Good afternoon, everyone, and welcome to TSMC's Fourth Quarter 2024 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's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the fourth quarter 2024, followed by our guidance for the first quarter 2025. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. C.C. 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 in 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 fourth quarter of 2024. After that, I will provide the guidance for the first quarter of 2025. Fourth quarter revenue increased 14.3% sequentially in NT, supported by strong demand for our industry-leading 3 nanometer and 5 nanometer technologies. Gross margin increased by 1.2 percentage points sequentially to 59%, mainly reflecting a higher capacity utilization rate and productivity gains, partially offset by the dilution of 3 nanometer ramp-up. With operating leverage, total operating expenses accounted for 10% of net revenue. Thus, operating margin increased by 1.5 percentage points sequentially to 49%. Overall, our fourth quarter EPS was 14.45 NT and ROE was 36.2%. Now let's move on to revenue by technology. 3 nanometer process technology contributed 26% of wafer revenue in the fourth quarter. 5 nanometer and 7 nanometer accounted for 34% and 14%, respectively. Advanced technologies, defined as 7 nanometer and below, accounted for 74% of wafer revenue. On a full year basis, 3 nanometer revenue accounted for 18% of 2024 wafer revenue, 5 nanometer 34%, 7 nanometer 17%. Advanced technologies accounted for 69% of total wafer revenue, up from 58% in 2023. Moving on to revenue contribution by platform. HPC increased 19% quarter-over-quarter to account for 53% of our fourth quarter revenue. Smartphone increased 17% to account for 35%. IoT decreased 15% to account for 5%. Automotive increased 6% to account for 4%, DCE decreased 6% to account for 1%. On a full year basis, HPC increased 58% year-on-year. Smartphone, IoT, Automotive, DCE increased 23%, 2%, 4% and 2%, respectively, in 2024. Overall, HPC accounted for 51% of our 2024 revenue, Smartphone accounted for 35%, IoT accounted for 6%, and Automotive accounted for 5%. Moving on to the balance sheet. We ended the fourth quarter with cash and marketable securities of TWD2.4 trillion or $74 billion. On the liabilities side, current liabilities increased by TWD184 billion, mainly due to the increase of TWD71 billion in accounts payable and increase of TWD99 billion in the accrued liabilities and others. In terms of financial ratios, accounts receivable turnover days declined by one day to 27 days, while inventory days decreased by seven days to 80 days, primarily due to shipment of N3 and N5 wafers. Regarding cash flow and CapEx. During the fourth quarter, we generated about TWD620 billion in cash from operations, spent TWD362 billion in CapEx and distributed TWD104 billion for the first quarter 2024 cash dividend. Overall, our cash balance increased TWD241 billion to TWD2.1 trillion at the end of the quarter. In US dollar terms, our fourth quarter capital expenditures total $11.2 billion. Now, let me recap our performance in 2024. Due to the strong demand for our 3 nanometer and 5 nanometer process technologies, we continue to outperform the foundry industry in 2024. Our revenue increased 30% in US dollar terms to $90 billion, or increased 33.9% in NT to TWD2.89 trillion. Gross margin increased 1.7 percentage points to 56.1%, mainly reflecting improvements in overall capacity utilization, partially offset by 3 nanometer dilution and higher electricity costs. With operating leverage, our operating margin increased 3.1 percentage points to 45.7%. Overall, full year EPS increased 39.9% to TWD45.25 and ROE increased 4.1 percentage points to 30.3%. On cash flow. We spent $29.8 billion or TWD956 billion in CapEx, generated TWD1.8 trillion in operating cash flow and TWD870 billion in free cash flow. We pay TWD363 billion in cash dividends