Q2 FY2025 Earnings Call
TSM · Preprocessing Report
2025-07-17
Quality
100%
88
Turns
14
Speakers
4
Sections
10
Exchanges
663
Claims

Entities by group 49

semiconductor foundry 1
TSMCcompany
analysts 10
Wendell HuangpersonJeff SupersonLaura ChenpersonBrett SimpsonpersonBrad LinpersonMehdi HosseinipersonArthur LaipersonSunny LinpersonUBScompanyGokul Hariharanperson
company executives 4
C. C. WeipersonBruce LupersonCharlie ChanpersonFelix Panperson
process node 7
N2technologyN3technologyN5technologyN2PtechnologyN7technologyN3EtechnologyN4technology
process nodes 9
A16technologyA14technology3-nanometertechnology4-nanometertechnology5-nanometertechnology2-nanometertechnologyN16technologyN+1technologyN+2technology
advanced packaging 1
CoWoStechnology
sell-side analysts 2
AretecompanyMacquariecompany
customers/partners 2
United StatescompanyNVIDIAcompany
china-export chip 1
H20product
artificial intelligence 1
AItechnology
high-performance computing 1
HPCtechnology
power rail technology 2
Super Power RailtechnologySPRtechnology
internet of things 1
IoTtechnology
data center chips 1
DCEtechnology
lithography technology 1
EUVtechnology
customers 1
Metacompany
Ungrouped 4
NTotherUSDotherTWDotherTAMother
REPORTING 86PROJECTING 69POSITIONING 193EXPLANATORY 58ANALYST 115

Topics 102

process×41ai×36capacity×33fab×30node×26n2×24demand×21gross margin×20capital expenditure×20revenue×15robot×11technology×10chip×10packaging×10capital intensity×10expansion×8cowos×8margin×7tax credit×7currency×6

Themes 341

ai×18overseas×12advanced×12gross margin×7ramp×7guidance×6cowos×6revenue mix×5on-device×5demand×5strong×5node×5impact×4customer demand×4development×4next year×4profitability×42-nanometer node×4third quarter guidance×3near-term×3capacity expansion×3supply-demand gap×3long-term growth×3timing×3revenue contribution×3process node×3roadmap×3return on investment×3corporate average×3investment×3outlook×3cloud ai×3humanoid×3market size×3technology leadership×2currency sensitivity×2full-year guidance×2u.s. expansion×2customer support×2schedule×2process roadmap×2volume production×2performance and power×2speed×2power×2chip density×2future growth opportunities×2tsmc×2data center and ai×2increase×2fourth quarter×2first-quarter decrease×2more conservative×2wafer×2shipments to china×2h20 development×2n2 ramp×2smartphone ramp×2growth outlook×2n5 and n3×2supply and demand outlook×2supply tightness×2tight supply×25-nanometer utilization×2n3 node tightness×2n5 node tightness×2leading-edge capacity×2benefits×2complexity×2leading edge×2second schedule×2sequential increase on strong demand×1u.s. dollar terms×1beat guidance×1operating leverage×13-nanometer mix×15-nanometer and 7-nanometer mix×1marketable securities balance×1current liabilities decline×1accrued liabilities and tax payment×1turnover days×1foreign exchange effect×1days×1from operations×1cash distribution×1balance×1quarterly spending×12025 guidance×1quarterly decline×1foreign exchange and fab ramp impact×1quarterly actual rate×1fx headwind×1customer and supplier management×1reporting currency×1usd exposure×1revenue impact×1revenue guidance×1operating drivers×1margin pressure×1long-term target×1q2 fy2025 above guidance×1leading-edge process technologies×1second half 2025×1policy uncertainty in end markets×1china demand upside×1non-ai recovery outlook×1broad market resilience×1long-term outlook improvement×1model usage growth×1leading-edge chip demand×1supported by advanced-node and hpc demand×1potential impact×1future megatrends×1competitive positioning×1global footprint update×1customer and government support×1u.s. manufacturing expansion×1high-volume production×1arizona n4 yield×1arizona 3nm completion×1u.s. interest×1new construction 2nm×1process technology×1construction schedule×1giga fab cluster×12-nanometer production in arizona×1u.s. semiconductor manufacturing buildout×1enabling role×1u.s. partnership×1japan production×1japan construction×1japan ramp×1germany expansion×1europe ramp×12-nanometer capacity×1global expansion×1strategic positioning×1energy-efficient computing demand×1broad adoption×12-nanometer ramp×1performance improvement×1density improvement×1application demand×1product extension×1production timeline×1interconnect architecture×1hpc products×1status update×1nanosheet transistor×1a14 production timing×1data center ai×1consumer demand×1cautious and conservative×1megatrend×1market balance×1clarification×1customer development×1interest level×1business trend×1adoption trend×1edge device scaling×1chip scaling×1trend continuing×1conservative outlook×1realism×1high target×1leadership position×1catching opportunities×1high-end×1foreign exchange impact×1material size×1low bar×1fx impact×1fx pass-through×1value delivery×1margin management×1target×1pricing issue×1china addressable market×1china export×1upside×1h20 shipping change×1too early to provide×1customer supply×1positive news×1n2 revenue contribution in 2026×1n2 vs n3 ramp pace×1n2 lifecycle pattern×1similar to n3×1capacity constraint×1ramp-up×1n2 contribution×1n2 outlook×1migration to n3×1n5 mostly done×1greenfield expansion from n3×1utilization and expansion×1value mix×1constraints×1competitive advantage×1installed base by node×1flexibility between nodes×1tightness×1structural cost increases×1pricing to offset costs×1computational×1foreign exchange and overseas fab costs×1operations and euv lithography benefits×1manufacturing benefits×1exchange-rate headwind×1pricing and profitability×1company framing×1other factors×1higher target×1manufacturing operations×1r&d×1gains×1disclosure limit×1follow-up×1taiwan count×1next-year expansion×1gigawatt announcements×1meta announcement×1n2 plan×1expansion×1scale×1data centers×1advanced-node demand×1opening×1capital expenditure intensity×1yield performance×1catch-up timeline×1catch-up timing×1return to old-days performance×1n2 revenue ramp×1high-performance computing×1short-term expansion constraints×1future spending acceleration×1macro uncertainty×1construction constraints×1future business opportunities×1opportunity-driven spending×1business environment×1capex planning×1spending stability×1accelerated growth×1accelerated revenue growth×1capacity plan×1new designs×1plan and timeline×1larger dies and power efficiency×1strategy and advanced nodes×1solution prioritization×1timeline and road map×1road map alignment×1customer collaboration×1customer-driven capacity×1priority setting×1system capabilities×1technology transfer×1fungibility×1technology similarities×1return on effort×1technology variety×1mature overcapacity×1mature process mix×1mature consolidation and efficiency×1older-node overcapacity×116nm and older strategy×1consolidation across nodes×1margin protection×1mature-node abundant×1specialty strategy×1rf image sensor and high-voltage×1customer-driven development×1mature-node overcapacity×1japan overcapacity×1germany overcapacity×1market outlook×1q2 fy2025 q&a×1mature nodes×1leading-edge and mature×1technology complexity×1usage×1medical use×1personal assistance×1sensor technology requirements×1safety risk×1future upside×1adoption timing×1question response×1end-market exposure×1into 2026×1value recycling×1pull forward×14q outlook×1behavior unchanged×13-nanometer cycle time×13-nanometer demand pull-in risk×1fully booked×1breakeven guidance×12026 outlook×1past investments in new nodes×1question confirmation×1spending outlook×1revenue growth outpacing capex growth×1lower over past few years×1goal setting×1depends on demand growth×1declining importance×1high-performance compute applicability×1hpc offering×1process nodes×1adoption on leading-edge node×1smartphone and hpc on leading-edge nodes×1future adoption on most leading node×1adoption one node behind×1future adoption on a16 node×1commentary×1technology node×1consumption×1a16×1data center demand×1further improvement of n2×1n3 demand×1geographic breakdown×1u.s. itc×1u.s. ramp speed×1itc increase×1itc benefit×1meet demand×1customer focus×1margin impact×1asset offset×1depreciation timing×1amortization×1geographic footprint×1specialty technology×1cmos image sensor customers×1automotive industry×1different fields×1

