Taiwan Semiconductor Manufacturing Company Ltd.

Good afternoon, everyone, and welcome to TSMC's fourth quarter 2024 Earnings Conference and Conference Call. This is Jeff Hsu, 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 2024, followed by our guidance for the first quarter 2025. Afterwards, Mr. Huang and TSMC's chairman and CEO, Dr. Cici 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 risk 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 2024. After that, I will provide the guidance for the first quarter of 2025. Fourth quarter revenue increased 14.3% sequentially in NT, supported by strong demand for our industry-leading three nanometer and five nanometer technologies. Gross margin increased by 1.2 percentage points sequentially to 59%, mainly reflecting a higher capacity utilization rate and productivity gains partially offset by the dilution of three nanometer ramp up. With operating leverage, total operating expenses accounted for 10% of net revenue. Thus, operating margin increased by 1.5 percentage points sequentially to 49%. Overall, our fourth quarter EPS was 14.45 NT and ROE was 36.2%. Now let's move on to revenue by technology. Three nanometer process technology contributed 26% of wafer revenue in the fourth quarter. 5 nanometer and 7 nanometer accounted for 34% and 14% respectively. Advanced technologies defined as 7 nanometer and below accounted for 74% of wafer revenue. On a full year basis, three nanometer revenue accounted for 18% of 2024 wafer revenue. Five nanometer, 34%. Seven nanometer, 17%. Advanced technologies accounted for 69% of total wafer revenue, up from 58% in 2023. Moving on to revenue contribution by platform. HPC increased 19% quarter over quarter to account for 53% of our fourth quarter revenue. Smartphone increased 17% to account for 35%. IoT decreased 15% to account for 5%. Automotive increased 6% to account for 4%. DCE decreased 6% to account for 1%. On a full year basis, HPC increased 58% year on year. Smartphone, IOT, automotive, DCE increased 23%, 2%, 4%, and 2% respectively in 2024. Overall, HPC accounted for 51% of our 2024 revenue. Smartphone accounted for 35%. IoT accounted for 6% and automotive accounted for 5%. Moving on to the balance sheet. We ended the fourth quarter with cash and marketable securities of 2.4 trillion NT or 74 billion US dollars. On the liability side, current liabilities increased by 184 billion NT, mainly due to the increase of 71 billion in accounts payable and increase of 99 billion in accrued liabilities and others. In terms of financial ratios, accounts receivable turnover days declined by 1 day to 27 days, while inventory days decreased by 7 days to 80 days, primarily due to shipment of N3 and N5 wafers. Regarding cashflow and CAPEX, during the fourth quarter, we generated about 620 billion NT in cash from operations, spent 362 billion in CAPEX and distributed 104 billion for the first quarter 24 cash dividend. Overall, our cash balance increased 241 billion NT to 2.1 trillion at the end of the quarter. In US dollar terms, our fourth quarter capital expenditures total 11.2 billion. Now let me recap our performance in 2024. Due to the strong demand for our three nanometer and five nanometer process technologies, we continue to outperform the foundry industry in 2024. Our revenue increased 30% in U.S. dollar terms to 90 billion U.S., or increased 33.9% in NT to 2.89 trillion NT. Growth margin increased 1.7 percentage points to 56.1%, mainly reflecting improvements in overall capacity utilization, partially offset by three nanometer dilution and higher electricity costs. With operating leverage, our operating margin increased 3.1 percentage points to 45.7%. Overall, full-year EPS increased 39.9% to 45.25 NT, and ROE increased 4.1 percentage point to 30.3%. On cashflow, we spent 29.8 billion US dollars or 956 billion NT in CAPEX, generated 1.8 trillion NT in operating cashflow and 870 billion in free cashflow. We pay 363 billion NT in cash dividends in 2024, up 24.5% year over year. I finished my financial summary. Now let's turn to our current quarter guidance. We expect our business in the first quarter to be impacted by smartphone seasonality, partially offset by continued growth in AI related demand. Based on the current business outlook, we expect our first quarter revenue to be between 25 billion and 25.8 billion US. which represents a 5.5% sequential decline or a 34.7% year-over-year increase at the midpoint. Based on the exchange rate assumption of $1 to 32.8 NT, gross margin is expected to be between 57% and 59%, operating margin between 46.5% and 48.5%. Regarding tax rate, our effective tax rate was 16.7% in 2024. For 2025, we expect our effective tax rate to be between 16 and 17%. This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our fourth quarter 24 and first quarter 25 profitability. Compared to third quarter, our fourth quarter gross margin increased by 120 basis points sequentially to 59%, primarily due to a higher capacity utilization rate and productivity gains, partially offset by dilution from the continued ramp up of our three nanometer technology. We have just guided our first quarter gross margin to decrease by 100 basis point to 58% at the midpoint. This is primarily due to REM costs associated with N2 and COAS expansion and the start of dilution from our overseas fabs. As a reminder, six factors determine TSMC's profitability. Leadership technology development and ramp up, pricing, cost reduction, technology mix, capacity utilization, and forward exchange rate. Looking at full year 2025, given the six