Earnings Call Transcript - TSM Q4 2025

Jeff Su, Director of Investor Relations

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 mode. The format for today's event will be as follows: First, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the fourth quarter of 2025, followed by our guidance for the first quarter of 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 could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our press release. And now I would like to turn the microphone over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.

Wendell Huang, CFO

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 U.S. dollar terms, revenue increased 1.9% sequentially to TWD 33.7 billion, slightly ahead of our fourth quarter guidance. Gross margin increased by 2.8 percentage points sequentially to 62.3%, primarily due to cost improvement efforts, favorable foreign exchange rate and high capacity utilization rate. The operating expenses accounted for 8.4% of net revenue compared to 8.9% in the 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 TWD 19.5 and ROE was 38.8%. Now let's move on to revenue by technology. 3-nanometer process technology contributed 28% of wafer revenue in the fourth quarter, while 5-nanometer and 7-nanometer accounted for 35% and 14%, respectively. Advanced technologies, defined as 7-nanometer and below, accounted for 77% of wafer revenue. On a full year basis, 3-nanometer revenue contribution came in at 24% of 2025 wafer revenue, 5-nanometer, 36% and 7-nanometer, 14%. Advanced technologies accounted for 74% of total wafer 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%, while 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 TWD 3.1 trillion or USD 98 billion. On the liability side, current liabilities increased by TWD 182 billion quarter-over-quarter, mainly due to the increase of TWD 95 billion in accrued liabilities and others and the increase of TWD 61 billion from the reclassification of bonds payable to current portion. In terms of financial ratios, accounts receivable days increased by 1 day to 26 days. Inventory days remained steady at 74 days. Regarding cash flow and CapEx, during the fourth quarter, we generated about TWD 726 billion in cash from operations, spent TWD 357 billion in CapEx and distributed TWD 130 billion for first quarter '25 cash dividend. Overall, our cash balance increased TWD 297 billion to TWD 2.8 trillion at the end of the quarter. In U.S. dollar terms, our fourth quarter capital expenditures totaled TWD 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 U.S. dollar terms to TWD 122 billion or increased 31.6% in NT dollar terms to TWD 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 fabs. With operating leverage, our operating margin increased 5.1 percentage points to 50.8%. Overall, full year EPS increased 46.4% to TWD 66.25 and ROE increased 5.1 percentage points to 35.4%. In 2025, we generated TWD 2.3 trillion in operating cash flow, spent TWD 1.3 trillion or USD 40.9 billion on capital expenditures. As a result, free cash flow amounted to TWD 1 trillion, up 15.2% from 2024. Meanwhile, we paid TWD 467 billion 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 TWD 18 cash dividend per share in 2025, up from TWD 14 in 2024, and they will receive at least TWD 23 per share in 2026. I have finished my financial summary. Now let's turn to our current quarter guidance. We expect our business to be supported by continued strong demand for our leading-edge process technologies. Based on the current business outlook, we expect our first quarter revenue to be between USD 34.6 billion and USD 35.8 billion, which represents a 4% sequential increase or a 38% year-over-year increase at the midpoint. Based on the exchange rate assumption of USD 1 to TWD 31.6, gross margin is expected to be between 63% and 65%, operating margin between 54% and 56%. Lastly, our effective tax rate was 16% in 2025. For 2026, we expect our effective tax rate to be between 17% and 18%. 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 the 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 3 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 USD 1 to TWD 31.01 as compared to our guidance of USD 1 to TWD 30.6. We have just guided our first quarter gross margin to increase by 170 basis points to 64% at the midpoint, primarily driven by continued cost improvement efforts, including productivity gains and a higher overall capacity utilization rate, partially offset by continued dilution from our overseas fabs. Looking at full year 2026, given the 6 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. N3 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 a cross-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 fabs in the next several years to be between 2% to 3% in the early stages and widen to 3% to 4% in the latter stages. Furthermore, the initial ramp-up of our 2-nanometer technology will start to dilute our gross margin in the second half of the year, and we predict between 2% to 3% 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 multiyear structural demand from the industry megatrends of 5G, AI, and HPC. In 2025, we spent USD 40.9 billion as compared to USD 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 USD 52 billion and USD 56 billion 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 2-nanometer technologies. Even as we invest in 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 5 years alone, our CapEx totaled USD 167 billion. Our R&D investments totaled USD 30 billion. Therefore, it is important for TSMC to earn a sustainable and healthy return as we continue to invest in leading-edge specialty and advanced packaging technologies to support our customers' growth. 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 1,000 wafer per month capacity of N2 is substantially higher than 1,000 wafer per month capacity for N3. The CapEx per k cost for A14 will be even higher. We also faced additional cost challenges from the expansion of our global manufacturing footprint, new investments in specialty technologies, and inflationary costs. These all lead to a higher level of CapEx spending. As a result, in the last 3 years, our CapEx dollars amount totaled USD 101 billion, but is expected to be significantly higher in the next 3 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 cross-node 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 cycle is achievable, and we can earn an ROE of high 20s percent 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.