in 2024, up 24.5% year-over-year. I've finished my financial summary. Now, let's turn to our current quarter guidance. We expect our business in the first quarter to be impacted by smartphone seasonality, partially offset by continued growth in AI-related demand. Based on the current business outlook, we expect our first quarter revenue to be between $25 billion and $25.8 billion, which represents a 5.5% sequential decline, or a 34.7% year-over-year increase at the mid-point. Based on the exchange rate assumption of $1 to TWD32.8, gross margin is expected to be between 57% and 59%, operating margin between 46.5% and 48.5%. Regarding tax rate, our effective tax rate was 16.7% in 2024. For 2025, we expect our effective tax rate to 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 fourth quarter 2024 and first quarter 2025 profitability. Compared to the third quarter, our fourth quarter gross margin increased by 120 basis points sequentially to 59%, primarily due to a higher capacity utilization rate and productivity gains, partially offset by dilution from the continued ramp-up of our 3 nanometer technology. We have just guided our first quarter gross margin to decrease by 100 basis points to 58% at the mid-point. This is primarily due to ramp costs associated with N2 and CoWoS expansion, and the start of dilution from our overseas fabs. As a reminder, six factors determine TSMC's profitability. Leadership technology development and ramp-up, pricing, cost reduction, technology mix, capacity utilization, and foreign exchange rate. Looking at full year 2025, given the six factors, there are a few puts and takes I would like to share. On the one hand, we are working hard to increase our value. The dilution impact from our N3 ramp is expected to gradually reduce and we expect our overall utilization rate to moderately increase in 2025. On the other hand, as we have said before, we forecast a 2% to 3% margin dilution impact from the ramp-up of our overseas fabs. The impact is less than 100 basis points in the first quarter of 2025, but we expect it to grow more pronounced throughout the year as our fabs in Kumamoto and Arizona ramp up. We also expect inflationary costs, including higher electricity prices in Taiwan to impact our gross margin by at least 1% in 2025. In addition, there are some ramp-up costs associated with N2 and further conversion of N5 to N3 capacity, which together we expect to impact our gross margin by about 1%. Finally, we have no control over the foreign exchange rate but that may be another factor in 2025. Longer-term, excluding the impact of the foreign exchange rate and considering our global manufacturing footprint expansion plans, we continue to forecast a long-term gross margin of 53% and higher is achievable. Next, let me talk about our 2025 capital budget and depreciation. Every year our CapEx is spent in anticipation of the growth that will follow in the future years, and our CapEx and capacity planning is based on the long-term market demand profile. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. In 2024, we spent $29.8 billion, as we continue to invest to support our customers' growth. With our strong technology leadership and differentiation, we are well-positioned to capture the multi-year structural demand from the industry megatrends of 5G, AI, and HPC. In 2025, we expect our capital budget to be between $38 billion and $42 billion, as we invest to capture the future growth. Out of the $38 billion to $42 billion CapEx for 2025, 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 depreciation expense is expected to increase by high-single-digit percentage year-over-year in 2025, as newly incurred depreciation will be partially offset by other nodes rolling off depreciation. 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 increased cash dividend per share on both an annual and quarterly basis. Now, let me turn the microphone over to C.C.

