Good afternoon, everyone, and welcome to TSMC's fourth quarter 2025 earnings conference and conference call. My name is Jeff Su, TSMC's Director of Investor Relations and your host for today. Today's event is being webcast live through TSMC's website at www.tsmc.com, where you can also download the earnings release materials. If you are joining us through the conference call, your dial-in lines are in listen-only The format for today's event will be as follows. First, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the fourth quarter 2025, followed by our guidance for the first quarter 2026. 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 would cause actual results to different maturity from those contained in the forward looking statements. Please refer to the safe harbor notice that appears in our press release. And now I would like to turn the microphone over to TSMC CFO Mr. Wendell Huang for the summary of operations and the current quarter guidance.
Thank you Jeff. Good afternoon everyone. Thank you for joining us today. My presentation will start with financial highlights for the fourth quarter of 2025 and a recap of full year 2025. After that, I will provide the guidance for the first quarter of 2026. Fourth quarter revenue increased 5.7% sequentially in NT, supported by strong demand for our leading edge process technologies. In US dollar term, Revenue increased 1.9% sequentially to $33.7 billion, slightly ahead of our fourth quarter guidance. Grows margin increased by 2.8 percentage points sequentially to 62.3%, primarily due to cost improvement efforts, favorable foreign exchange rate, and the high capacity utilization rate. The operating expenses accounted for 8.4% of net revenue, compared to 8.9% in third quarter of 25, due to operating leverage. Thus, operating margin increased sequentially by 3.4 percentage points to 54%. Overall, our fourth quarter EPS was 19.5 NT and ROE was 38.8%. Now let's move on to revenue by technology. Three nanometer process technology contributed 28% of wafer revenue in the fourth quarter while 5nm and 7nm accounted for 35% and 14% respectively. Advanced technologies defined as 7nm and below accounted for 77% of wafer revenue. On a full year basis, 3nm revenue contribution came in at 24% of 2025 wafer revenue. 5 nanometer, 36%, and 7 nanometer, 14%. Advanced technologies accounted for 74% of total welfare revenue, up from 69% in 2024. Moving on to revenue contribution by platform. HPC increased 4% quarter over quarter to account for 55% of our fourth quarter revenue. Smartphone increased 11% to account for 32%, IoT increased 3% to account for 5%, automotive decreased 1% to account for 5%, DCE decreased 22% to account for 1%. On a full-year basis, HPC increased 48% year-over-year. Smartphone, IoT, and automotive increased by 11%, 15%, and 34% respectively in 2025, while DCE remains flat. Overall, HPC accounted for 58% of our 2025 revenue. Smartphone accounted for 29%, IoT accounted for 5%, automotive accounted for 5%, and DCE accounted for 1%. Moving on to the balance sheet, we ended the fourth quarter with cash and marketable securities of 3.1 trillion NT or 98 billion US dollars. On the liability side, current liabilities increased by 182 billion NT, quarter over quarter, mainly due to the increase of 95 billion in accrual liabilities and others, and the increase of 61 billion from the reclassification of bonds payable to current portion. In terms of financial ratios, accounts receivable days increased by one day to 26 days. Inventory days remain steady at 74 days. Regarding cash flow and CAPEX, during the fourth quarter, we generated about 726 billion NT in cash from operations, spent $357 billion in CAPEX, and distributed $130 billion for first quarter 25 cash dividend. Overall, our cash balance increased $297 billion NT to $2.8 trillion at the end of the quarter. In U.S. dollar terms, our fourth quarter capital expenditures total $11.5 billion. Now let's look at the recap of our performance in 2025. Thanks to the strong demand for our leading edge process technologies, we continue to outperform the foundry industry in 2025. Our revenue increased 35.9% in US dollar terms to 122 billion or increased 31.6% in NT dollar terms to 3.8 trillion. Gross margin increased 3.8 percentage points to 59.9%, mainly reflecting a higher capacity utilization rate and cost improvement efforts, partially offset by an unfavorable foreign exchange rate and margin dilution from our overseas FAPS. With operating leverage, our operating margin increased 5.1 percentage point to 50.8%. Overall, full-year EPS increased 46.4% to 66.25 NT, and ROE increased 5.1 percentage point to 35.4%. In 2025, we generated 2.3 trillion NT in operating cash flow, spent 1.3 trillion NT or 40.9 billion US dollars on capital expenditures. As a result, free cash flow amounted to 1 trillion NT, up 15.2% from 2024. Meanwhile, we pay 467 billion NT in cash dividends in 2025, up 28.6% year-over-year, as we continue to increase our cash dividend per share. TSMC shareholders received a total of 18 NT cash dividend per share in 2025, up from 14 NT in 2024, and they will receive at least 23 NT per share in 2026. I finished my financial summary. Now let's turn to our current quarter guidance. We expect our business to be supported by continuous strong demand for our leading-edge process technologies. Based on the current business outlook, we expect our first quarter revenue to be between 34.6 billion and 35.8 billion US dollars, which represents a 4% sequential increase or a 38% year-over increase at the midpoint. Based on the exchange rate assumption of one U.S. dollar to 31.6 NT, gross margin is expected to be between 63 and 65 percent, operating margin between 54 and 56 percent. Lastly, our effective tax rate was 16 percent in 2025. For 2026, we expect our effective tax rate to be between 17 and 18 percent. This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our