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.

Thank you, Cici. This concludes our prepared statements. Before we begin the Q&A session, I would like to remind everybody to please limit your questions to two at a time to allow all the participants an opportunity to ask their questions. Questions will be taken from both 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 your question. For those of you on the call, if you would like to ask a question, please press the star then one on your telephone keypad now. If at any time you would like to remove yourself from the questioning queue, please press star two. Now we will begin the Q&A session. We'll take the first few questions here from the floor and then go to online. I think maybe left, middle, right, so on. Why don't we start? I think first question, Gokul Hariharan from J.P. Morgan.

Thanks, Jeff. Happy New Year, management team. My first question is on the TSMC's U.S. future strategy. There has been a lot of changes recently. Taiwan relaxed the N-1 restriction. There was news about that a week back. CC, you met Elon Musk as well recently, so you said there are a lot of developments that you've discussed. Your key IDM competitor seems to be struggling as well, while your Arizona fab seems to be ramping up quite well. So in light of all these, I just wanted to understand the longer term strategy. Would you consider investing in latest node in the US? Because so far it has been N minus one. Now you don't have the... restriction from the Taiwan government to go and invest in the latest node. What has been your feedback in whatever discussions you have had with the incoming President Trump administration? Because they have talked a lot about Chips Act and everything, but they're also supportive. Your original investment was during President Trump's first term. And lastly, I think, Wendell, I think last time you had mentioned, you're not very keen on taking over any IDM fabs. Has that thinking changed, especially given PSMC has the potential to become even more stronger partner for the U.S. in terms of bringing up U.S. local manufacturing? Sorry, long question.

Yes. Okay. Thank you, Gokul. Indeed, a very long question. I think Gokul's question is looking at TSMC and our strategies in terms of global expansion, particularly in the U.S. He notes that Taiwan has recently relaxed or said they relaxed the N-1 rule and CEC has met several, many of our large customers in the U.S., and our Arizona FAB is ramping quite well. So his question really is on the longer-term strategy, I believe three parts. Number one, what is the feedback or sort of discussions ongoing with the next administration in the U.S.? Secondly, would we consider taking over IDM's FABs? Has that thinking changed? And last on the new note, maybe we'll go one by one.

I almost forgot your question already. Okay, first one, the technology node. Actually, it's not that we don't want to ramp up the same technology as in Taiwan, but if you look at when we ramp it up, introduce a new technology into manufacturing, The FAB, the process is so complicated, so it has to be very close to the R&D people. So the initial phase of the ramping up always comes from the FAB close to R&D. So in that sense, we want to ramp up the same kind of technology in the U.S., but that practically is a little bit difficult. So Taiwan will always be first. Does that answer your question? It's not because of an N or N-1 sedimentation. No. It's particularly, we just have to ramp up a new node in Taiwan. And the second, do we change our strategy to expand faster or something? Again, this is, we always say that we... Build the capacity, oversee, it's due to customer's need. If my customer has a very high demand, what should I do? I build it more fast, right? With the necessary government's support, by the way. Okay, talking about the government, let me assure you that we have a very frank and open communication with the current government and with the future one also. I cannot say anything more than that. Okay. What is... IDM, IDM Fab. That's my customer. And now that we... Again, our strategy is not based on my IDM competitor's status. They are our very good customers. I like them, and they are very important to TSMC's business also. That all I can say. Thank you.

Okay. Thanks, Sisi. Maybe my next question, going to gross margins. So Wendell, we are almost approaching 60% gross margin. Last cycle, we peaked at about 60% towards the peak of the cycle. You are expecting the cycle to even strengthen based on guidance that CC provided for both AI as well as some improvement in non-AI. So how should we think about gross margins in this cycle? Is it realistic that we can get to more than 60% gross margin in this upcycle? And related to that, could you help us understand the US, especially the US fab, overseas fabs, but especially US fab dilution, what are the key factors there because As you mentioned, yield is already approaching or almost close to Taiwan yield. So is it basically cycle time is longer or is it that some other costs are much higher in the U.S. FAB because new FAB depreciation is probably fairly similar compared to the Taiwan FAB.

