Taiwan Semiconductor Manufacturing Co Ltd Q1 FY2025 Earnings Call

Good afternoon, everyone, and welcome to TSMC's First Quarter 2025 Earnings Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. TSMC is holding 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 first quarter 2025, followed by our guidance for the second 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 the line for questions and answers. 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'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 first quarter 2025. After that, I will provide the guidance for the second quarter of 2025. First quarter revenue decreased 3.4% sequentially in NT dollar or 5.1% in U.S. dollars as our business was impacted by smartphone seasonality, partially offset by continued growth in AI-related demand. In spite of the January 21 earthquake and several aftershocks, we worked diligently to recover much of the lost production. Thus, our revenue in the first quarter was slightly above the midpoint of our guidance. Gross margin decreased 0.2 percentage points sequentially to 58.8%, primarily due to the earthquake impact as well as the start of overseas dilution, partially offset by the cost improvement efforts. Total operating expenses accounted for 10.2% of net revenue. Operating margin decreased 0.5 percentage points sequentially to 48.5%. Overall, our first quarter EPS was TWD13.94 and ROE was 32.7%. Now let's move on to revenue by technology. 3-nanometer process technology contributed 22% of wafer revenue in the first quarter, while 5-nanometer and 7-nanometer accounted for 36% and 15%, respectively. Advanced technologies, defined as 7-nanometer and below, accounted for 73% of wafer revenue. Moving on to revenue contribution by platform. HPC increased 7% quarter-over-quarter to account for 59% of our first quarter revenue. Smartphone decreased 22% to account for 28%. IoT decreased 9% to account for 5%. Automotive increased 14% and accounted for 5%, and DCE increased 8% to account for 1%. Moving on to the balance sheet. We ended the first quarter with cash and marketable securities of TWD2.7 trillion or US$81 billion. On the liability side, current liabilities increased by TWD135 billion quarter-over-quarter, mainly due to the increase of TWD111 billion in accrued liabilities and others. The increase in accrued liabilities and others was mainly due to the accrual of income tax payables. On financial ratios, accounts receivable turnover days increased one day to 28 days. Days of inventory increased three days to 83 days, primarily due to the ramping of new overseas fabs. Regarding cash flow and CapEx. During the first quarter, we generated about TWD626 billion in cash from operations, spent TWD331 billion in CapEx and distributed TWD104 billion for second quarter 2024 cash dividend. In addition, we raised TWD16 billion in cash from bond issuances. Overall, our cash balance increased TWD267 billion to TWD2.4 trillion at the end of the quarter. In U.S. dollar terms, our first quarter capital expenditures totaled 10.06 billion. I finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our second quarter revenue to be between US$28.4 billion and US$29.2 billion, which represents a 13% sequential increase or a 38% year-over-year increase at the midpoint. Based on the exchange rate assumption of US$1 to TWD32.5, gross margin is expected to be between 57% and 59%, operating margin between 47% and 49%. Also, in the second quarter, we will need to accrue the tax on the undistributed retained earnings. As a result, our second quarter tax rate will be around 20%. The tax rate will then fall back to the 14% to 15% level in the third and fourth quarters, and the full-year tax rate will 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 first quarter 2025 and second quarter 2025 profitability. Compared to the fourth quarter, our first quarter gross margin slightly decreased by 20 basis points sequentially to 58.8%. This was primarily due to 60 basis points impact from the January 21 earthquake and its aftershocks as well as the start of dilution from our Kumamoto fab, partially offset by cost improvement efforts. We have just guided our second quarter gross margin to decrease by 80 basis points to 58% at the midpoint, primarily as the margin dilution impact from our Arizona fab starts to kick in. We expect the impact from overseas fabs to grow more pronounced throughout the year as we ramp up further in Kumamoto and Arizona and forecast a 2% to 3% margin dilution impact for the full-year 2025. 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. With our additional $100 billion investment plan in Arizona, we forecast the gross margin dilution from the ramp up of our overseas fabs in the next five years to start from 2% to 3% every year in the early stages, widened 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 the region that we operate. Thus, even considering our global manufacturing expansion plans, we believe a long-term gross margin of 53% and higher is achievable. Next, let me talk about our 2025 capital budget. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. We reiterate our 2025 capital budget is expected to be between US$38 billion and US$42 billion as we continue to invest to support customers' growth. 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. Our 2025 CapEx also includes a small amount related to our recently announced additional $100 billion investment plan to expand our capacity in Arizona. 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 increasing cash dividend per share on both an annual and quarterly basis.

Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. But before that, I would like to mention the earthquake during Lunar New Year. On January 21, Taiwan experienced a 6.4 magnitude earthquake on the Richter scale, followed by several significant aftershocks. Although a certain number of wafers in process were impacted and had to be scrapped, we worked tirelessly and were able to recover much of the lost production, demonstrating the resilience of our operation in Taiwan. I want to recognize and deeply appreciate all of our employees and our suppliers for their dedication and hard effort over the Lunar New Year holiday. I would also like to extend our great appreciation to our customers for their understanding and support during this time. Now let me talk about the first quarter results. We concluded our first quarter with revenue of US$25.5 billion. Our business in the first quarter was impacted by smartphone seasonality, partially offset by continued growth in AI-related demand. Moving to second quarter 2025, we expect our business to be supported by strong growth of our 3-nanometer and 5-nanometer technologies. Looking at the full-year 2025, we expect Foundry 2.0 industry growth to be supported by robust AI-related demand and a mild recovery in other end market segments. In January, we had forecast Foundry 2.0 industry to grow 10 points year-over-year in 2025, which is consistent with IDC's forecast of 11% year-over-year growth for Foundry 2.0. Now let me talk about the recent tariff. We understand there are uncertainties and risks from the potential impact of tariff policies. However, we have not seen any change in our customers' behavior so far. Therefore, we continue to expect our full-year 2025 revenue to increase by close to mid-20s percent in U.S. dollar terms. We might get a better picture in the next few months, and we will continue to closely monitor the potential impact on the end market demand and manage our business prudently. Amidst those uncertainties, we continue to focus on the fundamentals of our business with our technology leadership, manufacturing excellence, and customer trust to further strengthen our competitive position. As such, we are confident TSMC can continue to outperform the Foundry 2.0 industry growth in 2025. Now I'll talk about our AI demand outlook. We continue to observe robust AI-related demand from our customers throughout 2025. We reaffirm our revenue from AI accelerators to double in 2025. The AI accelerators will be defined as AI GPU, AI ASIC, and HBM controllers for AI training and inference in the data center. Based on our customers' strong demand, we are also working hard to double our CoWoS capacity in 2025 to support such growth. Recent developments are also positive for AI's long-term demand outlook. In our assessment, the impact from AI's recent models, including DeepSeek, will drive greater efficiency and help lower the barrier to future AI development. This will lead to wider usage and greater adoption of AI models, which all require the use of leading-edge silicon. Thus, these developments only serve to strengthen our conviction in the long-term growth opportunities from the industry megatrends of 5G, AI, and HPC. To address the structural increase in the long-term market demand profile, TSMC employed a disciplined and evolved capacity planning system. This is especially important when we have such high forecasted demand from AI-related business. Externally, we work closely with our customers, and our customers' customers to manage capacity. Internally, our planning system involves multiple teams across several functions to assess and evaluate the market demand from both a top-down and bottom-up approach to determine the appropriate capacity build. Based on our planning framework, we are confident that our revenue growth from AI accelerators will approach a mid-40s percentage CAGR for the next five years starting from 2024. Next, let me talk about TSMC's additional US$100 billion investment plan to expand in Arizona. All our overseas decisions are based on our customers' needs; they value some geographic flexibility and necessary level of government support. This is also to maximize the value for our shareholders. With a strong collaboration and support from our leading U.S. customers and the U.S. federal, state and city government, we recently announced our intention to invest an additional US$100 billion in advanced semiconductor manufacturing in the United States. This expansion includes plans for three additional wafer