fourth quarter 25 and first quarter 26 profitability. Compared to third quarter, our fourth quarter gross margin increased by 280 basis points sequentially to 62.3%, primarily due to cost improvement efforts, a more favorable foreign exchange rate, and a higher overall capacity utilization rate. Compared to our fourth quarter guidance, our actual gross margin exceeded the high end of the range provided three months ago by 130 basis points, mainly as we delivered better than expected cost improvement efforts. In addition, the actual fourth quarter exchange rate was one U.S. dollar to 31.01 NT as compared to our guidance of one U.S. dollar to 30.6 NT. We have just guided our first quarter gross margin to increase by 170 basis point to 64% at the midpoint, primarily driven by continued cost improvement efforts, including productivity gains and the higher overall capacity utilization rate, partially offset by continued dilution from our overseas FAP. Looking at full year 2026, given the six factors, there are a few puts and takes I would like to share. On the one hand, we expect our overall utilization rate to moderately increase in 2026, and free gross margin is expected to cross over to the corporate average sometime in 2026, and we continue to work hard to earn our value. In addition, we are leveraging our manufacturing excellence to drive greater productivity in our fabs to generate more wafer output. We are also increasing across node capacity optimization, which includes flexible capacity support among N7, N5, and N3 nodes to support our profitability. On the other hand, as the scale of our overseas expansion grows, we continue to forecast the gross margin dilution from the ramp-up of overseas faffs in the next several years to be between 2 to 3 percent in the early stages and widen to 3 to 4 percent in the latter stages. Furthermore, the initial ramp up of our two nanometer technology will start to dilute our gross margin in the second half of the year, and we expect between two to three percentage percent dilution for the full year of 2026. Finally, we have no control over the foreign exchange rate, but that may be another factor in 2026. Next, let me talk about our 2026 capital budget and depreciation. At TSMC, a higher level of capital expenditures is always correlated to the high growth opportunities in the following years. With our strong technology leadership and differentiation, we are well positioned to capture the multi-year structured demand from the industry megatrends of 5G, AI, and HPC. In 2025, we spent 40.9 billion US dollars as compared to 29.8 billion in 2024 as we began to raise our level of capital spending in anticipation of the growth that will follow in the future years. In 2026, we expect our capital budget to be between 52 billion and 56 billion U.S. dollars as we continue to invest to support our customers' growth. About 70 to 80% of the 2026 capital budget will be allocated to advanced process technologies. About 10% will be spent for specialty technologies, and about 10 to 20% will be spent for advanced packaging, testing, mask making, and others. Our depreciation expense is expected to increase by high teens percentage year over year in 2026, mainly as we ramp our two nanometer technologies. Even as we invest in the future growth with this level of CAPEX spending in 2026, we remain committed to delivering profitable growth to our shareholders. Finally, let me talk about TSMC's long-term profitability outlook. As a Foundry, our biggest responsibility is to support our customers' growth and we always view them as partners. Having said that, we are in a very capital-intensive business. In the last five years alone, our CAPEX totaled $167 billion US dollars. Our R&D investments totaled $30 billion US dollars. Therefore, it is important for TSNC to earn a sustainable and healthy return as we continue to invest in leading-edge specialty and advanced packaging technologies to support our customers' Today, we face increasing manufacturing cost challenges due to the rising cost of leading nodes. For example, the cost of tools are becoming more expensive and process complexity is increasing. As a result, the CAPEX dollar required to build 1k wafer per month capacity of N2 is substantially higher than 1k wafer per month capacity for N3. The CAPEX per K cost for A14 will be even higher. We also face additional cost challenges from expansion of our global manufacturing footprint, new investments in specialty technologies, and inflationary costs. These all lead to a higher level of capex standing. As a result, in the last three years, our capex dollars amount total 101 billion US dollars, but is expected to be significantly higher in the next three years. Having said that, we continue to work closely with our customers to plan our capacity while sticking to our disciplines to ensure a healthy overall capacity utilization rate through the cycle. Our pricing will remain strategic, not opportunistic to earn our value. We will work diligently with our suppliers to drive greater cost improvements. We will also leverage our manufacturing excellence to generate more wafer output and drive greater across no capacity optimization in our fab operations to support our profitability. By taking such actions, we believe a long-term gross margins of 56% and higher through the The cycle is achievable, and we can earn an ROE of high 20% through the cycle. By earning a sustainable and healthy return, even as we shoulder a greater burden of CAPEX investment for our customers, we can continue to invest in technology and capacity to support their growth while delivering long-term profitable growth to our shareholders. We also remain committed to a sustainable and steadily increasing cash dividends per share on both an annual and quarterly basis. Now let me turn the microphone over to C.C. Thank you, Wendell.
