Taiwan Semiconductor Manufacturing Co Ltd Q3 FY2025 Earnings Call

Good afternoon, everyone, and welcome to TSMC's Third Quarter 2025 Earnings Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. TSMC is hosting 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 third quarter 2025, followed by our guidance for the fourth 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 Q&A. 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 third quarter 2025. After that, I will provide the guidance for the fourth quarter 2025. Third quarter revenue increased 6% sequentially in NT as our business was supported by strong demand for our leading-edge process technologies. In U.S. dollar terms, revenue increased 10.1% sequentially to $33.1 billion, slightly ahead of our third quarter guidance. Gross margin increased 0.9 percentage points sequentially to 59.5%, primarily due to cost improvement efforts and a higher capacity utilization rate, partially offset by an unfavorable foreign exchange rate and dilution from our overseas fabs. Accordingly, operating margin increased 1.0 percentage points sequentially to 50.6%. Overall, our third quarter EPS was TWD 17.44, up 39% year-over-year, and ROE was 37.8%. Now let's move on to revenue by technology. 3-nanometer process technology contributed 23% of wafer revenue in the third quarter, while 5-nanometer and 7-nanometer accounted for 37% and 14%, respectively. Advanced technologies, defined as 7-nanometer and below, accounted for 74% of wafer revenue. Moving on to revenue contribution by platform. HPC remained flat quarter-over-quarter to account for 57% of our third quarter revenue. Smartphone increased 19% to account for 30%. IoT increased 20% to account for 5%. Automotive increased 18% to account for 5%. And DCE decreased 20% to account for 1%. Moving on to the balance sheet. We ended the third quarter with cash and marketable securities of TWD 2.8 trillion or USD 90 billion. On the liability side, current liability decreased by TWD 101 billion quarter-over-quarter, mainly due to the decrease of TWD 112 billion in accrued liabilities and others as we paid out 2025 provisional tax of TWD 136 billion. In terms of financial ratios, accounts receivable turnover days increased 2 days to 25 days. Days of inventory decreased 2 days to 74 days due to strong shipment in N3 and N5. Regarding cash flow and CapEx. During the third quarter, we generated about TWD 427 billion in cash from operations, spent TWD 287 billion in CapEx and distributed TWD 117 billion for fourth quarter '24 cash dividend. Overall, our cash balance increased TWD 106 billion to TWD 2.5 trillion at the end of the quarter. In U.S. dollar terms, our third quarter capital expenditures totaled $9.7 billion. I have finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our fourth quarter revenue to be between USD 32.2 billion and USD 33.4 billion, which represents a 1% sequential decrease or a 22% year-over-year increase at the midpoint. Based on the exchange rate assumption of USD 1 to TWD 30.6, gross margin is expected to be between 59% and 61%, operating margin between 49% and 51%. This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our third quarter '25 and fourth quarter '25 profitability. Compared to second quarter, our third quarter gross margin increased by 90 basis points sequentially to 59.5%, primarily due to cost improvement efforts and a higher overall capacity utilization rate, partially offset by margin dilution from our overseas fabs and an unfavorable foreign exchange rate. Compared to our third quarter guidance, our actual gross margin exceeded the high end of the range provided 3 months ago by 200 basis points, mainly as the actual third quarter exchange rate was $1 to TWD 29.91 compared to our guidance of $1 to TWD 29. In addition, we also delivered better-than-expected cost improvement efforts. We have just guided our fourth quarter gross margin to increase by 50 basis points to 60% at the midpoint, primarily driven by a more favorable foreign exchange rate, partially offset by continued dilution from our overseas fabs. While the cost of overseas fabs remains higher, thanks to the company's overall larger scale, we now expect the gross margin dilution from the ramp-up of our overseas fabs to be closer to 2% in the second half of 2025. For the full year 2025, we now expect it to be between 1% to 2% as compared to 2% to 3% previously. Looking ahead, we continue to forecast the gross margin dilution from the ramp-up of our overseas fabs in the next several years to be 2% to 3% in the early stages and widening to 3% to 4% in the latter stages. We will leverage our increasing size in Arizona and work on our operations to improve the cost structure. We will also continue to work closely with our customers and suppliers to manage the impact. Overall, with our fundamental competitive advantages of manufacturing technology leadership and large-scale production base, we expect TSMC to be the most efficient and cost-effective manufacturer in every region that we operate. Now let me make some comments on our 2025 CapEx. As the structural AI-related demand continues to be very strong, we continue to invest to support our customers' growth. We are narrowing the range of our 2025 CapEx to be between USD 40 billion and USD 42 billion as compared to USD 38 billion to USD 42 billion previously. About 70% of the capital budget will be allocated for advanced process technologies, about 10% to 20% will be spent for specialty technologies, and about 10% to 20% will be spent for advanced packaging, testing, mass making, and others. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. Even as we invest for future growth with this higher 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. Now let me turn the microphone over to C.C.

Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. We concluded our third quarter with revenue of USD 33.1 billion, slightly above our guidance in U.S. dollar terms, mainly due to the strong demand for our leading edge process technologies. Moving into the fourth quarter 2025, we expect our business to be supported by continued strong demand for our leading-edge process technologies. We continue to observe robust AI-related demand throughout 2025, while non-AI end market segments have bottomed out and are seeing a mild recovery. Supported by our strong technology differentiation and broad customer base, we now expect our full year 2025 revenue to increase by close to mid-30s percent year-over-year in U.S. dollar terms. While we have not observed any change in our customers' behavior so far, we understand there are uncertainties and risks from the potential impact of tariff policies, especially in consumer-related and price-sensitive end market segments. As such, we will remain mindful of the potential impact and be prudent in our business planning going into 2026 by continuing to invest for the future megatrend. Amidst the uncertainty, we will also continue to focus on the fundamentals of our business, that is technology leadership, manufacturing excellence, and customer trust, to further strengthen our competitive positioning. Next, let me talk about the AI demand outlook and TSMC's capacity planning process disciplines. Recent developments in the AI market continue to be very positive. The explosive growth in token volume demonstrates the increasing consumer AI model adoption, which means more and more computation is needed, leading to more leading-edge silicon demand. Companies such as TSMC are leveraging AI internally to drive greater productivity and efficiency to create more value. As such, enterprise AI is another source of demand. In addition, we continue to observe the rising emergence of sovereign AI. We are also happy to see continued strong outlook from our customers. In addition, we directly received very strong signals from our customers' customers, requesting the capacity to support their business. Thus, our conviction in the AI megatrend is strengthening, and we believe the demand for semiconductors will continue to be very fundamental. As a key enabler of AI applications, TSMC's biggest responsibility is to prepare the most advanced technologies and necessary capacity to support our customers' growth. To address the structural increase in the long-term market demand profile, TSMC employs a disciplined and thorough capacity planning system. Externally, we work closely with our customers and our customers' customer to plan our capacity. We have more than 500 different customers across all the end market segments. In addition, as process technology complexity increases, the engagement lead time with customers is now at least 2 to 3 years in advance. Therefore, we get the deepest and widest look possible in the industry. Internally, our planning system involves multiple teams across several functions to assess and evaluate the market demand from both top-down and bottom-up approaches to determine the appropriate capacity to build. This is especially important when we have such high forecasted demand from AI-related businesses. As the world's most reliable and effective capacity provider, we will continue to work closely with our customers to invest in leading-edge specialty and advanced packaging technologies to support their growth. We will also remain disciplined and thorough in our capacity planning approach to ensure we deliver profitable growth for our shareholders. Now let me talk about TSMC's global manufacturing footprint update. All our overseas decisions are based on our customers' needs, as they value some geographic flexibility and necessary levels of government support. This is also to maximize the value for our shareholders. With strong collaboration and support from our leading U.S. customers and the U.S. federal, state, and city governments, we continue to speed up our capacity expansion in Arizona. We are making tangible progress and executing well to our plan. In addition, we are preparing to upgrade our technologies faster to more advanced process technologies in Arizona, given the strong AI-related demand from our customers. Furthermore, we are close to securing a second large piece of land nearby to support our current expansion plans and provide more flexibility in response to the very strong multiyear AI-related demand. Our plan will enable TSMC to scale up through an independent giga fab cluster in Arizona to support the needs of our leading-edge customers in smartphone, AI, and HPC applications. Next, in Japan, thanks to the strong support from the Japan central, prefectural, and local governments, our first specialty fab in Kumamoto has already started volume production in late 2024 with very good yield. The construction of our second fab has begun, and the ramp schedule will be based on our customers' needs and market conditions. In Europe, we have received strong commitment from the European Commission and the German federal state and city government. Construction of our specialty fab in Dresden, Germany, has also started, and we are progressing smoothly with our plans. The ramp schedule will be based on our customers' needs and market conditions. In Taiwan, with support from the Taiwan government, we are preparing for multiple phases of 2-nanometer fab in both Hsinchu and Kaohsiung Science Parks. We will continue to invest in leading edge and advanced packaging facilities in Taiwan over the next several years. 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 logic IC industry for years to come. Finally, let me talk about our end-to-end A16 status. Our 2-nanometer and A16 technologies lead the industry in addressing sizable demand for energy-efficient computing, and almost all innovators are working with TSMC. N2 is well on track for volume production later this quarter. With a full year, we expect a faster ramp in 2026, fueled by both smartphone and HPC AI applications. 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 '26. We also introduced A16 featuring our best-in-class Super Power Rail or SPR. A16 is best suited for specific HPC products with compressed signal routes and dense power delivery networks. Volume production is on track for the second half of '26. We believe N2, N2P, A16, and its derivatives will propel our N2 family to be another large and long-lasting node for TSMC. This concludes our key message, and thank you for your attention.

