Taiwan Semiconductor Manufacturing Company Ltd.

Good afternoon, everyone, and welcome to TSMC's first quarter 2025 earnings conference call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. TSMC is holding our earnings conference call via live audio webcast through the company'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 first quarter of 2025, followed by our guidance for the second quarter of 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 the line for questions and answers. 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 call 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 first quarter 2025. After that, I will provide the guidance for the second quarter of 2025. First quarter revenue decreased 3.4% sequentially in NT dollar, or 5.1% in US dollars, as our business was impacted by smartphone seasonality, partially offset by continued growth in AI-related demand. In spite of the January 21st earthquake and several aftershocks, we worked diligently to recover much of the lost production. Thus, our revenue in the first quarter was slightly above the midpoint of our guidance. Gross margin decreased 0.2 percentage points sequentially to 58.8%, primarily due to the earthquake impact as well as the start of overseas dilution, partially offset by the cost improvement efforts. Total operating expenses accounted for 10.2% of net revenue. Operating margin decreased 0.5 percentage points sequentially to 48.5%. Overall, our first quarter EPS was 13.94 NT and ROE was 32.7%. Now let's move on to revenue by technology. 3nm process technology contributed 22% of wafer revenue in the first quarter, while 5nm and 7nm accounted for 36% and 15% respectively. Advanced technologies, defined as 7nm and below, accounted for 73% of wafer revenue. Moving on to revenue contribution by platform. HPC increased 7% quarter over quarter to account for 59% of our 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%. Moving on to the balance sheet. We ended the first quarter with cash and marketable securities of 2.7 trillion NT, or 81 billion US dollars. On the liabilities side, current liabilities increased by 135 billion NT, quarter over quarter, mainly due to the increase of 111 billion in accrued liabilities and others. The increase in accrual liabilities and others was mainly due to the accrual of income tax payables. On financial ratios, accounts receivable turnover days increased one day to 28 days. Days of inventory increased three days to 83 days, primarily due to the ramping of new overseas FABs. Regarding cash flow and CAPEX, during the first quarter, we generated about $626 billion NT in cash from operations, spent $331 billion in CAPEX, and distributed $104 billion for second quarter 2024 cash dividend. In addition, we raised $16 billion NT in cash from bond issuances. Overall, our cash balance increased 267 billion NT to 2.4 trillion at the end of the quarter. In U.S. dollar terms, our first quarter capital expenditures totaled 10.06 billion. I finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our second quarter revenue to be between $28.4 and $29.2 billion, which represents a 13% sequential increase or a 38% year-over-year increase at the midpoint. Based on the exchange rate assumption of $1 to 32.5 NT, gross margin is expected to be between 57% and 59%, operating margin between 47% and 49%. Also, in the second quarter, we will need to accrue the tax on the undistributed retained earnings. As a result, our second quarter tax rate will be around 20%. The tax rate will then fall back to 14% to 15% level in the third and fourth quarter, and the full-year tax rate will 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 first quarter of 25 and second quarter of 25 profitability. Compared to fourth quarter, our first quarter gross margin slightly decreased by 20 basis points sequentially to 58.8%. This was primarily due to 60 basis points impact from the January 21st earthquake and its aftershocks, as well as the start of dilution from our Kumamoto FAB, partially offset by cost improvement efforts. We have just guided our second quarter gross margin to decrease by 80 basis points to 58% at the midpoint, primarily as the margin dilution impact from our Arizona FAB starts to kick in. We expect the impact from overseas FAB to grow more pronounced throughout the year as we ramp up further in Kumamoto and Arizona and forecast 2% to 3% margin dilution impact for the full year 2025. As we have said before, under today's fragmented globalization environment, overseas fab costs are higher for everyone, including TSMC and all other semiconductor manufacturers. With our additional $100 billion investment plan in Arizona, we forecast the gross margin dilution from the ramp up of our overseas fabs in the next five years to start from 2% to 3% every year in the early stages and widen to 3% to 4% in the latter stages. We will leverage our increasing size in Arizona and work on our operations to improve the cost structure. We will also continue to work closely with our customers and suppliers to manage the impact. Overall, with our fundamental competitive advantages of manufacturing technology leadership and large-scale production base, we expect TSMC to be the most efficient and cost-effective manufacturer in the region that we operate. Thus, even considering our global manufacturing expansion plans, we believe a long-term gross margin of 53% and higher is achievable. Next, let me talk about our 2025 capital budget. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. We reiterate our 2025 capital budget is expected to be between 38 and 42 billion U.S. dollars as we continue to invest to support customers' growth. 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 2025 CAPEX also includes a small amount related to our recently announced additional $100 billion investment plan to expand our capacity in Arizona. 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 increasing 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 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 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 continual growth in AI-related demand. Moving into second quarter 2025, we expect our business to be supported by strong growth of our 3nm and 5nm 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 mild recovery in other year market segment. In January, we had a forecast of Foundry 2.0 industry to grow 10 points year-over-year in 2025. which is consistent with IDC's forecast of 11% year-over-year growth for Fundraise 2.0. Now, let me talk about the recent tariff. We understand there are uncertainties and risks 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-20% in U.S. 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 to outperform the Foundry 2.0 industry goals 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 accelerated to double in 2025. The AI accelerators we define as AI GPU, AI ASIC, and HPM controllers for AI training and inferencing in the data center. Based on our customers' strong demand, we are also working hard to double our cohort's 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 recently models, including DeepSeq, 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 are reserved to strengthen our conviction in the long-term growth opportunities from the industry megatrend of 5G, AI, and HPC. To address the structural increase in the long-term market demand profile, TSMC employs a disciplined and robust capacity planning system. This is especially important when we have such high forecasted demand from AI-related business. Externally, we work closely with our customers and our customers' customers 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, capable for the next five years 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' needs. 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 U.S. customers and the U.S. federal, state, and city governments, we recently announced our intention to invest an additional U.S. $100 billion in advanced semiconductor manufacturing in the United States. This expansion includes plans for three additional wafer manufacturing flaps, two advanced packaging flaps, 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 U.S. to U.S. $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 4Q24, utilizing N4 process technology with a yield comparable to our farm in Taiwan. The construction of our second farm, which will utilize 3nm 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 fab will use even more advanced technologies. The construction and ramp schedule for this fab 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 Gigafab 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 semiconductor manufacturing cluster in the U.S. It will also create greater economies of scale and help foster a more complete semiconductor supply chain ecosystem in the U.S. Thus, TSMC will continue to play a critical and integral role in enabling our customers' success. while remaining a key partner in enabling all the strengths and leadership of the U.S. 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 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 waiver manufacturing fabs and four advanced packaging facilities over the next several years. Volume production of N2 is expected to start in the second half of 2025, and we are preparing for multiple phases of two nanometer flaps in both Hsinchu and Kaohsiung science parks to support the strong structural demand from our customers. By expanding our global footprint while continuing investment in Taiwan, TSMC can continue to be the trusted technology and capacity provider of the global logic IC industry for years to come, while delivering profitable growth for our shareholders. Finally, I'll talk about our N2 status and A16 introduction. Our 2nm 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 a number of new tap-outs for 2nm technology in the first two years to be higher than both 3 nanometer and 5 nanometer in their first two years, fueled by both smartphone and HPC applications. N2W delivers full node performance and power benefits with 10-15% speed improvement at the same power or 20-30% 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 RAM 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 benefits on top of N2 and volume production is scheduled for second half 2026. We also introduced 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 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 concludes our key message and thank you for your attention.

