Taiwan Semiconductor Manufacturing Company Ltd.

Good afternoon, everyone, and welcome to TSMC's second quarter 2025 earnings conference and conference call. This is Jeff Su, 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 Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the second quarter of 2025, followed by our guidance for the third 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 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 risks 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 on our press release. And now, I would like to turn the microphone over to TSMC's 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 second quarter 2025. After that, I will provide the guidance for the third quarter of 2025. Second quarter revenue increased 11.3% sequentially in NT as our business was supported by strong demand for our industry leading three nanometer and five nanometer technologies, partially offset by an unfavorable foreign exchange rate. In U.S. dollar term, revenue increased 17.8% sequentially to $30.1 billion and exceeded our second quarter guidance. Gross margin decreased 0.2 percentage points sequentially to 58.6%. primarily due to an unfavorable foreign exchange rate and margin dilution from our overseas FABs, partially balanced by higher capacity utilization and cost improvement efforts. Due to operating leverage, operating margin increased 1.1 percentage points sequentially to 49.6%. Overall, our second quarter EPS was 15.36 NT, up 60.7% year over year, and ROE was 34.8%. Now let's move on to revenue by technology. Three nanometer process technology contributed 24% of wafer revenue in the second quarter. while 5 nanometer and 7 nanometer accounted for 36% and 14% respectively Advanced technologies defined as 7 nanometer and below accounted for 74% of wafer revenue Moving on to revenue contribution by platform HPC increased 14% quarter over quarter to account for 60% of our second quarter revenue Smartphone increased 7% to account for 27%. IoT increased 14% to account for 5%. Automotive stayed flat and accounted for 5%. And DCE increased 30% to account for 1%. Moving on to the balance sheet. We ended the second quarter with cash and marketable securities of 2.6 trillion NT or 90 billion US dollars. On the liability side, current liabilities decreased by 22 billion NT quarter over quarter, mainly due to the decrease of 38 billion in accrued liabilities and others. The decrease in accrued liabilities and others was mainly due to the payment of income tax. On financial ratios, accounts receivable turnover days decreased five days to 23 days. The decrease in accounts receivable was mainly due to NT dollar appreciation, as almost all of our accounts receivables are in US dollars. Days of inventory decreased seven days to 76 days, primarily due to higher M3 and M5 wafer shipments. Regarding cash flow and CAPEX, during the second quarter, we generated about 497 billion NT in cash from operations, spent 297 billion in CAPEX and distributed 117 billion for third quarter 24 cash dividend. Taking the unfavorable exchange rate into consideration, Our cash balance decreased 30.3 billion NT to 2.36 trillion at the end of the quarter. In U.S. dollar terms, our second quarter capital expenditures totaled 9.6 billion. I have finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our third quarter revenue to be between 31.8 billion and 33 billion US dollars, which represents an 8% sequential increase or a 38% year-over-year increase at the midpoint. Based on the exchange rate assumption of 1 US dollar to 29 NT, World's margin is expected to be between 55.5% and 57.5%. Operating margin between 45.5% and 47.5%. In addition, we maintain our 2025 capital budget to be between $38 billion and $42 billion U.S. This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our second quarter 25 and third quarter 25 profitability. Compared to first quarter, our second quarter gross margin slightly decreased by 20 basis points, sequentially to 58.6%. This was primarily due to an unfavorable foreign exchange rate and margin dilution from our overseas FABs. partially offset by higher than expected overall capacity utilization and cost improvement efforts Compared to the first quarter foreign exchange rate of $1 to 32.88 NT the actual second quarter exchange rate was $1 to 31.05 NT This created about 220 basis points margin headwind to our actual second quarter gross margin. We also experienced slightly more than 100 basis points impact from the ramp up of our overseas fabs, mainly as the margin dilution from our Arizona fab started to kick in. We have just guided our third quarter gross margin to decrease by 210 basis points to 56.5% at the midpoint, primarily due to the continued unfavorable foreign exchange rate and more pronounced dilution from overseas FABs as we ramp up further in Kumamoto and Arizona. We continue to forecast the gross margin dilution from