factors, there are a few puts and takes I would like to share. On the one hand, we are working hard to increase our value. The dilution impact from our N3 ramp is expected to gradually reduce, and we expect our overall utilization rate to moderately increase in 2025. On the other hand, as we have said before, we forecast two to three percent margin dilution impact from the ramp up of our overseas fabs. The impact is less than 100 basis point in the first quarter of 25, but we expect it to grow more pronounced throughout the year as our fabs in Kumamoto and Arizona ramp up. We also expect inflationary costs, including higher electricity prices in Taiwan to impact our gross margin by at least 1% in 2025. In addition, there are some ramp up costs associated with N2 and further conversion of N5 to N3 capacity, which together we expect to impact our gross margin by about 1%. Finally, we have no control over the foreign exchange rate, but that may be another factor in 2025. Longer term, excluding the impact of foreign exchange rate and considering our global manufacturing footprint expansion plans, we continue to forecast a long-term gross margin of 53% and higher is achievable. Next, let me talk about our 2025 capital budget and depreciation. Every year, our CAPEX is spent in anticipation of the growth that will follow in the future years, and our CAPEX and capacity planning is based on the long-term market demand profile. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. In 2024, we spent 29.8 billion U.S. dollars as we continue to invest to support our customers' growth. With our strong technology leadership and differentiation, we are well positioned to capture the multi-year structured demand from the industry megatrends of 5G, AI, and HPC. In 2025, we expect our capital budget to be between 38 and 42 billion US dollars as we invest to capture the future growth. Out of the 38 to 42 billion capex for 2025, about 70% of the capital budget will be allocated for advanced process technologies. About 10 to 20% will be spent for specialty technologies and about 10 to 20% will be spent for advanced packaging, testing, mask making and others. Our depreciation expense is expected to increase by high single digit percentage year over year in 2025. as newly incurred depreciation will be partially offset by other nodes rolling off depreciation. Even as we invest for the future growth with this level of CAPEX spending in 2025, we remain committed to delivering profitable growth to our shareholders. We also remain committed to a sustainable and steadily increased cash dividend per share on both an annual and quarterly basis. Now let me turn the microphone over to CC.

Thank you, Wendell. Good afternoon, everyone. First, let me start with the conclusion of 2024 and our 2025 outlook. 2024 was a mixed year of recovery for the global semiconductor industry. AI-related demand was shrunk, while other applications saw only a very mild recovery, as macroeconomics conditions weigh on consumer sentiment and end-market demand. Concluding 2024, The fund-raising $2 industry, which we define as all logical waveform manufacturing, packaging, testing, mass-making, and others, increased 6% year-over-year, slightly lower than our previous forecast. Supported by strong demand for our leading-edge process technologies, TSMC's revenue increased 30% year-over-year, in U.S. dollar term outperform the voluntary industry growth. Entering 2025, we expect fiberless semiconductor industry, semiconductor inventory to have returned to a healthier level exceeding 2024. We forecast the 2020 industry to grow 10% year-over-year in 2025, supported by robust AI-related demand and a mild recovery in the other end market segment. Supported by our technology leadership and broad customer base, we are confident we can continue to outperform the industry growth. We expect 2025 to be another strong growth year for TSMC and forecast our full-year revenue to increase by close to mid-20% in U.S. dollar term. Now I will talk about AI demand and TSMC's long-term growth outlook. We observe robust AI-related demand from our customers throughout 2024. Revenue from AI accelerators, which we now define as AI GPU, AI ASICs, and HBM controller for AI training and inference in the data center, accounted for close to 15% of our total revenue in 2024. Even after more than tripling in 2024, we forecast our revenue from AI accelerator to double in 2025, as the strong surge in AI-related demand continues. As a key enabler of AI applications, the value of our technology platform is increasing as customers rely on TSMC to provide the most advanced process and packaging technologies at scale in the most efficient and cost-effective way. To address the structural increase in the long-term market demand profile, TSMC is working closely with our customers to plan our capacity and investing in leading-edge specialty and advanced packaging technologies to support their goals. As we have said before, TSMC employs the discipline and the raw capacity planning system to evaluate and judge the market demand to determine the appropriate capacity to build. This is especially important when we have such high forecasted demand from AI-related business. At the same time, we are committed to earning a sustainable and healthy return that enables us to continue to invest to support our customers' growth while delivering profitable growth for our shareholders. Underpinned by our technology leadership and broader customer base, we now forecast the revenue growth from AI accelerators to approach a mid-40% CAGR for the