Good afternoon, everybody. First, let me start with our 2026 outlook. In 2025, we observed robust AI-related demand throughout the whole year, while non-AI and market segment buttoned out and saw a mild recovery. Concluding 2025, the voluntary 2.0 industry, which we define as all logic wafer manufacturing, packaging, testing, master making, and others, increased 16% year-over-year. Supported by our strong technology differentiation and broad customer base, TSMC's revenue increased 35.9% year-over-year in U.S. dollar terms, outperforming the $132.0 industry growth. Entering 2026, we understand there are uncertainties and risks from the potential impact of tariff policies and rising component prices, especially in consumer-related and price-sensitive market segment. As such, we will be prudent in our business planning while focusing on the fundamentals of our business to further strengthen our competition position. We forecast the Foundry 2.0 industry to grow 14% year-over-year in 2026, supported by robust AI-related demand. Underpinned by strong demand for our leading edge specialty and advanced packaging technologies, we are confident we can continue to outperform the industry growth. We expect 2026 to be another strong growth year for TSMC and forecast our four-year revenue to increase by close to 30% in U.S. data terms. Next, let me talk about AI demand and TSMC's long-term growth outlook. Recent development in the AI market continues to be very positive. Revenue from AI accelerator accounted for high 10% of our total revenue in 2025. Looking ahead, we observe increasing AI model adoption across consumer, enterprise, and sovereign AI segment. This is driving the need for more and more computation, which supports the robust demand for leading-edge silicon. Our customers continue to provide us with their positive outlook. In addition, our customers are customers who are mainly in the cloud service providers are also providing strong signals and reaching out directly to request the capacity to support their business. Thus, our conviction in the multi-year AI mega trend remains strong, and we believe the demand for semiconductor will continue to be very fundamental as our country our first responsibility is to fully support our customer with the most advanced technology and necessary capacity to unleash the giant innovations to address the structural increase in the long-term market demand profile tsmc was closely with our customer and our customers are customer plan our capacity. This process is continuous and ongoing. In addition, as process technology complexity increases, the engagement in time with customer is now at least two to three years in advance. Internally, as we have said before, TSMC employs a disciplined capacity planning system to assess the market demand from both top-down and bottom-up approaches. We focus on the overall addressable mega-train to determine the appropriate capacity to build. Based on our assessment, we are preparing to increase our capacity and stepping out our KPEX investment to support our customers' future growth. We are also putting forward the existing fab schedule to the extent possible, both in Taiwan and in Arizona. We are also leveraging our manufacturing excellence to drive greater productivity in our fabs, to generate more output, convert N5's capacity to support N3 wherever necessary, and focus on capacity optimization across node to maximize the support to our customers. Based on our planning framework, we raise our forecast for the revenue growth from AI accelerated to approach a mid-to-high 50% taker for the five-year period from 2024 to 2029. Underpinned by our technology efficiency and broad customer base, we now expect our overall long-term revenue growth to approach 25% taker in U.S. dollar terms for the five-year period starting from 2024. While we expect AI accelerators to be the largest contributor in terms of our incremental revenue growth, our overall revenue growth will be fueled by all four of our growth platforms, which are smartphone, SPC, IoT, and automotive, in the next several years. 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 in our capacity planning approach to ensure we deliver profitable growth for our shareholders. Now let me talk about the TSMC's Global Manufacturing Footprint Update. All our overseas decisions are based on our customers' needs, as they value some geographic flexibility and a 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 are speeding up our capacity expansion in Arizona and executing well to our plan. Our first flat has already successfully entered high-volume production in 4Q24. Construction of our second flat is already complete, and tool moving and installation is planned in 2026. Due to the strong demand from our customers, we are also pulling forward the production schedule and now expect to enter high volume manufacturing in the second half of 2027. Construction of our third fab has already started and we are in the process of applying for permits to begin the construction of our fourth fab and fourth advanced packaging fab. Furthermore, we have just completed the purchase of a second-large piece of land nearby to support our current expansion plan and provide more flexibility in response to the very strong multi-year AI-related demand. Our plan will enable TSMC to scale up an independent digital web 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 Prefecture and the local government, 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 started, and the technologies and 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 fire in Dresden, Germany is progressing in our plan. The REM schedule will be based on our customers' needs and market conditions. In Taiwan, with support from the Taiwan government, we are preparing multiple phases of two nanometers of fat in both Shenzhou and Kaohsiung Science Park. We will continue to invest in leading edge and advanced packaging facilities in Taiwan over the next few years. By expanding our global footprint while continuing investing in Taiwan, TSMC can continue to be better to be the trusted technology and capacity provider of the global logic industry for years to come. Last, let me talk about N2 and A16 status. Two nanometer and A16 technologies lead the industry in addressing the insensible demand for energy-efficient computing, and almost all the innovators are working with TSMC. N2 successfully entered high-volume manufacturing in 4Q 2025. At both our Xinzhu and Kaohsiung sites, with good yield, we are seeing strong demand from smartphone and HPC AI applications and expect a faster ramp in 2026. With our strategy of continuous enhancement, we also introduced the N2P as an extension of N2 family. N2P features a further performance and power benefit on top of N2, and volume production is scheduled for the second half of this year. We also introduced the A16 featuring our best-in-class superpower rail, or HPR. A16 is best suitable for specific HPC products with complex signal route and the dense power delivery network. Volume production is on track for second half of 2026. We believe N2, N2P, A16 and its derivatives will prepare our N2 family to be another large and long-lasting load for TSMC, while further extending our technology leadership position way into the future. This concludes our key message, and thank you for your attention.
