Taiwan Semiconductor Manufacturing Company Limited Q3 FY2025 earnings call

• Third quarter gross margin increased 0.9 percentage points sequentially to 59.5% due to cost improvement efforts and higher capacity utilization rate, partially offset by overseas fab dilution and unfavorable foreign exchange rate. • Fourth quarter gross margin is expected to increase by 50 basis points to 60% at the midpoint, driven by a more favorable foreign exchange rate, partially offset by dilution from overseas fabs. • 2025 CapEx is narrowed to between USD 40 billion and USD 42 billion, with about 70% allocated for advanced process technologies. • Global manufacturing footprint update: Expansion in Arizona is progressing, first specialty fab in Japan has started volume production, construction of second fab in Japan and specialty fab in Germany has begun, and preparations for multiple phases of 2-nanometer fab in Taiwan are underway. • Strong AI demand with customers and customer's customers requesting capacity, and focus on technology leadership, manufacturing excellence, and customer trust.

Third quarter revenue increased 6% sequentially in New Taiwan Dollar (NT) and by 10.1% sequentially in U.S. dollar terms to $33.1 billion. 3-nanometer process technology contributed 23% of wafer revenue, 5-nanometer accounted for 37%, 7-nanometer for 14%, and advanced technologies (7-nanometer and below) made up 74% of wafer revenue. By platform, HPC remained flat quarter-over-quarter at 57% of revenue, smartphone increased 19% to 30%, IoT was 5%, automotive was 5%, and DCE decreased 20% to 1%. Gross margin was 59.5%, operating margin was 50.6%, EPS was TWD 17.44, and ROE was 37.8%.

• Fourth quarter revenue is expected to be between USD 32.2 billion and USD 33.4 billion, representing a 1% sequential decrease or a 22% year-over-year increase at the midpoint. • Gross margin for the fourth quarter is expected to be between 59% and 61%, and operating margin between 49% and 51%. • For the full year 2025, gross margin dilution from overseas fab ramp-up is expected to be between 1% to 2% compared to the previous 2% to 3%. • 2025 CapEx is narrowed to between USD 40 billion and USD 42 billion.

• Potential impact of tariff policies on consumer-related and price-sensitive end market segments. • Uncertainty from U.S.-China relations affecting China AI GPU demand and its potential impact on AI-related growth.

Q: On AI demand and CapEx, how does TSMC see the growth and CapEx planning?

A: C.C. Wei stated that AI demand is stronger than expected, and Jen-Chau Huang noted that higher CapEx is correlated with growth opportunities.

Q: How does the idea that Moore's Law is dead affect TSMC's leading edge demand?

A: C.C. Wei explained that it's about system-level performance rather than just relying solely on chip technology.

Q: What is the impact of U.S.-China relations on China AI GPU demand and TSMC's growth?

A: C.C. Wei expressed confidence in customers' performance and that AI growth will continue despite uncertainties.

Q: Gross margin outlook for 2026 and the impact of N2 ramp?

A: Jen-Chau Huang discussed N2 dilution and the general upward trend of corporate margin.

Q: How does capacity planning for cloud AI differ from prior megatrends?

A: C.C. Wei mentioned focusing on customers' customers and a different approach to forecasting.

Q: What is the impact of 1 gigawatt AI data center capacity on TSMC revenue?

A: C.C. Wei said details are not shared yet but all use leading-edge technologies.

Q: What strategic initiatives is TSMC undertaking to strengthen competition?

A: C.C. Wei discussed Foundry 2.0 and working with customers despite competition.