Taiwan Semiconductor Manufacturing Co Ltd ($TSM) Q4 2025 Earnings Call

Good afternoon everyone, and welcome to TSMC's fourth quarter 2025 earnings conference and conference call. My name 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. 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 fourth quarter 2025, followed by our guidance for the first quarter 2026. Afterwards, Mr. Huang and TSMC's chairman and CEO, Dr. C.C. Wei, will jointly provide the company's key messages. 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 in our press release. And now, I would like to turn the microphone over to TSMC CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.

Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the fourth quarter of 2025, and a recap of full year 2025. After that, I will provide the guidance for the first quarter of 2026. Fourth quarter revenue increased 5.7% sequentially in NT, supported by strong demand for our leading-edge process technologies. In US dollar terms, revenue increased 1.9% sequentially to $33.7 billion, slightly ahead of our guidance. Gross margin increased by 2.8 percentage points sequentially to 62.3%, primarily due to cost improvement efforts, favorable foreign exchange rate, and high capacity utilization. Operating margin increased sequentially by 3.4 percentage points to 54%. Fourth quarter EPS was NT$19.5, and ROE was 38.8%. On technology: 3-nanometer contributed 28% of wafer revenue, 5-nanometer 35%, 7-nanometer 14%. Advanced technologies accounted for 77% of wafer revenue. On a full-year basis, 3nm accounted for 24%, 5nm 36%, 7nm 14%, advanced technologies 74% of total wafer revenue, up from 69% in 2024. By platform: HPC increased 4% QoQ to 55% of revenue, smartphone up 11% to 32%, IoT up 3% to 5%, automotive down 1% to 5%, DCE down 22% to 1%. For full year 2025, HPC accounted for 58%, smartphone 29%, IoT 5%, automotive 5%, DCE 1%. Balance sheet: cash and marketable securities of NT$3.1 trillion or $98 billion. Accounts receivable days increased by 1 to 26 days, inventory days steady at 74. CapEx in Q4 was $11.5 billion. Full year 2025 revenue increased 35.9% in USD to $122 billion, gross margin 59.9%, operating margin 50.8%, EPS NT$66.25, ROE 35.4%. Free cash flow NT$1 trillion, up 15.2%. Cash dividend increased to NT$18 per share in 2025, at least NT$23 in 2026. Guidance for Q1 2026: revenue between $34.6B and $35.8B, 4% sequential increase; gross margin 63-65%; operating margin 54-56%. Effective tax rate expected 17-18% for 2026. Now let me turn to our key messages. Fourth quarter gross margin exceeded guidance by 130 bps due to better cost improvement and favorable FX. We guide Q1 gross margin to 64% at midpoint, driven by continued cost improvement and higher utilization, partially offset by overseas fab dilution. For full year 2026, we expect overall utilization to moderately increase, N3 gross margin to cross over to corporate average, and we continue to earn our value. On the other hand, overseas fab dilution of 2-3% in early stages, widening to 3-4%, and N2 ramp dilution of 2-3% in second half of 2026. Regarding 2026 capital budget: $52-56 billion, 70-80% for advanced technologies, 10% specialty, 10-20% advanced packaging and others. Depreciation expected up high teens year-over-year. Long-term, we face increasing cost challenges but believe long-term gross margins of 56% and higher through the cycle is achievable, with ROE in high 20s. We remain committed to profitable growth and increasing cash dividends. Now let me turn the microphone over to CC.

Thank you, Wendell. Thank you, C.C. This does conclude our prepared statements. Before we begin the Q&A session, I would like to remind everybody to please limit your question to two at a time to allow all 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. For those on the call, please press star one to ask a question. We'll take the first few questions from the floor. Why don't we start with Gokul Hariharan from JP Morgan. Thank you.

Thank you and happy New Year. CC, it definitely feels like you have heard what your customers have said over the last 3-4 months. Could you give us a little more color on what you're hearing from your customers' customers on demand? This is a very big step up in capacity commitment. There is a lot of concern in the financial market about whether we are in a bit of a bubble, and obviously you are the one putting up all the capital. You've definitely considered this very carefully. So give us a little more detail on what you're hearing from your customers and your views on the cycle given that we've already had a longer than usual semiconductor cycle, but this doesn't feel typical.

Okay, Gokul, let me summarize your question for the benefit of those online and in person. Gokul's question is really he would like to hear CC's views about the overall AI-related demand and the semiconductor cycle. He notes that we are substantially stepping up our CapEx to support customers, but there are concerns about an AI bubble and risk. So part of Gokul's question is: what feedback or color can we share about discussions from both customers and customers' customers that CC mentioned? And how long do we think this cycle can last?

