Taiwan Semiconductor Manufacturing Co Ltd Q2 FY2025 Earnings Call

Good afternoon, everyone, and welcome to TSMC's Second Quarter 2025 Earnings 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, 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 second quarter 2025, followed by our guidance for the third 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 on 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. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the second quarter 2025. After that, I will provide the guidance for the third quarter of 2025. Second quarter revenue increased 11.3% sequentially in NT as our business was supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies, partially offset by an unfavorable foreign exchange rate. In U.S. dollar terms, revenue increased 17.8% sequentially to TWD 30.1 billion and exceeded our second quarter guidance. Gross margin decreased 0.2 percentage points sequentially to 58.6% primarily due to an unfavorable foreign exchange rate and margin dilution from our overseas fabs, partially balanced by higher capacity utilization and cost improvement efforts. Due to operating leverage, operating margin increased 1.1 percentage points sequentially to 49.6%. Overall, our second quarter EPS was TWD 15.36, up 60.7% year-over-year and ROE was 34.8%. Now let's move on to revenue by technology. 3-nanometer process technology contributed 24% of wafer revenue in the second quarter, while 5-nanometer and 7-nanometer accounted for 36% and 14%, respectively. Advanced technologies, defined as 7-nanometer and below, accounted for 74% of wafer revenue. Moving on to revenue contribution by platform. HPC increased 14% quarter-over-quarter to account for 60% of our second quarter revenue. Smartphone increased 7% to account for 27%. IoT increased 14% to account for 5%. Automotive stayed flat and accounted for 5%, and DCE increased 30% to account for 1%. Moving on to the balance sheet. We ended the second quarter with cash and marketable securities of TWD 2.6 trillion or USD 90 billion. On the liability side, current liabilities decreased by TWD 22 billion quarter-over-quarter, mainly due to the decrease of TWD 38 billion in accrued liabilities and others. The decrease in accrued liabilities and others was mainly due to the payment of income tax. On financial ratios, accounts receivable turnover days decreased 5 days to 23 days. The decrease in accounts receivable was mainly due to NT dollar appreciation as almost all of our accounts receivables are in U.S. dollars. Days of inventory decreased 7 days to 76 days, primarily due to higher N3 and N5 wafer shipments. Regarding cash flow and CapEx. During the second quarter, we generated about TWD 497 billion in cash from operations, spent TWD 297 billion in CapEx and distributed TWD 117 billion for third quarter '24 cash dividend. Taking the unfavorable exchange rate into consideration, our cash balance decreased TWD 30.3 billion to TWD 2.36 trillion at the end of the quarter. In U.S. dollar terms, our second quarter capital expenditures totaled TWD 9.6 billion. I finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our third quarter revenue to be between TWD 31.8 billion and USD 33 billion, which represents an 8% sequential increase or a 38% year-over-year increase at the midpoint. Based on the exchange rate assumption of $1 to TWD 29, gross margin is expected to be between 55.5% and 57.5%. Operating margin between 45.5% and 47.5%. In addition, we maintain our 2025 capital budget to be between USD 38 billion and USD 42 billion. This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our second quarter '25 and third quarter '25 profitability. Compared to first quarter, our second quarter gross margin slightly decreased by 20 basis points sequentially to 58.6%. This was primarily due to an unfavorable foreign exchange rate and margin dilution from our overseas fabs, partially offset by higher-than-expected overall capacity utilization and cost improvement efforts. Compared to the first quarter, foreign exchange rate of $1 to TWD 32.88, the actual second quarter exchange rate was $1 to TWD 31.05. This created about 220 basis points margin headwind to our actual second quarter gross margin. We also experienced slightly more than 100 basis points impact from the ramp-up of our overseas fabs, mainly as the margin dilution from our Arizona fab started to kick in. We have just guided our third quarter gross margin to decrease by 210 basis points to 56.5% at the midpoint, primarily due to the continued unfavorable foreign exchange rate and more pronounced dilution from overseas fabs as we ramp up further in Kumamoto and Arizona. We continue to forecast the gross margin dilution from the ramp-up of our overseas fabs in the next 5 years starting from 2025 to be between 2% to 3% every year in the early stages and widen to 3% to 4% in the later stages. Despite the higher cost of overseas fabs, we will leverage our increasing size in Arizona and work on our operations to improve the cost structure. We will also continue to work closely with our customers and suppliers to manage the impact. Overall, with our fundamental competitive advantages of manufacturing technology leadership and large-scale production base, we expect TSMC to be the most efficient and cost-effective manufacturer in every region that we operate. Now I will discuss the effect of foreign exchange rates on TSMC's revenue and profitability. The NT dollar serves as the reporting currency in our financial statements. Almost all of our revenue is generated in U.S. dollars, while about 75% of our costs are in NT. Consequently, changes in the exchange rate between the U.S. dollar and NT will significantly impact our reported revenue and gross profit margin. Our revenue is highly sensitive to fluctuations in the dollar NT exchange rate, so a 1% appreciation of the NT against the U.S. dollar will decrease our reported NT revenue by 1%. Additionally, our gross margin sensitivity to a 1% exchange rate change is roughly 40 basis points, meaning if the NT appreciates by 1% against the dollar, our gross margin will decline by about 40 basis points. In comparison to our second-quarter exchange rate guidance of $1 to TWD 32.5 provided on April 17, the NT dollar has risen by about 4.4% sequentially, negatively affecting our second-quarter revenue by approximately 4.4% in NT and our gross margin by about 180 basis points. For the third quarter of 2025, with the current exchange rate of $1 to TWD 29, we expect the NT dollar to appreciate by another 6.6% sequentially, which will further impact our third-quarter revenue by 6.6% in NT and lower our gross margin by around 260 basis points. It’s important to note that six factors influence TSMC's profitability: leadership in technology development and ramp-up, pricing, capacity utilization, cost reduction, technology mix, and foreign exchange rates, which are beyond our control. When faced with an unfavorable foreign exchange rate, as we are currently, we will concentrate on the core aspects of our business and rely on the other five factors to navigate this challenge, as we have successfully done in the past. Therefore, we remain confident that achieving a long-term gross margin of 53% and higher is still attainable despite the unfavorable foreign exchange environment.

Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. We concluded our second quarter with revenue of USD 30.1 billion, above our guidance in U.S. dollar terms, mainly due to continued robust AI and HPC-related demand. Moving into the third quarter of 2025, we expect our business in the third quarter to be driven by strong demand for our leading-edge process technologies. Looking into the second half of 2025, we have not seen any change in our customers' behavior so far. However, we understand there are uncertainties and risks from the potential impact of tariff policies, especially on consumer-related and price-sensitive end market segment. While we observe rebate programs in China stimulating some near-term demand upside, we believe this is short term in nature and continue to expect a mild recovery in the overall non-AI end market segment in 2025. Having said that, we believe the demand for semiconductors is very fundamental and will continue to be robust. Recent developments are also positive for AI's long-term demand outlook. The explosive growth in token volume demonstrates increasing AI model usage and adoption, which means more and more computation is needed, leading to more leading-edge silicon demand. We also see AI demand continuing to be strong, including the rising demand from sovereign AI. Therefore, we now expect our full year 2025 revenue to increase by around 30% in U.S. dollar terms, supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies underpinned by growth in our HPC platform. Amidst the uncertainties, we will remain mindful of the potential tariff-related impact and be prudent in our business planning going into the second half of 2025 and 2026 while continuing to invest for the future megatrends. We will also focus on the fundamentals of our business, technology leadership, manufacturing excellence, and customer trust to further strengthen our competitive position. Next, let me talk about TSMC's global manufacturing footprint update. All our overseas decisions are based on customers' needs, the value some geographic flexibility, and the necessary level of government support. This is also to maximize the value of our shareholders. With a strong collaboration and support from our leading U.S. customers and the U.S. federal, state, and city governments, we announced our intention to invest a total of USD 165 billion in advanced semiconductor manufacturing in the United States. This expansion includes plans for 6 advanced wafer manufacturing fabs in Arizona, 2 advanced packaging fabs, and a major R&D center to support the strong multiyear demand from our customers. Our first fab in Arizona has already successfully entered into high-volume production in 4Q 2024, utilizing N4 process technology with a yield comparable to our fab in Taiwan. The construction of our second fab, which will utilize 3-nanometer process technology, is already complete. We are seeing strong interest from our leading U.S. customers and are working on speeding up the volume production schedule by several quarters to support their need. Construction of our third fab, which will utilize 2-nanometer and A16 process technologies, has already begun, and we will look into speeding up the production schedule further based on the strong AI-related demand from our customers. Our fourth fab will utilize N2 and A16 process technology, and our fifth and sixth fabs will use even more advanced technology. The construction and ramp schedule for those fabs will be based on our customers' needs. Our expansion plan will enable TSMC to scale up to a giga fab cluster in Arizona to support the needs of our leading-edge customers in smartphone, AI, and HPC applications. We also plan to build 2 new advanced packaging facilities and establish an R&D center to complete the AI supply chain. 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. Thus, TSMC will continue to play a critical and integral role in enabling our customers' success. We also maintain a key partner and enabler of the U.S. semiconductor industry. Next, in Japan, thanks to the strong support from the Japan central manufacture and local government, our first specialty technology fab in Kumamoto has already started volume production in late 2024 with 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. The ramp schedule will be based on our customers' need and market conditions. In Europe, we have received strong commitment from the European Commission and the German federal, state, and city government and are progressing smoothly with our plans to build a specialty technology fab in Dresden, Germany. The ramp schedule will also be based on our customers' needs and market conditions. In Taiwan, with support from the Taiwan government, we plan to build 11 wafer manufacturing fabs and 4 advanced packaging facilities over the next several years. 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 while continuing to invest in Taiwan, TSMC can continue to be the trusted technology and capacity provider of the global IC industry for years to come while delivering profitable growth for our shareholders. Now let me talk about our N2 and A16 status. Our N2 and A16 technologies lead the industry in addressing the insatiable demand for energy-efficient computing and almost all the innovators are working with TSMC. We expect the number of new tape-outs for 2-nanometer technology in the first 2 years to be higher than both 3-nanometer and 5-nanometer in the first 2 years, fueled by both smartphone and HPC applications. N2 will deliver full node performance and power benefit 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 as compared with 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 our 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 featuring our best-in-class Super Power Rail or SPR. Compared with 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 suited for specific HPC products with complex signal routes and dense power delivery networks. Volume production is on track for the second half of 2026. We believe N2, N2P, A16 and its derivatives will fuel our N2 family to be another large and long-lasting node for TSMC. Finally, let me talk about our A14 status. Featuring our second-generation nanosheet transistor structure, A14 will deliver another full node stride from N2 with performance and power benefits to address the increasing structural demand for high-performance and energy-efficient computing. Compared with N2, A16 will provide 10% to 15% speed improvement at the same power or 20% to 30% power improvement at the same speed and about 20% chip density gain. Our A14 technology development is on track and progressing well with device performance and yield improvement on or ahead of schedule. Volume production is scheduled for 2028. We believe A14 and its derivative will further extend our technology leadership position and enable TSMC to capture the growth opportunities well into the future. This is concluding our key message, and thank you for your attention.