manufacturing fabs, two advanced packaging fabs, and a major R&D center. Combined with our previously announced plan to build three advanced semiconductor manufacturing fabs in Arizona, this brings our total investment in the U.S. to US$165 billion to support the strong multi-year demand from our customers. Our first fab in Arizona has already successfully entered high-volume production in 4Q 2024, utilizing N4 process technology with a yield comparable to our fabs in Taiwan. The construction of our second fab, which will utilize the 3-nanometer process technology, is already complete, and we are working on speeding up the volume production schedule based on the strong AI-related demand from our customers. Our third and fourth fabs will utilize N2 and A16 process technologies, and with the expectation of receiving all the necessary permits, are scheduled to begin construction later this year. Our fifth and sixth fabs will use even more advanced technologies. The construction and ramp schedule for these fabs will be based on our customers' demand. We also plan to build two new advanced packaging facilities and establish an R&D center in Arizona to complete the AI supply chain. Our expansion plan will enable TSMC to scale up to a giga-fab cluster to support the needs of our leading-edge customers in smartphone, AI, and HPC applications. With this additional US$100 billion investment plan to expand our leading-edge capacity in Arizona, I would also like to mention that TSMC is not engaged in any discussions with other companies regarding any joint venture, technology licensing or technology transfer and sharing. After completion, around 30% of our 2-nanometer and more advanced capacity will be located in Arizona creating an independent leading-edge semiconductor manufacturing cluster in the U.S. It will also create greater economies of scale and help foster a more complete semiconductor supply chain ecosystem in the U.S. Thus, TSMC will continue to play a critical and integral role in enabling our customers' success while remaining a key partner in enabling all the strength and leadership of the U.S. semiconductor industry. Next, in Japan, thanks to the strong support from the Japan central, prefecture, and local government, our first specialty technology fab in Kumamoto has already started volume production in late 2024 with a very good yield. The construction of our second specialty fab is scheduled to start later this year, subject to the readiness of the local infrastructure. In Europe, we have received strong commitments from the European Commission and the German federal, state and city government. We are on track with our plan to build a specialty technology fab in Dresden, Germany. In Taiwan, with support from the Taiwan government, we plan to build 11 wafer manufacturing fabs and four advanced packaging facilities over the next several years. Volume production of N2 is expected to start in the second half of 2025, and we are preparing for multiple phases of 2-nanometer fabs in both Hsinchu and Kaohsiung Science Parks to support the strong structural demand from our customers. By expanding our global footprint for continuing investment in Taiwan, TSMC can continue to be the trusted technology and capacity provider of the global logic IC industry for years to come while delivering profitable growth for our shareholders. Finally, I'll talk about our N2 status and A16 introduction. Our 2-nanometer and A16 technology is the industry leader in addressing the insatiable need for energy-efficient computing, and almost all the innovators are working with us. We expect the number of new tape-outs 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 benefits with 10% to 15% speed improvement at the same power or 20% to 30% power improvement at the same speed and more than 15% chip density increase compared with N3E. N2 is well on track for volume production in the second half of 2025 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 benefits on top of N2, and volume production is scheduled for the second half of 2026. We also introduced A16 feature in super power rail or SPR as a separate offering. 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 an additional 7% to 10% chip density gain. A16 is best suited for specific HPC products with complex signal routes and dense power delivery networks. 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 enabling TSMC to capture the growth opportunities well into the future. This concludes our key messages, and thank you for your attention.

