Taiwan Semiconductor Manufacturing Co Ltd ($TSM) Q1 2025 Earnings Call

Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. But before that, I would like to mention the earthquake during Lunar New Year. On January 21st, Taiwan experienced a 6.4 magnitude earthquake on the Richter scale followed by several significant aftershocks. Although a certain number of wafer in process were impacted and had to be scrapped. We worked tirelessly and were able to recover much of the lost of production, demonstrating the resilience of our operation in Taiwan. I want to recognize and deeply thank all of our employees and our suppliers for their dedication and hard effort over the Lunar New Year holidays. I would also like to extend our great appreciation to our customers for their understanding and support during this time. Now, let me talk about the first quarter's result. We conclude our first quarter with revenue of US 25.5 billion. Our business in the first quarter was impacted by smartphone seasonality, partially offset by continued growth in AI-related demand. Moving into second quarter 2025, we expect our business to be supported by strong growth of our 3-nanometer and 5-nanometer technologies. Looking at the full year of 2025, we expect foundry 2.0 industry growth to be supported by robust AI-related demand and a milder recovery in other end market segments. In January, we had forecast the foundry 2.0 industry to grow 10% year-over-year in 2025, which is consistent with IDC's forecast of 11% year-over-year growth for foundry 2.0. Now, let me talk about the rate the recent tariff. We understand there are uncertainties and risk from the potential impact of tariff policies. However, we have not seen any change in our customers' behavior so far. Therefore, we continue to expect our full-year 2025 revenue to increase by close to mid-20s percent in US dollar term. We might get a better picture in the next few months, and we will continue to closely monitor the potential impact to the end market demand and manage our business prudently. Amidst the uncertainties, we continue to focus on fundamentals of our business, which are technology leadership, manufacturing excellence, and customer trust to further strengthen our competitive position. As such, we are confident TSMC can continue out-perform the foundry 2.0 industry growth in 2025. Now, I will talk about our AI demand outlook. We continue to observe robust AI-related demand from our customers throughout 2025. We reaffirm our revenue from AI accelerators to double in 2025. The AI accelerators we define as AI GPU, AI ASIC, and HBM controllers for AI training and inferencing in the data center. Based on our customers' strong demand, we are also working hard to double our CoWoS capacity in 2025 to support their needs. Recent developments are also positive to AI's long-term demand outlook. In our assessment, the impact from AI reasoning mode models, including deep seek, will drive greater efficiency and help lower the barrier to future AI development. This will lead to wider usage and greater adoption of AI models which all require use of leading edge silicon. Thus, these developments only serve to strengthen our conviction in the long-term growth opportunities from the industry mega trend of 5G, AI, and HPC. To address the structural increase in the long-term market demand profile, TSMC employed a disciplined and robust capacity planning system. This is specially important when we have such high forecasted demand from AI related business. Externally, we work closely with our customers and our customers are customer to plan our capacity. Internally, our planning system involves multiple teams across several functions to assess and evaluate the market demand from both a top-down and bottom-up approach to determine the appropriate capacity to build. Based on our planning framework, we are confident that our revenue growth from AI accelerators will approach a mid-40s percentage CAGR for the next 5-year period starting from 2024. Next, let me talk about the TSMC's additional US $100 billion investment plan to expand in Arizona. All our overseas decisions are based on our customers' need. They value some geographic flexibility and necessary level of government support. This is also to maximize the value for our shareholders. With the strong collaboration and support from our leading US customers and the US federal, state, and city governments, we recently announced our intention to invest an additional US $100 billion in advanced semiconductor manufacturing in the United States. This expansion includes plans for three additional wafer manufacturing fabs, two advanced packaging fabs, and a major R&D center. Combined with our previously announced plan to build three advanced semiconductor manufacturing fab in Arizona, this brings our total investment in the US to US $165 billion to support the strong multi-year demand from our customers. Our first fab in Arizona has already successfully entered high-volume production in 4Q '24 utilizing N4 process technology with a yield comparable to our fab in Taiwan. The construction of our second fab, which will utilize a 3-nanometer process technology, is already complete, and we are working on speeding up the volume production schedule based on the strong AI-related demand from our customers. Our third and fourth fab will utilize N2 and A16 process technologies, and with the expectation of receiving all the necessary permits, are scheduled to begin construction later this year. Our fifth and sixth fabs will use even more advanced technologies. The construction and ramp schedule for these fabs will be based on our customers' demand. We also plan to build two new advanced packaging facilities and establish an R&D center in Arizona to complete the AI supply chain. Our expansion plan will enable TSMC to scale up to a giga fab cluster to support the needs of our leading-edge customers in smartphone, AI, and HPC applications. With this additional US $100 billion investment plan to expand our leading-edge capacity in Arizona, I would also like to mention that TSMC is not engaged in any discussion with other companies regarding any joint venture, technology licensing, or technology transfer and sharing. After completion, around 30% of our 2-nanometer and more advanced capacity will be located in Arizona, creating an independent leading-edge semiconductor manufacturing cluster in the US. It will also create greater economies of scale and help foster a more complete semiconductor supply chain ecosystem in the US. Thus, TSMC will continue to play a critical and integral role in enabling our customers' success while remaining a key partner and enabler of the strength and leadership 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 2024 with very good yield. The construction of our second specialty fab is scheduled to start at a later this year, subject to the readiness of the local infrastructure. In Europe, we have received strong commitment from the European Commission and the German federal state and city government. We are on track with our plan to build a specialty technology fab in Dresden, Germany. In Taiwan, with support from the Taiwan government, we plan to build 11 wafer manufacturing fab and four advanced packaging facility over the next several years. Volume production of N2 is expected to start in second half 2025. And we are preparing for multiple phases of 2 nanometer fabs in both Hsinchu and the Kaohsiung Science Parks to support the strong structural demand from our customers. By expanding our global footprint through our continuing investment in Taiwan, TSMC can continue to be the trusted technology and capacity provider of the large of the global logic IC industry for years to come while delivering profitable growth for our shareholder. Finally, I will talk about our N2 status and A16 introduction. Our 2 nanometer and A16 technology leads the industry in addressing the insatiable need for energy efficient computing and almost all the innovators are working with us. We expect the number of new tape out for 2 nanometer technology in first 2 years to be higher than both 3 nanometer and 5 nanometer in their first 2 years fueled by both smartphone and HPC applications. N2 will deliver full node performance and power benefits 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 N3E. N2 is well on track for volume production in second half of 2025 as scheduled with a ramp profile similar to N3. With our strategy of continuous enhancement, we also introduce N2P as an extension of N2 family. N2P features further performance and power benefits on top of N2 and volume production is scheduled for second half 2026. We also introduce A16 featuring super power rail or SPR as a separate offering. Compared with the N2P, A16 provides a further 8 to 10% speed improvement at the same power or 15 to 20% power improvement at the same speed and additional 7 to 10% chip density gain. A16 is best suited for specific HPC products with complex signal route and dense power delivery network. Volume production is scheduled for second half 2026. We believe in N2, N2P, A16 and its derivatives will further extend our technology leadership position and enable TSMC to capture the growth opportunities well into the future. This conclude our key message and thank you for your attention.