Thank you, Wendell. Thank you, CC. This does conclude our prepared statements. So before we begin the Q&A session, I would like to remind everybody to please limit your question to two at a time to allow all the participants an opportunity to ask their questions. questions will be taken both from the floor and from the call should you wait sorry should you wish to raise your question in Chinese I will translate it to English before our management answers your question for those of you on the call if you'd like to ask the question please press a star then one on your telephone keypad now questions will be taken in the order they will receive if at any time you'd like to remove yourself from the questioning queue please press star 2 so now let's begin the question and answer session I think I think we'll take the first few questions from the floor here. So why don't we start over here with Koko Hariharan from JPMorgan.
Thank you and Happy New Year. So CC, it definitely feels like you have heard what your customers have said to you over the last three, four months. Could you give us a little bit more color on what you are hearing from your customers, customers on demand because this is a very big step up in the capacity commitment. There is definitely a lot of concern in the financial market especially about whether we are in a bit of a bubble and obviously you are the one who is putting up all the capital in this industry so you've definitely considered this very carefully as well. So give us a little bit more detail in terms of what you're hearing from the customers and your views on the cycle given if you think about typical semiconductor cycle we've already probably lasted a little bit longer than usual cycles but this is definitely doesn't feel like a typical semiconductor cycle.
Okay Gokul let me summarize your question for the benefit of those online and those in person so again Gokul's question is really he would like to hear CC's views about the overall AI related demand and the semiconductor cycle. So again, Gokul notes that as Wendell and you said, we are substantially stepping up our capex to support the customers. But he does say, you know, there is concerns about an AI bubble and risk. So part of Gokul's question is how, what is the feedback, any color we can share about what type of discussions and feedback we're getting from both customers and the customers' customers that cc mentioned and how long do we think this uh cycle can last okay coco you essentially try to ask yourself whether the ai demand is real or not i'm also very nervous about it you bet because we have to invest about 52 to 56 billion u.s dollar for the kpx right if we
didn't do it carefully and that would be a big disaster to TSMC for sure so of course I spend a lot of time in the last three four three four months talking to my customer and then customers a customer I want to make sure that my customers that demand are real. So I talked to those cloud service providers over there. Their answer is I'm quite satisfied with their answer. Actually they show me the evidence that the AI really help their business. So they grow their business successfully and here see the in their financial return so I also double-checked their financial status they are very rich sounds much better than TSMC so so no doubt I also asked specifically that what's an application right i mean that's uh for one of the uh hyperscaler they told me that that helped their social media software and so the customer continued to increase so i believe that and with our own experience in the ai application we also help to our own fair to improve the productivity as I mentioned one time say that one percent or two percent productivity improvement that is free to TSMC and that's why also our grass margin is a little bit satisfied you know even in this a very high cost period of time and so all in all I believe you my point of view the AI is real not only real is starting to work grow into our daily life and we believe that is kind of a recorded AI mega trend we certainly would believe that so you are another question is can the semiconductor industry to be good for three four five years in a row i'll tell you the truth i don't know but i look at the ai looks like it is going to be like an endless i mean that's for many years to come uh no matter what tsmc stick on the fundamental technology leadership manufacturing excellence and we work with customers to get their trust and i think that fundamental thing why position tsmc to be very good future growth let me say that 25 kager as we projected and we used to be conservative team. You know that.
Thanks. Thanks, Sisi. My second question is on the U.S. expansion. You're pulling in some of the capacity in response to customers. You're already starting plans for the phase four. There's a lot of media reports about DSMC. You might have to build more fabs in the U.S. How should you think about U.S. expansion in principle over the next few years I think previously you had talked about reaching 20% or even 30% of two nanometer capacity in the US eventually the total capacity could be in the US could you give us a little bit more detail about how that is progressing and then could we get there in terms of the 30% or even 20% capacity okay so Google second question is about our overseas expansion particularly in In the U.S., he knows, as he said, we are pulling in the schedule for the FAB 2 earlier.
You know, we're starting the application for the fourth FAB. And so his question is partly around recent reports that we intend to build more FABs in Arizona. So his question is, how should we, or how is TSMC thinking about the future expansion in Arizona? And we have said in the past that, you know, around 30% of our 2 nanometer and more advanced capacity would be based in Arizona once we complete scaling out to this independent gigafab cluster. So what is the time frame or timetable for that? How quickly can we get there?