Key Metrics 71

capacity×35gross margin×33revenue×31demand×17capital expenditure×13capital intensity×10capital expenditures×8cagr×6node×5ramp×4capex×4yield×3chip density×3volume production×3growth×3utilization×3operating margin×2speed×2power×2guidance×2die size×2supply×2wafer price×2productivity×2fabs×2return on investment×2revenue growth×2market size×2eps×1return on equity×1cash and marketable securities×1current liabilities×1accrued liabilities×1accounts receivable turnover days×1accounts receivable×1inventory×1cash from operations×1dividend×1cash balance×1capital budget×1exchange rate×1foreign exchange rate×1fab count×1production×1production schedule×1tape-outs×1speed improvement×1performance×1supply-demand gap×1foreign exchange impact×1revenue contribution×1conversion×1price×1economic benefit×1fab efficiency×1cost structure×1average selling price×1roi×1profitability×1sales guidance×1sales×1power consumption×1tam×1addressable opportunity×1cycle time×1breakeven×1tape-out×1power efficiency improvement×1power efficiency×1investment tax credit×1margin×1

Entities 1021

TSMC×430C. C. Wei×109Wendell Huang×70N2×57N3×33Jeff Su×29A16×23Laura Chen×21Bruce Lu×20Brett Simpson×20N5×18CoWoS×17Charlie Chan×16Brad Lin×12Mehdi Hosseini×11Arete×10Arthur Lai×10Sunny Lin×9UBS×9United States×8NT×8Gokul Hariharan×8N2P×7A14×7H20×7AI×7Felix Pan×7USD×53-nanometer×5HPC×4TWD×3N7×3N3E×2IoT×1DCE×1N4×1Super Power Rail×1SPR×14-nanometer×1NVIDIA×1EUV×1Meta×15-nanometer×12-nanometer×1Macquarie×1N16×1TAM×1N+1×1N+2×1

Business Segments 28

Hpc×10Wafer Fabrication×10Foundry×6Automotive×1Consumer Electronics×1

Sectors 70

artificial intelligence×17robotics×16data center×9cloud computing×8semiconductor manufacturing×4smartphone×4high performance computing×3manufacturing×3automotive×3healthcare×1energy×1image sensors×1

Regions 81

U.S.×26Arizona×12Japan×11Germany×7China×6Taiwan×6Kumamoto×3United States×2Europe×2Hsinchu×2Kaohsiung×2Dresden×1global×1

