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.