That's a long question. We build a fab in Arizona. And we work hard. So today, everything, even the yield or defect density, is almost equal to Taiwan. And due to the strong demand, as I just answered from the AI, strong, that's a mega trend, all my customers, AI customers in the U.S., So, they asked a lot of support from the U.S. fab. So because of that, we had to speed up our fab expansion in Arizona. In Taiwan also, actually, we increased most of the capacity in Taiwan, no doubt about it because this is a most adjacent one we can progress very well in the US we try to speed it up and progress is very good we got the help from the government still we have to meet all the requirement for the permits or for those kind of thing and so both in Taiwan and in Arizona we speeded up our capacity expansion to meet the AI demand I can always say one one word the capacity is very tight we work very hard to narrow the gap so far probably this year next year we have to work extremely hard to narrow the gap Okay, we just bought a second land in Arizona. Let's give you a hint that's what we plan to do because we need it. We are going to expand the many files over there, and this gigafire cluster can help us to improve the productivity, to lower down the cost, and to serve our customer in the U.S. better. Okay.
Okay. Thank you, Gokuo. Let's move over here next to Laura Chen from Citibank, please.
Thank you, Citi and Window, for very comprehensive outlook briefing. And also, congratulate for the great result. Of course, we see that the AI SimConductor growth has seen very strong growth. And I believe all of your customer and customers' customers are very desperate to ask more capacity support from TSMC. But I'm just wondering how does TSMC evaluate the potential power electricity supply for data center? So other than that, the chips we can discuss with our customers, I think for the overall infrastructure buildup for data center, a lot of factors are also very important. I just want to understand more how does TSMC evaluate those key factors for the AI infrastructure buildup. That's my first question.
Okay, so Laura's first question is around the AI demand. She notes again, as we said, AI megatrend and the growth is very strong and customers, customers, customers and ourselves are strong believers. But when we do our planning, how do we, you know, balance this against the other considerations?
Do we look at things, for example, I think Laura's question is powering electricity grid availability to basically assess is this part of our included as part of our planning process do we factor such things in well Nora let me tell you first I worry about the electricity in Taiwan force I need to have a lot of electricity so I can start to expand the capacity without any limitation but talking about build a lot of AI data center and over the world I use one of my customers are customers I answered because I asked the same question. They told me that they planned this one five, six years ago already. So as I said, those cloud service providers are smart, very smart. If I knew that, I would, anyway. so they they say that they work on the power supply five six years ago so today their message to me is a silicon from TSMC is a bottleneck and ask me not to pay attention to all others because they have to solve the silicon bottleneck first but indeed we do get the power supply you know but over the world especially in the u.s not only that we also look at the who supported those kind of a power supply like a turbine like what nuclear power plant the plan or those kind of thing we also look at the supply of the rank we also look at the supply of the cooling system everything so far so good so we have to work hard to narrow the gap between the demand and supply from tsmc does that answer your question that's great to know that it would not be the constraints for
the further AI development. Yeah, thank you.
And my second question is on the leading edge advanced packaging.
And whether can you remind us that what would be the revenue contribution last year for the advanced packagings overall? First of all, we see that, I recall that in the past that the capex for leading edge advanced packaging roughly about 10%. Yeah. And now it could be up to like 20%. So I'm just wondering that for the expansion, can you give us more detail about what kind of the plans you are looking for? Will you focus more on like 3DIC, SOIC or you also start to work on more advanced like a panel base in the longer term? I also I also think before we talk about it, we'll work more closely with OSET's partner on the leading-edge advanced packaging. So just wondering what kind of the process will be the key expansion plan in the space. Thank you.
Okay, so Laura's second question is more related to advanced packaging. What was the revenue contribution of what we call the back end, which is the advanced packaging testing as a whole in 2025? And then she notes the CAPEX, actually this year, I believe, window we guided 10 to 20% of CAPEX, which is the same as last year. But anyways, she wants to know what is the focus of this CAPEX? Is it on 3DIC? Is it on SOIC packaging solutions, is it on panel level? Sort of what is the key areas we're focusing on relative to the CAPEX?
Okay, Laura, the revenue contribution last year from advanced packaging is close to 10%. It's about 8%. For this year, we expect it to be slightly over 10%. We expect it to grow in the next five years higher or faster than the corporate. And the CAPEX, yes, you're right, in the past, it's about 10%, lower than 10%. Now we're saying advanced packaging together with mask making and others accounted for between 10 to 20%. So you can see that the investment amount is higher. And we're investing in areas in advanced packagings where our customers need. So the areas that you mentioned, basically we continue to invest.
Thank you, Wendell. Okay, let's move on to Charlie Chan from Morgan Stanley here.
Thanks Jeff, Happy New Year C.C. and Wendell. So first of all, amazing results and guidance, congratulations to the management team. So my first question is about outside of AI, what do you see for those in markets, right? You talk about the memory cost, et cetera. So can you give us some kind of your underlying assumption for PC shipments, smartphone shipments, et cetera, and also in your HPC there are some other pieces like networking and general service. Can you comment about the growth potential for those segments?