C.C. Wei, Chairman and CEO

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 end market segments bottomed out and saw a mild recovery. Concluding 2025, the Foundry 2.0 industry, which we define as all logic wafer manufacturing, packaging, testing, mask 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 Foundry 2.0 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 end market segments. As such, we will be prudent in our business planning while focusing on the fundamentals of our business to further strengthen our competitive 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 full year revenue to increase by close to 30% in U.S. dollar terms. Next, let me talk about the AI demand and TSMC's long-term growth outlook. Recent developments in the AI market continue to be very positive. Revenue from AI accelerators accounted for high teens percent of our total revenue in 2025. Looking ahead, we observe increasing AI model adoption across consumer, enterprise, and sovereign AI segments. 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 a positive outlook. In addition, our customers' customers, who are mainly 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 multiyear AI megatrend remains strong, and we believe the demand for semiconductors will continue to be very fundamental. As a foundry, our first responsibility is to fully support our customers with the most advanced technology and necessary capacity to unleash their innovations. To address the structural increase in the long-term market demand profile, TSMC works closely with our customers and our customers' customers to plan our capacity. This process is continuous and ongoing. In addition, as process technology complexity increases, the engagement lead time with customers is now at least 2 to 3 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 megatrend to determine the appropriate capacity to build. Based on our assessment, we are preparing to increase our capacity and stepping out our CapEx 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 will also leverage our manufacturing excellence to drive greater productivity in our fabs to generate more output, convert N5 capacity to support N3 wherever necessary and focus on capacity optimization across nodes to maximize the support to our customers. Based on our planning framework, we raised our forecast for the revenue growth from AI accelerators to approach a mid- to high 50s percent CAGR for the 5-year period from 2024 to 2029. Underpinned by our technology differentiation and broad customer base, we now expect our overall long-term revenue growth to approach 25% CAGR in U.S. dollar terms for the 5-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 4 of our growth platforms, which are smartphone, HPC, 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 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 strong collaboration and support from our leading U.S. customers and the U.S. federal, state, and city governments, we are speeding up our capacity expansion in Arizona and executing well to our plan. Our first fab has already successfully entered high-volume production in the 4Q of '24. Construction of our second fab is already complete and tool moving and installation is planned in 2026. Due to the strong demand from our customers, we are also putting 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 first 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 multiyear AI-related demand. Our plan will enable TSMC to scale up 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 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 fab in Dresden, Germany is progressing in our plan. The ramp schedule will be based on our customers' needs and market conditions. In Taiwan, with support from the Taiwanese government, we are preparing multiple 2-nanometer fabs in both Hsinchu 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 continually 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. Our 2-nanometer and A16 technologies lead the industry in addressing the insatiable 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 Hsinchu and Kaohsiung sites with good yield. We are seeing strong demand from smartphone and HPC AI applications and expect a fast ramp in 2026. With our strategy of continuous enhancement, we also introduced N2P as an extension of the N2 family. N2P features further performance and power benefits on top of N2 and volume production is scheduled for the second half of this year. We also introduced A16 featuring our best-in-class superpower rail or SPR. A16 is best suitable 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 propel our N2 family to be another large and long-lasting node for TSMC, while further extending our technology leadership position well into the future. This concludes our key message, and thank you for your attention.