Thank you, C. C. Wei. This concludes our prepared statements. Now let's begin the question and answer session.

First question on demand. I think C. C., you mentioned data center AI demand definitely looks better than maybe 3 months back. Last quarter, you also mentioned CoWoS capacity will probably come into balance by 2026. Is that still our view? Or do you think that the capacity now starts to look tighter? Second, I think you talked about on-device AI as a potential future driver. Are you seeing more development on the on-device AI part? Is it better compared to maybe 3 or 6 months back? And lastly, near term, your 4Q looks like you're expecting revenue to decline. Is that based on what your customers are telling, especially on the consumer side? Or is it just TSMC being cautious and conservative in terms of the guidance?

Okay. Gokul, thank you. Again, for the benefit of those, of course, here in person on the line, please allow me to summarize your questions. So maybe we'll take them one by one. His first question is on the demand, particularly data center and AI-related demand. As C.C. said in his remarks, it is certainly still even stronger. So his question is about the advanced packaging and CoWoS demand into 2026. How do we see the supply-demand gap narrowing or becoming more balanced for CoWoS specifically?

Gokul, the demand from AI is becoming increasingly robust. If you focus on what the CEO mentioned regarding trading companies, the megatrend for AI remains strong, as does the CoWoS. Currently, we are working to narrow the gap. I prefer not to use the term 'balance' because it was misunderstood previously, so I’ll say we are aiming to narrow the gap. The momentum is still present and quite healthy.

Okay. And then the second question or second part is on on-device or edge AI. Gokul wants to know how is the development of customers to work on on-device AI compared to maybe 3 to 6 months ago? What is the interest or activity level? And how do we see this?

As I mentioned previously, it usually takes my customers 1 to 2 years to finalize their new designs for the product. The momentum remains strong. They are continuing their efforts, and over time, while the increase in the number of edge devices is somewhat modest, we are seeing a consistent rise in die size, which has grown by approximately 5% to 10%. This trend is ongoing. Therefore, it will likely take another 6 months to a year before we witness significant growth.

Okay. And then the second question and the final part on the near term. I think, Gokul, your question is with our third quarter guidance implies a fourth quarter. Is there any particular reason or any comment that we want to make about the implied fourth quarter business momentum?

I think you did not mention. Gokul is convinced or you become conservative. That comment is more real. We are a company that what we say we will achieve and achieve the high target. Your calculation, I think Charlie also is nodding. So a lot of you are calculating our reported numbers so that you can easily see that our first quarter is decreasing. We take into the consideration of the possible impact of tariffs and a lot of other uncertainties. So we become more conservative. That's our current attitude. But I guarantee you with our technology leadership position and excellent manufacturing. If there are any opportunities, we will catch. And be expected that we will achieve our high-end target.