Metadata Distributions

Sentiment
positive 107negative 40neutral 374
Temporality
backward 59forward 128current 334
Certainty
definitive 93confident 160moderate 122tentative 142speculative 4
Magnitude
major 66moderate 313minor 142
Direction
improvement 47decline 12flat 5mixed 5none 452
Time Horizon
immediate 51near_term 174medium_term 106long_term 19unspecified 171
Verifiability
quantitative 121event 32qualitative 368
Analyst Intent
probing 40challenging 7confirming 14seeking_detail 44seeking_guidance 10

Speakers

Executives
CWC. C. WeiCEOWHWendell HuangCFO
Analysts
BLBrad LinanalystBSBrett SimpsonanalystCCCharlie ChananalystLCLaura ChenanalystGHGokul HariharananalystFPFelix PananalystMHMehdi HosseinianalystSLSunny LinanalystALArthur LaianalystBLBruce Luanalyst
Other
JSJeff SuirOPOperatoroperator

Sections

TypeLabelSpeaker
preamblePreambleJeff Su
prepared_remarksPrepared RemarksC. C. Wei, Wendell Huang
qa_sessionQ&A Session—
closing_remarksClosing RemarksJeff Su

Q&A Exchanges 10

#AnalystFirmTurns
1
GHGokul Hariharan
JPMorgan8
2
CCCharlie Chan
Morgan Stanley7
3
BLBruce Lu
Goldman Sachs11
4
BSBrett Simpson
Arete10
5
ALArthur Lai
Macquarie5
6
SLSunny Lin
UBS7
7
LCLaura Chen
Citi11
8
BLBrad Lin
Bank of America8
9
MHMehdi Hosseini
SIG10
10
FPFelix Pan
KGI7

Claim Taxonomy 521

REPORTING86
resultFinancial outcome for a completed period50
metricNon-financial quantitative fact15
operationalDiscrete completed event21
PROJECTING69
guidanceQuantitative expectation with number + time27
commitmentPromise with binary verifiable outcome26
targetLong-term aspirational quantitative goal16
POSITIONING193
strategyPriority, direction, or initiative145
competitiveCompany's position or advantages7
opportunityMarket condition framed as growth driver20
riskHeadwind, constraint, or uncertainty21
EXPLANATORY58
attributionWhy a specific outcome happened7
contextNon-company macro/industry fact51
FRAMING0
thesisFalsifiable belief about how the world works0
ANALYST115
questionInterrogative seeking information62
observationRestates a fact or data point36
concernFlags a risk or challenge3
estimateAnalyst's own projection or calculation4
sentimentOpinion, praise, or critique10