Jeff Su, Director of Investor Relations

Thank you, Wendell. Thank you, C.C. This does conclude our prepared statements. So now let's begin the question-and-answer session. I think we'll take the first few questions from the floor here. So why don't we start over here with Gokul Hariharan from JPMorgan.

Gokul Hariharan, Analyst

So C.C., it definitely feels like you have heard what your customers have said to you over the last 3, 4 months. Could you give us a little bit more color on what you're 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 the typical semiconductor cycle, we've already probably lasted a little longer than usual cycles, but this certainly doesn't feel like a typical semiconductor cycle.

Jeff Su, Director of Investor Relations

Okay. Let me summarize your question for the benefit of everyone listening. Gokul's question is about C.C.'s views on the overall demand for AI and the semiconductor cycle. Gokul mentioned that, as noted by Wendell and you, we are significantly increasing our capital expenditures to support our customers. However, he pointed out concerns about the possibility of an AI bubble and associated risks. He also asked for any insights we can share regarding the discussions and feedback we are receiving from our customers and their clients, as C.C. mentioned. Additionally, he inquired about how long we anticipate this cycle might last.

C.C. Wei, Chairman and CEO

Okay. Gokul, you asked whether the AI demand is genuine, and I share some of that concern. We need to invest around 52 to 56 billion USD for CapEx, and if we don't proceed carefully, it could lead to significant issues for TSMC. I've spent considerable time over the last few months engaging with my customers and their clients to confirm that their demand is legitimate. I've spoken with all the cloud service providers, and I'm quite pleased with their responses. They’ve provided evidence that AI is truly benefiting their businesses, leading to successful and healthy financial growth. I also verified their financial status, and they appear to be in strong positions, even better than TSMC. When I asked about specific applications, one of the hyperscalers mentioned that AI improved their social media software, leading to ongoing customer growth. I believe that. Additionally, we are seeing productivity improvements in our own operations due to AI applications, translating to a 1% or 2% gain in productivity, which benefits TSMC. This contributes positively to our gross margin during this high-cost period. Overall, I believe AI is real and is starting to integrate into our daily lives, which we consider an AI megatrend that we strongly support. Regarding the semiconductor industry's outlook for the next several years, I can't say for certain, but AI seems poised for continuous growth moving forward. Regardless, TSMC will maintain its commitment to technological leadership and manufacturing excellence while fostering customer trust. I believe this foundation positions TSMC for promising future growth, targeting a 25% compound annual growth rate as we have projected, and we have always been conservative in our estimates.

Gokul Hariharan, Analyst

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 planned for the Phase 4. There's a lot of media reports about TSMC, you might have to build more fabs in the U.S. How should we 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 2-nanometer capacity in the U.S. eventually, the total capacity would be in the U.S. Could you give us a little bit more detail about how that is progressing? And when could we get there in terms of the 30% or even 20% capacity?

Jeff Su, Director of Investor Relations

Okay. So Gokul's second question is about our overseas expansion, particularly in the U.S. He knows that C.C. said, we are pulling in the schedule for fab 2 earlier. 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 around 30% of our 2-nanometer and more advanced capacity would be based in Arizona once we complete scaling out to this independent giga-fab cluster, so what is the timetable for that? How quickly can we get there?

C.C. Wei, Chairman and CEO

That's a long question. We built 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 stronger, that's a megatrend. All my customers and AI customers in the U.S., so they ask a lot of support from the U.S. fab. So because of that, we have 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 the most adjacent one we can progress very well. In the U.S., we try to speed it up and the progress is very good. We got the help from the government. But still, we have to meet all the requirements for the permits, for those kinds of things. And so both in Taiwan and in Arizona, we sped up our capacity expansion to meet the AI demand. I can always say 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. That gives you a hint. That's what we plan to do because we need it. We are going to expand many fabs over there, and this giga-fab cluster can help us to improve productivity, lower down the cost and serve our customers in the U.S. better.