the ramp up of our overseas fabs in the next five years starting from 2025 to be between 2% to 3% every year in the early stages and widened to 3% to 4% in the latter stages. Despite the higher cost of overseas fabs, 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 every region that we operate. Now let me make some comments on the impact of foreign exchange rate on TSMC's revenue and profitability. NT dollar is the reporting currency of our financial statements. Nearly all of our revenue is in U.S. dollars, while about 75% of cost of goods sold is in NT. Therefore, fluctuations in the exchange rate between U.S. dollar and NT will have a sizable impact to our reported revenue and gross profit margins. The sensitivity of the revenue to dollar NT exchange rate is nearly 100%. That is, every 1% appreciation of NT against US dollar will reduce our reported NT revenue by 1%. The sensitivity of our gross margin to the same 1% exchange rate change is about 40 basis points. That is, if NT appreciates 1% against the dollar, our gross margin will come down by about 40 basis points. Compared with our second quarter exchange rate guidance of $1 to 32.5 NT provided on April 17th, the NT dollar has appreciated by an average of about 4.4% sequentially. which negatively impacted our second quarter revenue by about 4.4% in NT and our gross margin by about 180 basis points. For third quarter of 25, based on the current exchange rate of $1 to 29 NT, the average NT dollar will appreciate by another 6.6% sequentially, which will negatively impact our third quarter revenue by 6.6% in NT and reduce our gross margin by about 260 basis points. As a reminder, six factors determine TSMC's profitability. Leadership technology development and ramp up, pricing, capacity utilization, cost reduction, technology mix, and foreign exchange rate, which is not in our control. When the foreign exchange rate is unfavorable as it is currently, we will focus on the fundamentals of our business and lean on the other five factors to manage through it and we have successfully done in the past. Thus, even with the unfavorable foreign exchange rate, we believe a long-term gross margin of 53% and higher remains well achievable. 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. We concluded our second quarter with revenue of $30.1 billion in U.S. dollar, above our guidance in U.S. dollar term, mainly due to continued robust AI and HPC-related demand. Moving into the third quarter 2025, we expect our business in the third quarter to be driven by strong demand for our leading-edge process technologies. Looking into the second half of 2025, we have not seen any change in our customers' behavior so far. However, we understand there are uncertainties and risks from the potential impact of tariff policies, especially on consumer-related and price-sensitive end-market segment. While we observe rebate programs in China are stimulating some near-term demand upside, we believe this is a short-term in nature and continue to expect a mild recovery in overall non-AI end-market segment in 2025. Having said that, we believe the demand for semiconductors is very fundamental and will continue to be robust. Recent developments are also positive to AI's long-term demand outlook. The explosive growth in token volume demonstrates increasing AI model usage and adoption, which means more and more computation is needed leading to more leading-edge silicon demand. We also see AI demand continuing to be strong, including the rising demand from sovereign AI. Therefore, we now expect our full-year 2025 revenue to increase by around 30%. In U.S. dollar term, supported by strong demand for our industry-leading 3nm and 5nm technologies, underpinned by growth in our HPC platform. Amidst the uncertainties, we will remain mindful of the potential tariff-related impact and be prudent in our business planning going into second half 2025 and 2026 while continuing to invest for the future megatrend. We will also focus on the fundamentals of our business, technology leadership, manufacturing excellence, and customer trust to further strengthen our competitive position. Next, let me talk about TSMC's Global Manufacturing Footprint Update. All our overseas decisions are based on customers' needs. The value sums up graphic flexibility and a necessary level of government support. This is also to maximize the value of our shareholders. With a strong collaboration and support from our leading U.S. customers, and the U.S. federal, state, and city government will announce our intention to invest a total of U.S. $165 billion in advanced semiconductor manufacturing in the United States. This expansion includes plans for six advanced wafer manufacturing fabs in Arizona, two advanced packaging fabs, and a major R&D center. to support the stronger multi-year demand from our customers. Our first fab in Arizona has already successfully entered into