Okay. Sorry, let's go one by one. Second question, then maybe Charlie Chan from Morgan Stanley.

So first of all, congrats for very strong results, and especially on the gross margin side, a very good execution indeed. So my first question is really also on the gross margin because the accumulated FX impact is almost like 4.4 percentage points. It's too big to ignore. So when TSMC considers your 2026 wafer pricing, so-called reflecting your value, would you consider this FX impact and is confident to keep your margin similar to this year's level? I feel like 53% is a low bar. So I just want to remain a little bit high and see if that FX impact can be considered to reflect on your value.

Okay. So Charlie's first question is on margin and I guess, pricing. He notes, obviously, as Wendell said, the big move in the exchange rate and therefore, a big impact on our profitability and gross margin. So his question is, looking ahead to 2026. Can we reflect or earn our value from including the FX impact into the pricing? And therefore, what is our confidence level on the gross margin for next year? Can it keep a similar level as this year?

Well, let me assure you that, yes, the impact from the exchange rate is huge. But you try to imply that whether we are still our value. Let me answer that. We are working on it. And we have confidence that the 53% gross margin and higher, I still want you guys to pay more attention to and higher.

Hopefully, it will work out well. My second question is also a very hot topic recently about the H20 chip shipping to China. I remember 3 months ago, there was another question on this matter, right, meaning that back then, I believe that chip was suspended, but you're still very confident about your mid-40% CAGR for cost-saving growth in the coming 5 years. Right now, China becomes your addressable market again, do you think that mid-40% CAGR target can be revised up?

Okay. Thank you, Charlie. So Charlie's second question is around the AI accelerator demand. He notes, of course, our customers' product, H20 recently now seems to be able to ship to China versus 3 months ago it was not. So his question really is our long-term AI accelerator growth CAGR to grow close to mid-40s. Can it be higher? Do we think it will be higher? Is there upside to this?

Charlie, the situation with H20 is still developing, and according to the CEO of the trading companies, we haven't received the signal yet. Therefore, it's too early for us to provide an estimate. However, this is undoubtedly positive news. China represents a large market, and our customer can continue to supply chips there, which is encouraging for them. This development also bodes well for TSMC. As for whether we are ready to adjust our forecast, we aren't at this point. We believe another quarter will provide a clearer picture to address your inquiry.

Okay. Then we'll move on to the right side of the room for us, Bruce Lu from Goldman Sachs.

I believe Charlie already addressed the profit question. Moving on to the N2 ramp, what revenue contribution do you anticipate for the N2 ramp next year? I'm somewhat surprised to learn that the N2 ramp is projected to grow at a similar rate to N3. With N2, you have both HPC and smartphone customers increasing at the same pace in the first year or year two, correct? Can we expect around 15% revenue contribution from N2 next year or a similar level compared to N2, which is about 10% to 11% for year two?

Okay. Bruce's first question is around the N2 ramp. His question is about the ramp and the ramp profile because we said the N2 ramp profile is similar to N3. So what does that mean? And then also, of course, what revenue contribution do we expect or can we share for N2 in 2026?

Bruce, you have a good argument. Usually, we ramp up a new node using smartphones. We knew that everybody knew it. Now it's not only smartphone but also HPC product. However, the ramping profile I just reported is similar to 3-nanometer. It's limited by our capability to build a new fab to ramp it up and also a little bit straightforward is constrained by the capacity. So we say the ramp profile is similar to N3, but the revenue contribution certainly will be bigger because you don't expect our N2 is the same price as N3, right?

If that is the case, we should assume like in '27, the N2 ramp-up will be faster, right? Because you take 12, 18 months for you to build a new fab, you should be able to achieve even higher growth in N2 in '27, right?

So Bruce is asking if the revenue contribution is much higher in '26, then should it be even greater in '27?

We will answer that question in '26.

The next question is about N5 and N3. I'm looking to understand the supply and demand for N5 and N3 over the next two years, especially since most AI will transition to N3 next year. It appears that the conversion to N5 and N3 is largely complete, and we don't see much in the way of new capacity expansion for N3. This suggests that N3 will be quite constrained in the upcoming years. Does this indicate that N5 will have lower utilization, or are we planning to increase N3 production in the future? Additionally, should we expect to capture more value for both N3 and N5 next year?

Okay. Bruce's second question is around N5 and N3. He wants to know what is the outlook, the supply-demand at these 2 advanced nodes in the coming 2 years. His observation is that AI products will migrate to N3 and the N5, N3 conversion is mostly done. So his question is, will the 3-nanometer supply be very tight in the next 3 years? And I think the last part, therefore, can we earn our value or price for that tightness? And then on the flip side, what about 5-nanometer? Will it become lower utilization?