Thank you, CC. 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. 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'd like to remove yourself from the questioning queue, please press star two. Now let's begin the Q&A session. Operator, can we please proceed with the first caller on the line?

The first one to ask question, Goku Harihalan from JP Morgan.

Thank you very much. Good afternoon. And first of all, thanks for clearing the air on all those JV-related news reports. I think a lot of people needed that. Thank you. My first question is on AI demand. So, CC, there has been a lot of talks about COVOS order adjustments and some concerns about AI demand. You did talk about COVOS capacity doubling. Could you talk a little bit about how you see demand versus supply? I think last time we talked about this, you did indicate COVAX demand is still well above supply. Could you talk a little bit about how the situation is looking for COVAX demand versus supply this year, and maybe a little bit of early color on 2026 also as you plan for the capacity?

All right, thank you, Gokul. For everyone's benefit, let me try to summarize your first question. So again, Gokul's first question is on the AI-related demand. He notes there's been a lot of noise around co-ops and order cuts and such. So he would like to ask CC, what is the thinking or strategy for TSMC co-ops still doubling this year? Is the demand still exceeding the supply? and how is the co-op's capacity and supply, or supply and demand, I should say, look like going into 26 if CC is able to provide any color?

Okay, Goku. I know there's a lot of rumors about the co-op. The last time when we talked about the co-op, 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 co-op capacity. Still fully loaded and we For 2026, I cannot say the number, but it's still a heresy momentum while we continued. Okay, did that answer your question?

Do you still think 2026 is going to be supply limited still, that demand is still going to be much more than supply even in 2026? Is that your current expectation, C.C.? ?

So Goku is asking, then do we still see demand exceeding supply for CoWAS in 2026?

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

Thank you. My second question is on the U.S. investment and all this persistent rumors about involvement in your competitors, operations, et cetera. You have interacted with the U.S. government, the new administration for the last several months, and the big announcement at the White House as well. Just wanted to understand what is TSMC's kind of impression in terms of what is required now that there is also the semiconductor tariff vacation going on? What is TSMC's impression of what is required over the next two, three years in terms of reassuring of capacity? both from a U.S. administration perspective, also from your U.S. customers' perspective. And I also, I think Vendel also indicated that the margin dilution may be slightly bigger as we go along. So could you talk a little bit about how much of the value can you pass on to the customers as the expansion becomes a little bit more accelerated? Thank you.

Okay, so Goku's second question is a bit involved, but he's asking about, again, a lot of talk about, you know, our recent announcement for an additional $100 billion expansion in the U.S. Again, talk about this involving a competitor. CC, you know, has been speaking to the U.S. government. There's still potential semiconductor tariff. So his question is really interesting. From TSMC's point of view, what do we think is required for more unshoring in the U.S.? Can we share the perspective from the U.S. government or more directly what our customers are asking us to do in terms of reshoring? That's the first part. Then the second part maybe Wendell can address on the margin.

Really? Okay. I thought that's a very long, long question. Let me answer that. Yes, indeed, we have talked with U.S. government officials, and... The reason we are expanding in Arizona, actually, let me say again, is all because of our customers' request. And that because of their very high, high demands. I announced it to, in other occasions, say that very strong AI demand from U.S. customers such as Apple, NVIDIA, AMD, Qualcomm, and Broadcom. And so that we need to expand our capacity in the U.S. and to support them. We talked with the U.S. government to ask for their help in getting the necessary permits so we can start the fire. And as a result, I would expect our two nanometers capacity, around 30% will be in Arizona. And that will be also independent, leading as semiconductor manufacturing cluster. Okay.

And then, Gokul, the second part of your question is related to then, 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?

Yeah, that's right. Yeah.

Hey, Goku. You're asking about the pricing. As we always said, reflecting our value is a continuous and ongoing process for TSMC, as we're in a very capital-intensive business. So we need to have a very high gross margin to earn the sustainable and healthy return. And that is why we set up our pricing strategy. Geographic manufacturing flexibility is an important part of our value proposition to the customers. We are already discussing this with our major customers, and the progress is so far so good.

Okay, Gokul?

Okay, understood, thank you.

All right, thank you. Operator, can we move on to the next participant, please?

The next to ask question, Bruce Lou from Goldman Sachs. Please ask a question.

Okay, thank you for taking my question. I think that geopolitical risk, micro concerns, is one of the major uncertainty nowadays. The last two days, we have H20 being banned in China, blah, blah, blah. So how does that impact to TSMC forecast and production planning? Do we have enough other customer and demand to keep our advanced node capacity fully utilized? Or how does that change our long-term production planning moving forward?

Okay, Bruce, thank you. Your first question is related. He's talking about geopolitical risk, or I guess some of the recent rules and announcements, specifically the ban on H-20. So his question is, how does this impact TSMC's business? How does this impact our capacity planning and our strategies?

Bruce, let me answer this question. Of course, we do not comment on specific customers' product, but let me assure you that we have taken this into consideration when providing our four years growth outlook. Did I answer the question?