Okay, Gokul. I know there's a lot of rumors about the CoWoS. The last time when we talk about the CoWoS, the demand is almost insane and much, much higher than we can prepare. And now it's a little bit better. I think still we need to build a lot of capacity to meet the demand. As I said, we have to double our CoWoS capacity. Still fully loaded and for 2026, I cannot say the number, but it's still a healthy momentum while we continued. Okay. Did that answer your question?

Well, we all work very hard to ensure that we don't have this kind of a demand is much much higher than the capacity. We're working very hard and I believe that you will be more balanced next year.

Really? Okay. I thought it is a very long question. Let me answer that. Yes, we indeed we have talked with US government officials. And the reason we are spending in Arizona, actually, let me say again, is all because of our customers request. And that because of they have very high demands. I announced it in other occasions say that very strong AI demand from US customers such as Apple, Nvidia, AMD, Qualcomm, and Broadcom. And so that we need to expand our capacity in the US and to support them. We talked with our US government and to ask for their help in getting the necessary permits so we can start the fab. And as a result, I would expect our 2 nanometers capacity around 30% will be in Arizona. And that will be also a independent leading edge semiconductor manufacturing cluster. Okay? And then Gokul, the second part of your question is related to then when Sorry, Wendell had mentioned that the margin may widen. So, Gokul's second part of the question I think was related to pricing. And what is our strategy or approach here as we expand overseas? Is that correct?

Bruce, let me answer this question. Of course, we do not comment on specific customers or product. But let me assure you that we have taken this into consideration when providing our 4-year growth outlook. Did I answer the question?

Well, actually we know a lot of people right now speculate a lot of things. But again, we certainly we are mindful of the potential impact from all the recent tariff announcement, especially the potential impact to the end market demand. We will continue to watch it carefully. Having said that, we have not seen any change in our customers' behavior so far.

And so, we stick on our forecast.

Let me answer the first part of the question. Are we considering slowing down? The answer is no. We are executing our plan as scheduled. The reason is very simple, because this kind of mature node is a specialty. Technology is a demand which my competitor did not have the capacity or the capability to support. So, it's kind of a free form. You mentioned the under-loading of the mature node. And so, again, I would emphasize, no, we are not going to slow down our plan in Japan or in Germany. The second question is how to do it? You have a good idea, but it's TSMC's confidential information. I'll let you know later.

