Taiwan Semiconductor Manufacturing Company Limited Q1 FY2025 earnings call

1. First quarter and second quarter profitability: First quarter gross margin slightly decreased sequentially to 58.8% due to earthquake and overseas dilution impact, with cost improvement efforts offsetting partially. Second quarter gross margin expected to decrease further with Arizona fab margin dilution, and long-term gross margin of 53% and higher achievable. 2. 2025 capital budget: Expected to be between US$38 billion and US$42 billion, with about 70% for advanced process technologies, 10%-20% for specialty technologies, and 10%-20% for advanced packaging, testing, etc. 3. Near-term demand outlook: Impacted by smartphone seasonality but AI-related demand continued growth, with earthquake recovery efforts. 4. Tariff impact: Uncertainties exist but no change in customer behavior seen so far. 5. AI demand outlook: Robust AI-related demand, revenue from AI accelerators to double in 2025, CoWoS capacity to double in 2025. 6. U.S. investment plan: Additional US$100 billion investment in Arizona for advanced semiconductor manufacturing, fabs, packaging fabs, and R&D center. 7. Japan and Europe expansion: First specialty tech fab in Kumamoto started volume production, second in Japan scheduled, specialty tech fab in Dresden, Germany on track. 8. N2 and related technologies: N2 on track for volume production in second half 2025, N2P and A16 to follow with performance and power benefits.

First quarter revenue decreased 3.4% sequentially in NT dollar or 5.1% in U.S. dollars. 3-nanometer process technology contributed 22% of wafer revenue in the first quarter, while 5-nanometer and 7-nanometer accounted for 36% and 15% respectively. Advanced technologies (7-nanometer and below) accounted for 73% of wafer revenue. HPC increased 7% quarter-over-quarter to account for 59% of first quarter revenue. Smartphone decreased 22% to account for 28%. IoT decreased 9% to account for 5%. Automotive increased 14% and accounted for 5% and DCE increased 8% to account for 1%.

Second quarter revenue expected to be between US$28.4 billion and US$29.2 billion (13% sequential increase, 38% year-over-year at midpoint). Gross margin between 57% and 59%, operating margin between 47% and 49%. Second quarter tax rate around 20%, full-year tax rate between 16% and 17%. 2025 capital budget between US$38 billion and US$42 billion.

Overseas fab expansion impact on gross margin: Margin dilution from Kumamoto and Arizona fabs, expected 2%-3% in 2025, widening to 3%-4% in later stages. Tariff policy uncertainties: Potential impact on end market demand.

Q: Gokul Hariharan from JPMorgan asked about AI demand, CoWoS capacity and supply.

A: C.C. Wei responded that CoWoS demand is still strong, working to balance supply and demand, and 2026 will be more balanced.

Q: Gokul Hariharan's second question was on U.S. investment and margin dilution.

A: C.C. Wei mentioned expansion is due to customer requests and Wendell Huang talked about reflecting value in pricing.

Q: Bruce Lu from Goldman Sachs asked about geopolitical risk and mature node expansion.

A: C.C. Wei said no slowdown in expansions and it's about specialty tech demand.

Q: Charlie Chan from Morgan Stanley asked about semiconductor tariffs and U.S. expansion margin.

A: C.C. Wei said not involved in tariff negotiations and Wendell Huang talked about margin dilution drivers.

Q: Charles Shi from Needham asked about U.S. expansion fairness and R&D.

A: C.C. Wei talked about fair treatment and R&D focus on manufacturing improvement.

Q: Sunny Lin from UBS asked about Arizona expansion timeline and pricing.

A: C.C. Wei said speeding up expansions and Wendell Huang talked about value reflection in pricing.

Q: Brett Simpson from Arete asked about AI demand despite China ban and share buybacks.

A: C.C. Wei talked about strong non-China AI demand and Wendell Huang said dividend is better return method.

Q: Laura Chen from Citi asked about AI chip design trends and Arizona capacity allocation.

A: C.C. Wei talked about chip design trends and capacity allocation plan.

Q: Krish Sankar from Cowen asked about second half revenue visibility and Japan fab contribution.

A: Wendell Huang said too early to talk second half and capacity of Japan fab is 40,000 with minor revenue contribution now