Yes, but I want a little bit more about like, you know, You know, I'm sure you guys did a lot of sensitivity analysis, like what kind of impact it's going to be, or can you show us how much buffer we got, like how comfortable we have to maintain our current composite planning moving forward or current utilization right now?

Okay, so Bruce is asking for some more color in terms of what type of buffer or what type of room we have in making our decisions for the long-term capacity planning.

Well, actually, we know a lot of people right now speculate a lot of things. But, again, we certainly are mindful of the potential impact from all the recent tariff announcements, 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.

I see. Thank you. Let me switch gears to a little bit for the non-US capacity extension. I think, yes, as we understand that the current capacity utilization for mature nodes is underutilized, right? Do we consider to slow down the capacity expansion in Japan or Europe, or just relocate the current equipment from Taiwan to Japan or Europe instead of building the new one? Why do we want to expand the capacity for the maternal, which management already mentioned that it's an oversupply industry, though? If we relocate them, we can squeeze more space, clean room in Taiwan for more advanced note.

Okay, so Bruce's second question is around mature node and our expansion into Europe and Japan. His question really is, given that the capacity of mature node and seven nanometer are underutilized, number one, are we concerning to slow down our expansions in these places? And then number two, would we consider using current relocate equipment from Taiwan to overseas rather than just the pure new expansion or greenfield expansion?

Ruth, let me answer the first part of the question. Are we considering slowing down? The answer is no. We executed our plan, our schedule. The reason is very simple. Because of this kind of mature node, it's a specialty technology that demand, which my competitor did not expect. have a capacity or capability to support. So it's kind of free from, 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 is TSMC the confidential information? I'll let you know later.

Okay, thank you. All right, thanks, Bruce. Operator, can we move on to the next participant, please?

Now the line is open to Charlie Chan, Morgan Stanley.

Hi, good afternoon, gentlemen. Thanks for taking my question. So my first question is really very specific on the semiconductor tariff on either Taiwan or TSNC's leading edge. So I'm wondering, first of all, does the TSNC get involved in all those tariff negotiations between Taiwan government and the U.S. government? And secondly, do you believe that your commitment of 165 billion USRC investments can get a spare on this semiconductor tariff? Because in your previous comment, you seemed to be only concerned about the tariff impact on consumer tech demand. But I think global investors are also very concerned about additional tariffs on this semiconductor category. Can you give us some color? Thank you.

OK, let me summarize your question. First question, Charlie. So Charlie's first question is on semiconductor tariffs. He wants to know what is our comment or view on potential tariffs on Taiwan, reciprocal tariffs or semiconductor specific tariffs. His question specifically is TSMC get involved in the negotiations between the Taiwan government and the U.S. government.

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?

Okay. Yeah, so actually, do you have any visibility that semiconductor-specific tariffs can be exempt? Yeah.

So Charlie is saying... Sorry, Charlie, I think your question was with our total investment of $165 billion in Arizona, do we believe, does TSMC believe, semiconductors will be exempt from these tariffs?

Yes. Charlie, all policy... especially this tariff decision, our governments have responsibility to decide. And as a private company, we are fully respectful of this, but we are not getting involved.

Okay, got you. I think you're too moderate, but let's move on to my second question. So based on your second quarter decision, Guidance, which is very strong, up 13% quarter-on-quarter. I can't help to think whether there are customers pulling given a tariff, or is it kind of really demand? And also, based on your four-year guidance, so-called mid-20%, it seems like second half recovery will be very, very gradual or a flat-ish. So I'm wondering if you're already backing There's a kind of consumer tech demand impact. And if a tariff has some kind of turnaround, right, meaning some exemption on, for example, major smartphone brands, whether there's a chance for you to revise for your revenue guidance. Thank you.

Okay, so Charlie's second question is on the revenue outlook. His first part is on the second quarter. He notes second quarter 13% at the midpoint in U.S. dollar terms, Q on Q is very strong. So he wonders, is this, are we seeing already some tariff pulling impact or this part of that guidance? I'll stop here first.

Yeah, Charlie, 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 three nanometer and five nanometer technologies underpinned by the growth in our HPC platform. As I said, we haven't seen any, observed any changes in customer behavior in terms of pooling or due to tariffs. It's probably better to ask them directly.