Transcript

Preamble
JS
Jeff SuirTSMC
[Foreign Language] Good afternoon, everyone, and welcome to TSMC's Second Quarter 2025 Earnings Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. Today's event is being webcast live through TSMC's website at www.tsmc.com, where you can also download the earnings release materials. If you are joining us through the conference call [Operator Instructions] The format for today's event will be as follows: First, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the second quarter 2025, followed by our guidance for the third quarter 2025. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. C.C. Wei, will jointly provide the company's key messages.
Then we will open both the floor and the line for the question-and-answer session. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears on our press release. And now I would like to turn the microphone over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.
Prepared Remarks
WH
Wendell HuangCFOTSMC
Thank you. Good afternoon, everyone. Thank you for joining us today.
My presentation will start with financial highlights for the second quarter 2025. After that, I will provide the guidance for the third quarter of 2025. Second quarter revenue increased 11.3% sequentially in NT as our business was supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies, partially offset by an unfavorable foreign exchange rate. In U.S. dollar terms, revenue increased 17.8% sequentially to TWD 30.1 billion and exceeded our second quarter guidance. Gross margin decreased 0.2 percentage points sequentially to 58.6% primarily due to an unfavorable foreign exchange rate and margin dilution from our overseas fabs, partially balanced by higher capacity utilization and cost improvement efforts. Due to operating leverage, operating margin increased 1.1 percentage points sequentially to 49.6%. Overall, our second quarter EPS was TWD 15.36, up 60.7% year-over-year and ROE was 34.8%.
Now let's move on to revenue by technology. 3-nanometer process technology contributed 24% of wafer revenue in the second quarter, while 5-nanometer and 7-nanometer accounted for 36% and 14%, respectively. Advanced technologies, defined as 7- nanometer and below, accounted for 74% of wafer revenue. Moving on to revenue contribution by platform.
HPC increased 14% quarter-over-quarter to account for 60% of our second quarter revenue. Smartphone increased 7% to account for 27%. IoT increased 14% to account for 5%. Automotive stayed flat and accounted for 5%, and DCE increased 30% to account for 1%. Moving on to the balance sheet.
We ended the second quarter with cash and marketable securities of TWD 2.6 trillion or USD 90 billion. On the liability side, current liabilities decreased by TWD 22 billion quarter-over-quarter, mainly due to the decrease of TWD 38 billion in accrued liabilities and others. The decrease in accrued liabilities and others was mainly due to the payment of income tax. On financial ratios, accounts receivable turnover days decreased 5 days to 23 days. The decrease in accounts receivable was mainly due to NT dollar appreciation as almost all of our accounts receivables are in U.S. dollars. Days of inventory decreased 7 days to 76 days, primarily due to higher N3 and N5 wafer shipments.
Regarding cash flow and CapEx. During the second quarter, we generated about TWD 497 billion in cash from operations, spent TWD 297 billion in CapEx and distributed TWD 117 billion for third quarter '24 cash dividend. Taking the unfavorable exchange rate into consideration, our cash balance decreased TWD 30.3 billion to TWD 2.36 trillion at the end of the quarter. In U.S. dollar terms, our second quarter capital expenditures totaled TWD 9.6 billion. I finished my financial summary.
Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our third quarter revenue to be between TWD 31.8 billion and USD 33 billion, which represents an 8% sequential increase or a 38% year- over-year increase at the midpoint. Based on the exchange rate assumption of $1 to TWD 29, gross margin is expected to be between 55.5% and 57.5%. Operating margin between 45.5% and 47.5%. In addition, we maintain our 2025 capital budget to be between USD 38 billion and USD 42 billion. This concludes my financial presentation. Now let me turn to our key messages.
I will start by talking about our second quarter ' 25 and third quarter '25 profitability. Compared to first quarter, our second quarter gross margin slightly decreased by 20 basis points sequentially to 58.6%. This was primarily due to an unfavorable foreign exchange rate and margin dilution from our overseas fabs, partially offset by higher-than-expected overall capacity utilization and cost improvement efforts. Compared to the first quarter, foreign exchange rate of $1 to TWD 32.88, the actual second quarter exchange rate was $1 to TWD 31.05. This created about 220 basis points margin headwind to our actual second quarter gross margin. We also experienced slightly more than 100 basis points impact from the ramp-up of our overseas fabs, mainly as the margin dilution from our Arizona fab started to kick in. We have just guided our third quarter gross margin to decrease by 210 basis points to 56.5% at the midpoint, primarily due to the continued unfavorable foreign exchange rate and more pronounced dilution from overseas fabs as we ramp up further in Kumamoto and Arizona. We continue to forecast the gross margin dilution from the ramp-up of our overseas fabs in the next 5 years starting from 2025 to be between 2% to 3% every year in the early stages and widen to 3% to 4% in the later stages. Despite the higher cost of overseas fabs, we will leverage our increasing size in Arizona and work on our operations to improve the cost structure. We will also continue to work closely with our customers and suppliers to manage the impact. Overall, with our fundamental competitive advantages of manufacturing technology leadership and large-scale production base, we expect TSMC to be the most efficient and cost-effective manufacturer in every region that we operate.
Now let me make some comments on the impact of foreign exchange rate on TSMC's revenue and profitability. NT dollar is the reporting currency of our financial statements. Nearly all of our revenue is in U.S. dollars, while about 75% of cost of goods sold is in NT. Therefore, fluctuations in the exchange rate between U.S. dollar and NT will have a sizable impact to our reported revenue and gross profit margin. The sensitivity of the revenue to dollar NT exchange rate is nearly 100% — that is every 1% appreciation of NT against U.S. dollar will reduce our reported NT revenue by 1%. The sensitivity of our gross margin to the same 1% exchange rate change is about 40 basis points. That is if NT appreciate 1% against the dollar, our gross margin will come down by about 40 basis points. Compared with our second quarter exchange rate guidance of $1 to TWD 32.5 provided on April 17, the NT dollar has appreciated by an average of about 4.4% sequentially, which negatively impacted our second quarter revenue by about 4.4% in NT and our gross margin by about 180 basis points. For third quarter of '25, based on the current exchange rate of $1 to TWD 29, the average NT dollar will appreciate by another 6.6% sequentially, which will negatively impact our third quarter revenue by 6.6% in NT and reduce our gross margin by about 260 basis points.