high-volume production in 4Q2024, utilizing N4 process technology with a yield comparable to our fab in Taiwan. The construction of our second fab, which will utilize 3nm process technology, is already complete. We are seeing strong interest from our leading U.S. customers and are working on speeding up the volume production schedule by several quarters to support their needs. Construction of our certified, which will utilize 2 nanometer and A16 process technologies has already begun and we are looking to speeding up the production schedule as well based on the strong AI-related demand from our customers. Our fourth web will utilize N2 and A16 process technology, and our fifth and sixth web will use even more advanced technologies. The construction and ramp schedule for those webs will be based on our customers' needs. Our expansion plan will enable TSMC to scale up to a gigaweb cluster in Arizona to support the needs of our leading edge customers in smartphone, AI, and HPC applications. We also plan to build two new advanced packaging facilities and establish an R&D center to complete the AI supply chain. After completion, around 30% of our two nanometer and more advanced capacity will be located in Arizona, creating an independent leading as semiconductor manufacturing cluster in the U.S. Thus, TSMC will continue to play a critical and integral role in enabling our customers' success. We will also maintain a key partner and enabler 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 farm in Kumamoto has already started volume production in late 2024 with very good yield. The construction of our second specialty farm. is scheduled to start later this year, subject to the readiness of the local infrastructure. The ramp schedule will be based on our customers' needs and market conditions. In Europe, we have received strong commitment from the European Commission and the German federal, state and city governments and are progressing smoothly with our plans to build a specialty Technology Fab in Dresden, Germany. The RAM schedule was also based on our customers' needs and market conditions. In Taiwan, with support from the Taiwan government, we plan to build 11 wafer manufacturing fabs and four advanced packaging facilities over the next several years. We are preparing for multiple phases of two nanometer fab in both Hsinchu and Kaohsiung Science Park to support the strong structural demand from our customers. By expanding our global footprint while continuing to invest in Taiwan, TSMC can continue to be the trusted technology and capacity provider of the global IC industry for years to come while delivering profitable growth for our shareholders. Now let me talk about our N2 and A16 status. Our N2 and A16 technologies lead the industry in addressing the insatiable demand for energy efficient computing and almost all the innovators are working with TSMC. We expect a number of new tape-outs for 2nm technology in the first two years to be higher than both 5nm in the first two years, fueled by both smartphone and HPC applications, and to deliver full-node performance and power benefit. 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 the N3e. N2 is well on track for volume production in the 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 our N2 family. N2P features further performance and power benefits on top of N2, and volume production is scheduled for second half of 2026. We also introduced A16 featuring our best-in-class super-powered rail, or SPR. Compared with N2P, A16 provides a further 8-10% speed improvement at the same power or 15-20% power improvement at the same speed and additional 7-10% chip density gain. A16 is best suited for specific HPC products with complex signal routes and dense power delivery network. Volume production is on track for second half 2026. We believe N2, N2P, A16, and its derivatives will fuel our N2 family to be another large and long-lasting node for TSMC. Finally, let me talk about our A14 status. Featuring our second-generation nano-sheet transistor structure, A14 will deliver another full node stride from N2 with performance and power benefits to address the increasing structural demand for high performance and energy efficient computing. Compared with the N2, A16 will provide 10 to 15 speed improvement at the same power or 20 to 30% power improvement at the same speed and about 20% chip density gain. Our A14 technology development is on track and progressing well, with device performance and year improvement on or ahead of schedule. Volume production is scheduled for 2028. We will continue our strategy of continuous enhancement with A14, including a superpower rail offering planned for 2029. We believe A14 and its derivative will further extend our technology leadership position and enable TSMC to capture the growth opportunities way into the future. This concludes our key message and thank you for your attention.