I appreciate your comment regarding the need to communicate our value due to the extremely limited capacity at the 3-nanometer node, which is expected to remain tight for a few years. The 5-nanometer node is also facing significant capacity constraints. The demand is high, particularly because many AI products are still using the 4-nanometer technology and are anticipated to transition to 3-nanometer in the next two years. In the meantime, the 5-nanometer node continues to experience tight capacity, while the 3-nanometer is even more constrained. We are actively addressing this situation. One of TSMC's strengths is our giga fab cluster, which allows us to effectively manage capacity across different nodes, including 7, 5, 3, and future 2-nanometer technologies, as we have around 85 to 90 percent of the necessary tools for each node. Although it’s not without cost, it is much easier for us to adjust or convert capacity between these nodes. Currently, we are utilizing 7-nanometer capacity to support the 5-nanometer node due to its tightness, and we are converting 5-nanometer capacity to meet the demands of 3-nanometer, as mentioned. We will continue this strategy. Our leading-edge technology capacity is indeed constrained, with both 7-nanometer and below being very tight. Simultaneously, we are working diligently to reduce the gap between demand and capacity.

Okay. Thank you, Bruce. Let's go to the participants online. Maybe we'll take 2 questions from the online, and then we'll come back to the floor. Operator?

Now asking question Brett Simpson from Arete.

I had a question for Wendell on gross margins. And it's always helpful you've laid out a framework for some of the puts and takes to TSMC's gross margins. But my question is really some of these headwinds like FX and the dilution from overseas fabs are more structural cost increases. And to what extent can TSMC adjust wafer pricing higher to neutralize these cost increases in your business? And I guess, secondly, on this point, how much economic benefits are you seeing from applying AI across the fabs? I mean, I think NVIDIA has mentioned that they're working with TSMC closely strategically in areas like computational lithography to try to drive further fab efficiencies. So can you maybe just give us some examples where you're seeing real gains in your cost structure? And are we at a point where you're starting to see several points of gross margin benefit from AI efficiencies?

Alright, Brett. Brett's first question is a bit complex. He observes that our gross margin and profitability are facing challenges due to unfavorable exchange rates and the impact of higher costs overseas. His question is about how we can adjust our wafer pricing to help offset some of these issues. Additionally, he wants to know about the economic benefits we are gaining from applying AI in our operations, particularly with EUV lithography and other examples where AI is improving our cost structure. He’s asking if we can quantify these benefits. That's your question, right, Brett?

Okay. Brett, the first question, gross margin, that's the reason why we've been talking about the 6 factors affecting our profitability. I don't think I need to repeat those 6 factors. But whenever, for example, using foreign exchange example, a few years ago, there were also a period of time that foreign exchange rates were against us. So we were able to lean on the other factors to help us mitigate the negative impact from certain factors and therefore, still achieve our gross margin targets. And you specifically asked about ASP, raising the price, but the price is just one of the factors. And I believe C.C. just elaborate a lot on earning our value. And at the same time, there are other factors that we can leverage on. So all in all, that's why we are saying 53% and higher gross margin is still achievable. Your second question on AI benefits. I think we also talked about that before. We use that in operation, in manufacturing. We also use that in R&D. Just think about it; if we are able to produce 1% of productivity gains in a company of our size, that equals to USD 1 billion. So that's a number we can share with you without going into too much other details.

Does that answer your question, Brett?

Yes, that's great. For my follow-up, C.C., you mentioned 11 fabs in Taiwan, and I believe there are 8 overseas fabs that aren't commercially operational yet. Can you discuss this? I've never seen such a significant roadmap from TSMC before. Are you planning a larger capacity expansion next year? Considering the recent announcements of numerous data centers, including a major one from Meta this week, the demand appears to be strong. Do you have enough capacity to meet this demand next year? Also, are you planning to convert more 5-nanometer to 3-nanometer, and what is your outlook for the N2 capacity plan for 2026?

Thank you, Brett. Your observation is right. Recently, we saw a lot of announcement of the AI data center all over the world, and the demand on 3-nanometer, actually on 5-nanometer, 3-nanometer, and the future 2-nanometer are very high. We did not see this kind of strong demand for a long time, but will be enough to support them, I still want to use my word, say that we try very hard to narrow the gap between the demand and supply. We're working very hard.

Okay. Thank you, Brett. Let's go to the next participant on the call.

Now it's Arthur Lai from Macquarie.