Jeff Su, Director of Investor Relations

Okay. Thank you, Gokul. Let's move over here next to Laura Chen from Citibank, please.

Chia Yi Chen, Analyst

Thank you, C.C. and Wendell for a very comprehensive outlook briefing and also congratulations for the great results. Of course, we see that the AI semiconductor growth has seen very strong growth. And I believe all of your customers and customers' customers are very desperate to add more capacity support from TSMC. But I'm just wondering how does TSMC evaluate the potential power electricity supply for data centers? So other than that, the chips we can discuss with our customers, I think for the overall infrastructure buildup for data centers, a lot of factors also very important. Just want to understand more how does TSMC evaluate those key factors for the AI infrastructure buildup? That's my first question.

Jeff Su, Director of Investor Relations

Okay. Laura's first question is about AI demand. She points out that the AI megatrend and growth are very strong, and both our customers and we are strong believers in this. However, when we plan, how do we balance this with other considerations? For instance, I believe Laura is asking whether we take into account the availability of electricity for the grid as part of our planning process. Do we consider these factors?

C.C. Wei, Chairman and CEO

Well, Laura, let me start by expressing my concerns about the electricity situation in Taiwan. I need a sufficient supply of electricity to expand our capacity without any limitations. Regarding the construction of AI data centers globally, I spoke with one of my customers' customers who mentioned that they had been planning this for the past 5 or 6 years. As I indicated, cloud service providers are very astute. They informed me that they focused on the power supply back then. Currently, their feedback is that silicon from TSMC is a bottleneck and advised me to prioritize resolving that issue first. We're closely examining the power supply situation worldwide, especially in the U.S., and we're also considering who supports these power supplies, whether it be turbines or nuclear power plants, among others. We're analyzing suppliers for racks and cooling systems as well. Everything appears to be progressing well, but we need to put in the effort to bridge the gap between TSMC’s demand and supply. Did that address your question?

Chia Yi Chen, Analyst

It's reassuring to hear that this won't hinder further AI advancements. My second question is about advanced packaging. Wendell, could you remind us about the revenue contribution from advanced packaging last year? I remember that previously, capital expenditure for leading-edge advanced packaging was about 10%. Now, it seems it could increase to around 20%. Can you provide more details on your expansion plans? Will the focus be more on 3DIC and SoIC, or are you also considering more advanced panel-based options in the long run? Additionally, I believe there will be closer collaboration with OSAT partners in this area. What are the key expansion processes you are planning in this space?

Jen-Chau Huang, CFO

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%. Okay. We expect it to grow in the next 5 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 packaging where our customers need. So the areas that you mentioned, basically, we continue to invest.

Jeff Su, Director of Investor Relations

Thank you, Wendell. Okay, let's move on to Charlie Chan from Morgan Stanley here.

Charlie Chan, Analyst

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 end markets, right? You talked about the memory costs, et cetera. So can you give us some of your underlying assumptions for PC shipments, smartphone shipments, et cetera? And also in your HPC, there are some other business like networking and general servers. Can you comment about the growth potential for those segments?

Jeff Su, Director of Investor Relations

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 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 of these different segments.

C.C. Wei, Chairman and CEO

Charlie, although we refer to it as non-AI, it's actually related to AI. The networking processor still requires AI data for scaling. Networking switches and similar products continue to grow strongly. Regarding PCs and smartphones, we anticipate higher memory prices, which means we expect minimal unit growth. However, we haven't noticed any changes in our customers' behaviors at TSMC and found that we supply most of the high-end smartphones. The demand for high-end smartphones remains strong and is less affected by memory prices. In summary, we are working hard to narrow the supply gap and need to provide a substantial quantity of wafers to meet demand.

Charlie Chan, Analyst

I think that's very consistent with your 5-year CAGR outlook for all the 4 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 2 of your key customers, right, NVIDIA, Apple may have a sound partnership with Intel Foundry. Should we concern about this so-called competition? And what TSMC can really do to mitigate or avoid potential market share loss at those key U.S. customers, not limited to the 2 customers I just mentioned?