Thank you, C.C. This concludes our prepared statements. Before we start the Q&A session, I want to remind everyone to please limit your questions to two at a time to give all participants a chance to ask. If you would like to ask your question in Chinese, I will translate it to English before management responds. Now let's begin the Q&A session. Operator, can we please proceed with the first caller on the line?

The first one to ask question is Gokul Hariharan from JPMorgan.

Thank you very much. Good afternoon. And first of all, thanks for clearing the air on all those JV-related news reports. I think a lot of people needed that. Thank you. My first question is on AI demand. So C.C., there has been a lot of talk about CoWoS order adjustments and some concerns about AI demand. You did talk about CoWoS capacity doubling. Could you talk a little bit about how you see demand versus supply? I think last time we talked about this, you did indicate CoWoS demand is still well above supply. Could you talk a little bit about how the situation is looking for CoWoS demand versus supply this year? And maybe a little bit of early color on 2026 also as you plan for the capacity?

All right. Thank you, Gokul. For everyone's benefit, let me try to summarize your first question. So again, Gokul's first question is on the AI-related demand. He notes there's been a lot of noise around CoWoS and order cuts and such. So he would like to ask C.C. what is the thinking or strategy for TSMC CoWoS still doubling this year? Is the demand still exceeding supply? And how is the CoWoS capacity and supply or supply and demand, I should say, look like going into 2026, if C.C. is able to provide any color?

Okay. Gokul, I know there's a lot of rumors about the CoWoS. The last time we talked about the CoWoS, the demand was almost insane and much, much higher than we could prepare for. And now it's a little bit better. I think we still need to build a lot of capacity to meet the demand. As I said, we have to double our CoWoS capacity, and it's still fully loaded. For 2026, I cannot say the number, but it still has strong momentum while we continue. Okay. Did that answer your question?

So do you still think 2026 is going to be supply limited still, but demand is still going to be much more than supply even in 2026? Is that your current expectation C.C.?

So Gokul was asking, then do we still see demand exceeding supply for CoWoS in 2026?

Well, we will work very hard to make sure that we don't have this kind of demand that is much, much higher than the capacity. We're working very hard, and I believe that you will be more balanced next year.

Thank you. My second question is on the U.S. investment and all this persistent rumors about involvement in your competitors' operations, etc. You have interacted with the U.S. government, the new administration for the last several months and C.C. made a big announcement at the White House as well. Just wanted to understand what does TSMC kind of impression in terms of what is required? Now that there is also the semiconductor tariffication going on. What is TSMC's impression of what is required over the next two, three years in terms of reassuring capacity both from a U.S. administration perspective and from your U.S. customers' perspective. And I also – I think Wendell also indicated that the margin dilution may be slightly bigger as we go along. So could you talk a little bit about how much of the value can you pass on to the customers as the expansion becomes a little bit more accelerated? Thank you.

Okay. So Gokul's second question is a bit involved, but he's asking about again, a lot of talk about our recent announcement for an additional $100 billion expansion in the U.S., again, talk about this involving a competitor. C.C. has been speaking to the U.S. government. There's still potential semiconductor tariffs. So his question is really from TSMC's point of view, what do we think is required for more onshoring in the U.S.? Can we share the perspective from the U.S. government? Or more directly what our customers are asking us to do in terms of reshoring? That's the first part. And the second part may be Wendell can address on the margin?

Really. Okay. I thought that was a very long, long question. Let me answer that. Yes, we indeed have talked with U.S. government officials. And the reason we are expanding in Arizona actually, let me say again, it's all because of our customers' request, and that is because of the very high demand. I announced on other occasions that there is very strong AI demand from U.S. customers such as Apple, NVIDIA, AMD, Qualcomm, and Broadcom. And so we need to expand our capacity in the U.S. and support them. We talked with the U.S. government and asked for their help in getting the necessary permits so we can start the fab. As a result, I would expect our 2-nanometer capacity around 30% will be in Arizona. That will also be an independent leading-edge semiconductor manufacturing cluster.

And then, Gokul, the second part of your question is related to the – sorry, Wendell had mentioned that the margin may widen. So Gokul's second part of the question, I think, was related to pricing and what is our strategy or approach here as we expand overseas. Is that correct?

Yes, that's right. Yes.