Arthur Lai from Macquarie. Again, congrats on a strong result. I would like to follow up on the N2. I think as C. C. highlights, this is a very exciting node we have all heard. And then I want to follow up on the return on investment. Can you compare the N2 and N3, the return on investment and then give us more color? Second one is the reason we ask this question is because the CapEx per area actually N2 is higher, right? And then we also heard from the industry that the company's yield on the N2 is also pretty good. So can you give us some put and take on how we think of the N2's future development?

Arthur's questions focus on N2, which is indeed a very promising node. He wants to know about the return on investment for N2 in comparison to N3, and he also seeks insights into N2's higher CapEx despite its good yield. What developments are we seeing for the 2-nanometer technology? Is that what you were asking, Arthur?

Arthur, N2 return, as we said before, N2, the profitability is better than N3. Now there were questions asking how many quarters to catch up with the corporate before. N3 took longer. But for N2, we think it will be back to the old days. Having said that, I need to remind everyone that in the old days, we're talking about corporate average of, say, 50% gross margin. Nowadays, we're talking about 53% gross margin. So it becomes less meaningful to talk about how much time it takes to catch up with corporate nowadays. But having said that, structurally, N2 does have a better profitability than N3, okay? And N2 development is right on track. We're ramping it in the second half of this year. We expect the revenue to come up in the first half of next year.

Okay. Thank you, Wendell. Thank you, Arthur. Let's come back to the floor. We'll go left middle right. So maybe Sunny Lin from UBS.

Very good results, and congrats. So my first question is to follow up on CapEx. So obviously, full year sales guidance is stronger. You are turning more constructive on high-performance compute and AI. Yet you are keeping your CapEx guidance. So is it fair to assume that you are considering some conservatism for CapEx for this year given the ongoing macro uncertainty? Or is it because in the short term, your capacity expansion is somewhat constrained by the ability that you can ramp up more capacity? And therefore, maybe in 2026 and 2027, we should expect some acceleration of your CapEx spending?

Okay. So Sunny's first question is around CapEx. She notes, of course, that we raised our 2025 revenue guidance this year, and we certainly still see a very robust demand from AI, yet we kept our CapEx guidance in the same range of $38 million to $42 million. So she wants to understand why? Is it because of macro uncertainty? Is it because of constraints in the construction? And her other part of this question is what is the CapEx outlook for '26 and '27, I guess?

Sunny, the CapEx, as we said before, the CapEx invested in a given year is for the business opportunities in the following years. And as long as there are business opportunities, we will not hesitate to invest. Having said that, nowadays, as C.C. also said, with all these macro uncertainties, we are mindful of these uncertainties. So we also take that into consideration in our capacity and CapEx plan. Going forward, it's too early to talk about future years CapEx, but I can share with you that a company of our size, it's unlikely that you see CapEx dollar amount suddenly drop a lot in any given year. That's all I can share with you.

Got it. It seems like capital expenditures might increase in the upcoming years. My second question is about cloud AI. You previously indicated that you expect most of the sales growth for 2025 to be driven by cloud AI. Do you have any updates regarding the growth of cloud AI in 2025, which you had earlier projected to be around 100%, and how this relates to your CoWoS capacity expansion? Will you be able to increase CoWoS capacity this year to accommodate the stronger growth in cloud AI? Additionally, could you provide any preliminary insights on your CoWoS capacity expansion plans for 2026?

Well, my answer stays the same. We are trying very hard to narrow the gap for now and for 2026, the demand momentum is very healthy and very strong. And so we are building many new facilities in the back end to increase the CoWoS capacity to support our customers. AI demand is very strong. And so the CoWoS capacity, the demand is very strong.

Okay. Thank you, Sunny. Then we'll move on to Laura Chen from Citi.

Congrats for the good results and outlook. My question is also about the AI chip. C. C., you mentioned that AI chip is getting bigger and bigger and also the power consumption is getting much more. So I'm just wondering that among like your advanced technology, including the advanced node, we also noted that during the symposium, TSMC also announced some of the new technology in advanced packaging as well. Just wondering how do you kind of prioritize your leading-edge advanced packaging. During the symposium, we see that system now wait for that kind of a new design. Do you have any plans or timeline for the new technology? And should we think about that, that should be aligned with our most advanced node process like N2 or N16 going forward?

Okay. So Laura's first question is on advanced packaging nodes. AI, the die sizes are increasing, and the need for power consumption or energy efficiency is rising. So she wants to understand how our strategy for advanced packaging along with the advanced node development. Are there any specific packaging solutions that we're prioritizing? What about the timeline and roadmap? How does that match up with our advanced node roadmap?