And the second part, then, Charlie, is asking about what the second quarter guidance implies, you know, limited half-on-half growth. So is that also because we are assuming something from a tariff impact to consumer demand, or why is that?

Charlie, as we also said in the prepared remarks, there are uncertainties and potential risks from tariffs exist. So, 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.

I see. So, yeah, so I think that's really what we want. But I think your answer to the previous question on long-term margin dilution was a little bit unclear, because we thought that the 2 to 3 percent margin dilution from overseas theft should remain to be the case, but it seems like it's widening. So I'm not sure if it is because you are further accelerating your U.S. FAB expansion or some cost item or pricing item are not in your expectations versus maybe one or two months ago.

Okay. I think so. Charlie is asking basically how come the dilution in the latter period widens to 3% to 4%. What are the drivers or reasons behind it?

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.

Okay. Oh, I see. Okay, thank you. Okay, thank you, Charlie. Okay, operator, let's move on to the next participant, please.

Next one, Charles Xi from . Go ahead, please.

Thank you for taking my questions. Maybe I'll ask a relatively higher level question. It's a two-part question. Both are regarding your expansion plan in the United States. I think management, you know, another occasion that what TSMC wants the most is really fairness. Nothing monetary, nothing about tariffs, but fairness. Can management kind of elaborate a little bit what fairness means? Give us a little bit more specifics. But the other part of the question regarding the U.S. expansion is about the R&D Team Center you announced. We understand, yes, the TSMC's R&D in the U.S. does need to start from somewhere, right? You said it's more about the production improvements related R&D on derivative nodes. But since this seems to be something the U.S. really cares about, that the R&D capability on the U.S. soil, on the leading edge, is there any longer-term plan to have the U.S. R&D center to be involved, let's say, in the primary R&D, let's say brand new processes, the major nodes of development. That's my two-part question. Thank you.

All right. Thank you, Charles. So again, to summarize, both questions are related to the expansion in the U.S. So first part of the question is we, you know, CC has mentioned all we want is fair treatment. So what do we mean by fair or fairness?

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

And then the second part of the question is regarding the R&D. Charles is saying he understands the R&D needs to start from somewhere, but with our major R&D center in Arizona, what will be the purpose or the focus, and will it be involved at some point in ramping new technologies?

As I said before, TSMC is a fab. Never stay stagnant. 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 support our manufacturing cluster, improve its technology, and allow it to operate independently. Okay. Did I answer the question? Okay.

Maybe let me just really follow up because there has been good amount of chatters about the U.S. R&D center more supporting manufacturing rather than doing major R&D, the brand new nodes. But looks like that's not the plan. But over the longer term, is there any thoughts of a management maybe they will get involved in brand-new nodes development one way or the other. I think that's a question people have been discussing about over the last quarter.

Okay, so Charles is asking, will the R&D center over the mid to long term, can it also focus on things like new node development or pathfinding opportunities, long-term research, these type of things?

Okay, actually, The first purpose is to let Arizona SAFEV can operate independently. But of course, we have done, and we are doing it right now, we do some kind of past funding, exploratory work, and cooperate with university, blah, blah, blah. You know, it actually a lot of activities. 1,000 engineers is not a small amount. Of course, it's not comparable to TSMC. Right now, it's 10,000 R&D people. But it's a beginning. Okay? So we do a lot more.

Okay, Charles, do you have a second question? No, I don't. Thank you. Okay, great. Thank you. Operator, the next participant, please.

Next one to ask question, Sonia Ling from UBS.

Good afternoon. Thank you very much for taking my questions. So my first question is to follow up on the Arizona expansions. So first part is on the timeline or the pace of your expansions. Now given the stronger demand for your U.S. capacities, to what extent could you put in the rep of the original second and third phase And for your first, fourth phase, you earlier mentioned that you will be constructing the fascial . So would that really be possible that you start to wrap the fourth phase at the same time, at the third phase?

Okay, so Sunny's first question is regarding our Gigafab cluster in Arizona. She wants to understand the timeline of expansion, particularly given the strong AI-related demand. Can we pull in the timing for both the second fab and the third fab? And also, can we, at the same time, start the production of the third and fourth fab simultaneously?

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

Okay, Sunny.