Thank you, C.C. This concludes our prepared statements. Now let's begin the Q&A session. Operator, can we please proceed with the first caller on the line? Thank you.

First one, Gokul Hariharan, JPMorgan.

Great results again. So on the AI front, C.C., I think you have met with pretty much everybody who is driving the Gen AI revolution over the last couple of months. And as you said, everybody seems to be a lot more positive. I think we gave a guidance of mid-40s data center AI growth CAGR earlier this year until 2029. Anything that you see which should change that number? Definitely feels like the growth today seems to be much stronger. And related to that, you did talk about the very detailed capacity expansion planning that TSMC does. In past technology cycles, TSMC CapEx has gone up significantly to prepare for the next upgrade or next leading-edge node. But in this cycle, TSMC revenues have grown 50% from the previous peak in '22, and CapEx has only grown about 10%. So how should we think about the CapEx over the next couple of years? I know that you're not giving numerical guidance yet, but I just wanted to understand if we are looking at much higher CapEx in the next couple of years, given all these conversations you've had. And I have a follow-up after that.

That's quite a detailed question. Gokul, the demand for AI remains very robust, even stronger than we anticipated three months ago. Currently, we have engaged with our customers and their clients. The compound annual growth rate we previously announced is around the mid-40s, and it appears to be slightly better than that. We expect to provide an update early next year for a clearer outlook. At this moment, the figures are remarkable.

And then the second part of Gokul's question is related to CapEx. He notes that in the past, when TSMC sees opportunities for higher growth, past cycles or past instances, we would step up the CapEx significantly to prepare to drive the future growth. But he notes, this cycle, actually, though, while CapEx is increasing, the revenue is increasing even faster. So his question really, I think, how do we see this playing out over the next few years, both in terms of the CapEx spend and the growth relative to the revenue growth.