I believe TSMC's approach to technology development focuses on collaboration with customers. There is significant demand from customers, and we respond by developing the necessary technology and increasing capacity. Every customer is a priority for TSMC. On the advanced packaging side, we cater to various customers who utilize different methods. We are working on a range of back-end packaging and advanced technologies for all our clients. This includes advanced leading-edge technology, and we have systems like CoWoS and various other packaging solutions that I might not recall all the names of, but there are many options available, and we collaborate closely with our customers to fulfill their needs.

Is that easy to kind of leverage or transfer different kinds of technology from your perspective?

Of course, there are some similarities in between. Otherwise, we are going to put too much of the effort and did not get the return. Yes, there's a lot of similarities, but a lot of varieties also.

Okay. My second question is about the AI demand for advanced nodes and leading-edge packaging, which is very tight. However, I wonder if there is still overcapacity in mature nodes across the industry. TSMC has more mature 16-nanometer processes and above. Can we consolidate our mature nodes to improve efficiency and capabilities to better meet the demand overall?

Okay. So Laura's second question is on mature nodes. She notes that there is overcapacity on the industry-wide in older nodes. So she wants to understand for TSMC specifically, if we take, for example, 16-nanometer and older nodes, what is our strategy? Can we consolidate amongst the different nodes? How do we protect our profitability?

Good question. If you read the newspaper, there are so many mature node capacities. TSMC's strategy actually is to develop specialties within the mature node technologies. For example, that RF technology or CMOS image sensor or the high voltage. So we develop technology at the request of our customer. So we don't worry too much about what you said, overcapacity. If it is really overcapacity, we will not build a fab in Japan. We will not build a fab in Germany. So it's not overcapacity. It's all related to customers' needs and demands, and those are all specialty technologies. Did I answer your question?

Okay. Thank you, Laura. I think in the interest of time, we'll go to Brad Lin from Bank of America. Then we'll take one more from the line and then if there's one more from the floor.

I have 2 questions. My first one is on the humanoid robot. So we have learned that humanoid robots started to contribute to TSMC, and it is gaining momentum as the next frontier of the AI hardware. How does TSMC evaluate the market size of humanoid robots in the semiconductor and in terms of the potential market TAM, compute, and also sensor requirements? And what do you think that might be another driver potentially for mature nodes too?

Okay. Thank you, Brad. So Brad's first question is around humanoid robots. We're starting to see some contribution. He wants to understand how do we evaluate the market size? What is the addressable opportunities for TSMC in the long term at the leading edge and also on the mature nodes with certain types of specialties?

Brad, it's too early to say whether the humanoid robot will have a role this year or even next year because it's quite complex. The humanoid robot is likely to be utilized primarily in the medical industry to assist an aging population. Personally, I may eventually need a humanoid robot for help. However, it's complicated as it involves various sensor technologies, including image, pressure, and temperature sensors, all providing feedback to the CPU. Given that it directly interacts with humans, it must be extremely cautious. Once it becomes operational, it could represent a significant advancement. A customer mentioned to me that while electric vehicles are notable, the impact of robots will be tenfold. I'm looking forward to that. Does that answer your question?

I believe the client definitely owns EV cars and robots, so he understands it well. My second question is about the potential for recycling value into 2026. We usually continue to incorporate value into our pricing. With the possibility of higher pricing in 2026, are you seeing any signs of increased demand from customers in the second half of the year? Considering the tight pipeline of N3 and N5, will we see a continuous trend into the fourth quarter, even though we've already indicated a potential decline? Is there any possibility of increased demand?

Okay. Brad's second question is specifically about whether we see any customers trying to bring forward their demand ahead of 2026 into the second half of this year. Also, do we have any additional comments to offer on the fourth quarter besides what we've already shared?

No, we have not observed any changes in customer behavior so far. To elaborate, regarding the demand for 3-nanometer, the cycle time remains around 4 months, which means there's no way to expedite anything. Our capacity is extremely tight, and all schedules are already in place. Therefore, there's no breakeven room for the full year, even considering various factors. So to clarify, no, there will be no changes. 2026 is still set for 2026, and we will keep you informed.

Thank you, C. C. Thank you, Brad. Alright, operator, let's go to the next question from the last participant on the line.

Yes. The last one to ask a question is Mehdi Hosseini from SIG.

The first question relates to capital intensity. Over the past five years, when ramping up N3 and N5, the capital intensity was at or above 40%. You also mentioned that the N2 tape-out is progressing better than the combined performance of N3 and N5. Does that suggest that capital intensity would need to rise back to 40%, indicating an initial investment for N2 to support these tape-outs? Is this the correct perspective on how investment will evolve? I have a follow-up question.

