Taiwan Semiconductor Manufacturing Company Limited (TSM) Q3 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call reflects strong financial performance with record revenue growth, robust cash flow, and optimistic guidance for AI demand. Despite some concerns on margin dilution and vague responses in the Q&A, the overall sentiment is positive due to strong demand in AI and advanced technologies, coupled with a solid shareholder return plan. The optimistic guidance for AI and technology advancements outweigh potential risks, suggesting a positive stock price movement.
Key Financial Performance
Third Quarter Revenue Increased 10.1% sequentially to $33.1 billion in U.S. dollar terms, supported by strong demand for leading-edge process technologies.
Gross Margin Increased 0.9 percentage points sequentially to 59.5%, primarily due to cost improvement efforts and a higher capacity utilization rate, partially offset by an unfavorable foreign exchange rate and dilution from overseas fabs.
Operating Margin Increased 1.0 percentage points sequentially to 50.6%, driven by the same factors as gross margin.
EPS TWD 17.44, up 39% year-over-year, reflecting strong operational performance.
ROE 37.8%, indicating robust profitability.
Revenue by Technology 3-nanometer process technology contributed 23% of wafer revenue, 5-nanometer accounted for 37%, and 7-nanometer accounted for 14%. Advanced technologies (7-nanometer and below) made up 74% of wafer revenue.
Revenue by Platform HPC accounted for 57% of revenue (flat quarter-over-quarter), Smartphone increased 19% to 30%, IoT increased 20% to 5%, Automotive increased 18% to 5%, and DCE decreased 20% to 1%.
Cash and Marketable Securities TWD 2.8 trillion or USD 90 billion, reflecting a strong liquidity position.
Accounts Receivable Turnover Days Increased by 2 days to 25 days, indicating slightly slower collection of receivables.
Days of Inventory Decreased by 2 days to 74 days, due to strong shipment in N3 and N5.
Cash Flow from Operations TWD 427 billion, showcasing strong cash generation.
Capital Expenditures (CapEx) TWD 287 billion or USD 9.7 billion, reflecting ongoing investments in advanced technologies.
Cash Dividend TWD 117 billion distributed for fourth quarter '24.
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Operating Highlights
3-nanometer process technology: Contributed 23% of wafer revenue in Q3 2025.
2-nanometer and A16 technologies: N2 is on track for volume production later this quarter, with a faster ramp expected in 2026. N2P, an extension of N2, is scheduled for production in the second half of 2026. A16 technology is also on track for production in the second half of 2026.
Global manufacturing footprint: Expansion in Arizona with advanced process technologies and plans for a second large piece of land. Specialty fab in Kumamoto, Japan, started production in late 2024, with a second fab under construction. Construction of a specialty fab in Dresden, Germany, has started. Multiple phases of 2-nanometer fab in Taiwan are being prepared.
Revenue growth: Q3 2025 revenue increased 10.1% sequentially to $33.1 billion, driven by strong demand for leading-edge process technologies.
Profitability: Gross margin increased to 59.5% in Q3 2025 due to cost improvements and higher capacity utilization. Operating margin rose to 50.6%.
CapEx: 2025 CapEx narrowed to $40-42 billion, with 70% allocated for advanced process technologies.
AI-related demand: Strong structural AI demand observed, with TSMC leveraging AI internally for productivity and efficiency. AI megatrend expected to drive semiconductor demand.
Overseas fabs: Gross margin dilution from overseas fabs expected to be 1-2% for 2025, improving from previous estimates of 2-3%.
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Risk or Challenges
Overseas Fabs Cost Challenges: The cost of overseas fabs remains higher, leading to gross margin dilution. The ramp-up of these fabs is expected to cause a 2%-3% gross margin dilution in the early stages, widening to 3%-4% in later stages.
Tariff Policy Risks: Potential impact of tariff policies, especially in consumer-related and price-sensitive end market segments, poses uncertainties and risks for the company.
Capacity Planning Risks: High forecasted demand from AI-related business requires disciplined capacity planning to avoid overbuilding or underutilization of resources.
