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CALL PARTICIPANTS
Chief Financial Officer — Jen-Chau Huang
Chief Executive Officer — C.C. Wei
Director of Investor Relations — Jeff Su
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TAKEAWAYS
Revenue — $33.1 billion in revenue for fiscal Q3 2025, up 10.1% sequentially, exceeding prior company guidance.
Gross Margin — 59.5% gross margin in fiscal Q3 2025, rising sequentially by 0.9 percentage points due to cost improvements and capacity utilization, outperforming guidance by 2.0 percentage points.
Operating Margin — 50.6% operating margin in fiscal Q3 2025, a sequential increase of 1.0 percentage point from fiscal Q2.
EPS — TWD 17.44 in the third quarter, growing 39% year-over-year.
Return on Equity (ROE) — ROE was 37.8% in the third quarter.
Revenue by Technology — 3-nanometer contributed 23% of wafer revenue, 5-nanometer accounted for 37% of wafer revenue, and 7-nanometer 14% of wafer revenue; advanced nodes (7-nanometer and below) represented 74% of wafer revenue.
Revenue by Platform — High-performance computing held 57% of revenue, and digital consumer electronics declined 20% to 1% of revenue.
Cash and Marketable Securities — USD 90 billion at quarter-end.
Capital Expenditure — $9.7 billion for the third quarter; full-year 2025 CapEx now guided to $40 billion-$42 billion (narrowed from $38 billion-$42 billion).
Gross Margin Guidance (Q4) — 59%-61% gross margin guidance for fiscal Q4 2025; operating margin expected between 49%-51% for fiscal Q4 2025.
2025 Revenue Guidance — Management expects full-year 2025 revenue to grow in the “mid-30s percent” year-over-year in U.S. dollar terms.
Overseas Fabs Dilution — Gross margin impact for full-year 2025 revised to 1%-2% (from previous 2%-3%), guidance for the longer-term ramp is 2%-3% in the early stages and widens to 3%-4% in the later stages, based on development stage.
CapEx Allocation — Roughly 70% of 2025 CapEx allocated to advanced process, 10%-20% of 2025 CapEx allocated to specialty technologies, 10%-20% of 2025 CapEx allocated to advanced packaging, testing, mask making, and others.
Capacity Expansion — Arizona’s site progressing rapidly; plans to acquire additional land for a future giga fab cluster; new advanced packaging facilities in Arizona announced; first Kumamoto (Japan) fab in volume, with second fab under construction; Dresden (Germany) fab construction started.
2-Nanometer Technology — Volume production “on track” for later this quarter; N2P and A16 extensions scheduled for second half 2026.
Inventory and Receivables — Inventory days decreased by 2 to 74; accounts receivable turnover rose by 2 days to 25.
Dividend — TWD 117 billion distributed as the Q4 2024 cash dividend during this period.
SUMMARY
Management indicated that AI-related demand exceeded prior estimates as of fiscal Q3 2025, strengthening expectations for secular growth across process technology and capacity planning. Engagement lead times with customers have expanded to up to three years, suggesting Taiwan Semiconductor Manufacturing Company (TSM -0.85%) receives earlier indications of demand trends compared to prior cycles. A higher level of annual CapEx is directly correlated with future growth opportunities, according to management, who added that revenue growth has continued to outpace CapEx increases in recent years. The company highlighted a disciplined process for forecasting and risk management, particularly for AI and cloud-related capital spending, involving closer collaboration with customers’ customers.
Management stated that “demand on leading edge semiconductor is real,” citing “very strong signals from our customers’ customers” for additional capacity.
C.C. Wei said, “AI demand actually continue to be very strong, it’s more — more stronger than we thought 3 months ago,” and further noted the previously disclosed mid-40s percent CAGR for AI accelerators “it’s a little bit better than that.”
Jen-Chau Huang explained, “if we do our job right, the growth of our business, of our revenue should outpace the growth of the CapEx,” describing historical and expected trends.
The company confirmed that advanced packaging revenue is approaching 10% of total revenue, as system-level performance becomes increasingly critical for customers’ designs.
Regarding the impact of export restrictions on China, management expressed confidence that “the AI’s growth will be very dramatically,” even if channels to China are limited.
INDUSTRY GLOSSARY
CoWoS: Chip-on-Wafer-on-Substrate, TSMC’s advanced 2.5D packaging technology enabling multiple dies to be integrated side-by-side on a silicon interposer for high bandwidth and performance computing applications.
A16: TSMC’s most advanced logic technology featuring Super Power Rail (SPR), designed for high-performance computing products requiring dense power delivery and compressed signal routing.
N2, N2P: TSMC’s nomenclature for its 2-nanometer (N2) and enhanced 2-nanometer (N2P) process technologies, targeting energy efficiency and performance leadership.
Foundry 2.0: TSMC’s strategic framework integrating both front-end (wafer fab) and back-end (advanced packaging) foundry services to address system-level customer needs.
OSAT: Outsourced Semiconductor Assembly and Test; companies specializing in package, assembly, and test services for semiconductor manufacturers such as TSMC.
Full Conference Call Transcript
Jen-Chau Huang: 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 U.S. 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 fabs. Accordingly, operating margin increased 1.0 percentage points sequentially to 50.6%.
Overall, our third quarter EPS was TWD 17.44, up 39% year-over-year, and ROE was 37.8%. Now let’s move on to revenue by technology. 3-nanometer process technology contributed 23% of wafer revenue in the third quarter, while 5-nanometer and 7-nanometer accounted for 37% 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 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 TWD 2.8 trillion or USD 90 billion. On the liability side, current liability decreased by TWD 101 billion quarter-over-quarter, mainly due to the decrease of TWD 112 billion in accrued liabilities and others as we paid out 2025 provisional tax of TWD 136 billion. In terms of financial ratios, accounts receivable turnover days increased 2 days to 25 days. Days of inventory decreased 2 days to 74 days due to strong shipment in N3 and N5. Regarding cash flow and CapEx.
During the third quarter, we generated about TWD 427 billion in cash from operations, spent TWD 287 billion in CapEx and distributed TWD 117 billion for fourth quarter ’24 cash dividend. Overall, our cash balance increased TWD 106 billion to TWD 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 USD 32.2 billion and USD 33.4 billion, which represents a 1% sequential decrease or a 22% year-over-year increase at the midpoint.
Based on the exchange rate assumption of USD 1 to TWD 30.6, 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 3 months ago by 200 basis points, mainly as the actual third quarter exchange rate was $1 to TWD 29.91 compared to our guidance of $1 to TWD 29. 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 2% to 3% 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 every region that we operate. Now let me make some comments on our 2025 CapEx. As the structural AI-related demand continues to be very strong, we continue to invest to support our customers’ growth.
We are narrowing the range of our 2025 CapEx to be between USD 40 billion and USD 42 billion as compared to USD 38 billion to USD 42 billion 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, mass 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.
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