Thank you, Wendell. Good afternoon everyone. First, let me start with a conclusion of 2024 and our 2025 outlook. 2024 was a mixed year of recovery for the global semiconductor industry. AI-related demand was strong while our other applications saw only a very mild recovery, as macroeconomic conditions weigh on consumer sentiment and end market demand. Concluding 2024, the Foundry 2.0 industry, which we define as all logic wafer manufacturing, packaging, testing, mask making, and others increased 6% year-over-year, slightly lower than our previous forecast. Supported by strong demand for our leading edge process technologies, TSMC's revenue increased 30% year-over-year in US dollar terms, outperforming the foundry industry growth. Entering 2025, we expect fabless semiconductor inventory to have returned to a healthier level, exceeding 2024. We forecast the Foundry 2.0 industry to grow 10% year-over-year in 2025, supported by robust AI-related demand and a mild recovery in other end market segments. Supported by our technology leadership and broader customer base, we are confident we can continue to outperform the industry growth. We expect 2025 to be another strong growth year for TSMC, and forecast our full-year revenue to increase by close to mid-20s percent in US dollar terms. Now, I will talk about AI demand and TSMC's long-term growth outlook. We observed robust AI-related demand from our customers throughout 2024. Revenue from AI accelerators, which we now define as AI GPU, AI ASICs, and HBM controllers for AI training and inference in the data center, accounted for close to mid-teens percent of our total revenue in 2024. Even after more than tripling in 2024, we forecast our revenue from AI accelerators to double in 2025, as a strong surge in AI-related demand continues. As a key enabler of AI applications, the value of our technology platform is increasing as customers rely on TSMC to provide the most advanced process and packaging technologies at scale in the most efficient and cost-effective way. To address the structural increase in the long-term market demand profile, TSMC is working closely with our customers to plan our capacity and investing in leading-edge specialty and advanced packaging technologies to support their growth. As we have said before, TSMC employs a disciplined and rigorous capacity planning system to evaluate and judge the market demand to determine the appropriate capacity build. This is especially important when we have such high forecast demand from the AI-related business. At the same time, we are committed to earning a sustainable and healthy return that enables us to continue to invest to support our customers, of course, while delivering profitable growth for our shareholders. Underpinned by our technology leadership and broad customer base, we now forecast the revenue growth from AI accelerators to approach a mid-40% CAGR for the five-year period, starting off the already higher base of 2024. We expect AI accelerators to be the strongest driver of our HPC platform growth and the largest contributor in terms of our overall incremental revenue growth in the next several years. Looking ahead, as the world's most reliable and effective capacity provider, TSMC is playing a critical and integral role in the global semiconductor industry. With our technology leadership, manufacturing excellence, and customer trust, we are well positioned to address the growth from the industry megatrends of 5G, AI, and HPC with our differentiated technologies. For the five-year period starting from 2024, we expect our long-term revenue growth to approach a 20% CAGR in US dollar terms, fueled by all four of our growth platforms which are smartphone, HPC, IoT, and automotive. Next, let me talk about our global manufacturing footprint update. All our overseas decisions are based on our customers' needs, as they value some geographic flexibilities and the necessary level of government support. This is also to maximize the value for our shareholders. In the US, we have a long-standing good relationship with the US government, dating back to even before our Arizona fab project announcement in May 2020. We have received strong commitment and support from the U.S. customers and the U.S. federal, state, and city government, and are making substantial progress. Building on the successful result of our earlier engineering wafer production, we were able to pull ahead the production schedule of our first fab in Arizona. Our first fab has already entered high-volume production in Q4 2024 utilizing N4 process technology with a yield comparable to our fabs in Taiwan. We expect a smooth ramp-up process and with our strong manufacturing capability and execution, we are confident to deliver the same level of manufacturing quality and reliability from our fab in Arizona as from our fab in Taiwan. Our plans for the second and third fabs in Arizona are also on track. These fabs are utilizing even more advanced technologies, such as N3, N2, and A16 based on our customers' needs. Thus, TSMC will continue to play a critical and integral role in enabling our customers' success while remaining a key partner in enabling the US semiconductor industry. Next, in Japan, thanks to the strong support from the Japan central, prefectural, and local government, our progress is also very good. Our first specialty technology fab in Kumamoto has started volume production at the end of 2024 with a record yield. Construction of our second specialty fab is scheduled to begin this year. In Europe, we have received strong commitment from the European Commission and the German federal, state, and city government. We are progressing smoothly with our plans to build a specialty technology fab in Dresden, Germany, focusing on automotive and industrial applications. In Taiwan, we continue to receive support from the Taiwan government, and we are investing in and expanding our advanced technology and packaging capacities. Given the robust multi-year demand for our 3-nanometer technology, we continue to expand our 3-nanometer capacity in Tainan Science Park. We are also preparing for multiple phases of 2-nanometer fabs in both Hsinchu and Kaohsiung Science Park to support the strong structural demand from our customers. We are also expanding our advanced packaging facilities across several locations in Taiwan. 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. We are leveraging our fundamental competitive advantage of manufacturing technology leadership and large-scale manufacturing base to be the most efficient and cost-effective manufacturer in the region that we operate while supporting our customers' growth. Finally, I will talk about N2 and A16 introduction. Our 2-nanometer and A16 technologies lead the industry in addressing the insatiable need for energy-efficient computing, and almost all the innovators are working with TSMC. We expect a number of the new tapeout for 2-nanometer 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. N2 will deliver full-node performance and power benefit with 10 to 15 times speed improvement at the same power or 20% to 30% power improvement at the same speed, and more than 15% chip density increases as compared with the N3E. N2 is well on track for volume production in the second half of 2025 as scheduled, with a ramp profile similar to N3. With our strategy of continuous enhancement, we also introduced N2P as an extension of the N2 family. N2P features further performance and power benefit on top of N2. N2P will support both smartphone and HPC applications, and volume production is scheduled for the second half of 2026. We will also introduce A16 featuring Super Power Rail, or SPR, a separate offering. TSMC's SPR is an innovative best-in-class backside power delivery solution that is first in the industry to incorporate a novel backside network scheme that preserves gate density and device flexibility to maximize the product benefit. 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 suitable for specific HPC products with a complex signal route and dense power delivery network. Volume production is scheduled for the second half of 2026. We believe N2, N2P, A16 and its derivatives will further extend our technology leadership position and enable TSMC to capture the growth opportunity well into the future. This concludes our key message. And thank you for your attention.