Okay, Charlie's first question is very specific. Well, generally he wants to know about how do we see the non-AI demand, especially in the context where the you know certain component costs such as memory costs are rising so he wants to know what do we see the impact on the pc and smartphone markets in terms of shipments he's also asking very specifically what about networking what about general server each these different segments well charlie uh those although we say is core non-ai if that But actually they're related to AI, you know that, right?
Because of networking processor, you still need to have AI data to scale up or scale out. Those are the networking switches or those kind of things still grow very strong. As for PC or the smartphone, to tell you the truth, we expect higher memory price. price, so we expect unit growth will be very minimal, but for TSMC, we did not feel our customers change their behavior. And we look at it, and then we find out that we supply most of the high-end smartphones. The high-end smartphone is less sensitive to the memory price. So the demand is still strong. I use one sentence I'd like to say, we still try very hard to narrow the gap. We are to supply a lot of wafers to them also.
I think that's very consistent with your five-year CAGR outlook for all the four segments. And my second question is about the Intel's foundry competition. I think the U.S. president seems to be very happy with Intel's recent progress. And even mentioned two of your key customers, right, NVIDIA, Apple, may have some partnership with Intel Foundry. So we're concerned about this so-called competition and what TSNC can really do to mitigate or avoid potential market share loss, as those are key U.S. customers, not limited to the two customers that I just mentioned thank you okay so Charlie's second question is on the foundry competition and you know competition from a U.S.
IDM he knows the U.S. president is very happy with the progress a couple two of our key customers he also was mentioned so his question is fundamentally is there a concern or risk going forward of market share loss for tsmc to our foundry competition well kind of a simple question i should say no let me explain a little bit because of in these days you know it's not a money to help you to compete i also
like you know whoever you just mentioned to invest on intel i like them to invest on tsmc also But the most fundamental thing is, let me share with you, today's technology is so complicated. So once you want to design a very complete or advanced technology, it takes two to three years to fully utilize that technology. That's today's situation. And so after two to three years of preparation, you can design your product. Once you get your product approved, it takes another one to two years to ramp it up. So we have a competitor, no doubt about it. That's formidable competitor. But first, it takes time to, we don't underestimate your progress, but are we afraid of it? For 30 some years, we always in a competition with our competitor. So no, we have a company that to keep our business for us, we estimate it.
Thank you, C.C. All right, let's take the next two questions online in the interest of time. Operator, can we take the first call from the line, please?
Line, McQuarrie, go ahead, please. Hi, that's a very strong performance. Thank you, C.C. Wendell and Jeff for taking my question. My first question is about the global capacity plan. Recently, a Taiwan local news report that DSMG put an exit 8-inch business and 12-inch to convert into the advanced packaging. And investors came to know if this is true, and the decision is based on the four kinds So key factor, i.e. C.C. just mentioned about power tightness or it's ROI constant. Thank you.
Okay, so Arthur's first question is about basically mature node. Our strategy on mature node, he knows a lot of local news has been reporting that TSMC is exiting 8-inch and 12-inch distances and converting the capacity to advanced packaging. so he wants to know if this is true and if so what are the reasons behind the power constraints ri etc etc good question indeed we reduce our eight inch waivers the capacity and six inch but let me assure you that we support all our customer
We discuss with our customer and to do this kind of resources more flexible and more, what is the word we say, optimized, which I should, optimize the resources to support our customer. Let me assure you also to my customer that we continue to support them. We will not let them down. If they have a good business, we continue to support that even in the 8-inch way for the business.
Arthur, do you have a second question?
Yes. Thank you. My second question is regarding the consumer in-demand outlook. So, CJ also mentioned that the mainly price actually inflation, and you're also pushing up the cost of the consumer electronics. so invest actually concerned about the filter demand softness in the this year and next year or particularly next year so can management comment about what your client or your class kind how to resolve this memory tightness or we call a memory urgency issue thank you okay so Arthur second question is on the impact from the memory price increase uh and the demand softness i believe his question really because
cc already shared the impact this year he wants to know what is the impact for 2027. for gsmc no impact as i just mentioned most of my customers now focus on high-end smartphone or pc so those kind of a demand has less sensitive to the components of price so they continue to give us a very heresy forecast this year and the next year okay thank you zizi all right let's operator let's move on to the next uh participant from the line please next one brett simpson everything go
ahead thanks very much um my question is really on on ai i mean tsmc has been supply constrained for your AI customers, I think since 2024, and it sounds like 2026 is another year where we're going to see challenges. Do you think the capex you've laid out for this year, 52 to 56 billion, could that mean that we start to see supply and demand more in balance in 2027? Any thoughts there just in terms of how you're thinking about that capacity plan, and does it alleviate the supply bottlenecks that we see today? And as part of this, from a supply perspective, we hear TSMC is finding it quite challenging to develop enough engineering talent, picking us both in the U.S. and in Taiwan. Can you talk more about this trend and what's the scale of the labor shortage of family engineers at the moment?