Hey, Gokul, you're asking about the pricing. As we have always said, reflecting our value is a continuous and ongoing process for TSMC as we're in a very capital-intensive business. So we need to have a very high gross margin to earn the sustainable and healthy return. And that is why we set up our pricing strategy. Geographic manufacturing flexibility is an important part of our value proposition to the customers. We are already discussing this with our major customers, and the progress is so far so good.

Okay. Gokul?

Okay. Understood. Thank you.

All right. Thank you. Operator, can we move on to the next participant, please?

The next to ask question is Bruce Lu from Goldman Sachs. Please ask your question.

Okay. Thank you for taking my question. I think the geopolitical risk is one of the major uncertainties nowadays. Last two days, we have like H20 being banned in China. So how does that impact TSMC focus and production planning, right? Do we have enough other customers and demand to keep our advanced node capacity fully utilized? Or how does that change our long-term production planning moving forward?

Okay. Bruce, thank you. Your first question is related. He's talking about geopolitical risk or I guess some of the recent rules and announcements, specifically the ban on H20. So his question is how does this impact TSMC's business? How does this impact our capacity planning and our strategies?

Bruce, let me answer this question. Of course, we do not comment on specific customer products, but let me assure you that we have taken this into consideration when providing our full-year growth outlook. Did I answer the question?

Yes, but I want a little bit more about, like – I'm sure you guys did a lot of sensitivity analysis, like what kind of impact is going to be? Or can you show us like how much buffer we got, like you've assume, like how comfortable we have to maintain our current capacity planning moving forward or current utilization right now?

Okay. So Bruce is asking for some more color in terms of what type of buffer or what type of room we have in making our decisions for the long-term capacity planning?

Well, actually, we know a lot of people right now speculate a lot of things. But again, certainly, we are mindful of the potential impact from all the recent tariff announcements, especially the potential impact on the end market demand. We'll continue to watch it carefully. Having said that, we have not seen any change in our customers’ behavior so far. Therefore we stick to our forecast.

I see. Thank you. Let me switch gears to a little bit for the non-U.S. capacity expansion. I think as we understand that the current capacity utilization for mature node is underutilized, right? Do we consider to slowdown the capacity expansion in Japan or Europe? Or just relocate the current equipment from Taiwan to Japan or Europe instead of building the new one? We don't want – why do we want to expand the capacity for the mature node, which management already mentioned that it's an oversupply industry though. If we relocate them, we can squeeze more space, clean room in Taiwan for more advanced nodes?

Okay. So Bruce's second question is around mature nodes and our expansion into Europe and Japan. His question really is given that the capacity of mature nodes 7-nanometer underutilized. Number one, are we considering to slowdown our expansions in these places? And then number two, would we consider using current relocated equipment from Taiwan to overseas rather than just the pure new expansion or greenfield expansion?

Bruce, let me answer the first part of the question. Are we considering slowing down? The answer is no. We executed our plans as scheduled. The reason is very simple: this kind of mature node is a specialty technology demand, which my competitors did not have the capacity or capability to support. Therefore, it is kind of a free form. You mentioned the underloading of the mature node, and so again I would emphasize, no, we are not going to slowdown our plan in Japan or in Germany. The second question is how to do it. We have a good idea, but it's TSMC's confidential information – I'll let you know later.

Okay. Thank you.

All right. Thanks, Bruce. Operator, can we move on to the next participant, please?

Now the line is open to Charlie Chan from Morgan Stanley.

Hi. Good afternoon, gentlemen. Thanks for taking my question. So my first question is really very specific on the semiconductor tariffs on either Taiwan or TSMC's leading edge. So I'm wondering, first of all, does TSMC get involved in all those tariff negotiations between the Taiwan government and the U.S. government? And secondly, do you believe that your commitment of US$165 billion investment can get us bear on these semiconductor tariffs? Because in your previous comment, it seems to only concerned about the tariff impact on consumer tech demand. But I think global investors are also very concerned about additional tariffs on this semiconductor category. Can you give us some color? Thank you.