Thank you C.C. 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. Questions will be taken from both the floor and from the call. Should you wish to raise your question in Chinese, I will translate it to English before our management answers your question. Operator Instructions: Now we will begin the Q&A session. We'll take the first few questions here from the floor and then go to online. I think maybe left, middle, right. So why don't we start. I think first question Gokul Hariharan from JP Morgan.

Thanks, Jeff. Happy New Year to the management team. My first question is about TSMC's future strategy in the US. There have been many changes recently, including the relaxation of the N minus 1 restriction, which was reported a week ago. C.C., you also met with Elon Musk recently, and you mentioned that there are many developments you've discussed. Your main IDM competitor appears to be having difficulties, while your Arizona fab seems to be performing well. Given all this, I wanted to gain insight into your long-term strategy. Are you considering investing in the latest node in the US now that the Taiwanese government has lifted the restriction? What feedback have you received from discussions with the incoming President Trump administration, especially since they have emphasized the CHIPS Act and show support for your investments made during Trump's first term? Lastly, Wendell, you previously indicated that you weren't interested in taking over any IDM fabs. Has that perspective shifted, particularly considering TSMC's potential to strengthen US local manufacturing? Sorry for the lengthy question.

Thank you, Gokul. That was quite a lengthy question. I believe Gokul is inquiring about TSMC and our global expansion strategies, especially in the U.S. He pointed out that Taiwan has recently eased the N minus 1 rule, and C.C. has engaged with many of our large customers in the U.S., while our Arizona fab is progressing well. His question seems to focus on our long-term strategy, which I see as having three parts. First, what feedback or discussions are currently happening with the next U.S. administration? Second, are we considering taking over IDM fabs, and has our stance on that shifted? Lastly, regarding the new node, let's address these one at a time.

I almost forgot your question already. Okay, first one, regarding the technology node, it's not that we don't want to ramp up the same technology as in Taiwan. However, the one we're ramping up involves introducing a new technology into manufacturing. The process is very complicated, so it has to be very close to the R&D team. Therefore, the initial phase of the ramp-up always comes from the fab that is close to R&D. In that sense, we do want to ramp up the same kind of technology in the US, but it is practically a little bit difficult. So Taiwan will always be first. Does that answer your question? It's not related to N or N minus 1 certification. Critically, we just have to ramp up a new node in Taiwan.

Okay.

Our strategy to expand depends on customer demand. If there is significant demand from our customers, we respond by increasing production capacity. This requires the necessary support from the government. I want to emphasize that we maintain open and honest communication with both the current and future government. Unfortunately, I cannot provide further details at this time.

IDM fab?

That's my customer. Our strategy is not influenced by the status of my IDM competitors. They are valuable customers, and I appreciate them; they play an important role in TSMC's business as well. That's all I can say. Thank you.

Thank you, C.C. I have a question about gross margins. Wendell, we are nearing a 60% gross margin. In the last cycle, we peaked at around 60% at the top of the cycle. You anticipate that this cycle will strengthen based on C.C.'s guidance for both AI and improvements in non-AI. How should we approach the topic of gross margins in this cycle? Is it feasible for us to exceed a 60% gross margin during this upcycle? Additionally, could you clarify the situation with U.S. fabs compared to overseas fabs? What are the main factors affecting dilution, especially in the U.S. fabs, considering that yield is nearly comparable to Taiwan's? Is the longer cycle time a factor, or are other costs significantly higher in U.S. fabs, given that new fab depreciation is likely similar to that of Taiwan?

Okay. So Gokul's second question is on gross margin. Again two parts. He notes gross margin is almost approaching 60%. In 2022, the last cycle, it was also around this type of level. We have said that this year is another very strong growth year for TSMC. So his question is how should we think about gross margins in this current cycle? Can we approach or get to 60% or low 60s type again? And then the second part is more specific to the US in terms of the cost gap. What are the US cost factors leading to the dilution impact?

Okay. Gokul, first question on the gross margin. As we said, there are six factors affecting the profitability. Every year, different factors play different roles. But, for example, if the utilization is extremely high like the last cycle, it is not impossible for us to reach what you just said. And secondly, the US fab cost, it is more expensive in the US, mainly because of several reasons. Number one, the smaller scale; number two, the higher price in the supply chain; and number three, the very early stage of the ecosystem. So if you add all these up, as we said, 2% to 3% dilution from our overseas fabs every year in the next five years.

If I use the 2% to 3% and do some math, it feels like the overseas fab is starting at, I don't know, 10% gross margin or 5% gross margin, just adding in factors. Obviously, it's not how it works, but I'm just doing outside in. Is that right? Is that the right kind of ballpark in terms of thinking about margin?

All we can share is the 2% to 3%. Yes.

Gokul, we are working hard to improve it.

Okay, thank you Gokul. We'll go to the middle. Laura Chen from Citigroup.

Thank you, and congratulations on the good result. I would like more details about your review. I think people are looking for your updated long-term CAGR growth. I believe that 20% starting from a very high base in 2024 is a strong long-term objective. I am curious, aside from the strong AI demand, what is your perspective on traditional applications such as PC and smartphone growth, particularly for this year?

Laura's first question notes that we have updated our long-term compound annual growth rate to be approaching 20% revenue growth in US dollars, starting from the high base of 2024. Her question focuses on the influence of AI demand, but also inquires about smartphone and PC growth, particularly regarding this year, 2025.

