TSMC (Minutes): 30% of future 2nm capacity will be at the US factory
Taiwan Semiconductor Manufacturing Company (TSMC) released its Q1 2025 financial report (ending March 2025) before the U.S. stock market opened on April 17, 2025, Beijing time:
Below is the summary of TSMC's Q1 2025 earnings call. For the interpretation of the financial report, please refer to Tariff Chaos Does Not Hinder "Explosive" Guidance, Is TSMC Steadily Fishing?
1. $Taiwan Semiconductor(TSM.US) Core Financial Information Review
1. Revenue Overview
(1) Q1 2025 revenue: decreased by 3.4% in New Taiwan Dollars and 5.1% in U.S. Dollars quarter-over-quarter, mainly due to weak seasonal demand for smartphones, partially offset by growth in AI-related demand. The revenue was slightly above the midpoint of the guidance range, affected by earthquake factors.
(2) Revenue contribution by technology:
3nm: 22% of wafer revenue
5nm: 36% of wafer revenue
7nm: 15% of wafer revenue
Advanced technologies (7nm and below): 73% of wafer revenue
(3) Revenue contribution by platform:
HPC: increased by 7% quarter-over-quarter, accounting for 59% of revenue
Smartphones: decreased by 22% quarter-over-quarter, accounting for 28% of revenue
Internet of Things (IoT): decreased by 9% quarter-over-quarter, accounting for 5% of revenue
Automotive: increased by 14% quarter-over-quarter, accounting for 5% of revenue
DCE: increased by 8% quarter-over-quarter, accounting for 1% of revenue
2. Financial Metrics
(1) Gross margin: 58.8%, a decrease of 0.2 percentage points quarter-over-quarter, mainly affected by the earthquake and dilution from overseas wafer fabs, partially offset by cost improvement measures.
(2) Operating expenses: 10.2% of net revenue.
(3) Operating profit margin: 48.5%, a decrease of 0.5 percentage points quarter-over-quarter.
(4) Earnings per share (EPS): NT$13.94.
(5) Return on equity (ROE): 32.7%.
3. Balance Sheet
(1) Cash and cash equivalents: NT$2.7 trillion (approximately USD 81 billion).
(2) Current liabilities: increased by NT$135 billion quarter-over-quarter, mainly due to an increase of NT$111 billion in accrued liabilities and other liabilities, primarily from an increase in income tax payables.
(3) Financial ratios: Days sales outstanding increased by 1 day to 28 days; inventory turnover days increased by 3 days to 83 days, mainly due to capacity expansion at new overseas wafer fabs 4. Cash Flow and Capital Expenditure
(1) Operating cash flow: NT$626 billion.
(2) Capital expenditure (CapEx): NT$331 billion (approximately USD 10.06 billion).
(3) Dividends: Paid NT$104 billion for cash dividends in the second quarter of 2024.
(4) Bond issuance: Raised NT$16 billion in cash.
(5) Cash balance: Increased by NT$267 billion, totaling NT$2.4 trillion at the end of the quarter.
4. Guidance for Q2 2025
(1) Revenue: Expected to be between USD 28.4 billion and USD 29.2 billion, representing a quarter-over-quarter growth of 13% or a year-over-year growth of 38% based on the midpoint.
(2) Gross margin: Expected to be between 57% and 59%, based on an exchange rate assumption of 1 USD to 32.5 NT$.
(3) Operating margin: Expected to be between 47% and 49%.
(4) Tax rate: 20% for Q2 2025, expected to drop to 14%-15% in Q3 and Q4, with an annual tax rate between 16% and 17%.
II. Detailed Content of TSMC's Earnings Call
2.1 Key Information from Executives
1. Profitability and Margin Outlook
(2) Q1 2025 gross margin: Slightly decreased by 20 basis points to 58.8%, mainly impacted by a 60 basis point effect from the earthquake and dilution from the Kumamoto fab, partially offset by cost improvement measures.