Every year, we invest in capital expenditures based on our business opportunities for the upcoming years. As long as we identify potential for growth, we will continue to invest without hesitation. If we manage our operations effectively, we expect our revenue growth to outpace our capital expenditure growth, which is what we have achieved in recent years. Looking ahead, if we maintain our strong performance, we should see this trend continue. For a company of our scale, it's unlikely that capital expenditures will increase significantly year-over-year. As we invest and our growth surpasses capital expenditure growth, we will see growth similar to what we experienced in the previous years.

Understood. I know that it is unlikely to drop, but it is also likely to grow quite a bit given what C.C. mentioned in terms of every customer asking you and every customers' customer requesting you for capacity addition, right?

Yes. As I said, a higher level of CapEx is always going to be correlated with a higher growth opportunity. So as C.C. said, next year looks to be a healthy year, and we are confident on the mega trend that we'll continue to invest.

Yes. Maybe one more follow-up question from me. C.C., I think last year also, you gave us an indication of how much CoWoS capacity you would be building. I think you talked about 2x, of doubling the CoWoS capacity. It clearly feels like even that is not enough. Could you give us some idea about how much capacity you would be building next year just to get some idea about what you are seeing in terms of AI demand? And also just to get some understanding of TSMC's data center AI exposure, I think last year, we talked about mid-teens revenues. Where do we end up this year? Do we end up close to like 30% of revenues coming from AI?

Well, Gokul, this is C.C. Wei again. Talking about the CoWoS capacity, all I can say is continue the 3 months ago. We are working very hard to narrow the gap between the demand and supply. We are still working to increase the capacity in 2026. The real number, we probably update you next year. Today, all I want to say about the AI everything related like front-end and back-end capacity is very tight. We are working very hard to make sure that the gap will be narrow, but all I can say is we are working very hard.

Okay. Thank you, Gokul. I think we need to move on in the interest of time. So operator, can we move to the next participant, please?

Yes. Next one, Charlie Chan, Morgan Stanley.

Congratulations on the impressive results, C.C., Wendell, and Jeff. My first question relates to your business demand. As C.C. mentioned, your front-end demand remains strong heading into next year. However, one of your major customers indicated that system-level innovations in areas like thermal management could significantly enhance performance. How do we reconcile your robust leading-edge demand with customers continuing to shift towards your most advanced nodes, while also reflecting value, especially when some customers believe that Moore's law is no longer applicable? Could we get some clarification from TSMC?

Okay. Charlie, this is C.C. Wei. Yes, one of my customers, a very important customer, says Moore's law is dead, but what he meant is it's not only we rely on the chip technology anymore; now we have to focus on that whole systems' performance. So he wants to emphasize the whole systems' performance rather than just talking about the Moore's law, which is not enough to meet his requirement. So again, we work very closely with his people and to design our technology both in front-end and back-end and also in all the packaging to meet his requirement. That's all I can say.

Okay. Thank you, C.C. Do you have a second question, Charlie?

Yes, I do, Jeff. Yes. So anyway, I would interpret it as so-called Moore's Law 2.0 that your co-COO, Mr. Cliff Hou also comes here during the SEMICON Taiwan. But anyway, thanks, C.C., for your commentary. And my second question is actually a follow-up from last quarter's same question. Back then, I consulted you about China AI GPU demand, right, whether you can seize the market opportunity because China, certainly, they also expanding their AI infrastructure very rapidly. But given the recent kind of back and forth between the U.S. and China, whether China can really import NVIDIA GPU, would that kind of discount your potential long-term growth of the AI CAGR? Is that something that TSMC would worry about?

Okay. So Charlie's second question is related around AI demand and specific to China. With the sort of export control and restriction, his question is, does that impact our ability to address the market opportunity and will this impact our AI CAGR growth if we are not allowed to fully serve China.

Yes. I think it's a little bit of both sides, meaning restriction from the U.S., but also the Chinese government's kind of discouragement to procure U.S. chip. Sorry for the interruption.

