support or none do. This principle underpins their approach to U.S. operations.

R&D Center Focus and Future Involvement

• The new R&D center in Arizona will initially focus on supporting manufacturing improvements rather than leading-edge technology development but may evolve over time towards more innovative projects as capabilities grow with approximately 1,000 engineers involved.

Long-Term Research Aspirations

Potential for New Node Development

• While the primary goal is operational independence for Arizona's facility, there are ongoing exploratory efforts involving path-finding research and collaboration with universities that could lead to future developments in new nodes over time as resources expand beyond initial capacities.

This structured summary captures key discussions from the transcript while providing clear timestamps for reference, facilitating efficient study and comprehension of critical insights shared during the session.

Expansion Plans and AI Demand Insights

Discussion on Fab Construction Phases

• The conversation begins with a question about the feasibility of wrapping up the fourth phase of facial data literature while simultaneously working on the third phase.

• Sonny inquires about the timeline for expanding their digafab cluster in Arizona, specifically regarding the second and third fabs, amidst strong AI-related demand.

• The speaker confirms efforts to accelerate production at the second fab and construction at the third fab to meet demand.

• Emphasis is placed on customer demand as a critical factor influencing speed and timelines for future phases.

Timeline Adjustments for Production

• Sonny seeks clarification on whether production timelines for both the second fab (originally set for 2028) could be moved forward to mid or early 2027, along with potential adjustments for the third fab's timeline.

• The speaker acknowledges that they are indeed speeding up processes but cannot provide specific dates due to labor shortages and permitting issues in Arizona.

• A commitment is made to update stakeholders within one or two quarters regarding progress.

Pricing Strategy Amidst Strong Demand

• Sonny raises questions about pricing and margin impacts from overseas expansions, particularly given heightened US capacity demands.

• Inquiry into underlying price assumptions related to growth margin dilution estimates suggests that raising prices could mitigate some dilution effects.

Value Reflection and Margin Dilution

• The speaker explains that reflecting value is an ongoing process tied closely to business nature, emphasizing high growth margins necessary for sustainable returns.

• Discussions with major customers are ongoing regarding geographic manufacturing flexibility as part of their value proposition amid cost inflation and tariff policies affecting margins.

AI Demand Outlook Despite Challenges

• A new participant asks about guidance related to AI expectations despite US bans on certain products into China, noting significant previous shipments to China.

• Clarification is sought on whether strong non-China demand has contributed significantly to expected doubling of AI revenue this year despite challenges faced in China.

Customer Pull-ins Ahead of Tariffs

• Questions arise regarding potential customer pull-ins ahead of anticipated tariffs being applied in September quarter, indicating strategic planning by customers based on market conditions.

TSMC's Customer Behavior and Technology Demand

Overview of Customer Behavior and Technology Growth

• TSMC has not observed any changes in customer behavior, with growth in Q2 attributed to demand for three nanometer (N3) and five nanometer (N5) technologies, particularly from the High-Performance Computing (HPC) platform.

Shareholder Returns Discussion

• A question was raised regarding TSMC's traditional focus on growing dividends as a primary shareholder return method, contrasting it with US tech peers where buybacks are more common.

• The inquiry focused on why TSMC does not adopt a buyback policy given its strong cash position.

• TSMC management reiterated their commitment to sustainable and steadily increasing dividends as the preferred method for returning cash to shareholders.

AI Chip Design and Advanced Packaging Technologies

Future Trends in AI Chip Design

• A question about potential structural changes in AI chip design moving to N3 technology was posed, specifically regarding the adoption of chiplet designs.

• The discussion included advanced packaging technologies like co-package optics (CPO) and panel-level packaging (PLP), questioning whether these would be developed first in Taiwan or Arizona.

Capacity Allocation Between Taiwan and Arizona

• TSMC is actively developing panel-level packaging but is still assessing whether it will launch first in Taiwan or the US; likely starting in Taiwan.

• Questions arose about capacity allocation between Taiwan and Arizona, specifically if 30% of advanced node capacity would also apply to future leading nodes.

Revenue Guidance and Demand Visibility

Maintaining Revenue Guidance Amid Uncertainty

• Despite uncertainties, TSMC maintains its revenue guidance for this year and next year while addressing visibility into second-half revenues.

• Management indicated that it's too early to predict second-half performance due to existing uncertainties but expects clearer insights soon.

What is the Current Capacity and Revenue Contribution from Japan?

Inquiry about Japan's Specialty Technology Fab

• Chris inquires about the current installed capacity in Japan and its revenue contribution, specifically regarding TSMC's specialty technology fab.

• The capacity for the specialty technology fab in Japan is projected to be 40k when fully ramped up.

• Currently, the revenue contribution from this facility to TSMC as a whole is not significant for this year.

Conclusion of Q&A Session

• The Q&A session concludes with thanks to participants, indicating that a replay will be available within 30 minutes.