This year shows modest growth for PCs and smartphones, but the focus is on AI. This is why we are confident in projecting close to 20% compound annual growth rate over the next five years. In smartphones, AI functionality will be integrated, which will also lead to an increase in silicon content. Furthermore, the replacement cycle will be quicker, and advanced technology will be necessary. To incorporate extensive functionality within a small chip, more sophisticated technology is required for the tiny components. Even though smartphone unit growth is nearly in the low single digits, factors like silicon growth, accelerated replacement cycles, and technological advancements contribute to our increased growth outlook, which is similar for PCs.

So we can kind of expect those AI-capable devices, they were all based on 2 nanometer next year second half?

Leading-edge technology. That's what I say.

Okay, thank you. And also my next question is about AI. I noted that these times you include the HBM controller into your AI business revenues definition. So can you provide us more update about what the HBI base die business opportunities could be? And previously TSMC kind of announced cooperation with the key memory suppliers globally. Can you give us more details or updates on the progress of this business engagement?

Okay, thank you, Laura. So Laura's second question is on HBM controllers. She notes that our definition of AI accelerators includes memory controllers or HBM controllers. So her question is how do we see this opportunity or what is the opportunity for TSMC, and what is the progress of this working with our memory partners?

We are working with all the memory suppliers, all of them, and that is because of TSMC's logic chip or logic technology is more advanced, and that means our customers' requirements. So all of them are working with TSMC. Now, we start to see some of the product coming out, but high volume, probably you need to wait for another half or one year to see the high volume and big contributions to TSMC's revenue.

Okay, thank you. We'll move to this side of the room. I guess we have Charlie Chan from Morgan Stanley.

Hey, C.C., Wendell, and Jeff. First of all, Happy New Year. I think it's going to be a very exciting year given your bullish outlook and also lots of news going on. Right? So let me start with, overnight the US seems to put a new framework on restricting China's AI business. Right? So I'm wondering whether that will create some business impact to your China business, and how are we going to manage it? And also for some chips in the middle, high performers, like crypto mining, autonomous driving chips, do you think those count as cloud AI and would TSMC be able to continue to service your China customers? Thank you.

Okay, thank you, Charlie. So Charlie's first question, if I may, sort of extrapolate or summarize about the announcements of different types of US export restrictions this week pertaining to China and AI-related chips. So his question is what is the impact to TSMC? How does it impact our business?

So far, we don't have all the analysis yet, but the initial assessment is not significant. It's manageable. This does not mean that my customers are being restricted in any way. We are applying for special permits for them, and we are confident that they will receive some permissions as long as they are not involved in the AI sector, particularly in the automotive industry or in areas like crypto mining.

Yes, thank you. This is very helpful. My second question is about the CPO, which has been a significant topic recently. I believe your main partner, Jensen, came to Taiwan not only to meet with you but also to enhance the supply chain. At your recent technology symposium, you seemed prepared for your COUPE optical engine. Do you believe the Taiwan supply chain can effectively support this CPO, considering the key components and potential issues with the next-generation Rubin schedule? This is the first part of my question regarding how you plan to facilitate the CPO supply chain. The second part is about TSMC's foundry service. Do you anticipate considerable benefits when an indistinguishable network transitions to CPO? I ask this because some conventional products like optical transceivers and DSP may be replaced. Thank you.

Well, Charlie's second question is a very specific topic. He wants to know, well, if I can generalize because we certainly don't comment on customers or their products, but in terms of our progress on silicon photonics and CPO, how are we working with customers? How are we preparing as part of our advanced packaging solutions, and what are the opportunities for TSMC as optical moves to silicon photonics and other type of solutions on a general basis?

Charlie asked a very technical question. We are indeed working on silicon photonics, and the initial results are promising. However, I don't expect significant volume this year; it may take one to one and a half years before we see substantial contributions or production levels. Overall, our customers seem satisfied with the results so far.

Okay, thank you, C.C. Operator, we'll now move to the questions online. We'll take the first call from the online participant, please.

Yes, first question, Brett Simpson, Arete Research.

Yes, thanks very much. And can I just say congratulations on reaching 100 billion in annual sales in Q4. It's quite a milestone. So my first question is on Arizona. I think, Wendell, you mentioned that we need to see some higher scale. So can you update us on the status of phase two? It looks like the construction of its shell is nearly complete, but would be great to understand more about how you see P2 developing over the course of 2025. And in terms of pricing US wafers, how are you planning to do this? Will you have a US price and a Taiwan price, or are you more likely to have a global price regardless of where you make the wafers? Thank you.