Well, Charlie, to speak the truth, I have confidence in my customers, both in graphic or in ASIC, they are all performing well. And so if the Chinese market is not available, but I still think the AI's growth will be very dramatic and, as I said, very positive, and I have confidence that our customers' performance, and they will continue to grow, and we will support them.

So even with limited opportunity from China for the time being, you are still confident that a 40% CAGR or even higher can be achieved in the coming years?

You are right.

Operator, can we move on to the next participant, please?

Yes. Next one, Sunny Lin, UBS.

Congrats on the very strong gross margin. So my first question is how should we think about 2026? I understand we should get better color maybe into January, but just want to get some directional major puts and takes for gross margin trending going to 2026. Especially, how should we think about the gross margin impact from 2-nanometer ramp for 2026?

Okay. So Sunny's first question is regarding gross margin. She would like to know directionally, how do we see the gross margin for next year 2026 in terms of certain puts and takes? And also if Wendell is able to comment specifically, Sunny, sorry if I heard you right, on the N2 dilution impact, correct?

Okay. Sunny. Yes, it's too early to talk about 2026. But you already mentioned about the N2 dilution. And as with all the new nodes, when they just come out, the N2 will have dilution in our gross margin in 2026. But at the same time, the N3 dilution is gradually coming down, and we expect the N3 to catch up to the corporate average sometime in 2026. The other factors include overseas fabs dilution, which will continue, and which we said that it will be about 2% to 3% dilution in the early stage of the next several years. That will also be there. And also, we all saw the dramatic foreign exchange rate movement in the earlier part of this year. There's no control. We don't know where that will be. But every percentage move of the dollar against NT will affect our gross margin by 40 to 50 basis points. So that just gives you some rough idea.

Got it. Sorry, if I may, yes, a very quick follow-up. And so on 2-nanometer, would the typical 2% to 3% dilution by new node for the first 7 to 8 quarters of mass production be a good reference for 2-nanometer as well for 2026?

Yes. Sunny, let me share with you. N2's structural profitability is better than the N3, okay? Secondly, it's less meaningful nowadays to talk about how long it will take for a new node to reach to a corporate average in terms of profitability. And that's because the corporate profitability, the corporate gross margin moves, and generally, it has been moving upwards. So it's less meaningful to talk about that, okay?

Got it. No problem. That's very helpful. My second question is maybe for C.C. Thanks a lot for sharing with us the details on how you think about the capacity expansions and planning. And so my question is now cloud AI is ramping a lot faster than the prior opportunities like smartphones and PCs. Yes, I think the demand for cloud AI is also may be harder to forecast. So just want to maybe get a bit more color from you that now versus the prior rounds of capacity expansions, what is TSMC doing differently versus before? And how do you ensure that while you are ramping up the capacities more quickly while still having good risk control?

Okay. Thank you, Sunny. So Sunny's second question is regarding capacity planning and expansion. In a capital-intensive business, she notes this is very important. But in the past, smartphone and PC megatrends; today, it's AI and cloud AI. She's wondering, does that make this planning process more difficult to forecast? And what are we doing differently or how do we forecast this to make sure that we are investing appropriately?

Right now, we are in the early stages of AI applications, making it challenging to provide accurate forecasts. We approach this differently by paying close attention to our customers' customers. We engage with them to discuss their applications in search engines and social media, understanding their perspectives on AI functionality. This allows us to evaluate the potential growth of AI more effectively than before, where we focused solely on our customers through internal studies. Did I address your question?

Got it. Yes, yes, yes, and looking forward to the CapEx guide in January.

You're welcome.

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

Next one, Bruce Lu, Goldman Sachs.

