Taiwan Semiconductor Manufacturing Company Ltd.

Good afternoon, everyone, and welcome to TSMC's third quarter 2025 earnings conference call. This is Jeff Su, TSMC's Director of Investor Relations, and your host for today. TSMC is hosting 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 third quarter of 2025, followed by our guidance for the fourth 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 Q&A. 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 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 third quarter 2025. After that, I will provide the guidance for the fourth quarter 2025. Third quarter revenue increased 6% sequentially in NT as our business was supported by strong demand for our leading edge process technologies. In US dollar terms, revenue increased 10.1% sequentially to 33.1 billion, slightly ahead of our third quarter guidance. Gross margin increased 0.9% percentage points sequentially to 59.5%, primarily due to cost improvement efforts and a higher capacity utilization rate, partially offset by an unfavorable foreign exchange rate and dilution from our overseas FAPs. Accordingly, operating margin increased 1.0 percentage points sequentially to 50.6%. Overall, our third quarter EPS was 17.44 NT, up 39% year over year, and ROE was 37.8%. Now let's move on to revenue by technology. Three nanometer process technology contributed 23% of wafer revenue in the third quarter, while five nanometer and seven nanometer accounted for 37% and 14% respectively. Advanced technologies defined as seven nanometer and below accounted for 74% of wafer revenue. Moving on to revenue contribution by platform. HPC remained flat quarter over quarter to account for 57% of our third quarter revenue. Smartphone increased 19% to account for 30%. IoT increased 20% to account for 5%. Automotive increased 18% to account for 5%. And DCE decreased 20% to account for 1%. Moving on to the balance sheet, we ended the third quarter with cash and marketable securities of 2.8 trillion NT or 90 billion US dollars. On the liability side, current liability decreased by 101 billion NT quarter over quarter, mainly due to the decrease of 112 billion NT in accrued liabilities and others, as we paid out 2025 provisional tax of 136 billion NT. In terms of financial ratios, accounts receivable turnover days increased two days to 25 days. Days of inventory decreased two days to 74 days due to strong shipment in N3 and N5. Regarding cash flow and CAPEX, during the third quarter, we generated about 427 billion NT in cash from operations, spent 287 billion in CAPEX, and distributed 117 billion for fourth quarter 24 cash dividend. Overall, our cash balance increased 106 billion NT to 2.5 trillion at the end of the quarter. In U.S. dollar terms, our third quarter capital expenditures totaled 9.7 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 fourth quarter revenue to be between 32.2 and 33.4 billion US dollars, which represents a 1% sequential decrease or a 22% year over year increase at the midpoint. Based on the exchange rate assumption of one US dollars to 30.6 centi, gross margin is expected to be between 59 and 61%, operating margin between 49 and 51%. This concludes my financial presentation. Now, let me turn to our key messages. I will start by talking about our third quarter 25 and fourth quarter 25 profitability. Compared to second quarter, our third quarter gross margin increased by 90 basis points sequentially to 59.5%, primarily due to cost improvement efforts and a higher overall capacity utilization rate, partially offset by margin dilution from our overseas fabs and an unfavorable foreign exchange rate. Compared to our third quarter guidance, our actual gross margin exceeded the high end of the range provided three months ago by 200 basis points, mainly as the actual third quarter exchange rate was $1 to 29.91 NT, compared to our guidance of $1 to 29 NT. In addition, we also delivered better than expected cost improvement efforts. We have just guided our fourth quarter gross margin to increase by 50 basis points to 60% at the midpoint, primarily driven by a more favorable foreign exchange rate, partially offset by continued dilution from our overseas FABs. While the cost of overseas fabs remain higher, thanks to the company's overall larger scale, we now expect the gross margin dilution from the ramp up of our overseas fabs to be closer to 2% in the second half of 2025. For the full year 2025, we now expect it to be between 1% to 2% as compared to 2% to 3% previously. Looking ahead, we continue to forecast the gross margin dilution from the ramp up of our overseas fabs in the next several years to be two to 3% in the early stages and widen to three 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 every region that we operate. Now let me make some comments on our 2025 CAPEX. As the structure AI related demand continues to be very strong, we continue to invest to support of customers growth. We are narrowing the range of our 2025 CAPEX to be between 40 and 42 billion US dollars as compared to 38 to 42 billion US dollars previously. 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. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. Even as we invest for the future growth with this higher 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. We concluded our third quarter with revenue of US$33.1 billion, slightly above our guidance in US dollar terms, mainly due to the strong demand for our leading-edge process technologies. Moving into first quarter 2025, we expect our business to be supported by continuous strong demand for our leading-edge process technologies. We continue to observe robust AI-related demands throughout 2025 for our non-AI end-market segment. have buttoned out and are seeing a mild recovery. Supported by our strong technology differentiation and broad customer base, we now expect our full year 2025 revenue to increase by close to mid 30% year over year in US dollar term. While we have not observed any change in our customers' behavior so far, we understand there are uncertainties and risks from the potential impact of terrorist policies, especially in consumer-related and price-sensitive market segments. As such, we will remain mindful of the potential impact and be prudent in our business planning going into 2026 while continuing to invest for the future megatrend. Amidst the uncertainty, We will also continue to focus on the fundamentals of our business, that is, technology leadership, manufacturing excellence, and customer trust, to further strengthen our competitive position. Next, let me talk about the AI demand outlook and TSMC's capacity planning process disciplines. Recent developments in AI market continue to be very positive. The explosive growth in token volume demonstrated increasing consumer AI model adoption, which means more and more computation is needed. leading to more leading-edge silicon demand. Companies such as TSMC, we are leveraging AI internally to drive greater productivity and efficiency to create more value. As such, enterprise AI is another source of demand. In addition, we continue to observe the rising emergence of sovereign AI. We are also happy to see continuous strong outlook from our customers. In addition, we directly receive very strong signals from our customers' customers requesting the capacity to support their business. Thus, our conviction in the AI megatrend is strengthening, and we believe the demand for semiconductor will continue to be very fundamental. As a key enabler of AI applications, TSMC's biggest responsibility is to prepare the most advanced technologies and necessary capacity to support our customers' growth. To address the structural increase in the long-term market demand profile, TSMC employs a disciplined and robust capacity planning system. Externally, we work closely with our customers and our customers' customers to plan our capacity. We have more than 500 different customers across all the market segments. In addition, as process technology complexity increases, the engagement lead time with customer is now at least two to three years in advance. Therefore, we probably get the deepest and widest look possible in the industry. Internally, our planning system involves multiple teams across several functions to assess and evaluate the market demand from both top-down and bottom-up approach to determine the appropriate capacity to build. This is especially important when we have such high forecasted demand from AI-related businesses. As the world's most reliable and effective capacity provider, we will continue to work closely with our customers to invest in leading-edge specialty and advanced packaging technologies to support their growth. We will also remain disciplined and arrive in our capacity planning approach to ensure we deliver profitable growth for our shareholder. Now let me talk about TSMC's global manufacturing footprint update. All our overseas decisions are based on our customers' needs as they value some geographic flexibility and a necessary level of government support. This is also to maximize the value for our shareholders. With a strong collaboration and support from our leading US customers and the US federal, state, and city governments, we continue to speed up our capacity expansion in Arizona. We are making tangible progress and executing well to our plan. In addition, we are preparing to upgrade our technologies faster to N2 and more advanced process technologies in Arizona, giving the strong AI-related demand from our customers. First of all, we are close to securing a second large piece of land nearby to support our current expansion plans and provide more flexibility in response to the very strong multi-year AI-related demand. Our plan will enable TSMC to scale up to an independent gigafile cluster in Arizona to support the needs of our leading edge customers in smartphone, AI, and HPC applications. Next, in Japan, thanks to the strong support from the Japan central, prefectural, and local government, our first specialty fire in Kumamoto has already started volume production in late 2024 with very good yield. The construction of our second fire has begun, and the ramp schedule will be based on our customers' need and market conditions. In Europe, we have received strong commitment from European Commission and the German federal, state, and city governments. Construction of our specialty fab in Dresden, Germany has also started, and we are progressing smoothly with our plans. The ramp schedule will be based on our customers' need and market conditions. In Taiwan, with support from the Taiwan government, we are preparing for multiple phases of two nanometer fab in both Hsinchu and Kaohsiung science parks. We will continue to invest in leading-edge and advanced packaging facilities in Taiwan over the next several years. 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 logic IC industry for years to come. Finally, let me talk about our N2 and S16 status. Our 2nm and S16 technologies lead the industry in addressing accessible demand for energy efficient computing, and almost all innovators are working with TSMC. N2 is well on track for volume production later this quarter. With Goodyear, we expect a faster ramp in 2026, fueled by both smartphone and HPC AI applications. With our strategy of continuous enhancement, we also introduced N2P as an extension of our N2 family. N2P feature further performance and power benefits on top of N2 and volume production scheduled for second half 26. We also introduced A16 featuring our best-in-class super power rail or SPR. A16 is best suited for a specific HPC product with complex signal routes and dense power delivery networks. Volume production is on track for second half 26. We believe N2, N2P816 and its derivatives will prepare our N2 family to be another large and long lasting node for TSMC. This concludes our key message and thank you for your attention.