As a reminder, 6 factors determine TSMC's profitability: Leadership technology development and ramp-up, pricing, capacity utilization, cost reduction, technology mix and foreign exchange rate, which is not in our control. When the foreign exchange rate is unfavorable as it is currently, we will focus on the fundamentals of our business and lean on the other 5 factors to manage through it, and we have successfully done in the past. Thus, even with the unfavorable foreign exchange rate, we believe a long-term gross margin of 53% and higher remains well achievable. Now let me turn the microphone over to C.C.
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CW
C. C. WeiCEOTSMC
Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. We concluded our second quarter with revenue of USD 30.1 billion, above our guidance in U.S. dollar terms, mainly due to continued robust AI and HPC- related demand. Moving into the third quarter of 2025, we expect our business in the third quarter to be driven by strong demand for our leading-edge process technologies. Looking into second half of 2025, we have not seen any change in our customers' behavior so far. However, we understand there are uncertainties and risk from the potential impact of tariff policies, especially on consumer- related and price-sensitive end market segment. While we observe rebate program in China are stimulating some near-term demand upside, we believe this is a short term in nature and continue to expect a mild recovery in overall non-AI end market segment in 2025. Having said that, we believe the demand for semiconductors is very fundamental and will continue to be robust. Recent developments are also positive to AI's long-term demand outlook. The explosive growth in token volume demonstrate increasing AI model usage and adoption, which means more and more computation is needed, leading to more leading-edge silicon demand. We also see AI demand continuing to be strong. including the rising demand from sovereign AI. Therefore, we now expect our full year 2025 revenue to increase by around 30% in U.S. dollar terms, supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies underpinned by growth in our HPC platform.
Amidst the uncertainties, we will remain mindful of the potential tariff- related impact and be prudent in our business planning going into second half 2025 and 2026 while continuing to invest for the future megatrends. We will also focus on the fundamentals of our business, technology leadership, manufacturing excellence and customer trust to further strengthen our competitive position. Next, let me talk about TSMC's global manufacturing footprint update. All our overseas decisions are based on customers' needs, the value some geographic flexibility and the necessary level of government support. This is also to maximize the value of our shareholders. With a strong collaboration, and support from our leading U.S. customers and the U.S. federal state and city government, we announced our intention to invest a total of USD 165 billion in advanced semiconductor manufacturing in the United States. This expansion includes plans for 6 advanced wafer manufacturing fab in Arizona, 2 advanced packaging fabs and a major R&D center to support the strong multiyear demand from our customers.
Our first fab in Arizona has already successfully entered into high-volume production in 4Q 2024, utilizing N4 process technology with a yield comparable to our fab in Taiwan. The construction of our second fab, which will utilize 3-nanometer process technology is already complete. We are seeing strong interest from our leading U.S. customers and are working on speeding up the volume production schedule by several quarters to support their need. Construction of our third fab, which will utilize 2-nanometer and 16 process technologies has already begun, and we will look into speeding up the production schedule as well based on the strong AI- related demand from our customers. Our fourth fab will utilize N2 and A16 process technology and our fifth and sixth fab will use even more advanced technology. The construction and ramp schedule for those fabs will be based on our customers' needs.
Our expansion plan will enable TSMC to scale up to a giga fab cluster in Arizona to support the needs of our leading-edge customers in smartphone, AI and HPC applications. We also plan to build 2 new advanced packaging facilities and establish an R&D center to complete the AI supply chain. After completion, around 30% of our 2-nanometer and more advanced capacity will be located in Arizona, creating an independent leading- edge semiconductor manufacturing cluster in the U.S. Thus, TSMC will continue to play a critical and integral role in enabling our customers' success. We also maintain a key partner and enabler of the U.S. semiconductor industry.
Next, in Japan, thanks to the strong support from the Japan central manufacture and local government, our first specialty technology fab in Kumamoto has already started volume production in late 2024 with very good yield. The construction of our second specialty fab is scheduled to start later this year, subject to the readiness of the local infrastructure. The ramp schedule will be based on our customers' need and market conditions. In Europe, we have received strong commitment from the European Commission and the German federal, state and city government and are progressing smoothly with our plans to build a specialty technology fab in Dresden, Germany. The ramp schedule will also based on our customers' need and market conditions.
In Taiwan, with support from the Taiwan government, we plan to build 11 wafer manufacturing fab and 4 advanced packaging facilities over the next several years. We are preparing for multiple phases of 2-nanometer fab in both in both Hsinchu and Kaohsiung Science Parks to support the strong structural demand from our customers. By expanding our global footprint while continuing to invest in Taiwan, TSMC can continue to be the trusted technology and capacity provider of the global IC industry for years to come while delivering profitable growth for our shareholders. Now let me talk about our N2 and A16 status. Our N2 and A16 technologies lead the industry in addressing the insatiable demand for energy-efficient computing and almost all the innovators are working with TSMC.
We expect the number of new tape-outs for 2-nanometer technology in the first 2 years to be higher than both 3-nanometer and 5-nanometer in the first 2 years, fueled by both smartphone and HPC applications, N2 will deliver full node performance and power benefit with 10 to 15 speed improvement at the same power or 20% to 30% power improvement at the same speed and more than 15% chip density increase as compared with N3E. N2 is well on track for volume production in the second half of 2025 as scheduled with a ramp profile similar to N3. With our strategy of continuous enhancement, we also introduced N2P as an extension of our N2 family, N2P features further performance and power benefits on top of N2 and volume production is scheduled for second half 2026. We also introduced A16 featuring our best-in-class Super Power Rail or SPR. Compared with N2P, A16 provides a further 8% to 10% speed improvement at the same power or 15% to 20% power improvement at the same speed and additional 7% to 10% chip density gain. A16 is best suited for specific HPC products with complex signal routes and dense power delivery network.