Jeff Su, Director of Investor Relations

Charlie’s second question is about the foundry competition and competition from a U.S. IDM. He understands that the U.S. President is pleased with the progress of a couple of our key customers. His question essentially asks if there is a concern or risk going forward regarding potential market share loss for TSMC to our foundry competition.

C.C. Wei, Chairman and CEO

Well, kind of a simple question, I should say, no. Let me explain a little bit because in these days, it's not just money to help you to compete, right? I also like whoever you just mentioned to invest in Intel; I like them to invest in 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 2 to 3 years to fully utilize that technology. That's today's situation. And so after 2 to 3 years of preparation, you can design your product. Once you get your product approved, it takes another 1 to 2 years to ramp it up. So we have a competitor, no doubt about it. That's a formidable competitor. But first, it takes time; two, we don't underestimate their progress. But are we afraid of it? For 30-some years, we've always been in competition with our competitors. So no, we have confidence to keep our business growing as we estimate.

Jeff Su, Director of Investor Relations

Thank you, C.C. All right. Let's take the next 2 questions online in the interest of time. Operator, can we take the first call from the line, please?

Operator, Operator

First question on the line, Macquarie.

Yu Jang Lai, Analyst

First, congrats, very strong performance. My first question is about the global capacity plan. Recently, Taiwan local news reported that TSMC could exit the 8-inch business and mature node, 12-inch to convert into advanced packaging. And the investors are keen to know if this is true. And the decision is based on what kind of key factor, i.e., C.C. just mentioned about the power tightness or its ROI concern?

Jeff Su, Director of Investor Relations

Okay. So Arthur's first question is about basically mature nodes. Our strategy on mature node. He knows a local news has been reporting that TSMC is exiting 8-inch and 12-inch businesses 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, ROI, et cetera, et cetera?

C.C. Wei, Chairman and CEO

Good question. We have indeed reduced our 8-inch and 6-inch wafer capacity. However, I want to assure you that we are committed to supporting all our customers. We engage with them to make our resources more flexible and optimized to meet their needs. I want to emphasize to our customers that we will continue to support them and will not let them down. If they have a strong business, we will maintain our support, even in the 8-inch wafer sector.

Jeff Su, Director of Investor Relations

Okay. Arthur, do you have a second question?

Yu Jang Lai, Analyst

Yes. My second question is regarding the consumer and demand outlook. So C.C. also mentioned that the memory price actually has inflation and he also pushing up the cost of consumer electronics. So investors actually are concerned about the further demand softness in this year and next year or particularly next year. So can management comment about what your client or your clients' client, how to resolve this memory tightness or we call memory urgency issue?

Jeff Su, Director of Investor Relations

Okay. So Arthur's second question is on the impact from the memory price increase and the demand softness. I believe this question really because C.C. already shared the impact this year. He wants to know what is the impact for 2027?

C.C. Wei, Chairman and CEO

For TSMC, no impact. As I just mentioned, most of my customers now focus on high-end smartphones or PCs. So those kinds of demand are less sensitive to the components' price. So they continue to give us a very healthy forecast this year and next year.

Jeff Su, Director of Investor Relations

Thank you, C.C. Let's move on to the next participant from the line, please.

Operator, Operator

Next one, Brett Simpson, Arete.

Brett Simpson, Analyst

My question is really 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. TWD 52 billion to TWD 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 quick enough, 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 foundry engineers at the moment?

Jeff Su, Director of Investor Relations

Okay. 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 the significant step-up in our CapEx to support the customers, TWD 52 billion to TWD 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 U.S.?