So Brett's first question is related around AI and our capacity. So he notes the supply looks to continue to be tight in 2026, but with these, you know, significant step up in our CAPEX to support the customers 52 to 56 billion, do we expect the supply demand or the gap, so to speak, to be more balanced in 2027? And then is engineering resources, fab engineers, a constraint or a bottleneck for us in making these expansions, whether in Taiwan or the US?
Okay. Let me answer this question first. You know, if you build a new fab, it takes two and three years, two to three years to build a new fab. So even we start to spend $52 to $56 billion, the contribution to this year almost none, and to 2027 a little bit. So we actually were looking for 2028, 2029 supply, and we hope in that time that the gap will be narrow. For 2026 and 2027, we are focused on the short-term, more output. Actually, our productivity continues to increase. our people has an incentive because of one of the TSMC's incentive is to satisfy customer. It's not because of our financial results are good, but we want to let customer feel that TSMC is trusted, that whenever they have a good opportunity to grow, we will support it. So in 2026, 2027, for the short term, we focus on the productivity improvement, which we done quite a good result because of, Wingo just mentioned, that we can have a good financial result because of that. But that's not our incentive, but that's not our purpose, our purpose is to support our customer. so 2026 2027 for the short term we are looking to improve our productivity 2028 to 2029 yes we start to increase our k-tax significantly and it will continue this way if the ai demand make a trend as we expected okay brett thank you sisi brett do you have a second question Yeah, I do.
And that was very clear. I guess my second question is about pricing. And if I look at 2025, this was the second consecutive year where TSMC's wafer ASPs were up around 20%. As leading edge becomes a bigger portion of the mix and also you see through price increases. When we factor in the ramp of more expensive overseas staffs, is 20% ASP, wafer ASP increases, the new normal for TSMC? Typically, you have an annual price negotiation about this time of the year, and so I'm trying to understand how you project ASPs in 26, and is your March quarter guidance sattering in price increases at leading edge?
Okay, so Brad's question is on pricing. He notes that, you know, our, which he's looking at the blended wafer price is increasing at close to 20% according to his estimates. Of course, that's blended both on price and mix, but, you know, it's a leading edge, and also we have mentioned earning our value. So he wants to know, is this the new normal going forward?
This is a tough question I didn't see able to answer.
Okay, every new note that we have a price, the price will increase, the blended ASP will I think they continue this way in the past and will continue with the way in going forward. But I think you're asking about the contribution from pricing to the profitability. Now as we mentioned before, the profitability, there are six factors affecting the profitability And price is just one of them. And of course, we continue trying to earn our value, but in fact, in the last few years, the pricing benefits to the profitability was just enough to cover the inflation cost from tools, equipment, materials, labor, et cetera. There are other factors contributing to the higher profitability. The first one will be a high utilization rate as the demand is so high and as our disciplined approach to capacity planning, the utilization rate supports our high profitability. The other one will be manufacturing excellence. As C.C. said, we continue to drive increasing productivity to generate more wafer output. Also we continue to drive optimization capacity among nodes, which includes converting part of the N5 to N3. It also involves cross supports from different nodes, from the mature nodes to the more advanced nodes. That is a very important advantage of TSMC. So with all these efforts, we're able to maintain a good, healthy, sustainable return profitability so that we can continue to invest to support our customers' growth.
Okay. Thank you, Wendell. In the interest of time, we'll take two more questions from the floor and one more from the line. So, we'll go here, Sunny Lynn UBS, and then...
Thank you, good afternoon. Very strong results, congratulations. So, number one, if we look at the company very different versus in the past from many angles, but if we look at the rep from New Know, now you can generate actually higher revenue from New Know in year four, even year five of mass production. versus in the past you know like peak revenue in a second or even third year of mass production and so could you help us understand with this new trend what the financial implications and then what does that imply for you to operate or even compete differently versus in the past so Sonny's first question I think
maybe is related well to our technology differentiation but she knows that when we ramp a new you know in the past when we have a new node after a few years sort of you know the revenue or you know comes down a bit but she knows that nowadays we can still enjoy very high revenue from a node even after in its fourth or fifth year so her question is what are the financial implications from this, and also from a, I believe, competitive dynamics?
I can answer, say, we are lucky. Actually, if you look at the semiconductor's product, right now, the trend is you need to have a lower power consumption, always, and then high-speed performance. And for TSMC, our technology differentiation become more and more clear. We have both benefit. We have a high speed and we have a low power consumption. And so our leading edge customer, the first wave, the second wave, the third wave continue to come and so that sustain the demand for a long, long time. That's the difference. Of course, this one, you need to have technology leadership, and which the technology leadership is much easier to say, but every year you have to improve. As we said, we have N2, N2P, and then you won't be surprised, and the third one will be N2 something, and continuously. And so that one give us the benefit and to support our customers continuous innovation. And so they continue to stay with TSMC and so their product can be very competitive in the market. So that answers the question say that, you know, once we got the peak revenue and did not decrease, it's continuous because second wave, third wave, customer continue to join.