Sorry, just to clarify. So the second phase originally is planning for production in 2028. So now should we assume it to be from maybe mid-2027 or even first of 2027? And for the third phase, since you are building the FAB show this year, so will the production start maybe one year ahead versus the original timeline of 2030?

Okay, so Sunny specifically, so the second one, we said we're speeding up. Can we give some context of a timeframe? And then for the third FAB, will we also speed it up? Could that also be moved forward?

Okay, yes, we are speeding it up. How fast? The second five, as you said, it should be pouring in. And this one, we are working hard to pour in at least a couple of quarters. That's at least. On the 35, actually, I did not speak the whole thing. It's also being constrained by the labor shortage of Arizona, and we need to get all the permits, everything, et cetera. 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.

Got it. No problem. My second question is on the pricing and margin of the overseas expansions. And so now with the especially stronger demand for the U.S. capacities, would you be able to sell more value given the stronger onshoring requirements? And then for margin, earlier you mentioned the 2% to 3% margin dilution for the coming two, three years, and then expanding to 3% to 4%, maybe into 2029 to 2030. I just wondered what the underlying weather price assumption for that growth margin dilution estimates. If you are able to raise the AZ pricing a bit, will the growth margin dilution could be less?

OK, so Sunny's question is on the overseas expansion in both pricing and margin. Given the strong demand in terms of pricing, can we reflect even greater value to our customers? And also, her question is, given that the dilution from overseas will widen to 3% to 4% in the latter stages of the five-year period, she wants to know, what is our underlying wafer price assumption? behind this?

Sunny, let me answer that. These two things actually go together. As we said, reflecting our value is a continuous and ongoing process, and 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. Now, at the same time, the margin dilution from the overseas FAPs, 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?

Got it.

All right.

All right, very clear. Thank you very much.

Thank you. Operator, can we move on to the next participant, please?

Next one to ask questions, Brett Simpson, Aerotain.

Yeah, thanks very much. I have a two-part question on this year's guidance for CC. First, Cece, you mentioned that AI is still expected to double this year despite the U.S. ban on AI GPUs into China. And I guess China was a meaningful portion of accelerator shipments, well over 10% of volumes. So factoring this in, it would imply your AI outlook this year still doubling would mean that the AI orders have improved meaningfully outside of China in the last of the three months. Is that how we should interpret your comment about you still expect the business to double? And then second, we're in a June quarter where tariffs have been paused for 90 days. So to what extent does your above-seasonal June quarter guidance reflect customer pull-ins ahead of potential tariffs being applied in the September quarter? Thank you.

Okay, so Brett, his question is on, again, the one part is on the AI demand that although there's a ban in China on certain AI chips or products, that we reiterated our AI accelerated growth will double this year. So his assumption is that implies a strong non-China AI-related demand and wondering what is the mechanics or can we comment behind that?

Brett, you know, three months ago, now I can tell you that three months ago, we are barely, we just cannot supply enough waiver to our customer. And now it's 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 U.S. And so we are confident that we are going to double our AI revenue this year.

Yeah. And then very quickly, he was asking about the second quarter revenue guidance. And do we see any tariff-related polling? I think Wendell answered this earlier.

Yeah, I think we have, as Cici said in his prepared remarks, we haven't seen any changes in customer behavior. The growth in second quarter was primarily due to the demand from our 3 nanometer and 5 nanometer technologies underpinned by the demand from the HPC platform.

Okay, do you have a second question, Brad?

Sorry. Yeah. Yeah, thanks, Jeff. My second question was for Wendell, and thanks for clarifying that, Wendell. Follow-up is on shareholder returns. And TSMC traditionally has always favored growing the dividends as the main policy, but many shareholders would argue that the dividend payouts are not having that much of an impact on the discounted multiple that TSMC trades at versus some of your U.S. big tech peers. So my question is why does TSMC management not adopt buyback, a buyback framework, particularly with the strength of the cash position? on your balance sheet at the moment. Thank you.

Okay, thank you, Brett. So Brett's second question is circulated on shareholder return. He notes TSMC's policy has always been a stable and steadily increasing cash dividend and focused on cash dividend payout. His question is, would we consider, why do we not consider adopting more of a buyback policy, share buyback policy?