Okay, so Goko's second question is on gross margin. Again, two parts. He notes gross margin is almost approaching 60%. In 2022, the last cycle, it was also around this type of level. We have said that this year is another very strong growth year for TSMC. So his question is, how should we think about gross margins in this current cycle? Can we approach or get to 60 or low 60s type of again? And then the second part is more specific to the U.S. in terms of the cost gap. What are the U.S. cost factors leading to the dilution impact?

Goku, first question on the gross margin. As we said, there are six factors affecting the profitability. Every year, different factors play different roles. But, for example, if the utilization is extremely high, like the last cycle, it is not impossible for us to reach what you just said. And secondly, the U.S. FAP costs. It is more expensive in the U.S., mainly because of several reasons. Number one, the smaller scale. Number two, the higher price in the supply chain. And number three, the very early stage of the ecosystem. So if you add all these up, as we said, 2% to 3% delusion from our overseas fabs every year in the next five years.

If I use the 2% to 3% and do some math, it feels like the overseas FAB is starting at, I don't know, 10% gross margin or 5% gross margin. Just adding up factors. Obviously, it's not how it works, but I'm just doing outside in. Is that right? Is that the right kind of ballpark in terms of thinking about margin?

All we can share is the 2% to 3%.

I don't think TSMC has ever started a FAB at 10% gross margin. Thank you.

Goku, we are working hard to improve it.

Okay. Thank you, Goku. We'll go to the middle. Laura Chen from Citibank.

Thank you, and congratulations for the good result. I just want to have more details about your review. I mean, I think people are kind of looking for your updated long-term CAGR growth. So I believe that 20%, starting from a very, already very high base in 2024, is a really good long-term objective, but just wondering that aside from the strong AI demand, what's your view on the traditional applications like a PC and the smartphone growth, particularly for this year?

Okay, so Laura's first question is looking, she notes that we have updated our long-term CAGR to be approaching 20%, you know, revenue growth in U.S. dollars, starting off even the high base of 24. So her question is, you know, of course, AI demand is part of that, but what about smartphone and PC? And I think your question is specific to this year, CC, 2025.

This year is still a mild growth for PC and smartphone, but everything is AI related. So you can start to see why we have confidence to give you a close to 20% CAGR in the next five years. AI. You look at a smartphone, they will put the AI functionality inside. And not only that, so the silicon content will be increased. In addition to that, actually the replacement cycle will be shortened. And also they need to go into the very advanced technology. Because if you want to put a lot of functionality inside a small chip, you need much more advanced technology to put those kinds of chips. Put it all together, that even smartphone, the unit growth is almost no single digit. But then the silicon... and the replacement cycle and the technology migration that give us more growth than just the unit growth. Similar reason for PC.

So we can kind of expect those AI-capable devices, they will all be based on two nanometers next year, second half.

eating edge technology, that's all I say.

Okay, thank you. And also my next question is about AI. I noted that these times you include the HPN controller into your AI business revenues definition. So can you provide us more update about what the HBI baseline business opportunities could be? And previously TSMC kind of announced cooperation with the key memories suppliers globally. Can you give us more details or updates on the progress of this business engagement?

Okay, thank you, Laura. So Laura's second question is on HPM controllers. She notes that our definition of AI accelerators includes memory controllers or HPM controllers. So her question is how do we see this opportunity or what is the opportunity for TSMC and what is the progress of this working with our memory partners?

We are working with all the memory suppliers, all of them. And that is because of TSMC's larger chip, or larger technology, more advanced. And that means our customers' requirement. So all of them are working with TSMC. Now we start to see some of the product coming out. But the high volume, probably you need to wait for another half of one year to see the high volume and big contribution to TSMC's revenue.

Okay, thank you. We'll move to this side of the room. I guess we have Charlie Chan from Morgan Stanley.

CC, Wendell, and Jeff, first of all, Happy New Year. I think it's going to be a very exciting year given your bullish outlook and also lots of news going on, right? So let me start with overnight, the U.S. seems to put a new framework on restricting China's AI business, right? I'm wondering whether that will create some business impact to your China business and how are we going to manage it? And also for some chips in the middle, high performers like crypto mining, a time-driving chip, do you think this counts as cloud AI? And would TSNC be able to continue to service your China customers? Thank you.