Okay, Mehdi. Sorry, we couldn't hear you exactly clearly. Let me try to summarize your question. Your question is about capital intensity. You mentioned that in the past, when we invested in new nodes or structural megatrends like we have with N3 and N5, our capital intensity increased to over 40%. So if I understood you correctly, you're asking about our expectations for capital intensity given the strong demand for 2-nanometer in the upcoming multiyear period. Is that correct?

Okay, Mehdi, let me answer this question. As we just said, the capital expenditures invested in any year is the future growth opportunities. So if we do our job right, the growth in the next few years is likely to exceed the growth in CapEx dollars, even though, as I said, the CapEx dollars is unlikely to drop significantly in any given year. So you see a higher growth in revenue than the growth in capital expenditure, then you don't have it such a high capital intensity. And we actually demonstrated that in the past few years. And also, let me just share with you that because of this, we're not operating setting a capital intensity as a goal. The dollar amount invested is really on the structural demand growth in the following years. So talking about capital intensity is also less meaningful than before.

Okay. I have a follow-up question. You mentioned A16, which is highly relevant for high-performance computing. Is that the point where AI and HPC will be comparable to smartphones as a market that drives demand for the most advanced nodes?

Sorry, Mehdi, again, I apologize. We couldn't hear you clearly, but I think his question is about on A16, where we said it's more for specific HPC-related offering. So his question is, I think, Mehdi, your question is, is that where the AI demand also comes in for the 2-nanometer family?

Mehdi, you make a valid point. Typically, customers in high-performance computing tend to lag behind by a generation or two in technology. The current demand for AI is exceptionally strong. However, what's crucial is that we require better performance while also being mindful of power consumption, which is extremely important. With the A16, we've achieved an additional power efficiency improvement of nearly 20%. This significantly benefits AI data center applications, enabling my customers to progress more swiftly. When discussing AI data centers, the primary concern is often power supply and electricity. While they may not explicitly emphasize the importance of power efficiency, they highlight the need for substantial electricity infrastructure to support these centers, underscoring its significance. TSMC is the provider of the technology, and the A16 is an enhancement of the N2 node. Therefore, it's not surprising that those in the AI data center sector are inclined to adopt the A16.

Okay. Thank you, C. C. Thank you, Mehdi. We'll take the last question from the floor. We have one participant here, Felix Pan from KGI.

I only have one question about the overseas expansion. I think C. C. earlier mentioned that the second fab for the N3, there's a strong demand. So you guys need to speed up several quarters for that. Together with, I think the U.S. government also raised the investment tax credit cap for next year. So I wonder how this shapes or how this speeds up your ramping schedule for the second fab and how this impacts the overseas fab dilution for the guidance windows given earlier. And I think the follow-up question will be if you guys speed up the U.S. investment, how does that impact other regional investments like Japan and Germany as well? And lastly, is that possible to break down the overseas CapEx and domestic CapEx going forward? That's all my questions.

Sure. Felix asked about our international expansion plans and mentioned that we are accelerating the schedule for the second fab in the U.S. He also referred to the recent passage of the U.S. ITC bill. He inquired about the effects on our ramp schedules for the U.S. expansion and the implications for overseas dilution. Additionally, he wondered how speeding up U.S. investments would impact other regional investments in places like Japan and Germany, and if it would be possible to provide a breakdown of overseas and domestic CapEx moving forward.

Well, that's 2 questions. Okay. Let me share with you about our ramp-up schedule. It's totally because of our customers' demand. We appreciate the U.S. government increasing the ITC from 25% to 35%. We appreciate that. It helps. But the real schedule is because of our customers' demand. So we have to prepare the capacity to meet the demand. That's the #1 consideration.

The margin impact is positive, although not that significant in the 5-year period. Think about this; the ITC is used to offset the asset value. And the benefit comes when depreciation starts. So it gets amortized.

And then Felix's second question is how does the ramp and speed up of the U.S. cluster expansion, how is this impacting our expansion plans in Japan and Europe, if it does at all?

Well, you think about the TSMC expansion, the overseas fab in the U.S. is leading edge. In Japan, it's on specialty technology. To be specific, most of the time, it's for the CMOS image sensor. For Germany, it's the automotive industry. So they are all not in the same field. So actually, it doesn't affect. The investment in the U.S. or invest in leading edge does not affect the investment in Japan or in Germany.

Thank you, C.C. Thank you, Felix. Okay, everyone. So this concludes our question-and-answer session. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within 30 minutes from now. The transcript will become available 24 hours from now, and both are going to be available through TSMC's website at www.tsmc.com. So thank you very much for joining us today. We hope everyone continues to stay well, and we hope you will join us again next quarter. Goodbye, and have a good day. Thank you.