Charlie, this kind of tariff discussion is between countries. We are a private company. Certainly, no, we are not getting involved.

What is the second question?

Charlie, all policy, especially this tariff decision, are governments responsibility to decide. And as a private company, we are fully respectable of this. But we are not getting involved.

Yeah, Charlie, we have as we said in the prepared remarks, we haven't seen any changes in customers' behavior so far. Our second quarter growth is driven mainly by strong demand for the 3 nanometer and 5 nanometer technologies underpinned by the growth in our HPC platform. As I said, we haven't seen any observe any changes in customer behavior in terms of pulling or due to tariffs. You're probably better to ask them directly.

I Charlie as we also said in the prepared remarks, there are uncertainties and potential risks from tariffs exist. So far that's what we are able to share with you is we stick to the mid 20 or close to mid 20% year-over-year growth no different from the previous quarter.

Yeah, Charlie the widening of dilution on the gross margin in the later part of the five-year period is mainly from inflation in cost and also potential tariff related cost increases. Those are the reasons.

Well, let me answer this question. What we mean by fair treatment is very simple. If anybody gets the subsidy or gets incentive, it should be everybody should get the same. Either we got all or we got zero, all right? So, that's what we call fair. So, again, I would like to assure you that we will be very competitive in either conditions.

Well, as I said before, TSMC's fab, you know, never be state-of-the-art. We always continue to improve it. And we need to establish a major R&D center in Arizona, with about 1,000 engineers. That's a big amount. But the focus will be to support our manufacturing cluster, improve its technology, and allow it to operate independently. Okay. Did I answer the question?

Okay, actually the first purpose is to let the Arizona Sapphire can operate independently, but of course, we have done and we are doing it right now or do some kind of pathfinding, exploratory work, and cooperate with university, etc., you know, it actually a lot of activities. 1,000 engineer is not a small amount. Of course, it's not comparable to TSMC's. Right now, it's a 10,000 R&D people, but it's a beginning. Okay? So, we do a lot more.

Well, Sunny, we are working very hard to speed it up of our production in the second fab and the construction of the third fab. All I can say now is, customer's demand is strong. We have to really do speed it up. And the following all the fab will definitely will depend on our customer's demand, of course.

Okay, yes, we are speeding it up. How fast? The second fab, as you said, it should be pulling. And this one we are working hard to pull in at least a couple of quarters. That's at least. On the third fab, actually, I did not speak the whole thing. It's also being constrained by the labor shortage over Arizona, and we need to get all the permits, everything, etc. So, I cannot give you a very definite date yet, but we are going to update you probably in the next quarter or one quarter after that.

Sunny, let me answer that. These two things are actually go together. As we said, reflecting our value is a continuous and ongoing process. And we because of our business nature, we need very high gross margin to earn a sustainable healthy return. Now, geographic manufacturing flexibility is an important part of our value proposition to the customers. Therefore, we are already discussing this with our major customers. And the progress is so far, so good. Okay? Now, at the same time, the margin dilution from the overseas fabs, the additional dilutions come from the cost inflation, as well as potential cost increases from the tariff policies. Of course, with that, we also want to reflect the value, and therefore the discussion with the customers are in continuous. Okay, Sunny?

Brett, you know, it's 3 months ago. Now I can tell you that 3 months ago we are barely we just cannot supply enough wafer to our customer. And now is a little bit balanced, but still the demand is very strong. And you are right. Other than China, the demand is still very strong, especially in US. And so, we are confident that we are going to double our AI revenue this year.

That's a long question, but Nora. Yes. Our customers they continue to use TSMC's leading edge technology. And they also adopt the advanced packaging technologies more and more. And also more advanced. Right? This year is probably most of CoWoS S and then next year CoWoS Europe and etc. And we can see that customer start to picking up the SoIC and the more advanced packaging technologies. As for the what we call panel level packaging, we are aggressively developing it. And today is still in the feasibility study stage. Too early to say it will be in Taiwan or in US. But most likely it will be in Taiwan first. We ramp it up and then bring it to US.

Well, you know, we have right now we plan a six fab in Arizona. And in that six fab, the 2 nanometer will be a major node. And that's what I say 30% will be there. As time goes by, after the 2 nanometer will be 1.4 and 1.0, that has not been discussed yet.

Okay, let me talk about the first one. We're only at second quarters. So, I think it's too early to talk about the second half. We did mention that the uncertainties and risks from tariffs exist and we might get a better picture in the next few months. So, we can probably update you in the next earnings call.

So far, actually so far is very strong as we said. All the new tape out customer is the number of the tape outs is exceeding what we expected. And as we said, the number of the new tape outs is much higher than the 3 nanometer and 5 nanometer in the same period of time.