Okay, thank you, Charlie. So Charlie's first question, if I may sort of extrapolate or summarize, is about the announcements of different types of U.S. export restrictions this week pertaining to China and AI-related chips. So his question is, what is the impact to TSMC? How does it impact our business?

So far, we look at – we don't have all analysis yet. But the first look is not significant. It's manageable. So that meaning that my customers who are being restricted or something, we are applying for the special permit for them. And we believe that we have a confidence that they will get some permission so long as they are not in the AI area. especially automotive industry, or even you talk about crypto mining.

Thank you. That is super helpful. And my second question is actually a very hot topic recently as well, the CPO. I think your main partner, Jensen, come to Taiwan this time probably besides meeting you, right, probably also want to enable this supply chain. So based on your recent technology symposium, right, you already get ready for your coupe or coupe optical engine. But do you think, the Taiwan supply chain can really facilitate this CPO because without these key components, the next generation Rubin schedule could have some issues. So I think this is part of the first part of the question about how you are going to facilitate this CPO supply chain. And secondly, to TSNC, your foundry service, do you see significant upside when the OptiNode networking migrate to CPO because I ask this because some conventional product like optical transceiver, DSP, could be replaced. Thank you.

Well, Charlie's second question is a very specific topic. He wants to know, well, if I can generalize, because we certainly don't comment on customers or their products, but in terms of our progress on silicon photonics and CPO, how are we working with customers? How are we preparing as part of our advanced packaging solutions? And what are the opportunities for TSMC as optical moves to silicon photonics and other type of solutions on a general basis?

Charlie, that is a very technical question. Silicon photonics, we are working on it, as you say, and we got a good result also. However, a big volume, I don't think it will be in this year or probably we have to wait for one or one and a half year. You can see that contribution of the volume production. The initial results are quite good, no doubt about it, and so my customers are quite happy.

Okay. Thank you, CC. Operator, we'll now move to the questions online. We'll take the first call from the online participant, please.

Yes. First question, Brett Simpson, EverTay Research. Yeah, thanks very much. And can I just say congratulations on reaching $100 billion in annual sales in Q4. It's quite a milestone. So my first question is in Arizona. I think, Wendell, you mentioned that we need to see some higher scale. So can you update us on the status of Phase 2? It looks like the construction of the shell is nearly complete, but it would be great to understand more about how you see P2 developing over the course of 2025. And in terms of pricing US wafers, how are you planning to do this? Will you have a US price and a Taiwan price, or are you more likely to have a global price regardless of where you make the wafers? Thank you.

Okay, so Brett's question, first question is on Arizona, maybe split into two parts. First is in terms of, you know, we have already started the volume production of the first fab, so Brett would like an update on the progress of the second fab in terms of the construction of the buildings and the shelves, et cetera. And then the second part would be on the pricing of overseas. As we say, there's value to our customers. He wants to know, do we charge a separate price or is it part of the overall pricing, et cetera, et cetera?

Let me answer the second question first. Do we charge a little bit higher? Yes, we did because we have a value of... geographics of flexibility, right? And you guys know that Managing USA is premium product. Yes, we discuss with our customer and they are all agree and happy to work with TSMC so that we can, because of the cost structure over there, so it's a little bit higher price over there. The progress of the first five is right now involving production. Second five, we almost finished all the building and start to put the facility, et cetera, et cetera. And we expect that we move the tools this year also. And we have a plan that our third five. probably will start very soon. And we will announce it in the later days. Okay.

Okay, thank you, CC. Brett, does that answer your first question? And do you have a second one?

Yeah, very clear. And the second question, I wanted to get your perspective. Brocom's CEO recently laid out a large SAM for AI hyperscalers building out custom silicon systems. I think he was talking about million accelerator clusters from each of the customers he has in the next two or three years. What's TSMC's perspective on all this? I'm sure you've spent a lot of time verifying what hyperscalers are planning over the years to come. And how comfortable are you with the scale of what's being implied here? Thanks.

Okay, so Brett's second question is looking at AI. I guess, you know, specifically AI custom chips or ASICs. He notes that one of our customers recently laid out a very strong or large addressable SAM market for AI hyperscalers using custom silicon. Lots of them talking about clusters of one million chips. So he wants to know what is TSMC's view, how do we see this trend in terms of AI ASICs as part of the AI demand megatrend?