C.C. Wei, Chairman and CEO

Let me address that question first. Building a new fab takes two to three years. So even if we start spending TWD 52 billion to TWD 56 billion, the contribution this year will be minimal and there will only be a slight contribution by 2027. We're really looking ahead to 2028 and 2029 for supply. We hope that by then the gap will be narrower. For 2026 and 2027, our focus is on maximizing short-term output. Our productivity continues to improve, and our team is motivated because TSMC's aim is to satisfy customers. It's not solely about financial performance; we want our customers to feel they can trust TSMC. Whenever they have good growth opportunities, we will support them. In the short term for 2026 and 2027, we are working to enhance productivity. We're seeing positive results, partially due to that effort, which Wendell mentioned leads to strong financial performance. But that’s not our primary goal; our main objective is to support our customers. By 2028 and 2029, we plan to significantly increase our CapEx and will continue on that path if the AI demand trend unfolds as we expect.

Jeff Su, Director of Investor Relations

Thank you, C.C. Brett, do you have a second question?

Brett Simpson, Analyst

Yes, I do. That was very clear. My second question is about pricing. Looking at 2025, this was the second consecutive year where TSMC's wafer average selling prices were up around 20%. As leading edge technology becomes a larger part of the mix, along with price increases, I'm curious if 20% wafer price increases will become the new standard for TSMC. Typically, you have annual price negotiations around this time of the year, so I'm trying to understand how you project prices for 2026. Also, does your guidance for the March quarter take into account price increases at the leading edge?

Jeff Su, Director of Investor Relations

Okay. Brett's question is about pricing. He observes that our blended wafer price is increasing close to 20% according to his estimates. This increase is based on a combination of price and mix, particularly at the leading edge, and we've also mentioned earning our value. He wants to know if this is the new normal going forward.

C.C. Wei, Chairman and CEO

This is a tough question. I'll get the CFO to answer.

Jen-Chau Huang, CFO

Okay. Every new node that we have a price. The price will increase. The blended ASP will increase I think they continue this way in the past and will continue with the way going forward. But Brett, I think you're asking about the contribution from pricing to the profitability. Now as we mentioned before, the profitability, there are 6 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 our 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-support 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.

Jeff Su, Director of Investor Relations

Okay. In the interest of time, we'll take 2 more questions from the floor and 1 more from the line. So we'll go here, Sunny Lin, UBS and then...

Sunny Lin, Analyst

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 ramp from a new node, now you can generate actually higher revenue from a new node in year 4 or even year 5 of mass production versus in the past, new node like peak revenue in the second or even third year of mass production. And so could you help us understand what this new trend, what's the financial implications? And then what does that imply for you to operate or even compete differently versus in the past?

Jeff Su, Director of Investor Relations

Sunny's first question is connected to our technology differentiation. She observes that in the past, when we ramped a new node, revenue would typically decline after a few years. However, she points out that today we can still achieve very high revenue from a node even in its fourth or fifth year. Her question is about the financial implications of this trend and how it affects our competitive dynamics.

C.C. Wei, Chairman and CEO

If I can respond, we are fortunate. Currently, in the semiconductor sector, there is a clear trend towards lower power consumption combined with high-speed performance. For TSMC, the advantages of our technology are becoming more evident; we excel in both areas. Our leading-edge customers continue to come in waves, sustaining demand over a prolonged period. This is significant. Achieving this requires technology leadership, which sounds straightforward, but necessitates continuous improvement annually. As we mentioned, we have N2, N2P, and you can expect that the next one will be N2 something, and we will keep advancing. This progression enables us to support our customers' ongoing innovation, ensuring they remain competitive in the market. This explains why, after reaching peak revenue, we have not seen a decline; demand remains stable as new customers continue to join.

Sunny Lin, Analyst

Thank you very much, C.C. And then maybe a question on 2 nanometer, which you should see meaningful revenue coming through in 2026. And so in the past, you guided like how much a new node will contribute to sales for the year. And so any expectations on the revenue contribution from 2-nanometer in 2026? And then I recall in terms of process migration, a few years ago, there were a lot of concerns on increasing cost per transistor. And that obviously is not declining from 5-nanometer? But then now looking at 2-nanometer, I think process migration seems to be reaccelerating even for smartphone and PC and then with larger demand coming from high-bandwidth compute. And so maybe based on your feedback from clients, maybe for smartphone and PC clients, why are they reaccelerating process migration into 2-nanometer?