Okay. So Brett's question, first question is on Arizona, maybe split into two parts. First is in terms of we have already started the volume production of the first fab. So Brett would like an update on the progress of the second fab, in terms of the construction of the buildings and the shelves, et cetera. And then the second part would be on the pricing of overseas, as we say there's value to our customers. He wants to know do we charge a separate price or is it part of the overall pricing, et cetera, et cetera.

Let me address the second question first. Yes, we do charge a bit more because we offer geographic flexibility. You all know that bearing USA is a premium product. We have discussions with our customers, and they all agree and are pleased to work with TSMC, which allows us to maintain a higher price due to the cost structure there. Currently, the first fab is in volume production. The second fab is nearly done with all the buildings, and we are starting to install the facilities. We expect to move the tools this year as well. We also anticipate that our third fab will begin very soon, and we will make an announcement in the coming days.

Okay, thank you, C.C. Brett, does that answer your first question, and do you have a second one?

Yes, very clear. And the second question, I wanted to get your perspective. Broadcom CEO recently laid out a large SAM for AI hyperscalers building out custom silicon. I think he was talking about a million accelerator clusters from each of the customers he has in the next two or three years. What's TSMC's perspective on all this? I'm sure you've spent a lot of time verifying what hyperscalers are planning over the years to come. And how comfortable are you with the scale of what's being implied here? Thanks.

Okay. So Brett's second question is looking at AI, I guess, specifically AI custom chips or ASICs. He notes that one of our customers recently laid out a very strong or large addressable SAM market for AI hyperscalers using custom silicon. Lots of them talking about clusters of 1 million chips. So he wants to know what is TSMC's view? How do we see this trend in terms of AI ASICs as part of the AI demand megatrend?

Brett, I won't provide a specific number, but I can assure you that both ASICs and graphics require very advanced technology, and they are all collaborating with TSMC. Regarding your second question about whether the demand is real and if this is based on what my customer said, I can confirm that the demand is indeed very strong. Does that answer your question, Brett?

Yes, that's great. Thank you.

Okay, thank you, Brett. Operator, do we have anyone else on the line? It seems not. Then let's move on.

No, we don't.

Okay, we don't. Then let's go back to the floor. I think on the left side, Bruce Lu from Goldman Sachs.

Hi. Thank you for my question. To be honest, I would be a bit surprised if the long-term gross margin target doesn't change. I believe TSMC's value is certainly more than just passing on the costs. I think TSMC needs to invest significantly more in R&D to maintain their leadership. TSMC mentioned or increased the gross margin target in 2022 with a higher requirement for R&D and a more profitable target, correct? I asked the same question two quarters ago while understanding that price negotiations were ongoing, but I think those negotiations are mostly complete. What is the discrepancy here? Why can't TSMC raise the profitability target?

Bruce is asking about our long-term gross margin target of 53% and why it hasn't changed. He points out that TSMC's value is increasing and that we need to invest significantly in R&D and capacity to support our customers' growth. We have always focused on achieving the appropriate return. He also notes that in 2022, our gross margin was around 50%, which we then raised to 53% and higher. His question is why it hasn't gone higher yet.

Hi, Bruce. As we said, six factors affecting the profitability. Every year, different factors have different weights. Now two things to note. Number one, starting from this year, overseas fab expansion, 2 to 3 percentage point impact every year for the next five years. The other things to note. Macro environment uncertainty, which may lead to impacting the global economy, which may lead to end market demand. Now having said that, we are in the capital-intensive industry, so we will need to have to earn a healthy return to continue to invest, to support our customer, support their growth, and also deliver a profitable growth to our shareholders. And you mentioned about the raising of long-term gross margins back in 2022 to 53% and higher, and we have been able to deliver that in higher part since then. So given all the above, we continue to think that 53% and higher gross margin is achievable and we work very hard to achieve on the higher part.

Okay, I'll try next two quarters. For the CoWoS capacity, TSMC has been very aggressive in expanding the capacity. However, the application is highly concentrated in AI at the current stage, which there are certain noise around it. When can we see non-AI applications such as servers, smartphones, or anything else can start to adapt CoWoS capacity in case there is any fluctuation in the AI demand?

Okay, thank you, Bruce. So Bruce's second question is on CoWoS capacity. In his words, we have been very aggressive to expand the capacity but his concern, it's highly concentrated with AI-related demand. So his question is when do we expect or to see more non-AI application adoption of CoWoS solutions?

Well, yes, today is all AI-focused and we have very tight capacity and cannot even meet customers' need. But will the other product will adopt this kind of CoWoS approach? They will. It's coming, and we know that it's coming. So that's all I can say.

When?

It's coming.