Thank you, Cece. 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 the telephone keypad now. If at any time you'd like to remove yourself from the questioning queue, please press star then two. Now let's begin the Q&A session. Operator, can we please proceed with the first caller on the line? Thank you.

Yes. First one, Goku Harihalen, JP Morgan. Go ahead, please.

Yeah, thanks. Good afternoon, CC, Bill, and Jeff. Great result again. So on the AI front, CC, I think you have met with pretty much everybody who is driving the Gen AI revolution over the last couple of months. And as you said, everybody seems to be a lot more positive. I think we gave a guidance of mid-40s data center AI growth CAGR earlier this year until 2029. Anything that you see which should kind of change that number definitely feels like the growth today seems to be much stronger. And related to that, you did talk about the very detailed capacity expansion planning that the TSMC does. In past technology cycles, TSMC CapEx has gone up significantly to prepare for the next upgrade or next leading edge node. But in this cycle, TSMC revenues have grown 50% from the previous peak in 22. CapEx has only grown about 10%. How should we think about the CapEx over the next couple of years? I know that you're not giving numerical guidance yet, but I just wanted to understand. Are we looking at much higher CapEx in the next couple of years, given all these conversations you've had? And I had a follow-up to that.

Okay, so Goku's first question, sorry Goku, let me summarize for everyone's benefit. So again, he wants to know firstly related to the AI related demand that TSMC works with many, if not everyone who is doing AI and many of the customers seem to be even more positive today. So I guess he would like to ask CC sort of what are we seeing or hearing from our customers? And then we had previously said that the next five years from 2024 to 29, we expect AI accelerator to grow at a mid 40s CAGR. You know, is there any update to this? I think this is the first part, then I'll get to the second part on CAPEX.

Wow, that's a long question, isn't it? But Goku, the AI demand actually continue to be very strong. is more stronger than we thought three months ago. Okay, so in today's situation, we have talked to customer, and then we talk to customer's customer. So the CAGR we previously announced is about mid 40s, but it is still, It's a little bit better than that. We will update you probably in beginning of next year. So we have more clear picture. Today, the number are insane.

And then the second part of Gokul's question related to CAPEX, he notes that in the past, when TSMC sees opportunities for higher growth, past cycles or past instances, we would step up the CAPEX significantly to prepare to drive the future growth. But he notes this cycle actually, though while CapEx is increasing, the revenue is increasing even faster. So his question really, I think, how do we see this playing out over the next few years, both in terms of the CapEx spend and the growth relative to the revenue growth?