Jen-Chau Huang, CFO

Yes. Sunny, the 2-nanometer will be a bigger node than 3-nanometer 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 yes, revenue dollar, it's a bigger node. But percentage-wise, less meaningful.

Jeff Su, Director of Investor Relations

Okay. Regarding the second part of Sunny's question about technology, as she mentioned the rising cost per transistor and increasing capital expenditures, the question is straightforward: what is the value? What is motivating smartphone and HPC customers to expand their adoption of N2? What value is encouraging these customers to embrace the N2 technology?

C.C. Wei, Chairman and CEO

I already answered the question, right? The entire product is focused on lower power consumption and high-speed performance, and our technology delivers that value. Furthermore, we consistently improve each year, so even with the same name for the same node, their products continue to advance. This creates value. While the cost per transistor may be increasing, the performance relative to the cost-performance ratio has significantly improved. As a result, customers remain loyal to TSMC. Our current challenge, if you can call it that, is the demand and supply gap. We need to make a concerted effort to reduce this gap.

Jeff Su, Director of Investor Relations

Operator, can we take the last call from the line, and we'll take one last one from the floor.

Operator, Operator

Next one, Krish Sankar, TD Cowen.

Jeff Su, Director of Investor Relations

Okay. Krish, are you there? I guess not. Then let's just take the last question from Bruce Lu from Goldman Sachs.

Zheng Lu, Analyst

Thank you for allowing me to ask the final question. I hope it's not too difficult. TSMC is making significant efforts to increase capacity. AI revenue is growing at over 15% annually. However, token consumption over the past few quarters has been around 15% each quarter, indicating a persistent gap. This is why there has been talk about the chip war. Could you provide insight into your assumptions regarding AI revenue growth of over 50%? Specifically, what level of token consumption can you support, and how much power in gigawatts can be allocated to the chips in your five-year revenue guidance for AI?

Jeff Su, Director of Investor Relations

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 5-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?

C.C. Wei, Chairman and CEO

Bruce, you’ve got me there. I'm also trying to understand what drives growth. My customers continue to see improvements in their products, with companies like Hopper, Blackwell, and Rubin almost doubling or tripling their performance. This allows them to support significant growth and compute power. To be honest, I lose track sometimes. For gigawatt, I'm more interested in how much TSMC can profit from it rather than how much we can provide. From my perspective, the main bottleneck is TSMC's wafer supply, not power consumption at this point. We're taking a close look at that. To answer your question, TSMC's wafer capacity isn't sufficient to fully support the gigawatts yet, but they do have a strong power supply in the U.S.

Zheng Lu, Analyst

Okay. My next question is for the CapEx, right? I want to double check with what I just heard that C.C. was talking about like 2027, the CapEx will be more for the productivity improvement and '28, '29 may be meaningfully higher. So I do recall that in 2021, TSMC provided at 3 years for $100 billion CapEx to support that structural growth. Now the demand is even stronger. Based on that, can we do 3 years $200 billion of CapEx for the next 3 years? The math sounds doable.

Jeff Su, Director of Investor Relations

First, I want to clarify that while we are significantly increasing our CapEx investment this year, it takes about 2 to 3 years to build the necessary capacity. So in relation to Bruce's question about a substantial increase in CapEx by 2027, it's important to note that this capacity will take time to develop.

Jen-Chau Huang, CFO

Yes. I think Bruce, what C.C. said was the productivity was our main focus in '26 and '27 because when we start to invest in the fab, the volume production will not come out until '28 and '29. So the dollar amount invested today is for 2 years or even in the future. And the CapEx dollar amount, as I said, in the last 3 years, $101 billion in the next 3 years, significantly higher. I'm not going to share with you the number, but significantly higher.

Jeff Su, Director of Investor Relations

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.tsmc.com. So again, thank you, everyone, for taking the time to join us today. We certainly would like to wish everyone a Happy New Year. We hope everyone continues to stay well, and you will join us again next quarter. Thank you. Goodbye, and have a good day.