Okay, I'll try next quarter.

All right. And the CPO and the server chip, let me give you a hint.

Okay, thank you, Bruce. We'll go to the middle. Arthur Lai from Macquarie.

Hi C.C., Wendell, and Jeff. This is Arthur Lai from Macquarie. First of all, congratulations on the strong gross margin. I have a quick follow-up regarding the US and Japan expansion, which is crucial. My clients are seeking updates. Do you have an operational strategy in place to address the cost differences between the overseas fab and the Taiwan fab? C.C., you suggested that you are working on this to improve the gross margin. However, during the Chinese New Year, I read Morris Chang's autobiography, where he mentioned that the strategy is to replicate exactly what is done at the Taiwan mother fab. I would like to understand how we can maintain high yields while also lowering costs. Thank you.

Okay, so Arthur's question is about our overseas expansion. His question is related to the cost gap and what is our operational strategies to mitigate the cost gap. How are we doing this internally in our fab operations and strategies to do so?

You mentioned my boss's book, which indicates that you really read it. What he states is that whatever improvements occur in Taiwan will also be adopted in the US. This doesn't imply that the situation will remain constant this year, next year, or the year after. We are continually making improvements to our cost structures in both Taiwan and the US. We are also actively exploring a new methodology that I can't disclose right now, but it will benefit the Arizona fab. This will help reduce the cost structure gap between the US and Taiwan. We are committed to this effort, and regardless of what I say, we aim to be the best fab in that location.

Second follow-up question is about Wendell. You mentioned a margin dilution of 200 to 300 basis points. Can you provide more details on the variable and fixed costs? Which of the two is higher?

Okay. So Arthur's second question is on the overseas dilution of 2% to 3%. He is asking if we can provide a further breakdown in terms of how much of that is composed from variable cost, how much of that is from fixed cost, et cetera.

We really can't provide a detailed breakdown of these numbers, but both figures are higher. That's all I can share with you.

Okay, thank you. We'll move to the right side of the room. I think Rick Hsu from Daiwa Securities.

Yes. Hi. Happy New Year and thank you for taking my question. So first one is C.C., can you share with us your view on this year's global semiconductor revenue forecast as memory or any drivers by applications in priority across the main application? Thank you.

Okay. So Rick's first question, he's asking for our forecast of the semiconductor industry, what we used to provide as semi ex-mem, but of course, we have already given Foundry 2.0. Then he would like the outlook by end market application in terms of ranking. Maybe just a comment on the overall end markets as a whole.

I believe the memory business will experience growth this year as well. However, I can only say that HBM will grow very rapidly. I won't comment on other memory types because it doesn't make sense.

And we have already provided Foundry 2.0 to grow 10% year-over-year. That's our industry forecast for 2025.

Just a quick follow-up. Can I use your Foundry 2.0 market growth as a proxy of the global semi ex-mem?

So his question is can we use Foundry 2.0 as a proxy for semiconductor ex-memory?

Yes, thank you. The second one is very quick about your CoWoS and SoIC capacity ramp. Can you give us more color here, because recently there seemed to be a lot of market noises, some add orders, some cut orders. So I would like to see your view on the CoWoS ramp.

Okay. So Rick's second question is lots of market rumors here. So he would like to know any comment we can provide on CoWoS ramp in 2025.

There are many rumors, and I assure you this is just a rumor. We are diligently working to meet our customers' demands. Therefore, cutting orders will not occur; in fact, we expect to continue increasing them. I want to emphasize that we are putting in a lot of effort to enhance our capacity.

Okay, thank you. Okay, let's move back to the operator. Is there anyone online?

Yes, we have the next one, Robert Sanders, Deutsche Bank. Go ahead, please.

Yes, hi there. I just had a question on AI demand. Is there a scenario where HBM is more of a constraint on the demand rather than CoWoS, which seems to be the bigger constraint at the moment? And I have a follow-up. Thanks.

Okay. So Rob is asking us to comment on AI demand and HBM status constraint or what is the bigger constraint in AI demand.

I don't comment on other suppliers, but I know that we have a very tight capacity to support the AI demand. I don't want to say I'm the bottleneck. TSMC, always working very hard with customer to meet their requirement. That's all I can say.

You have a second question?

Yes. Just on SoIC, there's been more discussion in the market around your smartphone customers adopting SoIC. Can you just discuss if there's any kind of inflection point here, whether it's in the PC domain or the smartphone domain? Or is this still more of a data center story? Thanks.

Okay. Well, Rob's second question is on SoIC adoption. His question basically in a nutshell is when do we see an inflection point for smartphone application to adopt SoIC?

Today, SoIC's demand still can focus on AI applications. For PC or for other areas is coming, but not right now.