Thanks, C.C. My second question is on the US expansion. You're pulling in some capacity in response to customers. You're already starting plans for phase four. There are many media reports about TSMC building more fabs in the US. How should we think about US expansion in principle over the next few years? Previously you talked about reaching 20% or even 30% of 2nm capacity in the US eventually. Could you give us more detail about how that is progressing and when we could get there?

Okay, Gokul's second question is about our overseas expansion, particularly in the US. He knows C.C. said we are pulling in the schedule for fab two earlier, starting the application for the fourth fab. So his question is around recent reports that we intend to build more fabs in Arizona. How is TSMC thinking about future expansion in Arizona? And we have said in the past that around 30% of our 2nm and more advanced capacity would be based in Arizona once we complete scaling out to an independent gigafab cluster. So what is the timetable for that?

Okay, thank you, Gokul. Let's move over here next to Laura Chen from Citibank, please.

Thank you. Thank you, CC and Wendell, for very comprehensive outlook briefing and also congratulate for the great result. Of course, we see that the AI semiconductor growth has seen very strong growth and I believe all of your customer and customer's customers very desperate to ask more capacity support from TSMC. But I'm just wondering, how does TSMC evaluate the potential power electricity supply for data center? So, other than that the chips we can discuss with our customers, I think for the overall infrastructure build-out for data center, a lot of factors also very important. Just want to understand more, how does TSMC evaluate those key factors for the AI infrastructure build-out? That's my first question.

Okay, so Laura's first question is around the AI demand. She notes again, as we said, AI mega trend and the growth is very strong, and customers, customers, customers, and ourselves are strong believers. But when we do our planning, how do we balance this against the other considerations? Do we look at things, for example, I think Laura's question is power and electricity grid availability to basically assess this? Is this part of our included as part of our planning process? Do we factor such things in?

That's great to know that it's would not be the constraints for the further AI development. Yeah, thank you. And, my second question is on the leading edge advanced packaging. And, when can you remind us that what would be the revenue contribution last year for the advanced packaging overall? First of all, we see that I recall that in the past that the capex for leading edge advanced packaging roughly about 10%. Yeah. And now it's could be up to like a 20%. So, I'm just wondering that for the expansion, can you give us more detail about what kind of the plans you are looking for? Will you focus more on like a 3DIC, SOIC, or are you also start to work on more advanced like a panel base in the longer term? I also think that before we talked about that we'll work more closely with OSATs partner on the leading edge advanced packaging. So, just wondering what kind of the process will be the key expansion plan in this space. Thank you.

Okay, so Laura's second question is more related to advanced packaging. What was the revenue contribution of what we call the back end, which is advanced packaging testing as a whole in 2025? And then she notes the capex actually this year, I believe we know we guided 10 to 20% of capex, which is the same as last year. But anyways, she wants to know what is the focus of this capex. Is it on 3DIC? Is it on SOIC packaging solutions on panel level? So, what is the key areas we're focusing on relative to the capex?

Thank you, Wendell. Okay, let's move on to Charlie Chan from Morgan Stanley here.

Thanks, Jeff. Happy New Year, C.C. and Wendell. So, first of all, amazing results and guidance. Congratulations to the management team. So, my first question is about also AI. What do you see for those AI markets? You talked about the memory cost, etc. So, can you give us some kind of your underlying assumption for PC shipments, smartphone shipments, etc. And also, in your HPC, there are some other pieces like networking and the general service. Can you comment about the growth potential for those segments? Thank you.

Okay, Charlie's first question is very specific. Well, generally, he wants to know about how do we see the non-AI demand, especially in the context where the certain component costs such as memory costs are rising. So, he wants to know what do we see the impact on the PC and smartphone markets in terms of shipments. He's also asking very specifically, what about networking? What about general server? Each these different segments.

TSMC, I think that's very consistent with your 5-year CAGR outlook for all the four segments. And my second question is about the Intel's foundry competition. I think US president seems to be very happy with Intel's recent progress. And even mentioned two of your key customers, right? Nvidia, Apple may have a some partnership with Intel foundry. Are you really concerned about this so-called competition? And what TSMC can really do to mitigate or avoid a potential market share loss if those are key US customers, not limited to the two customers that I just mentioned. Thank you.

Okay, so Charlie's second question is on the foundry competition and competition from a US IDM. He knows US presidents is very happy with the progress. A couple two of our key customers he also was mentioned. So his question is fundamentally is there a concern or risk going forward of market share loss for TSMC to our foundry competition.

Thank you, CC. All right. In the interest of time, let's take the next two questions online. Operator, can we take the first call from the line, please?