Brett, I'm not going to answer the question of the specific number, but let me assure you that whether it's an ASIC or it's a graphic, they all need a very leading-edge technology, and they're all working with TSMC. And the second one is, is the demand real? It's a number that my customer said. I would say that the demand is very strong. Is that enough to answer your question? Brett?

Yeah, that's great. Thank you.

Okay, thank you, Brett. Operator, do we have anyone else on the line? It seems not. Okay, we don't. Then let's go back to the floor. I think on the left side, Bruce Liu from Goldman Sachs.

All right, thank you for taking my question. To be honest, I've been surprised that the long term gross margin target doesn't really change it. I believe TSMC's value is definitely more than selling the pass on the cost. I believe that TSMC need to invest a lot more in R&D to maintain the leadership. TSMC suggested a raise the gross margin target in 2022. with higher r d requirement with higher uh uh profitable target right so i asked the same question two quarters ago which is in the process of you know price negotiation which is understandable but i think the price negotiation is pretty much done uh you know what what's the what's the discrepancy here you know where why tsmc cannot raise the you know profitability target

Okay, so Bruce's first question, he wants to know, again, our long-term gross margin. Why are we not changing the target of 53 and higher? Okay, he correctly notes that certainly TSMC's value is increasing, and certainly TSMC, we need to invest a lot of money in R&D and capacity to support our customers' growth. So we have always had a focus on earning the right return. He also notes in 2022, while our gross margin used to be about 50, then we raised it to 53 and higher. So his question is, why is it not and higher, I guess?

Hi, Bruce. As we said, six factors affecting the profitability. Every year, different factors have different weight. Now, two things to note. Number one, starting from this year, overseas FAB expansion, two to three percentage point impact every year for the next five years. The other things to note, macro environment, uncertainty, which may lead to impacting the global economy, which may lead to end market demand. Now, having said that, we are in a capital-intensive industry, so we will need to earn a healthy return to continue to invest to support our customer. support their growth and also deliver a profitable growth to our shareholders. And you mentioned about the raising of long-term growth margins back in 2022 to 53% and higher, and we have been able to deliver that in higher parts since then. So given all the above, we continue to think that 53% and higher gross margin is achievable, and we work very hard to achieve on the higher part.

Okay, I'll try next two quarters. For the coalesce capacity, TSMG has been very aggressive in expanding the capacity. However, the application is highly concentrated in AI at the current stage, which there are certain noise around it. When can we see non-AI application such as server, smartphone, or anything else can start to adapt cohort capacity in case there is any fluctuation in the AI demand?

Okay, thank you, Bruce. So Bruce's second question is on co-op capacity. In his words, we have been very aggressive to expand the capacity, but his concern is highly concentrated with AI-related demand. So his question is, when do we expect or to see more non-AI application adoption of co-op solutions?

Well, yes, today is all AI-focused. And we have a very tight capacity and cannot even meet customers' need. But whether other product will adopt this kind of a co-author approach, they will. It's coming. And we know that it's coming. So that's all I can say. When? It's coming. Thank you.

Okay, I will try next quarter.

On the CPU and on the server chip, let me give you a hint. Thank you.

Okay, thank you, Bruce. We'll go to the middle. Arthur Lai from Macquarie.

Hi, CZ, I'm Wendell and Jeff. First of all, congrats on the strong growth margin. Just have a very quick follow-up on the US and JP expansion as this is important. My client keeps chasing me. Do you have operational strategy to mitigate the cost gap between, you know, the overseas Fed and Taiwan Fed? Yeah, I think CCU hint that you will work on it and improve the cost margin. But during the Chinese New Year, I read Maurice Zhang's piece of autobiography. And he mentioned that the strategy is copied exactly from the Taiwan Mother Fabric. So I want to understand how we maintain the high yield and also drive the cost down. Thank you.

Okay, so Arthur's question is about our overseas expansion. His question is related to the cost gap and what is our operational strategies to mitigate the cost gap? How are we doing this internally in our fab operations and strategies to do so?