Foreign Exchange Rate Impact: Unfavorable foreign exchange rates have partially offset cost improvement efforts and impacted gross margins.
Geopolitical and Regulatory Risks: Expansion in regions like the U.S., Japan, and Europe depends on government support and collaboration, which introduces risks related to geopolitical and regulatory changes.
Supply Chain and Customer Dependency: Strong dependency on customer demand and supply chain alignment, especially for AI-related growth, could pose risks if demand forecasts or customer behaviors change.
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Guidance & Outlook
Fourth Quarter 2025 Revenue: Expected to be between USD 32.2 billion and USD 33.4 billion, representing a 1% sequential decrease or a 22% year-over-year increase at the midpoint.
Fourth Quarter 2025 Gross Margin: Expected to be between 59% and 61%, with operating margin between 49% and 51%.
Full Year 2025 Revenue: Expected to increase by close to mid-30s percent year-over-year in U.S. dollar terms.
2025 Capital Expenditures (CapEx): Narrowed to between USD 40 billion and USD 42 billion, with approximately 70% allocated for advanced process technologies, 10%-20% for specialty technologies, and 10%-20% for advanced packaging, testing, and others.
Gross Margin Dilution from Overseas Fabs: Expected to be closer to 2% in the second half of 2025, with full-year 2025 dilution between 1% and 2%, compared to 2%-3% previously. Long-term dilution expected to be 2%-3% in early stages and 3%-4% in later stages.
AI-Related Demand: Continued robust demand throughout 2025, with structural increases in long-term market demand driven by AI megatrends.
2-Nanometer Technology: Volume production on track for late 2025, with a faster ramp expected in 2026 fueled by smartphone and HPC AI applications.
Global Manufacturing Footprint: Expansion plans in Arizona, Japan, Germany, and Taiwan to support strong AI-related demand and customer needs. Arizona facility to scale up with advanced process technologies and a second large land acquisition underway.
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Shareholder Return Plan
Cash Dividend Distribution: Distributed TWD 117 billion for fourth quarter '24 cash dividend.
Commitment to Dividend Growth: TSMC remains committed to a sustainable and steadily increasing cash dividend per share on both an annual and quarterly basis.
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Key Q&A
Q:What is the outlook for AI-related demand and the mid-40s CAGR guidance for AI accelerators from 2024 to 2029?
A:AI demand continues to be very strong, even stronger than anticipated three months ago. The mid-40s CAGR guidance for AI accelerators remains valid and may slightly improve. A clearer update will be provided early next year.
Q:How should we think about TSMC's CapEx over the next few years given the strong AI demand?
A:TSMC's CapEx is based on business opportunities in the coming years. While CapEx growth is unlikely to spike significantly in any given year, revenue growth is expected to outpace CapEx growth, as has been the trend in recent years.
Q:What is the plan for CoWoS capacity expansion and TSMC's data center AI revenue exposure?
A:TSMC is working hard to narrow the gap between demand and supply for CoWoS capacity and will provide updates next year. AI-related revenue is expected to grow significantly, but specific figures for 2025 will be shared later.
Q:How does TSMC reconcile strong leading-edge demand with claims that Moore's law is dead?
A:TSMC collaborates with customers to focus on overall system performance rather than just chip technology. This approach aligns with customer requirements and ensures strong demand for leading-edge nodes.
Q:What is TSMC's view on China AI GPU demand amidst U.S.-China trade restrictions?
A:TSMC remains confident in its customers' performance and AI growth, even with limited opportunities in China. The mid-40s CAGR for AI remains achievable.
Q:What are the major factors influencing TSMC's gross margin for 2026, including the impact of 2-nanometer ramp?
A:The 2-nanometer ramp will dilute gross margins initially, but N3 dilution will decrease, and N3 is expected to reach corporate average profitability by 2026. Other factors include overseas fab dilution and foreign exchange rate movements.
Q:How is TSMC planning capacity expansions differently for AI compared to past trends like smartphones and PCs?
A:TSMC now engages with customers' customers to better understand AI applications and forecast demand. This approach differs from past trends where TSMC primarily relied on internal studies and direct customer input.