(2) Q2 2025 gross margin: Expected to decrease by 80 basis points to 58% at the midpoint, primarily due to dilution from the Arizona fab.
(3) Full-year 2025 margin dilution: Expected that overseas fabs will lead to a 2%-3% margin dilution, with dilution expected to expand to 3%-4% in the later stages of the next five years.
2. Capital Expenditure and Investment Plans
(1) 2025 capital expenditure budget: Between USD 38 billion and USD 42 billion, with 70% allocated to advanced process technologies, 10%-20% to specialty processes, and 10%-20% to advanced packaging, testing, and mass production.
(2) Arizona expansion: Additional planned investment of USD 100 billion to expand capacity in Arizona, including three additional wafer fabs, one advanced packaging facility, and a major R&D center. Total investment in the U.S. will reach USD 165 billion.
(3) Progress of U.S. factories: The first wafer fab in Arizona successfully entered mass production in Q4 2024, with process technology yields comparable to our fabs in Taiwan. Our second fab will utilize 3nm process technology, with construction completed, and we are accelerating mass production based on strong customer demand for AI-related products. Our third and fourth fabs will utilize N2 and A16 process technologies, with plans to begin construction this year, pending all necessary permits. Our fifth and sixth fabs will utilize more advanced technologies. The construction and capacity ramp-up plans for these fabs will be determined based on customer demand
3. Market and Demand Outlook
(1) Growth of the OEM 2.0 Industry: It is expected to grow by 10% year-on-year by 2025, consistent with IDC's forecast of an 11% year-on-year increase.
(2) AI Demand: Strong AI-related demand is expected throughout 2025, with AI revenue projected to double. AI accelerators (AI GPU, AI ASIC, HBM controllers) will drive significant demand, with internal models estimating a compound annual growth rate of over 45% in the five years following 2024.
(3) Tariff Policy: No changes in customer behavior have been observed so far; revenue in USD is expected to grow nearly 25% for the entire year of 2025.
4. Global Expansion
(1) Arizona: Plans to add 3 wafer fabs (N2 and A16 process technologies) and 2 new advanced packaging facilities. Once completed, approximately 30% of our 2-nanometer and more advanced process capacity will be located in Arizona, creating an independent leading semiconductor manufacturing cluster in the U.S.
(2) Japan and Europe: The Kumamoto wafer fab in Japan (special processes) is expected to start mass production by the end of 2024; the Dresden wafer fab in Germany is under construction as planned.
(3) Taiwan: Plans to build 11 wafer manufacturing plants and 4 advanced packaging facilities in the coming years with government support.
5. Technology Updates
2-Nanometer (N2) and A16 Technology: N2 is expected to have higher tape-out volumes in the first two years compared to N3 and N5, driven by smartphone and high-performance computing applications. N2 is expected to start mass production in the second half of 2025. A16 introduces further performance and power advantages, with plans to start mass production in the second half of 2026.
2.2 Q&A
Q: What is the current and 2026 supply-demand situation for CoWoS? Will there still be a supply shortage in 2026?
A: Previously, CoWoS demand far exceeded supply, and while the situation has slightly improved, significant capacity expansion is still needed to meet demand. We must double CoWoS capacity, which is currently running at full capacity. For 2026, while specific data cannot be provided, the growth momentum remains strong. The company will work to achieve a more balanced supply-demand situation, with expectations for a more balanced scenario next year.
Q: What is TSMC's view on expanding production in the U.S.? What are the requirements from the U.S. government and customers, and how much cost can be passed on to customers during the acceleration of expansion?
A: TSMC's expansion in Arizona, USA, is in response to customer demands due to strong AI needs from U.S. clients such as Apple, NVIDIA, AMD, Qualcomm, and Broadcom. The company is communicating with the U.S. government to obtain the necessary permits to start construction, with an expectation that approximately 30% of the 2-nanometer capacity will be located in Arizona, forming an independent leading semiconductor manufacturing cluster.