Volume production is on track for second half 2026. We believe N2, N2P, A16 and its derivatives will fuel our N2 family to be another large and long-lasting node for TSMC. Finally, let me talk about our A14 status. Featuring our second-generation nanosheet transistor structure, A14 will deliver another full node stride from N2 with performance and power benefits to address the increasing structural demand for high-performance and energy-efficient computing. Compared with N2, A16 will provide 10 to 15 speed improvement at the same power or 20% to 30% power improvement at the same speed and about 20% chip density gain. Our A14 technology development is on track and progressing well with device performance and yield improvement on or ahead of schedule. Volume production is scheduled for 2028. We will and its derivative will further extend our technology leadership position and enable TSMC to capture the growth opportunities well into the future. This is concluding our key message, and thank you for your attention.
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Q&A Session
Q&A 1/10
JS
Jeff SuirTSMC
We will take the first few questions from the floor, then we'll flip and alternate to those on the line. Maybe we'll go left, center and then right sort of sequence, and we'll start here with Gokul Hariharan from JPMorgan.
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Gokul HariharananalystJPMorgan
First question on demand. I think C. C. you mentioned data center AI demand definitely looks better than maybe 3 months back. Last quarter, you also mentioned CoWoS capacity will probably come into balance by 2026. Is that still our view? Or you think that the capacity now starts to look tighter?
Second, I think you talked about on-device AI as a potential future driver. Are you seeing more development on the on-device AI part? Is it better compared to maybe 3, 6 months back? And lastly, near term, your 4Q looks like you're expecting revenue to decline. Is that based on what your customers are telling, especially on the consumer side? Or is it just TSMC being cautious and conservative in terms of the guidance?
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Jeff SuirTSMC
Okay. Gokul, thank you. Again, for the benefit of those, of course, here in person on the line, please allow me to summarize your questions. So maybe we'll take them one by one. His first question is on the demand, particularly data center and AI-related demand. As C.C. said in his remarks, it is certainly still even stronger. So his question is about the advanced packaging and CoWoS demand into 2026. How do we see the supply-demand gap narrowing or becoming more balanced for CoWoS specifically?
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Wendell HuangCFOTSMC
Gokul, the demand from the AI getting stronger and stronger, if you pay attention to what — for trading companies, the CEO said. And so the megatrend for the AI continue to be strong and so is the CoWoS. And so now we are — again, we are in a mode trying to narrow the gap. I don't want to use the balance. The last time you guys misunderstood what I said is — sorry it's bad worded. So I will say we try to narrow the gap, all right? So momentum is still there and very healthy.
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Jeff SuirTSMC
Okay. And then the second question or second part is on on-device or edge AI. Gokul wants to know how is the development of customers to work on on-device AI compared to maybe 3 to 6 months ago? What is the interest or activity level? And how do we see this?
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C. C. WeiCEOTSMC
As the last time I say, I say that it takes 1 to 2 years for my customer to complete their new design on the product. The momentum is still going. They are still continue to — as time goes by, as I said, the increase on the edge device, the number of the units is actually mild. But then the die size increase. We continue to see that. And the die size increased by about 5% to 10%.
And that kind of trend continued. Okay? So you have to wait another probably 6 months or 1 year to see an explosion.
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Jeff SuirTSMC
Okay.
And then the second question and the final part on the near term. I think, Gokul, your question is with our third quarter guidance implies fourth quarter. Is there any particular reason or any comment that we want to make about the implied fourth quarter business momentum?
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C. C. WeiCEOTSMC
I think you did not mention Gokul is convinced or you become conservative. That comment is more real. We are a company that what we say we will achieve and achieve the high target. So your calculation, I think Charlie also is nodding.
So a lot of you is calculating our reported numbers so that you can easily see that our first quarter is decreasing. We take into the consideration of the possible impact of tariff and a lot of other uncertainties. So we become more conservative. That's our current attitude. But I guarantee you with our technology leadership position and excellent manufacturing. If there are any opportunities, we will catch. And be expected that we will achieve our high-end target.
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Q&A 2/10
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Jeff SuirTSMC
Okay. Sorry, let's go one by one. Second question then maybe Charlie Chan from Morgan Stanley.
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Charlie ChananalystMorgan Stanley
So first of all, congrats for very strong results and especially on the gross margin side, a very good execution indeed. So my first question is really also on the gross margin because the accumulated FX impact is almost like 4.4 percentage points.
It's too big to ignore. So when TSMC consider your 2026 wafer pricing, so-called reflecting your value, would you consider this FX impact and is confident to keep your margin similar to this year's level. I feel like 53% is a low bar. So I just want to remain a little bit high and see if that FX impact can be considered to reflect to your value.
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Jeff SuirTSMC
Okay.
So Charlie's first question is on margin and I guess, pricing. He notes, obviously, as Wendell said, the big move in the exchange rate and therefore, a big impact to our profitability and gross margin. So his question is, looking ahead to 2026. Can we reflect or earn our value from the including the FX impact into the pricing?
And therefore, what is our confidence level on the gross margin for next year? Can it keep a similar level as this year?
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C. C. WeiCEOTSMC
Well, let me assure you that, yes, the impact from the exchange rate is huge. But you try to imply that whether we are — still our value. Let me answer that.
We are working on it. And we have confidence that the 53% gross margin and higher, I still want you guys to pay more attention to and higher.
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Charlie ChananalystMorgan Stanley
Hopefully, it will work out well.
My second question is also a very hot topic recently about the — H20 chip shipping to China. I remember 3 months ago, there was another question on this matter, right, meaning that back then, I believe that chip was suspend, but you're still very confident about your mid-40% CAGR for cost saving growth in the coming 5 years. Right now China becomes your addressable market again, do you think that mid-40% CAGR target can be revised up?
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Jeff SuirTSMC
6 Okay. Thank you, Charlie. So Charlie's second question is around the AI accelerator demand. He notes, of course, our customers' product, H20 recently now seems to be able to ship to China versus 3 months ago, it was not. So his question really is our long-term AI accelerator growth CAGR to grow close to mid-40s.
Can it be higher? Do we think it will be higher? Is there upside to this?
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C. C. WeiCEOTSMC