Thank you very much, C.C. And then maybe a question on 2nm, which is C.C., meaningful revenue coming through in 2026. And so in the past, you guys, like, how much a new node will contribute to cells for the year. And so any expectations on the revenue contribution from 2nm in 2026. And then I recall in terms of process migration, a few years ago, there were lots of concerns on increasing cost per transistor and that obviously is not declining from five nanometer but then now looking at two nanometer obvious I think process migration seems to be accelerating even for a smartphone and PC and then with larger demand coming from headphones compute and so maybe based on your feedback from clients maybe for a smartphone and PC clients why are they accelerating process migration into two nanometers?
Okay, so Sunny's second question very quickly in two parts. Two nanometers, as we said, is a fast ramp in 2026. Very strong customer interest and demand. So do we have any revenue percentage to guide for in 2026?
Yeah, Sunny, the two nanometer will be a bigger node than 3 nanometers from the start, okay. But it's less meaningful nowadays to talk about the percentage of revenue contribution when the new node starts because the corporate as a whole, the revenue has become much bigger than before. So yeah, revenue dollar, it's a bigger node, but percentage-wise, less meaningful.
And then the second part of Sunny's question from a technology perspective, as you know, she noted increasing cost per transistor, as we said, CapEx per K is going higher. So her question very simply, what's the value, what's driving, you know, smartphone, HPC, customers actually to see, we're seeing a widening out of the adoption of N2. So what is the value that it's providing that the customers are willing to adopt N2?
That already answers the question, right? because of now the whole product is looking for low power consumption and high speed performance and our technology can provide that value i also say that every year we improve so every year they adopt the same even the same name or the same node their product continues to improve so that provide the value it's uh if you say that the cost per transistor is increased i saw the cost of the transistor the performance compared the not called the cp value is increased it's much better so that customer stick with the tsmc our headache right now if i can call it a headache is a demand in the supply gap we need to work hard to narrow the gap thank you thank you operator can we take the last call from the line and you will take one last one from the floor next one creation some car TV Cohen go ahead please hello
Okay, Krish, are you there? I guess not. Then let's just take the last, not call, sorry, the last question from Bruce Liu from Goldman Sachs.
Thank you for letting me ask the last question, hopefully it's not that difficult. So I think one of the key, I understand that TSN is trying very hard to increase the capacity. You know, AI revenue is growing like 50% a year, 15% plus a year. But token consumption for last few quarters is 50% a quarter. So the gap is still there, right? I mean, that's why Elon Musk was talking about the chip wall. So can you share with us that in your assumption when you provide 50% plus AI revenue growth, what kind of token consumption you can support? And how many gigawatts power in terms of the chips you can support in your assumption when you provide this kind of five years revenue guidance for AI?
Okay, so Bruce's first question is around our AI CAGR. Actually to be correct, we have guided for the AI CAGR to grow mid to high 50s CAGR in the five year period from 2024 to 2029. So, that is the official guidance we have provided just today. Bruce's question is in this guidance, what is our assumption basically assuming about the token growth behind this type of CAGR? What is our assumption in terms of translating to how much gigawatts of data center can we support and other specific assumptions behind our guidance?
Bruce, you got me. I mean, that's, I also try to understand what is the tokens of growth, but my customers of their products of improvement continue to increase. So from, it's a well-known from Harper to Blackwell to Rubin, they almost double, triple that their performance. so the one they can support the tokens of course or the one they can continue to support the compute power is enormous and so I do subtract to be friend with you and for gigawatt I want to see that how much of TSMC can make the money for the gigawatt rather than say that you know how much we can support today from my point of view still the bottleneck is tsmc's a wafer supply not the power consumption not yet so we also look at carefully to answer your question say that the tsmc's a wafer can support how much of the gigawatt still not enough they still have an abundant of power supply in the u.s okay my next question is for the cap hacks right i i want to double check with uh what i just heard that cc was talking about like 2027 the cap has will be more for the productive improvement when 28 29 may be
meaningfully higher. So I do recall that in 2021, TSMC provided three years for a hundred billion dollar capex to support that structural growth. Now the demand is even stronger. On base of that, can we do three years, two hundred billion capex for next three years?
You know, the math sounds doable okay so well first a slight clarification because uh cc was talking about this year we have substantially you know stepping up our capex investment but cc also mentioned it takes two to three years to build capacity so in terms of it proves this question do we say 2027 significant step up in capex i think we're saying it takes time to for that capacity to come out So that's the first part.
Yeah, I think what Zizi said was the productivity was our main focus in 26 and 27 because when we start to invest, the fab, the volume production will not come up until 28 and 29. So the dollar amount invested today is for two years or even in the future. And CAPEX dollar amount, as I said, in the last three years, 101 billion. In the next three years, significantly higher. I'm not going to share with you the number, but significantly higher.
Yeah. So I think Wendell has addressed at least both parts of Bruce's question. Okay. So again, thank you. So again, thank you, everyone. this does conclude 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 available or will be available through our TSMC's website at www.tsmcs.com.