In terms of pricing, reflecting the company's value is an ongoing process. As a capital-intensive enterprise, TSMC requires high gross margins to achieve sustainable and healthy returns. Geographical manufacturing flexibility is an important part of the value proposition offered to customers, and the company has had positive discussions with major clients.
Q: What impact do geopolitical risks (such as recent related bans) have on TSMC's business, capacity planning, and strategy?
A: The company has taken these factors into account when providing full-year growth outlook.
Q: What sensitivity analyses has TSMC conducted, what impact do tariffs have on capacity planning and utilization rates, and how confident is TSMC in maintaining current capacity planning and utilization rates?
A: TSMC will continue to closely monitor the potential impact of recent tariff announcements on end-market demand, but currently, customer behavior has not changed, so the original forecast remains.
Q: Given the insufficient utilization rate of mature nodes, will TSMC consider slowing down capacity expansion in Japan or Europe, or relocating existing equipment from Taiwan to Japan or Europe instead of building new capacity?
A: There will be no slowdown in capacity expansion plans in Japan or Germany due to the special process requirements of mature nodes, as competitors do not have corresponding capacity. How to implement capacity expansion is confidential information of TSMC and will be communicated later.
Q: Is TSMC involved in the semiconductor tariff negotiations between the Taiwan government and the U.S. government, can the $16.5 billion investment withstand the impact of semiconductor tariffs, and is there any possibility of exemptions for specific semiconductor tariffs?
A: TSMC is a private company and does not participate in tariff discussions and negotiations between countries. Tariff decisions are the responsibility of the government, and TSMC will fully respect that but will not participate.
Q: The second-quarter revenue increased by 13% quarter-on-quarter; is this due to customers pulling orders in advance due to tariffs, or is it real demand? The full-year revenue guidance shows a slow recovery in the second half; has the impact of tariffs on consumer technology demand been considered? If the tariff situation changes, is there a possibility of revising the full-year revenue guidance?
A: So far, no changes in customer behavior due to tariffs have been observed; the growth in the second quarter was mainly driven by strong demand for 3nm and 5nm technologies from high-performance computing platforms. Due to the uncertainty and potential risks associated with tariffs, the guidance of approximately 25% year-on-year growth remains unchanged from the previous quarter.
Q: It was previously mentioned that overseas business leads to a 2% - 3% dilution in profit margins; now it seems to have expanded. Is this due to accelerated expansion of U.S. fabs, cost items, or pricing items?
A: In the later stages of the five-year plan, gross margin dilution has expanded to 3% - 4%, mainly due to cost inflation and potential increases in tariff-related costs.
Q: What does "fairness" specifically refer to in TSMC's expansion plans in the U.S.?
A: The meaning of fairness is simple; if someone can receive subsidies or incentives, then everyone should receive the same treatment—either everyone gets it, or no one does. TSMC will remain competitive under any circumstances.
Q: What is the purpose and focus of TSMC's R&D center in Arizona, and will it participate in major R&D work such as the development of new nodes in the medium to long term?
A: The Arizona R&D center will have approximately 1,000 engineers, focusing on supporting manufacturing cluster improvement technologies to enable independent operations. Some activities are already underway, including testing funding, exploratory work, and collaborations with universities. Although it is currently incomparable to TSMC's existing 10,000 R&D personnel, this is a start, and more will follow in the future. In the medium to long term, while the primary goal is to enable the Arizona wafer fab to operate independently, more work will also be undertaken, potentially involving the development of entirely new nodes.
Q: Given the strong demand for capacity in the U.S., what is the timeline and progress of TSMC's expansion plans in Arizona? Is it possible to complete the original Phase II construction ahead of schedule, and can Phases III and IV be initiated simultaneously?
A: TSMC is working to accelerate the production of the Phase II plant and the construction of the Phase III plant, with specific progress depending on customer demand. The Phase II plant will be completed at least a few quarters ahead of schedule, but it is uncertain exactly when. The Phase III plant cannot provide a very definite date due to constraints such as labor shortages in Arizona and obtaining relevant permits; updates may come next quarter or the quarter after.