Okay, Goku. Every year we spend the CAPEX based on the business opportunity in the following few years. As long as we believe there are business opportunities, we will not hesitate to invest. And if we do our job right, the growth of our business, of our revenue should outpace the growth of the CAPEX. And that's what we have been delivering in the past few years. Now going forward, assuming we're still doing a very good job, then we will continue to see that happening again. So a company of our size, the CAPEX number, it's unlikely to suddenly drop significantly in any given year. when we continue to invest and our growth is outpacing CAPEX growth, then you see the growth like what we have done in the past few years.

Understood. I know that it is unlikely to drop, but... It is also likely to grow quite a bit given what CC mentioned in terms of every customer asking you and every customer's customer requesting you for capacity additions, right?

Yeah, as I said, a higher level of CapEx is always going to be correlated with a higher growth opportunity. So as CC said, next year looks to be a healthy year and we are confident on the megatrend that we'll continue to invest. Okay, cool.

Got it.

Yeah.

Maybe one more follow-up question from me. CC, I think last year also you gave us an indication of how much co-op capacity you would be building. I think you talked about 2x of doubling the co-op capacity. It clearly feels like even that is not enough. Could you give us some idea about how much capacity would you be building next year just to get some idea about what you are seeing in terms of AI demand? And also just to get some understanding of TSMC's data center AI exposure. I think last year we talked about mid-teens revenues. Where do we end up this year? Do we end up close to like 30% of revenues coming from AI? Yeah.

Okay, so Goku, your second question, really he wants to understand, can we provide any detail or colors on the COAS capacity plan for 2026 in terms of year on year increase? And also in terms of our definition of AI accelerator revenue, the narrow definition, how much will it contribute for 2025 revenue? Is it 30%?

Bua Koku, this is Cici Wei again. Talking about the Cold War's capacity, all I can say is continue the three months ago, we are working very hard to narrow the gap between the demand and supply. We are still working to increase the capacity in 2026. The real number, we probably update you next year. Today, all I want to say about AI, everything related, like front-end and back-end capacity, is very tight. We are working very hard to make sure that the gap will be narrow, but, you know, all I can say is we are working very hard.

Okay, thank you, Gokul. I think we need to move on in the interest of time. So, operator, can we move to the next participant, please?

Yes, next one, Charlie Chen, Morgan Stanley. Go ahead, please.

Thank you for taking my question. And again, congratulations for a very strong resource, C.C. Wendell and Jeff. So my first question is really about your D-Nash demand. As C.C. just mentioned, your front-end demand is also very strong into next year. But one of your major customer demands um said that more slow is that i think uh his point is that uh by doing maybe a system level uh you know innovation in the thermal etc can boost up more kind of performers so just a kind of dumb question how do we reconcile your very very strong bdh demand and that customer continue to migrate to your most advanced notes, and also you continue to respect the value, whereas the customer continues to think that more so is that. Can we get some clarification from TSMC?

All right, so Charlie's question is very specific, although he wants us to comment on a customer saying Moore's Law is dead, but how do we reconcile this with a very strong leading edge demand into 2026, and also with system level innovations?

Okay, Charlie, this is CC Wei. Yeah, one of my customers, very important customer, say Moose Law is dead. But what he means is it's not only rely on... the chip technology anymore. Now we have to focus on the whole systems of performance. So he wanted to, he wanted to emphasize the whole systems of performance rather than just talking about the Moore's law, which is not enough to meet his requirement. So again, we work very closely with his people and to design our technology, both in front-end and back-end, and also in all the packagings to meet his requirement. That's all I can say. Okay, thank you, C.C.

Do you have a second question, Charlie?

Yes, I do. Thanks, Jeff. Yeah, so anyway, I will interpretate that as so-called Morso 2.0, that your co-CEO, Mr. Cliff Hall, also comes here during the Semi-Con Taiwan. But anyway, thanks, CC, for your commentary. My second question is actually a follow-up from Last quarter, same question. Back then, I consulted about the China AI GPU demand, whether you can seize the market opportunity. Because China, CS3, they're also extending their AI infrastructure very rapidly. But given the recent kind of back and forth between U.S. and China, whether China can really impose this NVIDIA GPU, will that kind of discount your potential long-term growth of the AI caterer? Is that something that TSMC would worry about?