You mentioned my boss is a book. Okay, that's meaning that you really read it. But he says copy exactly whatever Taiwan's improvement, the U.S. will copy over there. Doesn't mean that this year, next year, and the following year will be the same. We continue to improve. that improves the cost structure, both in Taiwan and in the U.S. And we also try very hard to find out a new methodology or whatever that I cannot share with you right now, but it will give Arizona FAB some benefit. And so that will improve, will minimize the gap between the cost structure between U.S. and Taiwan. And we are working on that. But no matter what I say, what be the best of fab over there? Okay.

Second follow-up question probably is on window. You just mentioned that there's 200 bps or 300 bps margin dilution, right? So can you give us a one-level downside, you know, the variable cost and the fixed cost, maybe half of, or maybe which one is higher?

Okay, so Arthur's second question is on the overseas dilution of 2% to 3%. He is asking if we can provide a further breakdown in terms of how much of that is composed from variable costs, how much of that is from the fixed costs, et cetera.

Arthur, we really don't give breakdown on these numbers, but both of them are higher. That's all I can share with you.

Okay, thank you. We'll move to the right side of the room. I think Rick Xu from Daiwa Securities.

Yeah, hi. Happy New Year, and thank you for taking my question. So the first one, Xu, can you share with us your view on this year's global semiconductor revenue forecast as memory or any driver by applications in priority across the main application? Thank you.

Okay, so Rick's first question, he's asking for our forecast of the semiconductor industry, what we used to provide as semi-XMEM, but of course we have already given Foundry 2.0. Then he would like the outlook by end market application in terms of ranking. Maybe just a comment on the overall end markets as a whole, right? Yeah.

Rick, I think the memory business will grow this year also. But all I can say is that HBM will grow very fast. And I don't comment on other memories because of, you know, it's not logic.

And we have already provided Foundry 2.0 to grow 10% year over year. That's our industry forecast for 2025.

Just a quick follow-up. Can I use your Foundry 2.0 market growth as a proxy of the global semi-edge memory?

So his question is, can we use Foundry 2.0 as a proxy for semiconductor X memory? Yes.

Thank you. On the second one, it's very quick. About your COAS and SOIC capacity RAM, can you give us more coverage here? Because recently there seemed to be a lot of market noises, some add orders, some cut orders. So I would like to... to see your view on the CoWAS ramp.

Okay, so Rick's second question is lots of market rumors here. So he would like to know any comment we can provide on CoWAS ramp in 2025.

Rick, as you said, there's a lot of rumor. That's a rumor, I assure you. We are working very hard to meet the requirement of my customers' demand. So cut the order, that won't happen. Actually, continue to increase. So we are, again, I will say that we are working very hard to increase the capacity.

Okay, thank you. Okay, let's move back to operators. Is there anyone online?

Yes, we have next one, Robert Sanders, Deutsche Bank. Go ahead, please.

Yeah, hi there. I just have a question on AI demand. Is there a scenario where HBM is more of a constraint on the demand rather than co-ops, which seems to be the bigger constraint at the moment? And I have a follow-up, thanks.

Okay, so Rob is asking us to comment on AI demand in HBM status constraint or what is the bigger constraint in AI demand?

I don't comment on other suppliers, but I know that we have a very tight capacity to support the AI demand. I don't want to say I'm the bottleneck. TSMC always working very hard with customer to meet their requirement. That's all I can say. You have a second question.

Yeah, just on SOIC, there's been more discussion in the market around your smartphone customers adopting SOIC. Can you just discuss if there's any kind of inflection point here, whether it's in the PC domain or the smartphone domain, or is this still more of a data center story? Thanks.

Okay, well, Rob, second question is on SOIC adoption. His question, basically in a nutshell, is when do we see an inflection point for smartphone application to adopt SOIC?

Today, SOIC's demand still can focus on AI applications. For PC or for other area, it's coming, but not right now.

Okay, thank you, Rob. Thank you, Cici. I think in the interest of the time, we'll take the last two questions, please. Okay, I guess we'll go to Sunny Lin from UBS.

Good afternoon. Thank you for taking my questions. And so my first question is to try to get a bit more clarity on the cloud growth for 2025. I think longer term, without a doubt, the technology definitely has lots of potential for demand opportunities. But I think if we look at 2025 and 2026, I think there could be increasing uncertainties coming from maybe CSP spending, macro, or even some of the supply chain challenges. And so I understand the management just provided a pretty good guidance for this year for sales to double. And so if you look at that number, do you think there is still more upside than downside as we go through 2025? Or how should we think about demand profile for this year and next year?