Q: Regarding pricing and profit margins in overseas expansion, given the strong demand for capacity in the U.S., can greater value be reflected to customers? It is expected that profit margins will be diluted by 2% to 3% over the next 2 to 3 years, expanding to 3% to 4% by 2029 to 2030. What wafer price assumptions are behind this gross margin dilution? If the pricing of the Arizona plant is increased, will the gross margin dilution decrease?
A: Reflecting the company's value is an ongoing process. Due to the nature of the business, a higher gross margin is needed to achieve sustainable healthy returns, and geographical manufacturing flexibility is an important part of the value proposition to customers. The dilution of profit margins at overseas plants is additionally affected by cost inflation and potential cost increases due to tariff policies. The company also hopes to reflect value, and discussions with customers are ongoing.
Q: This year, AI business is expected to double. Considering the U.S. ban on exporting AI GPUs to China, and that China accounts for over 10% of accelerated shipments, does this mean that AI orders from regions outside of China have significantly improved over the past three months? The 90-day tariff suspension in the second quarter, to what extent does it reflect customers' advance purchases before potential tariffs in the third quarter, exceeding the seasonal guidance for the second quarter?
A: Three months ago, there was a shortage of wafer supply; now supply and demand are slightly balanced, but demand remains strong, particularly in the U.S. There is confidence that AI revenue will double this year. As the CEO mentioned in prepared remarks, no changes in customer behavior have been observed. The growth in the second quarter was mainly due to demand for 3nm and 5nm technologies, which support the demand for high-performance computing platforms.
Q: TSMC traditionally tends to increase dividends as a primary policy, but many shareholders believe that dividend payments have little impact on TSMC's valuation multiples compared to some large tech peers in the U.S. Why does management not adopt a stock buyback framework, especially given the good cash position on the balance sheet?
A: The company conducted research a long time ago and continues to reassess it, also communicating with investors. The conclusion is that sustainable and steadily increasing dividends are a better way to return cash to shareholders, so the existing policy will be maintained.
Q: In 2026, supply and demand will be more balanced. When transitioning to N3 technology, will there be structural changes in future AI chip designs, such as designs similar to tri-core? What is TSMC's view on new technologies like CPO or PLP (panel-level packaging)? Will these technologies be applied first in Taiwan, or will there also be considerations for further investment in backend new technologies in Arizona?
A: Customers continue to use TSMC's cutting-edge technology and are increasingly adopting advanced packaging technologies. This year, the focus is mainly on CoWoS, and next year, customers will start adopting more advanced packaging technologies like SoIC. For panel-level packaging, the company is actively developing it, currently still in the feasibility study stage. It is too early to determine whether it will be scaled up in Europe, Taiwan, or the United States; it is likely to be scaled up in Taiwan first before being introduced to the U.S.
Q: TSMC's 2-nanometer capacity is 30% in Arizona. When will this capacity start, and in the long term, will advanced process nodes maintain a 30% ratio?
A: Currently, there are plans to build six fabs in Arizona, with 2-nanometer being the main process node, accounting for about 30%. As for more advanced process technologies beyond 2-nanometer, discussions have not yet taken place.
Q: Given the current uncertainties, TSMC maintains its full-year revenue guidance and the 2-nanometer capacity plans for this year and next year. What is the visibility for revenue in the second half of this year and the demand for 2-nanometer wafers next year?
A: We are currently in the second quarter, and it is still too early to discuss the situation in the second half of the year. There are uncertainties and risks due to tariffs, and clearer situations may emerge in the coming months, which will be updated in the next earnings call. Currently, the demand for 2-nanometers is very strong, with the number of new tape-out customers exceeding expectations, and the number of new tape-outs during the same period is far higher than that for 3-nanometers and 5-nanometers.
Q: What is the current capacity of TSMC's Japan fab, and how significant is its revenue contribution this year?
A: The Japan fab will reach a capacity of 40,000 wafers after ramping up. Compared to the company's overall performance, the revenue contribution from this fab is currently not significant.
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