Okay, so Charlie's second question is related around AI demand and specific to China with the sort of the export control and restriction. His question is, does that impact our ability to address the market opportunity and will this impact our AI CAGR growth if we are not allowed to fully serve China?

I think there will be both sides, meaning restriction from the U.S., but also China government's kind of discouragement to procure a U.S. chip. Sorry for the interruption.

Well, Charlie, To speak the truth, I have confidence in my customers, both in Graphic or in ASIC. They all perform very well. And so if the China market is not available, but I still think the AI's growth will be very dramatically, and as I said, very positive, and I have confidence that our customers' performance, and they will continue to grow, and we will support them.

Thank you, CZ. So even with limited opportunity from China, for the time being, you are still confident that a 40% CAGR or even higher can be achieved in coming years? You are right.

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

Yes. Next one, Sony Lin, UBS. Go ahead, please.

Thank you very much. Good afternoon. Congrats on the very strong growth margin. So my first question is how should we think about 2026? I understand we should get better color maybe into January, but just want to get some directional major puts and takes for growth margin trending going to 2026. Especially how should we think about the growth margin impact from two nanometer run for 2026?

Okay, so Sunny's first question is regarding gross margin. She would like to know directionally how do we see the gross margin for next year, 2026, in terms of certain puts and takes, and also if Wendell's able to comment specifically. Sunny, sorry if I heard you right, on the N2 dilution impact, correct? Yeah, that's right, thank you. Okay, that's her first question.

Okay, Sunny. Yeah, it's too early to talk about 2026. But you already mentioned about the N2 dilution. And as all the new nodes, when they just come out, the N2 will have dilution in our gross margin. in 2024, in 2026. But at the same time, the N3 dilution is gradually coming down and we expect the N3 to catch up to the corporate average sometimes in 2026. The other factors includes like overseas fabs dilution, which will continue and which we said that it will be about two to 3% dilution in the early stage of the next several years. That will also be there. And also, we all saw the dramatic foreign exchange rate movement in the earlier part of this year. There's no control. We don't know where that will be. But every percentage move of dollar against NT will affect our gross margin by 40 basis point. So that just give you some rough idea.

Okay, thank you. Sorry, if I may. Yeah, a very quick follow-up. And so on two nanometer, the typical two to three percent dilution by new null for the first seven to eight quarters of mass production being a good reference for two nanometer as well for 2026.

Okay, so Sunny, a quick follow-up. She wants to know for the two nanometer dilution, if we're able to provide any detail and can she still think about it in terms of seven to eight quarters or six to eight quarters dilution to reach the time, sorry, to reach the corporate average?

Yeah, Sunny, let me share with you. N2 structural profitability is better than N3, okay? Now, secondly, it's less meaningful nowadays to talk about how long it will take for a new node to reach the corporate average in terms of profitability. And that's because the corporate profitability, the corporate gross margin moves, and generally it has been moving upwards. So that's meaningful to talk about that. Okay?

No problem. That's very helpful. My second question is maybe for Cici. Thanks a lot for sharing with us the details on how you think about the capacity expansion and planning. And so my question is now call AI is ramping a lot faster than the prior opportunities like smartphones and PCs. Yes, I think the demand for call AI is also maybe harder to forecast. So just want to maybe get a bit more color from you that now the prior rounds of capacity expansion, what is TSMC doing differently versus before? And how do you ensure that while you are ramping up the capacities more quickly, we're still having good risk control? Thank you.

Okay, thank you, Sunny. So, Sunny, second question is regarding capacity planning and expansion. In a capital-intensive business, she knows this is very important, but in the past, smartphone and PC megatrends, today it's AI and cloud AI. She's wondering, does that make this planning process more difficult to forecast? and what are we doing differently, or how do we forecast this to make sure that we are investing appropriately?