6 Charlie, the H20 now is again, according to the trading companies CEO, we did not receive the signal yet.
So it's too early to give you an estimate. But certainly, this is a good news, right? I mean that's — China is a big market and my customer can still continue to supply the chip to the big market. And it's a very positive news for them. And in return, it's a very positive news to TSMC. Whether we are ready to increase our forecast, not yet. Another quarter probably will be more appropriate to answer your question.
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Q&A 3/10
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Jeff SuirTSMC
Okay. Then we'll move on to the right side of the room for us, Bruce Lu from Goldman Sachs.
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Bruce LuanalystGoldman Sachs
I think Charlie already asked the profit question already.
So I just move on to your N2 ramp. So what's the revenue contribution you expect for the N2 ramp for next year? I'm a little bit surprised to hear that the N2 ramp is similar rate with N3 with N2, you do have both HPC and smartphone customers ramping up at the same pace in the first — year 1 or year 2, right? Can we expect like 15% revenue contribution coming from N2 for next year or a similar level compared to N2, which is around like 10%, 11% for the year 2?
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Jeff SuirTSMC
6 Okay.
Bruce's first question is around the N2 ramp. His question is about the ramp and the ramp profile because we said the N2 ramp profile is similar to N3. So what does that mean? And then also, of course, what revenue contribution do we expect or can we share for N2 in 2026?
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C. C. WeiCEOTSMC
Bruce, you have a good argument.
Usually, we ramp up a new node using the smartphone. We knew that everybody knew it. Now it's not only smartphone, but also HPC product. However, the ramping profile I just reported is similar to 3-nanometer. It's limited by our capability to build a new fab to ramp it up and also a little bit straightforward is constrained by the capacity. So we say the ramp profile is similar to N3, but the revenue contribution certainly will be bigger because you don't expect our N2 is the same price as N3, right?
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Bruce LuanalystGoldman Sachs
If that is the case, we should assume like in '27, the N2 ramp-up will be faster, right? Because you take 12, 18 months for you to build new fab, you should be able to achieve even higher growth in N2 in '27, right?
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Jeff SuirTSMC
So Bruce is asking if the revenue contribution is much — is higher in '26, then should it be even greater in '27?
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C. C. WeiCEOTSMC
We will answer that question in '26.
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Bruce LuanalystGoldman Sachs
Okay.
The next question is for N5 and N3, right? So I want to understand the supply demand for the N5 and N3 in the coming 2 years as most of the AI will migrate to N3 next year. But it seems to me that the N5 conversion is mostly done — and N5, N3 conversion is mostly done. And we don't really see like greenfield capacity expansion from N3. So it becomes like super tight for the N3 for the coming years. So does that mean that N5 will be lower utilized or we try to build more N3 in the future? Or what kind of — or we should see we can fill out more value for N3, N5 next year?
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Jeff SuirTSMC
Okay.
Bruce's second question is around N5 and N3. He wants to know what is the outlook, the supply-demand at these 2 advanced nodes in the coming 2 years. His observation, AI products will migrate to N3 and the N5, N3 conversion is mostly done. So his question is, will 3-nanometer supply be very tight in the next 3 years?
And I think the last part, therefore, can we earn our value or price for that tightness? And then on the flip side, what about 5-nanometer? Will it become lower utilization?
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C. C. WeiCEOTSMC
I like your comment, we have to share our value because of very tight in N3 capacity. It will be continued for a couple of years, very tight. And in fact, N5 also very tight. The demand is high because of a lot of AI products still in the 4-nanometer technology node, and they will transition to 3-nanometer probably in next 2 years. So in meanwhile, N5 are still very tight in capacity.
N3 even tighter. And so we are working hard. One of the TSMC's advantage is that we have giga fab cluster.
And so we have between N7, N5, N3, even the future N2, we have almost for each node, we have about 85% to 90% [inaudible] tools. So it's not free, but it's much easier for TSMC to adjust or convert the capacity between those nodes. And today, let me share with you, we are using the N7 capacity to support N5 because the N5 is too tight. And then we are converting N5 to N3 as you just pointed out. We'll continue to do that. And so today, we are — our leading edge technology is capacity. We define N7 and below are all very tight. And at same time, we are working very hard to, again, using my sentence to narrow the gap between the demand and the capacity.
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Jeff SuirTSMC
Okay. Thank you, Bruce. Let's go to the participants online. Maybe we'll take 2 questions from the online, and then we'll come back to the floor. Operator?
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Q&A 4/10
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Operatoroperator
Now asking question Brett Simpson from Arete.
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Brett SimpsonanalystArete
I had a question for Wendell on gross margins. And it's always helpful you've laid out a framework for some of the puts and takes to TSMC's gross margins.
But my question is really some of these headwinds like FX and the dilution from overseas fabs are more structural cost increases. And to what extent can TSMC adjust wafer pricing higher to neutralize these cost increases in your business? And I guess, secondly, on this point, how much economic benefits are you seeing from applying AI across the fabs? I mean I think NVIDIA has mentioned that they're working with TSMC closely strategically in areas like computational lithography to try to drive further fab efficiencies. So can you maybe just give us some examples where you're seeing real gains in your cost structure? And are we at a point where you're starting to see several points of gross margin benefit from AI efficiencies?
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Jeff SuirTSMC
6 All right, Brett.
So Brett's first question is a little bit involved, but looking at our gross margin and profitability, he notes that the unfavorable exchange rate and the dilution from the overseas due to the higher costs, these are structural headwinds. So his question is, can we — how can we or can we earn our value or adjust our wafer price to help offset some of these? And also how much we've talked about before about using AI ourselves in our operations, how much economic benefit are we deriving from things such as EUV litho with our customers, such as — and are there other examples of using AI where it's helping our cost structure? And can we quantify that — quantify the benefit, sorry. That's your question, right? Brett?
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Brett SimpsonanalystArete
That's right.
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Wendell HuangCFOTSMC