First question on the line, Macquarie. Go ahead, please.

Hi. First, congrats on a very strong performance. Thank you, CC, Wendell, and Jeff for taking my question. My first question is about the global capacity plan. Recently Taiwan local news report that TSMC put exit the 8-inch business and mature node 12-inch to convert into the advanced packaging. And the investor is keen to know if this is true. And the decision is based on what kinds of key factor? CC just mentioned about the power tightness or if ROI concern. Thank you.

Okay, so Arthur's first question is about basically mature node. Our strategy on mature node, he knows the local news has been reporting that TSMC is exiting 8-inch and 12-inch basic businesses and converting the capacity to advanced packaging. So, he wants to know if this is true and if so, what are the reasons behind it? Power constraints, ROI, etc., etc.

Okay, Arthur, do you have a second question?

Yes, thank you. My second question is regarding the consumer and demand outlook. So, the CEO also mentioned that the memory price inflation and the also pushing up the cost of the consumer electronics. So, investors actually talking about the further demand softness in this year and the next year or particularly next year. So, can management comment about what your client or your client's client how to resolve this memory tightness or memory urgency issue. Thank you.

Okay, so Arthur's second question is on the impact from the memory price increase and the demand softness. I believe his question really because CC already shared the impact this year. He wants to know what is the impact for 2027.

Okay, thank you, C.C. All right, operator, let's move on to the next participant from the line, please.

Next one, Brett Simpson, Arete. Go ahead, please.

Yeah, thanks very much. My question is really on AI. I mean, TSMC has been supply constrained for your AI customers, I think since 2024. And it sounds like 2026 is another year where we're going to see challenges. Do you think the CapEx you've laid out for this year, 52 to 56 billion, could that mean that we start to see supply and demand more in balance in 2027? Any thoughts there just in terms of how you're thinking about that capacity plan? And does it alleviate this supply bottleneck that we see today? And as part of this, from a supply perspective, we hear TSMC is finding it quite challenging to develop enough engineering talent good enough both in the US and in Taiwan. Can you talk more about this trend and what's the scale of the labor shortage of our foundry engineers at the moment? Thank you.

Okay, so Brett's first question is related around AI and our capacity. So, he notes the supply looks to continue to be tight in 2026, but with these significant step up in our CapEx to support the customers 52 to 56 billion, do we expect the supply demand or the gap, so to speak, to be more balanced in 2027? And then is engineering resources fab engineers a constraint or a bottleneck for us in making these expansions whether in Taiwan or the US.

Okay, Brett. Thank you. Brett, do you have a second question?

Yeah, I do. And thanks, that was very clear. I guess my second question is about pricing. If I look at 2025, this is the second consecutive year where TSMC's wafer ASPs were up around 20%. As leading edge becomes a bigger portion of the mix and also you feed through price increases, when we started on the ramp of more expensive overseas fabs, is 20% ASP wafer ASP increases the new normal for TSMC? Typically you have an annual price negotiation about this time of the year and so I'm trying to understand how you project ASPs in '26 and is your March quarter guidance factoring in price increases at leading edge? Thank you.

Okay, so Brett's question is on pricing. He notes that our blended wafer price is increasing at close to 20% according to his estimates. Of course, that's blended both on price and mix, but it's a leading edge and also we have mentioned earning our value. So, he wants to know is this the new normal going forward?

Okay, every new node, we have a price, the price will increase, the blended ASP will increase. I think they continue this way in the past and will continue with the way in going forward. But bro, I think you're asking about the contribution from pricing to the profitability. Now, as we mentioned before, the profitability, there are six factors affecting the profitability and price is just one of them. And of course, we continue trying to earn our value. But in fact, in the last few years, the pricing benefits to the profitability was just enough to cover the inflation cost from tools, equipment, materials, labor, etc. There are other factors contributing to the higher profitability. The first one will be a high utilization rate. As the demand is so high and as our disciplined approach to capacity planning, the utilization rate supports our high profitability. The other one will be our manufacturing excellence. As CC said, we continue to drive increasing productivity to generate more wafer output. Also, we continue to drive optimization capacity among nodes, which includes converting part of the N5 to N3. It also involve cross supports from different nodes, from the mature nodes to the more advanced nodes. That is a very important advantage of TSMC. So, with all these efforts, we're able to maintain a good, healthy, sustainable return profitability so that we can continue to invest to support our customers growth.

Okay. Thank you, Wendell. In the interest of time, we'll take two more questions from the floor and one more from the line. So, we'll go here, Sunny Lin, UBS, and then...