Sanib, indeed, right now, because of COVID, I believe we are just in the early stage of the AI application. So very hard to make a right forecast at this moment. What do we do differently? There's a big difference because right now we pay a lot of attention to our customer as a customer. We talk to and then discuss with them and look at their applications, be it in the search engine or in social media's application. We talk with them and see how they view the AI application to those functions. And then we make a judgment about what the AI going to grow. And so this is what the difference as compared with before, we only talk to our customers and have an internal study. This is a different. Did I answer your question?

Got it. Thank you very much, CC. Yeah, yeah, yeah. And looking forward to the KPAG Sky in January. Thank you.

You're welcome. All right. Thank you, Sunny. Operator, can we move on to the next participant, please?

Next one, Bruce Lu, Goldman Sachs. Go ahead, please.

Hello. Thank you for taking my question. I think Jensen talked about, like, 3 to 4 trillion, you know, AI infrastructure opportunity by 2030, right? This compared to, like, 600 billion cap as recent of this year implies for about 40% computers. This is similar to TSMC guidance for the AI growth, right? But for me, first of all, what I want to know is what's TSMC's view for the AI infrastructure growth for the next five years? And what's TSMC's forecast for the token growth rate in the next few years? TSMC used to provide the same industry growth, foundry growth, and how much TSMC can outperform the industry. Given the context, can we assume TSMC AI-related revenue can track track with the KPEX scores of AI or the major service provider, or should we expect an even higher growth rate for TSMC, considering you're potentially getting more value out of it?

Okay, let me try to summarize your question, Bruce. He notes that one of our customers has highlighted a three to four trillion infrastructure opportunity over the next few years compared to 600 billion current CAPEX, implying a 40-something percent CAGR or growth rate, which is similar to ours. Bruce's question is he wants to know what is TSMC's forecast or view for AI infrastructure growth? He would also like to know what is TSMC's forecast or view for the token growth? And then what is TSMC's AI-related revenue growth? Can it track that of the cloud service providers? And his question is, should it be even higher? Shouldn't it be even higher given the value that we capture? That's actually several questions, but is that correct, Bruce?

That's right. Thank you. Well, Bruce, essentially, just want to know that how accurate that we can predict that AI is at demand. We give you a number roughly in the mid-40s is a kegger. That including all the infrastructures built up and also aligned with our major customers' forecasts or their view. But more than that, I think if we are talking about the tokens, the number of tokens that increase is exponential. And I believe that almost every three months it will be exponentially increased. And that's why we are still very comfortable that the demand on leading edge semiconductor is real and as I continue to say that we look at all the demand and look at our capacity expansion, we need, TSMC need to work very hard to narrow the gap. That's what we are doing right now. Executive number that we probably will share with you in next year so that when we have a very better clear picture.

I just have a quick follow-up. I'll use that as my second question anyway. I think the question is that the token growth seems to be substantially higher than the AI-related revenue guidance on TSMC, right? So the gap is actually enlarging if you compound in the outer years, right? That's why, you know, That's the differences between what we see for the current TSMC outlook and the potential token consumptions, right? So the gap is continuing to see an enlarging. How do we solve this and do we really see that as a major issue as well?

Okay, so Bruce's second question, which is the follow on from his first, is that the token growth is growing at a much higher rate or exponentially than TSMC's AI revenue growth, and this gap will only enlarge or widen in the next few years. So he wants to know, sorry, Bruce, basically what's the implication to TSMC or how do we see this? Is that correct?

That's right. Okay, Bruce, you are right. You are right. The tokens and the number of tokens that increase exponentially is much, much higher than TSMC's CAGR as we forecasted. But let me tell you that First, our technology continue to improve, and so our customer moving from one node to the next node so that they can handle much more tokens number in their basic fundamental calculation. So that's one thing, you know. we progress very well from one node to the other node. And our customer working with TSMC to continuously to improve their performance. And that's why when we say that we have about a 40, 45 KG, but then, the token number are exponentially increased because of our customer and TSMC technology combined that can handle much more or much efficient than before. Did I answer your question?