Q:What is TSMC's view on AI infrastructure growth and its AI-related revenue growth?
A:TSMC aligns its AI-related revenue growth with the mid-40s CAGR forecast and expects exponential growth in token consumption. TSMC's technology advancements and customer collaborations will support this growth.
Q:How does TSMC address the gap between exponential token growth and AI-related revenue growth?
A:TSMC's technology advancements and customer design improvements enable handling of exponentially increasing tokens, ensuring alignment with AI-related revenue growth.
Q:What is the revenue opportunity for TSMC from 1 gigawatt of AI data center capacity?
A:TSMC has not disclosed specific revenue figures for 1 gigawatt of AI data center capacity, as it varies by project. AI systems involve multiple chips, not just one.
Q:Does it matter to TSMC whether AI demand comes from GPUs or ASICs?
A:No, TSMC supports both GPUs and ASICs equally, as both use leading-edge technologies and contribute to strong growth.
Q:What strategic initiatives is TSMC undertaking to strengthen its competitive position in the Foundry 2.0 market?
A:TSMC focuses on advanced packaging and system performance, with advanced packaging revenue approaching 10% of total revenue. TSMC collaborates with customers to meet their advanced product needs.
Q:Is TSMC concerned about prebuild in the smartphone market?
A:No, TSMC is not concerned about prebuild as inventory levels are currently healthy and at seasonal levels.
Q:Review of Unclear Management Responses
A:Management avoided providing specific numerical updates for CoWoS capacity expansion, AI-related revenue contributions for 2025, and the revenue opportunity from 1 gigawatt of AI data center capacity. Additionally, they used vague language when discussing the exponential growth of tokens and its alignment with AI-related revenue growth, as well as the implications of U.S.-China trade restrictions on AI demand.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI application
AI demand
Arizona
HPC
TWD
Wendell
addition
basis
capacity planning
cash
cost
customer
day
demand edge
dilution
dollar term
edge process
effort capacity
end
exchange rate
fab
fabs
government
margin
market
nanometer
need
outlook
point
process technology
production
ramp
specialty
support
volume
year
TSM Transcript
Taiwan Semiconductor Manufacturing Company Limited (TSM) Q3 2025 Earnings Call Transcript
Positive10-16
The earnings call reflects strong financial performance with record revenue growth, robust cash flow, and optimistic guidance for AI demand. Despite some concerns on margin dilution and vague responses in the Q&A, the overall sentiment is positive due to strong demand in AI and advanced technologies, coupled with a solid shareholder return plan. The optimistic guidance for AI and technology advancements outweigh potential risks, suggesting a positive stock price movement.
Taiwan Semiconductor Manufacturing Company Limited (TSM) Q2 2025 Earnings Call Transcript
Positive7-17
The earnings call reveals strong financial performance and optimistic guidance, with a 13% sequential revenue increase and high gross margins. The Q&A section highlights robust AI demand, strategic investments, and expansion plans, despite some uncertainties. These factors, along with a stable shareholder return strategy, suggest a positive stock price movement in the short term.
Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) Q1 2025 Earnings Call Transcript
Unknown4-18
The earnings call reflects mixed signals: strong AI demand and a slight EPS beat are positive, but revenue decline and margin pressure due to external factors (earthquake, overseas expansion) are concerning. Q&A highlighted demand strength but also management's evasiveness on certain risks. No explicit Q2 guidance was given, which can cause uncertainty. The absence of a share repurchase plan and increased inventory days further contribute to a neutral outlook. Without market cap data, a neutral prediction is prudent, considering both positive and negative elements.
Taiwan Semiconductor Manufacturing Company Limited (TSM) Q1 2025 Earnings Call Transcript
Unknown4-17
The earnings call highlighted strong AI demand and a significant investment plan, but these were offset by a decline in revenue and margins, and vague management responses in the Q&A. The guidance for Q1 2025 indicates a revenue decline, and there was no new partnership announcement or shareholder return plan adjustment. The market is likely to remain cautious, resulting in a neutral stock price movement.
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