I believe Jensen mentioned that there is a $3 trillion to $4 trillion opportunity in AI infrastructure by 2030. In comparison, the capital expenditures for this year are around $600 billion, which suggests a growth rate of about 40%. This aligns with Jensen's outlook for AI growth. However, I am curious about TSMC's perspective on the growth of AI infrastructure over the next five years. Additionally, what is TSMC's projection for the growth rate in the upcoming years? Historically, TSMC has provided insights into the semiconductor industry growth, foundry growth, and how TSMC can exceed the industry average. Given this context, can we expect TSMC's AI-related revenue to grow in line with the capital expenditure growth of AI or major cloud service providers? Or should we anticipate an even higher growth rate for TSMC due to the potential for increased value?

Well, Bruce, I essentially want to understand how accurately we can predict the AI demand. We estimate that the compound annual growth rate is roughly in the mid-40s, not including all the infrastructure development, and this aligns with our major customers' forecasts. Additionally, the increase in the number of tokens is exponential, and I believe it will continue to grow exponentially every three months. This reassures us that the demand for leading-edge semiconductors is substantial. As I've mentioned, we're analyzing all current demand alongside our capacity expansion. TSMC needs to make significant efforts to close the gap, and that is our current focus. We will likely share more precise numbers with you next year when we have a clearer picture.

I just wanted to follow up with a second question. It seems that the token growth is much higher than the AI-related revenue guidance from TSMC. The gap appears to be increasing, especially when we look at future years. This highlights the differences between the current TSMC outlook and the potential token consumption. The gap is continuing to widen. How do we address this? Do we consider this a significant issue?

Okay, Bruce, you are right, you are right. The tokens and the number of tokens increase exponentially is much, much higher than TSMC's CAGR as we forecasted. And let me tell you that, first, our technology continues to improve. And so our customer is moving from one node to the next node so that they can handle a much larger number of token numbers in their basic fundamental calculation. So that's one thing. We progressed very well for one node into the other node, and our customer working with TSMC to continuously to improve their performance. And that's why when we say that we have about 40%, 45% CAGR, then the token number is exponentially increased because of our customer and TSMC's technology combined can handle much more or much efficiently than before. Did I answer your question?

I see. So you believe your node migration plus your customer design change can fulfill or can meet the exponential growth for token consumption?

Exactly.

Sorry, Bruce, that was your second question. Operator, we need to move on. Thank you, Bruce.

Next on, Laura Chen, Citi.

Appreciate C.C. sharing your view on TSMC strategy on the AI capacity planning. I think along with very strong advanced node demand, I believe that advanced packaging like CoWoS is also one of the focuses for your AI clients they are now looking for. I recall that TSMC previously also planned to expand advanced packaging in Arizona. So can you give us an update here? And also, I mean, for the time being, just very stretched demand at the moment. So TSMC will work more closely with your OSAT partner to fulfill the strong demand at the same time? That's my first question.

Okay. We have announced our plan to build two advanced packaging fabs in Arizona to support our customers. But at the same time, actually, right now, we are working with one OSAT, a big company and our good partner, and they are going to build their fab in Arizona, and we are working with them because they're already breaking ground, and the schedule is earlier than TSMC's two advanced packaging fabs. And we are working with them. And our main purpose is to support our customers, and so we can many in the U.S.

Yes. Certainly, I mean, obviously, we see that the advanced node, advanced packaging are quite strong. And also at the same time, we are also seeing that the migration is also happening for N2 and N3. So just wondering that from the revenue growth perspective, I know it's still early to predict next year based on your guidance. But I'm just wondering, will it be more driven by the ASP increase because of the technology migration? TSMC will be able to sell at your value or more that will be driven by the capacity or volume growth on both N2 ramp-up? And also, C.C., you mentioned some of the mild silicon recovery. So that may also drive some of the volume growth into next year. So just wondering, like if you look at the growth outlook, that will be more driven by the technology upgrade ASP increase or also more like a volume? That's my second question.

Laura, all the above. All right? You knew it, right?

May I follow up by noting that N3 is currently very tight. At the same time, we are expanding N2. C.C., you previously mentioned migrating some of that to N7, N6, and N5G. Specifically regarding N3, do we need to add more capacity for next year?