I see. So you believe your no migration plus your custom design change can fulfill or can meet the exponential growth for the token consumption? Exactly. Is that the conclusion? Yes. I understand.

Okay. Okay. Thank you. Sorry, Bruce, that was your second question. Operator, we need to move on. Thank you, Bruce.

Yes. Next one, Loan Chain City. Go ahead, please.

Yeah, thank you very much for taking my questions. I appreciate CCU sharing your view on TSMC's strategy on the AI capacity planning. I think along with the very strong advanced no-demand, I believe that advanced packaging, like I call it, It's also one of the focus for your AI clients they are now looking for. I recall that TSMC previously also planned to expand advanced packaging in Arizona. So can you give us updates here? And also, I mean, for the time being, there are very stretched demands at the moment. So will TSMC work more closely with your offset partner to fulfill the strong demand at the same time?

that's my first question thank you okay thank you laura so her first question is uh on capacity planning we have talked earlier on the call about the planning for leading nodes she wants to understand also on the co-ops capacity uh and specifically i guess advanced packaging in arizona and how do we work with uh our osat partners

Okay, we have announced our plan to build two advanced packaging fab in Arizona and to support our customers. But at the same time, actually, right now we are working with the one OSAT, a big company and our good partner, and they are going to build their fire app in Arizona. And we are working with them because they already breaking ground and the schedule is earlier than TSMC's two advanced packaging fire app. and we are working with them. And our main purpose is to support our customer and so we can marry in the US.

Laura, do you have a second question? Yes, yes, certainly. I mean, obviously, we see that the advance, no advance packages are quite strong. And also, at the same time, we are also seeing that the migration is also happening for N2 and N3. So just wondering that from the revenue growth perspective, I know it's still early to predict next year, based on your guidance. But I'm just wondering, will it be more driven by the ASP increase because of the technology migration? TSMC will be able to sell your value, or more that will be driven by the capacity or volume growth on both end to end up? And also, since you mentioned some of the mild silico recovery, so that may also drive some of the volume growth into next year. So just wondering if you look at the growth outlook, that would be more driven by the technology with upgrade ASP increase or also more like a volume? That's my second question, thank you.

Okay, so Laura's again, second question is looking at 2026. She would like to understand what will be the key drivers of the growth. Is it more from the technology mixed migration, things like N2? Is it more from ASP upgrade or is it more from just pure wafer volume growth?

Well, all right, all the above. All right? You knew it, right? It's growing.

May I also follow up? Because we see that actually N3 is very tight, and at the same time, we are also kind of expanding on N2. And Cici, you previously mentioned that you will migrate some of the, even N7 and N6, and also N5 to N3, but specifically on N3, do we also need to add more capacity into next year for newly added capacity?

Sorry, Laura is saying that next year, will we continue? Sorry, Laura, if I understand correctly, will we need to add new capacity? Will we continue to do conversion? What will we do to support the very strong demand we see at Leading Edge next year?

Yes, thank you. Well, let me answer that question. We continue to optimize the N5, N3 capacity to support our customer. For the new building for the N3 capacity to expand, we put the new building for the N2 technology. That's today's plan. So, okay?

Okay, yeah. Thank you, thank you very clear.

Appreciate it. Thank you, Laura. Operator, in the interest of time, we'll take the questions from the last two participants, please. Thank you.

Yes, next one, . Go ahead, please.

Hi, thanks for taking my question. My first one is about 10 years ago, back in the smartphone days, TSM would talk about the revenue opportunity for TSM per phone. I was wondering, in today's world, can you talk about how much one gigawatt of AI data center capacity could transfer in terms of wait for demand or revenue for TSMC? I'm going to add a follow-up.

Okay, so Chris's first question, he notes in the past in the smartphone megatrend, we talked about the content per phone opportunity for TSMC. So now with AI, is there a way to frame or quantify one gigawatt of data center capacity? What is the revenue opportunity for TSMC?