Okay. Let me summarize your question. First question, Charlie. So Charlie's first question is on semiconductor tariffs. He wants to know what is our comment or view on potential tariffs on Taiwan, reciprocal tariffs or semiconductor-specific tariffs. His question specifically, is TSMC involved in the negotiations between the Taiwan government and the U.S. government?

Charlie, these kinds of tariff discussions are between countries. We are a private company. Certainly, no, we are not getting involved. What is the second question?

Okay. Yes. So actually, do you have any visibility that the semiconductor-specific tariffs can be exempt?

Sorry, Charlie, I think your question was with our total investment of US$165 billion in Arizona. Do we believe TSMC believes semiconductors will be exempt from these tariffs?

Charlie, all policy, especially this tariff decision, are governments' responsibility to decide. And as a private company, we fully respect this, but we are not getting involved.

Okay. Got you. I think you were to moderate, but let's move on to my second question. So based on your second quarter guidance, which is very strong, up 13% quarter-on-quarter. I can't help to think whether there are customers pooling given the tariffs? Or is it kind of real demand? And also based on your full-year guidance, so-called mid-20%, it seems like second half recovery will be very, very gradual or flattish. So I'm wondering if you're already baking in kind of consumer tech demand impact. And if a tariff have some kind of turnaround, right, meaning, for example, major smartphone brands, whether there's a chance for you to revise your full-year revenue guidance? Thank you.

Okay. So Charlie's second question is on the revenue outlook. His first part is on the second quarter. He noted second quarter, 13% at the midpoint in U.S. dollar terms, Q-on-Q is very strong. So he wonders, are we seeing already some tariffs pull-in impact? Or is this part of that guidance? I'll stop here first.

Yes, Charlie, we have – as we said in the prepared remarks, we haven't seen any changes in customer behavior so far. Our second quarter growth was driven mainly by strong demand for the 3-nanometer and 5-nanometer technologies underpinned by the growth in our HPC platform. As I said, we haven't seen any – observed any changes in customer behavior in terms of pooling or due to tariffs; you're probably better to ask them directly.

And the second part then Charlie is asking about what the second quarter guidance implies limited half-on-half growth. So is that also because we are assuming something from tariff impact on consumer demand? Or why is that?

Charlie, as we also said in the prepared remarks, there are uncertainties and potential risk from tariffs exist. So far, that's what we are able to share with you is we stick to the mid-20% or close to mid-20% year-over-year growth. No different from the previous quarter.

I see. Yes, so I think that's real. But I think your answer to focus the previous question on long-term margin dilution was a little bit unclear because we thought that a 2% to 3% margin dilution from overseas should remain to be the case, but it seems like is widening. So I'm not sure if you use because you are further accelerating your U.S. fab expansion or some cost item or pricing item not in your stations versus maybe one or two months ago?

Okay. I think – so Charlie is asking basically how come the dilution in the latter period widens to 3% to 4%? What are the drivers or reasons behind it?

Yes, Charlie, the widening of dilution on the gross margin in the later part of the five-year period is mainly from inflation in cost and also potential tariff-related cost increases. Those are the reasons.

I see. Okay. Thank you.

Okay. Thank you, Charlie. Okay, operator, let's move on to the next participant, please?

Next one, Charles Shi from Needham. Go ahead, please.

Thanks for taking my questions. Maybe I'll ask a relatively higher level question. It's a two-part question. Both are regarding your expansion plan in the United States. I think management on another occasion said that what TSMC wants the most is really fairness. Nothing monetary, nothing about tariffs, but fairness, and management kind of elaborated a little bit what fairness means, give us a little bit more specifics. But the other part of the question regarding the U.S. expansion, it's about the R&D team center you announced. So we understand, yes, TSMC's R&D in the U.S. does need to start from somewhere, right? You said it's more about the production improvements related to R&D on derivative nodes. But since this seems to be something U.S. really cares about, the R&D capability on U.S. soil on the leading-edge, is there any longer-term plan to have the U.S. R&D center to be involved, let's say, in primary R&D, let's say, brand new processes, that the major nodes divestment? That's my two-part question. Thank you.