Okay, Brad, we've done studies a long time ago, and we continue to revisit that. We also talked to investors. Our conclusion stays the same. The sustainable and steadily increasing dividends is a better way of returning cash to the shareholders. So we're maintaining the policy.

Okay, thank you.

All right. Operator, in the interest of time, can we take the questions from the last two participants, please?

Yes. Now the line is open to Laura Chang, Citi.

Hello, hi. Thank you very much for taking my question. Can you hear me clearly?

Yes.

Yeah, thank you. My question is also about the AI and also the U.S. expansion. CC, you just mentioned that the COVID supply demand will be more balanced into 2026. Do you see any structural change in the future AI chip design when moving to N3, such as like a triplet, that kind of a design? And also, in that kind of new trend, what TSMC's view on the new technologies, such as CPO or PLP panel-based, Will that still start from Taiwan first or you would also consider to further invest the other new like a back end technology in Arizona since you just mentioned that you would also start to to build up the fab in advanced packaging in Arizona.

Okay, Laura's first question is a very broad question, but basically, if I just try to distill, she wants to know, do we see any changes in the chip design, particularly moving to chiplets with N3? Do we see this more and more? What about the role of things like co-package optics and panel-level packaging? And I think the essence of the question, will we continue to use our leading, sorry, advanced packaging technologies like, you know, COAS or SRIC in Taiwan first, or is this also part of the plan for the expansion in Arizona?

That's a long question, but... Laura? Yes. Our customers, they continue to using the 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 COVAX-S and then next year COVAX-AEROB and etc. And we can see that customers start to picking up the SOIC and the more advanced packaging technologies. As for the what we call is panel levels of packaging. We are aggressively developing it, and today is still 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.

Okay, thank you very much. That's very clear. And also my second question is also about the capacity allocation between Taiwan and also Arizona. Citi, you just shared with us that for about like 30% of N2 capacity will be in Arizona. We know it will be starting from when or what kind of time frame you are looking for. Can we also assume that the same scale, like 30%, of your Arizona FAB for the advanced node in the longer term.

Okay, so Laura's second question is about the capacity allocation between how do we allocate between Taiwan and the U.S.? Maybe, you know, is it duplicative or extra capacity? And then very specific, Cici had mentioned that N2 and more advanced capacity, 30%, around 30% will be in Arizona once we scale up to the cluster. Will that be kind of the percentage for the leading node in the future?

Well, you know, we have right now we plan a 6-5 in Arizona. And in that 6-5, 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, you know, discussed yet.

Okay, thank you. Thank you very much. That's very clear.

All right, thanks, Laura. Operator, can we take the last questions from the last participant, please?

The last one to ask questions, Chris Asankar Cohen. Go ahead, please.

Hi, thanks for taking the question. My first one is, you know, it's very impressive, given uncertainty, you're still maintaining full-year revenue guidance and also your end-to-capacity guidance. plan for this year and next year. Kind of curious, what is your visibility on second half revenues and also N2 demand for Rayford into next year? And then add a follow-up.

Okay, so Chris's first question is sort of in the near term, what is our visibility into the second half business outlook? And then also, how do we see the demand for N2 progressing this year and also next year?

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.

And then the second part of it is on the demand visibility of our two nanometer.

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

Okay. And did you have a second question, Krish?

Got it. Very helpful. Yeah. Yes, Jeff. Yeah. Just one quick follow-up. You spoke about the Japan TAP. I'm curious, what is the capacity installed in Japan today and how do you think about the revenue contribution this year from Japan?

Okay. Chris's second question is related to our first specialty technology FAB in Japan. He wants to know what is the capacity installment for this specialty technology FAB and also the revenue contribution from JASM.

Yeah, the capacity for the FAB will be 40K when it's ramped up. The revenue for this year compared to the whole company is really not significant at this moment.

Okay, Krish. Thank you, Vandal. Thank you, Jeff.

Thank you very much. No problem. Okay, thank you, everyone. This concludes our question and answer session. Before we conclude today's conference, please be advised that the replay of the conference call will be accessible within 30 minutes from now. The transcript will become available 24 hours from now, and both will be available through TSMC's website at www.tsmc.com. So thank you again for joining us today. We hope everyone continues to stay well and hope you will join us again next quarter. Goodbye and have a good day. Take care. Thank you.