We... You know, recently, as I said, the AI demand continues to increase, and then my customers say that one gigawatt, they need to invest about $50 billion. How much of TSMC is wavering inside? We are not ready to share with you yet because it's different from different approaches. And then a quick follow-up. Yeah, excuse me. I just want to say that, you know, right now it's not only one chip. Actually, it's many chips together to form a system.

Got it, got it. Very helpful for that. A little quick follow-up. You know, obviously you forecast long-term trends and then build capacity towards that. I'm kind of curious, when you look at the AI demand over the next several years, from a TSMC angle, does it matter whether that demand is coming through a GPU or an ASIC? Does it have an impact on your revenue or gross margin mix?

Okay, thank you, Chris. So his second question is, again, with our business outlook, again, we forecast the long-term trends. We plan our capacity, as he said, in a thorough and disciplined manner. His question is, what are the implications, for example, of, I believe you said, GPU versus ASIC in terms of the AI market? you know, do we have a preference or what, is there a difference for TSMC? Is that correct, Krish?

That's right. The impact to revenue and gross margin, whether it's a GP or an ASIC.

Right. Okay. So... Well, Chris, no matter if it's GPU or it's ASIC, it's all using our leading-edge technologies. And from our perspective, we are working with our customer, and we all know that they are going to grow strongly in the next several years. So no differentiation in front of TSMC. We support all kinds of types. Thank you very much. Thank you.

Operator, can we take... Thank you, thank you. Thank you, Chris. So we'll take the question from the final participant, please.

Yes, last one of the Lai, Macquarie. Go ahead, please.

Hi, Sigi, Wendell, and Jeff. Congrats on a strong outlook as a Lai from Macquarie. So my question is about competition. So since you define the Foundry 2.0 market, and I wonder what's the strategic initiative the TSMC undertaking to further strengthening your competitive landscape and also in this border ecosystem. So some context, I got the question from a US investor as your clients announced they invest in Intel. Thank you.

Okay. Arthur's question is around competition. In the Foundry 2.0 landscape, what strategic initiatives, what things are TSMC focusing on to further strengthen our competitive advantage? I think the last part, Arthur, you're asking in the environment where one of our competitors in the US, how do we focus on the competition? Is that correct?

Yes, thank you, Jeff. Okay, let me answer that one. When we introduced Fundraise 2.0, we set the purpose that, as I said, one of my customers said that system performance is very important in these days, not only a single chip. And also, let me share with you that our advanced packaging revenue is approaching close to 10%. and is significant in our revenue. And it's important for our customer. So that's why we introduced Fundry 2.0 to catalyze this Fundry business. Now, as usual, previously we only look at the front end portion. Now it's at the whole... the whole thing, the front end, the back end, and also important for our customer. That's why we introduced 2.0. Talking about our competition in the U.S., that competitor is happen to be our customer, very good customer. So in fact, we are working with them for their most advanced product. Other than that, I don't want to make any more comment.

Thank you. Can I ask one more question? Yes, you have two. So your second question, sure. Yeah, my second question is very quick on the ending name. So I recall, CC, you last time mentioned that we should also monitor and worry about the pre-built, especially in the consumer electronics industry. And then this quarter, our number suggests that there's a QOQ 19% growth in the smartphone. So my question is, do you still worry about the pre-build? Thank you.

All right, so Arthur's second question is on smartphone. Are we concerned about pre-build or sort of, I guess, pulling pre-build from customers in that regard?

No, we don't worry about pre-built because of when you have a pre-built, you have an inventory. In these days, the inventory already go to that very seasonal level and very healthy. So no pre-built. Thank you very much.

Okay. Thank you, Cece. Thank you, Arthur. Thank you, everyone. So 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 both are going to be available through TSMC's website at www.tsmc.com. So thank you, everyone, for joining us today. We hope you all continue to stay well, and we hope you will join us again next quarter in early 2026. Thank you and have a good day.