All right. Thank you, Charles. So again, to summarize, both questions are related to the expansion in the U.S. So the first part of the question is we – C.C. has mentioned, all we want is fair treatment. So what do we mean by fair or fairness?

Well, let me answer this question. What we mean by fair treatment is very simple. If anybody gets a subsidy or gets the incentive, it should be that everybody should get the same. Either we get all or we get zero, all right? So that's what we call fair. So again, I would like to assure you that we will be very competitive in either condition.

Okay. And then the second part of the question is regarding the R&D. Charles is saying he understands the R&D needs to start from somewhere, but with our major R&D center in Arizona, what will be the purpose or the focus? And will it be involved at some point in ramping new technologies?

As I said before, TSMC is a fab; we never stagnate. We always continue to improve. We need to establish a major R&D center in Arizona with about 1,000 engineers. That's a significant amount. But the focus will be to support our manufacturing cluster, improve its technology, and allow it to operate independently. Okay. Did I answer the question?

Maybe let me just really follow-up because there has been a good amount of chatters about the U.S. R&D center more supporting manufacturing rather than doing a brand – major R&D, but it looks like that's not the plan. But over the longer term, is there any thoughts of management maybe will get involved in brand-new nodes development one way or the other? I think that's the question people have been discussing about over the last quarter.

Okay. So Charles is asking, will the R&D center over the mid to long-term be able to focus on things like new node development or pathfinding opportunities, long-term research, these type of things?

Okay. Actually, the first purpose is to ensure that the Arizona fab can operate independently. But of course, we have done and are doing some kind of test funding, exploratory work, and cooperate with universities, etc. There are actually a lot of activities. 1,000 engineers is not a small amount. Of course, it's not comparable to TSMC right now, which has about 10,000 R&D people, but it's a beginning, okay? So we do a lot more.

Okay. Charles, do you have a second question?

No, I don't. Thank you.

Okay. Great. Thank you. Operator, the next participant, please?

Next one to ask question is Sunny Lin from UBS.

Good afternoon. Thank you very much for taking my questions. So my first question is to follow-up on the Arizona expansions. So the first part is on the timeline or the pace of your expansion now given the stronger demand for your U.S. capacities. To what extent could you pull in the ramp of the original second and third phase? And for your fourth phase, you earlier mentioned that you will be constructing the new facility there this year. So would that be possible that you start to ramp the fourth phase at the same time as the third phase?

Okay. So Sunny's first question is regarding our Giga fab cluster in Arizona. She wants to understand the timeline of expansion, particularly given the strong AI-related demand. Can we pull in the timing for both the second fab and the third fab? And also, can we, at the same time, start the production of the third and fourth fab simultaneously?

Well, Sunny, we are working very hard to speed up our production in the second fab and the construction of the third fab. All I can say around is customers' demand is strong. We have to speed it up. And the following all the fabs will definitely depend on our customers' demand, of course.

Okay. Sunny?

Well, so sorry, just to clarify. So the second phase originally was planned for production in 2028. So now should we assume it to be from maybe mid-2027 or even the first half of 2027? And for the third phase since you are building the new facility this year, so will the production stop maybe one year ahead versus the original timeline of 2030?

Okay. So Sunny, specifically, so the second one, we said we're speeding up. Can we give some context of the timeframe? And then for the third fab, will we also speed it up, could that also be moved forward?

Okay. Yes, we are speeding up. How fast? The second fab, as you said, should be pulled in. We are working hard to pull it in by at least a couple of quarters, that's at least. On the third fab, actually, I did not speak; the whole thing is also being constrained by the labor shortage in Arizona, and we need to get all the permits and everything, etc. So I cannot give you a very definite date yet, but we are going to update you probably in the next quarter or one quarter after that.