five-year period, starting off the already higher base of 2024. We expect AI accelerators to be the strongest driver of our HPC platform growth and the largest contributor in terms of our overall incremental revenue growth in the next several years. Looking ahead, as the world's most reliable and effective capacity provider, the SMC is playing a critical and integral role in the global semiconductor industry. With our technology leadership, manufacturing excellence, and customer trust, we are well-positioned to address the growth from the industry megatrend of 5G, AI, and HPC with our differentiated technologies. For the five-year period starting from 2024, we expect our long-term revenue growth to approach 20% CAGR, a starter term fueled by all four of our growth platforms, which are smartphone, HPC, IoT, and automotive. Next, let me talk about our global manufacturing footprint update. All our overseas decisions are based on our customers' needs. as they value some geographic flexibilities and the necessary level of government support. This is also to maximize the value for our shareholder. In the U.S., we have a longstanding good relationship with the U.S. government, dating back to even before our Arizona Fair Project announcement in May 2020. We have received a strong commitment and support from the U.S. customers and the U.S. federal, state, and city government and are making substantial progress. Building on the successful result of our earlier engineering wafer production, we were able to pull ahead the production schedule of our first fab in Arizona. Our first fab has already entered the high-volume production 4Q24 utilizing N4 process technology with a yield comparable to our fabs in Taiwan. We expect a smooth ramp-up process, and with our strong manufacturing capability and execution, we are confident to deliver the same level of manufacturing quality and reliability from our fab in Arizona as from our fab in Taiwan. Our plans for second FAB and third FAB in Arizona are also on track. These FAB will utilize even more advanced technologies such as N3, N2, and N16 based on our customers' needs. TSMC will continue to play a critical and integral role in enabling our customers' success. while remaining a key partner in enabling of the U.S. semiconductor industry. Next, in Japan, thanks to the strong support from the Japan Central Prefecture and local government, our progress is also very good. Our first specialty technology fab in Kumamoto has started volume production at the end of 2024 with very good yield. Construction of our second specialty fire is scheduled to begin this year. In Europe, we have received strong commitment from the European Commission and German federal, state, and city government. We are progressing smoothly with our plans to build a specialty technology fire in Dresden, Germany, focusing on automotive and industrial application. In Taiwan, we continue to receive support from Taiwan government, and we are investing in and expanding our advanced technology and packaging capacities. Given the robust multi-year demand for our 3 nanometer technology, we continue to expand our 3 nanometer capacity in Tainan Science Park. We are also preparing for multiple phases two nanometer fabs in both Hsinchu and Kaohsiung Science Park to support the strong structural demand from our customers. We are also expanding our advanced packaging facilities across several locations in Taiwan. As we have said before, under today's fragmented globalization environment, our CFAB costs are higher for everyone. including TSMC and all other semiconductor manufacturers. We are leveraging our fundamental competitive advantage of manufacturing technology leadership and large-scale manufacturing base to be the most efficient and cost-effective manufacturer in the region that we operate. We are supporting our customers' growth. Finally, I will talk about EN2. and the A16 introduction. Our two nanometer and A16 technologies lead the industry in addressing the insatiable need for energy efficient computing and almost all the innovators are working with TSMC. We expect a number of the new tap out for two nanometer technology in the first two years to be higher than both three nanometer and five nanometer in their first two years. fueled by both smartphone and HPC applications. And to what deliver full node performance and power benefit, 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 the N3E. N2 is well on track for volume production in the second half of 2025 as scheduled, with a run profile similar to N3. With our strategy of continuous enhancement, we also introduced N2P as an extension of N2 family. N2P features further performance and power benefit on top of N2. N2P will support both smartphone and SPG applications, and volume production is scheduled for second half 2026. We will also introduce A16 featuring Super Power Rail, or SPR, as a separate offering. TSMC's SPR is an innovative, best-in-class backside power delivery solution that is first in the industry to incorporate another backside metal scheme that preserves gate density and device with flexibility to maximize the product benefit. 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 the best usable for specific HPC products. with a complex signal route and dense power delivery network. Volume production is scheduled for second half 2026. We believe N2, N2P, A16 and its derivative will further extend our technology leadership position and enable TSMC to capture the growth opportunity way into the future. This concludes our key message. Thank you for your attention.