Thank you. Good afternoon. Very strong results, congratulations. So, number one, if we look at the company very different versus in the past from many angles. But if we look at the ramp from new node, now you can generate actually higher revenue from new node in year four of even year five of mass production versus in the past, new node like peak revenue in the second or even third year of mass production. And so, could you help us understand what is this new trend? What's the financial implications? And then what does that imply for you to operate or even compete differently versus in the past?

So, Sunny's first question I think maybe is related well to our technology differentiation, but she knows that when we ramp a new, in the past when we have a new node, after a few years sort of the revenue comes down a bit, but she knows that nowadays we can still enjoy very high revenue from a node even after in its fourth or fifth year. So, her question is what are the financial implications from this and also from a competitive dynamics.

Thank you very much, C.C. And then maybe a question on 2 nanometer, which is the C.C. meaningful revenue coming through in 2026. And so in the past, you guide like how much a new node contribute to sales for the year. And so any expectations on the revenue contribution from 2 nanometer in 2026. And then, I recall in terms of process migration, few years ago, there were lots of concerns that increasing cost per transistor. And that obviously is not declining from 5-nanometer, but then now looking at 2-nanometer, obvious I think process migration seems to be reaccelerating even for smartphone and PC. And then with larger demand coming from high-performance compute. And so, maybe based on your feedback from clients, maybe for smartphone and PC clients, why are they reaccelerating process migration into 2-nanometer?

Okay. So, Sunny's second question very quickly in two parts. 2-nanometers we said is a fast ramp in 2026. Very strong customer interest and demand. So, what do you do we have any revenue percentage to guide for in 2026?

And then the second part of Sunny's question from a technology perspective, as you know, she noted increasing cost per transistor as we said capex per K going higher. So, your question very simply, what's the value what's driving smartphone, HPC customers actually to see what they're seeing, widening out of the adoption of N2. So, what is the value that is providing that the customers are willing to adopt N2?

Very good. Thank you.

Thank you. Operator, can we take the last call from the line and we'll take one last one from the floor.

Next one Krishna Sanker. TD Cowen. Go ahead, please.

Hello? Okay. Krish, are you there? I guess not. Then let's just take the last call. Sorry, the last question from Bruce Lu from Goldman Sachs. Thank you.

Thank you for letting me to ask the last question. Hopefully it's not that difficult. So, I think one of the key I understand that TSMC is trying very hard to increase the capacity. AI revenue is growing like 50% a year 50% plus a year. But token consumption for last few quarters is 50% a quarter. So the gap is still there, right? That's why Elon Musk was talking about the chip war. So, can you share with us that in your assumption, when you provide 50% plus AI revenue growth, what kind of token consumption you can support, and how many gigawatts power in terms of the chips you can support in your assumption when you provide this kind of 5-year revenue guidance for AI?

Okay. So, Bruce's first question is on our AI CAGR. Actually, to be correct, we have guided for the AI CAGR to grow mid-to-high 50s CAGR in the 5-year period from 2024 to 2029. So, that is the official guidance we have provided just today. Bruce's question is, in this guidance, what is our assumption basically assuming about the token growth behind this type of CAGR, what is our assumption in terms of translating to how much gigawatts of data center can we support, and other specific assumptions behind our guidance?

Okay, my next question is for the capex, right? I want to double check with what I just heard that CC was talking about like 2027, the capex will be more for the productivity improvement when 2028, 2029 maybe meaningfully higher. So, I do recall that in 2021, TSMC provided a 3 years for 100 billion dollar capex to support a structural growth. Now, the demand is even stronger. On base of that, can we do 3 years 200 billion for capex for next 3 years? You know, the math sounds doable.

Okay, so well, first a slight clarification because CC was talking about this year we have substantially stepping up our capex investment, but CC also mentioned it takes 2 to 3 years to build capacity. So, in terms of Bruce's question is do we say 2027 sending the step up in capex? I think we're saying it takes time for that capacity to come out. So, that's the first part.

Yeah, I think Bruce, what CC said was the productivity was our main focus in 26 and 27 because when we start to invest, the fab, the volume production will not come out until 28 and 29. So, the dollar amount invested today is for 2 years or even in the future. And capex dollar amount, as I said, the last 3 years, 101 billion. In the next 3 years, significantly higher. I'm not going to share with you the number, but significantly higher.

Yeah. So, I think Wendell has addressed at least both parts of Bruce's question. Okay?

Thank you.

So, again, thank you. So, again, thank you, everyone. This does conclude 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, and both are available or will be available through our TSMC's website at www.tsmc.com. So, again, thank you, everyone, for taking the time to join us today. We certainly would like to wish everyone a happy new year. We hope everyone continues to stay well, and you will join us again next quarter. Thank you. Goodbye, and have a good day.