Okay, well, Sunny's question is about the AI-related demand. We have said that even after tripling, more than tripling last year, it will double again in 2025. She wants to know, is there upside or downside to this? And also for us to provide an outlook on the 2026 AI growth.

Sunny, I certainly hope there is an upside, but I hope I get... my team can supply enough capacity to support it. Did that give you enough hint? And we also forecast based on the 2024's high number, we also forecast of mid-40s is CAGR for the five years. That give you some kind of estimate that you can calculate.

Yeah, so Me 40% is the long-term expectation in terms of growth by next few years. But how should we think about the trajectory of the growth? For sure this year is still pretty strong growth, but do you think at some point maybe we see a moderation of growth temporarily and then followed by another ramp?

Well, I think Sunny's question, again, is asking us to comment on 2026 outlook, which is a little bit early, or that, you know, how do we see the trajectory of the growth?

I have already said it's a little bit too early.

Sure, no problem. So I will follow up maybe next quarter as well. And so my second question is on HCI. And so last year, management thinks by maybe 2025 to be the inflection point for it to see more content related to HCI. So based on your current visibility, are you seeing clients ramping for this year for the HCI products, maybe into second half? And before you also mentioned HGI could potentially drive 5% to 10% dye size increase, would that be a one-time increase? Or do you think beyond the 5% to 10% increase for the maybe first-gen product, there should be sustainable increase going forward?

Okay, so Sunny's second question is related to Edge AI. She would like some more detail or color. Do we see customers ramping Edge or what we call on-device AI products in second half of this year? And the second part in terms of the content increase, 5% to 10% increase, is this a one-time thing? Is this an ongoing thing? How do we estimate the content benefit from on-device AI?

Okay, on the Edge AI, Our observation, we find out that our customer start to put more neural processor inside. And so we estimate it's a five to 10% more silicon being used. Can it be every year five to 10%? The definite is no, right? So they will move to next node, the technology migration. That's also to TSMC's advantage. Not only that, I also say that the replacement cycle, I think it will be shortened because when you have a new toy with AI functionality inside, everybody will replace it, replace their smartphone, replace their PCs. And I count that one much more than a mere 5% increase. All right. Did I answer your question?

Yeah, thank you very much.

Okay, thank you. Operator, I think there's one more participant online, so we'll take the last question from online participant, please.

But I think the last caller just dropped the line. Thank you.

Okay, then we'll take the last question from Brad Lynn from Bank of America.

Thank you for squeezing me in. So happy new year and taking my question. So I would like to answer two questions. First question will be on the CoWAS as well. So we have observed an increasing margin of advanced packaging. Could you remind us the CoWAS contribution of last year? And do you expect the margin to kind of approach the corporate average or even exceed it after the so-called value reflection this year? That would be my first question. Thank you.

Okay, so Brad's first question is very specific to co-ops. Basically, he wants to know what is the revenue contribution from co-ops last year and what is the margin profile? Maybe we can talk about events packaging.

Brad, we don't break it down in different segments of the advanced packaging, but overall speaking, advanced packaging accounted for over 8% of revenue last year, and it will account for over 10% this year. In terms of gross margins, it is better. It is better than before, but still below the corporate average. Thank you.

Thank you, Wendell. That's very helpful. And then my second question will be on the IDM. So we have seen IDMs increasingly rely on TSMC, and then do we still expect the IDM to support our long-term growth?

Okay, so Brad's second question I think is on IDM and IDM outsourcing. He does note that we do see more IDM outsourcing business. So is this part of our long-term growth outlook, Kager?

Again, let me repeat again. They are our very good customers. And we work together. I don't say that we rely on TSMC. We are partners. And I really hope that, you know, a long-term relationship will be there for sure.

Okay. Thank you, Cici. Thank you, Brad. Thank you, everyone. This concludes 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 certainly both will be available through TSMC's website at www.tsmc.com. So thank you, everyone, for joining us today online and in person. We'd like to wish everyone a happy new year and hope everyone continues to stay well and hope you'll join us again next quarter. Goodbye and thank you. Have a good day.