Got it. No problem. My second question is on the pricing and margin of the overseas expansions. And so now with the especially stronger demand for the U.S. capacities, would you be able to sell more value given the stronger onshoring requirements? And then for margin, earlier, you mentioned the 2% to 3% margin dilution for the coming two, three years, and then expanding to 3% to 4% maybe into 2029 to 2030. I just wonder what the underlying wafer price assumption for that gross margin dilution estimate? If you are able to raise the AZ pricing a bit, will the gross margin dilution could be less?

Okay. So Sunny's question is on the overseas expansion in both pricing and margin, given the strong demand in terms of pricing, can we reflect even greater value to our customers? And therefore – and also her question is given that the dilution from overseas will widen to 3% to 4% in the latter stages of the five-year period. She wants to know what is our underlying wafer price assumption behind us.

Sunny, let me answer that. These two things actually go together. As we said, reflecting our value is a continuous and ongoing process. And we – because of our business nature, we need a very high gross margin to earn sustainable and healthy returns. Now geographic manufacturing flexibility is an important part of our value proposition to the customers. Therefore, we are already discussing this with our major customers, and the progress is so far so good, okay? Now at the same time, the margin dilution from the overseas fabs, the additional dilutions come from cost inflation as well as potential cost increases from the tariff policies. Of course, with that, we also want to reflect the value and therefore, the discussion with the customers are continuous.

Okay. Sunny?

Got it.

All right. Thank you very much.

Next one to ask question is Brett Simpson from Arete.

Yes. Thanks very much. I have a two-part question on this year's guidance for C.C. First. C.C., you mentioned that AI is still expected to double this year despite the U.S. ban on AI GPUs into China. I guess China was a meaningful portion of accelerated shipments well over 10% of volumes. So factoring this in, it would imply your AI outlook this year still doubling would mean that the AI orders have improved meaningfully outside of China in the last sort of three months? Is that how we should interpret your comment about you still expect the business to double? And then second, we're in the June quarter where tariffs have been paused for 90 days. So to what extent do the above seasonal June quarter guidance reflect customer pull-ins ahead of potential tariffs being applied in the September quarter? Thank you.

Okay. So Brett, this question is on, again, the one part is on the AI demand that although there is a ban in China on certain AI chips or products that we reiterated our AI accelerated growth will double this year. So his assumption is that implies a strong non-China AI-related demand. I'm wondering what is the mechanics or can we comment on that behind that?

Brett, three months ago. Now I can tell you that three months ago, we were barely – we just could not supply enough wafers to our customers, and now it's a little bit balanced, but still, the demand is very strong. And you are right; other than China, the demand is still very strong, especially in the U.S. And so we are confident that we are going to double our AI revenue this year.

Yes. And then very quickly, he was asking about the second quarter revenue guidance. And do we see any tariff-related pull-in? I think Wendell answered this earlier.

Yes. I think that we have – as C.C. said in his prepared remarks, we haven't seen any changes in customer behavior. The growth in the second quarter was primarily due to the demand from our 3-nanometer and 5-nanometer technologies underpinned by the demand from the HPC platform.

Okay. Do you have a second question, Brett? Sorry.

Yes. Thanks, Jeff. Yes. Just one quick follow-up. You spoke about the Japan fab. I'm curious what is the capacity installed in Japan today? And how do you think about the revenue contribution this year from Japan?

Okay. Krish's second question is related to our first specialty technology fab in Japan. He wants to know what is the capacity installed for this specialty technology fab and also the revenue contribution from Japan?

Yes. The capacity for the fab will be 40,000 when it's ramped up. The revenue for this year compared to the whole company is really not significant at this moment.

Okay, Krish?

Got it. Thank you, Wendell. Thank you, Jeff. Thank you very much.

No problem. Okay. Thank you, everyone. This concludes our question-and-answer session. Before we conclude today's conference, please be advised that the replay of the conference call will be accessible within 30 minutes from now. The transcript will become available 24 hours from now, and both will be available through TSMC's website at www.tsmc.com. So thank you again for joining us today. We hope everyone continues to stay well and hope you will join us again next quarter. Goodbye, and have a good day. Take care. Thank you.