Sorry, Laura is saying that next year, will we need to add new capacity? Will we continue with conversion? What will we do to support the strong demand we anticipate at leading edge next year?

Well, let me answer that question. We continue to optimize the N5, N3 capacity to support our customers. For the new building for the N3 capacity to expand, we put the new building for the N2 technology. That's today's plan.

Thank you, Laura. Operator, in the interest of time, we'll take the questions from the last two participants, please. Thank you.

Yes. Next one, Krish Sankar, TD Cowen.

My first one is, C.C., about 10 years ago, back in the smartphone days, TSM would talk about the revenue opportunity for TSM per phone. I was wondering in today's world, can you talk about how much 1 gigawatt of AI data center capacity could translate in terms of wafer demand or revenue for TSMC? And then I have a follow-up.

We have observed an increasing demand for AI recently. My customer has indicated that for 1 gigawatt, they need to invest approximately 50 billion. However, we are not yet prepared to disclose how much of TSMC's wafers will be involved, as it varies by different projects.

And then a quick follow-up.

Yes, excuse me, I just want to say that right now, it's not only one chip. Actually, it's many chips together to form a system, all right?

I understand, that's very helpful. I have a quick follow-up. Clearly, you first project long-term trends and then build capacity accordingly. I'm curious, when you consider the AI demand over the next few years from TSMC's perspective, does it matter whether that demand is coming from a GPU or an ASIC? Does it impact your revenue or gross margin mix?

Krish, no matter if it's GPU or it's an ASIC, they are all using our leading-edge technologies. And from our perspective, we are working with our customers, and we all know that they are going to grow strongly in the next several years. So no differentiation in front of TSMC. We support all kinds of types.

Thank you, Krish. We will take the question from the final participant, please.

Last one, Arthur Lai, Macquarie.

Congrats on a strong outlook. I'm Arthur Lai from Macquarie. So my question is about competition. So C.C., you defined the Foundry 2.0 market. And I wonder what's the strategic initiative that TSMC's undertaking to further strengthening your competitive landscape and also in this broader ecosystem. So some context. I got the question from the U.S. investor as your clients have announced they invest in Intel.

Okay. Arthur's question is around competition. In the Foundry 2.0 landscape, what strategic initiatives, what things are TSMC focusing on to further strengthen our competitive advantage? I think the last part, Arthur, you're asking in the environment where one of our competitors in the U.S., how do we focus on the competition? When we introduced Foundry 2.0, our goal was to address the growing importance of system performance for our customers, moving beyond just single chip solutions. I want to highlight that our advanced packaging revenue is nearing 10%, which is significant in our overall revenue and essential for our customers. This is why we launched Foundry 2.0, to redefine our foundry business by looking at it in its entirety, including both front-end and back-end processes. Regarding our competition in the U.S., one of our competitors is actually one of our valued customers. We are currently collaborating with them on their most advanced product. Beyond that, I prefer not to comment further.

Can I ask one more question?

Yes, you have two. So your second question, sure.

Yes. My second question is very quick on the end demand. So I recall, C.C., you last time mentioned that we should also monitor and worry about the prebuild, especially in the consumer electronics. And then this quarter, our number suggests that there's a Q-o-Q 19% growth in the smartphone. So my question is, do you still worry about the prebuild?

Arthur's second question is about smartphones. Are we concerned about prebuild or pulling prebuild from customers in that regard?

No. We don't worry about the prebuild because when you have a prebuild, you have inventory. And in this stage, the inventory already go to the very seasonal level and very healthy. So no prebuild.

Okay. Thank you, C.C. Thank you, Arthur. Thank you, everyone. So 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 both are going to be available through TSMC's website at www.tsmc.com. So thank you, everyone, for joining us today. We hope you all continue to stay well, and we hope you will join us again next quarter in early 2026. Thank you, and have a good day.