Okay, thank you, Rob. Thank you, C.C. I think in the interest of the time, we'll take the last two questions, please. Okay, I guess we'll go to Sunny Lin from UBS.

Good afternoon. Thank you for taking my questions. My first question is about gaining clarity on cloud growth for 2025. I believe that technology has significant potential for demand in the long term, but when we consider 2025 and 2026, there may be increasing uncertainties related to CSP spending, macroeconomic factors, or supply chain challenges. I understand that management has provided strong guidance for this year, suggesting sales will double. Given that, do you think there’s still more potential for growth than risk as we move into 2025, or how should we view the demand outlook for this year and next?

Sunny's question is about the demand related to AI. We mentioned that after more than tripling last year, it is expected to double again in 2025. She wants to know if there is potential for upside or downside to this. Additionally, she is looking for an outlook on AI growth for 2026.

Sunny, I certainly hope there is an upside, and I hope my team can provide enough capacity to support it. Did that give you enough hint? Okay. Based on the high numbers for 2024, we also expect a mid-40s compound annual growth rate for the next five years. That will give you an estimate you can work with.

Yes. Also mid-40% is the long-term expectation in terms of growth by the next few years. But how should we think about the trajectory of the growth? For sure, this year is still pretty strong growth but do you think at some point maybe we see a moderation of growth temporarily, and then followed by another ramp?

Well, I think Sunny's question again is asking us to comment on the 2026 outlook, which is a little bit early, or that how do we see the trajectory of the growth?

I have already said, it's a little bit too early. All right.

Sure, no problem. So I will follow up maybe next quarter as well. And so, my second question is on Edge AI. And so, last year management thinks by maybe 2025 to be the inflection point for it to see more content related to Edge AI. So based on your current visibility, are you seeing clients ramping for this year for the Edge AI products maybe into the second half? And before you also mentioned Edge AI could potentially drive 5% to 10% die size increase. Will that be a one-time increase or do you think beyond the 5% to 10% increase for maybe first-gen product, there should be sustainable increase going forward.

Okay. So Sunny's second question is related to Edge AI. She would like some more detail or color, do we see customers ramping Edge or what we call on-device AI products in the second half of this year? And the second part in terms of the content increase, 5% to 10% increase, is this a one-time thing? Is this an ongoing thing? How do we estimate the content benefit from on-device AI?

On Edge AI, we've noticed that our customers are increasingly incorporating more neural processors. We've estimated that there's a 5% to 10% increase in silicon usage. However, it's not likely that this increase will be consistent every year. As customers move to the next technology node, this also benefits TSMC. Additionally, I believe the replacement cycle will be shorter because when people get new devices with AI capabilities, they tend to replace their smartphones and PCs more frequently, which suggests a greater increase than just 5%. Did I address your question?

Yes, thank you very much.

Okay, Thank you. Operator, I think there's one more participant online. So we'll take the last question from the online participant, please.

I think the last caller just dropped the line. Thank you.

Okay, then we'll take the last question from Brad Lin from Bank of America.

Thank you for squeezing me in. So, Happy New Year, and taking my questions. I would like to answer two questions. First question would be on the CoWoS as well. So we have observed an increase in margin of advanced packaging. Could you remind us the CoWoS contribution of last year and do you expect the margin to kind of approach the corporate average or even exceed it after the so-called value reflection this year? That would be my first question. Thank you.

Okay. So Brad's first question is very specific to CoWoS. Basically he wants to know what is the revenue contribution from CoWoS last year and what is the margin profile. Maybe we can talk about advanced packaging.

Hey, Brad, we don't break it down in different segments of the advanced packaging. But overall speaking, advanced packaging accounted for over 8% of revenue last year and it will account for over 10% this year. In terms of gross margins, it is better. It is better than before but still below the corporate average. Thank you.

Thank you, Wendell, that's very helpful. And then my second question would be on the IDM. So we have seen IDMs increasingly rely on TSMC, and then do we still expect the IDM to support our long-term growth?

Okay. So Brad's second question I think is on IDM and IDM outsourcing. He does note that we do see more IDM outsourcing business. So is this part of our long-term growth outlook CAGR?

Again, let me repeat again. They are our very good customers and we work together. I don't say they rely on TSMC. We are partners and I really hope that a long-term relationship will be there, for sure.

Okay, thank you C.C. Thank you, Brad. Thank you everyone. 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 certainly both will be available through TSMC's website at www.tsmc.com. So thank you everyone for joining us today online and in person. We'd like to wish everyone a Happy New Year and hope everyone continues to stay well, and hope you'll join us again next quarter. Goodbye and thank you. Have a good day.