Okay. Brett, the first question, gross margin, that's the reason why we've been talking about the 6 factors affecting our profitability. I don't think I need to repeat those 6 factors. But whenever, for example, using foreign exchange example, a few years ago, there were also a period of time that foreign exchange rates were against us. So we are able to lean on the other factors to help us mitigate the negative impact from certain factors and therefore, still achieve our gross margin targets. And you specifically asked about ASP, raising the price, but the price is just one of the factors. And I believe C.C. just elaborate a lot on earning our value. And at the same time, there are other factors that we can leverage on. So all in all, that's why we're saying 53% and higher gross margin is still achievable. Your second question on AI benefits.
I think we also talked about that before. We use that in operation, in manufacturing. We also use that in R&D. And just think about if we are able to produce 1% of productivity gains in a company of our size, that equals to USD 1 billion. So that's the number we can share with you without going into too much other details.
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Jeff SuirTSMC
Does that answer your question, Brett?
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Brett SimpsonanalystArete
Yes, that's great. I guess my follow-up question, I guess, just digesting your prepared remarks, C.C., you mentioned 11 fabs in Taiwan. I think I count 8 fabs for overseas that you're planning that aren't commercially online yet. Can you maybe just talk a bit about — I mean I've never seen that type of — that type of road map before from TSMC. It's quite big. Can you maybe share with us if you're planning a bigger expansion of new capacity next year?
And I say this because in the last few months, we've seen so many gigawatts data center announcements. I think this week, we had one from Meta that was significant. So are you — the demand looks very strong.
And I'm just wondering whether you have enough capacity to satisfy demand next year and whether you plan to convert further 5-nanometer to 3-nanometer. And how you see the N2 capacity plan for 2026?
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Jeff SuirTSMC
Okay.
Brett's second question, he notes that we are building many fabs, both in Taiwan and also overseas. He's never seen this size or scale of the capacity expansion from TSMC before. So it's very — and he also notes that the demand from data centers continues to be very strong. So his question is basically very simply, do we have enough capacity to support the strong demand specific to next year and also very specifically to 2-nanometer and will we further also convert more 5-nanometer to 3? That's, I think, all of his question.
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C. C. WeiCEOTSMC
Thank you Brett. Your observation is right. Recently, we saw a lot of announcement of the AI data center all over the world and the demand on 3-nanometer, actually on 5-nanometer, 3-nanometer and the future 2-nanometer are very high. And we did not see this kind of strong demand for a long time, but will be enough to support them, I still want to use my word, say that we try very hard to narrow the gap. between the demand and the supply. We're working very hard.
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Jeff SuirTSMC
Okay. Thank you Brett. Let's go to the next participant on the call.
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Q&A 5/10
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Operatoroperator
Now it's Arthur Lai from Macquarie.
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Arthur LaianalystMacquarie
Arthur Lai from Macquarie. Again, congrats on a strong result.
I would like to follow up on the N2. I think as C. C. highlight, this is a very exciting node we are all heard. And then I want to follow up on the return on investment. Can you compare to the N2 and N3, the return on investment and then give us more color? Second one is the reason we ask this question is because the CapEx per area actually N2 is higher, right? And then we also heard from industry that the company's yield on the N2 is also pretty good. So can you give us some put and take on how we think of the N2's future development?
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Jeff SuirTSMC
Okay.
So Arthur's question, both questions, I think, are around N2. N2, as you said, is a very exciting node. He would like to know understand what is the return or the return on investment that we see from N2 compared to N3 and also, can we talk a little bit N2, the CapEx is higher, but the yield is still very good. What is the developments that we're seeing for 2-nanometer? I think that's — is that your question, Arthur?
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Arthur LaianalystMacquarie
Yes, yes. Yes, exactly.
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Wendell HuangCFOTSMC
Arthur, N2 return, as we said before, N2, the profitability is better than N3. Now there were questions asking how many quarters to catch up with the corporate before. And N3 was — it took N3 longer.
But for N2, we think it will be back to the old days. Having said that, I need to remind everyone that in the old days, we're talking about corporate average of, say, 50% gross margin. Nowadays, we're talking about 53% gross margin. So it becomes less meaningful to talk about how much time it takes to catch up with corporate nowadays. But having said that, structurally, N2 does have a better profitability than N3, okay? And N2 development is right on track.
We're ramping it in the second half of this year. We expect the revenue to come up in the first half of next year.
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Q&A 6/10
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Jeff SuirTSMC
Okay. Thank you, Wendell. Thank you, Arthur. Let's come back to the floor. We'll go left middle right. So maybe Sunny Lin from UBS.
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Sunny LinanalystUBS
Very good results and congrats.
So my first question is to follow up on CapEx. So obviously, full year sales guidance is stronger. You are turning more constructive on high-performance compute and AI. Yet you are keeping your CapEx guidance — so is it fair to assume that you are considering some conservatism for CapEx for this year given the ongoing macro uncertainty?
Or is it because in the short term, your capacity expansion is somewhat constrained by the ability that you can ramp up more capacity. And therefore, maybe in 2026 and 2027, we should expect some acceleration of your CapEx spending?
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Jeff SuirTSMC
Okay. So Sunny's first question is around CapEx. She notes, of course, that we raised our 2025 revenue guidance this year, and we certainly still see a very robust demand from AI, yet we kept our CapEx guidance in the same range of $38 million to $42 million.
So she wants to understand why? Is it because of macro uncertainty? Is it because of constraints in the construction? And her other part of this question is what is the CapEx outlook for '26 and '27, I guess?
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Wendell HuangCFOTSMC
Sunny, the CapEx, as we said before, the CapEx invested in a given year is for the business opportunities in the following years. And as long as there are business opportunities, we will not hesitate to invest. Having said that, nowadays, as C.C. also said, with all these macro uncertainties, we are mindful of these uncertainties. So we also take that into consideration in our capacity and CapEx plan.
Going forward, it's too early to talk about future years CapEx, but I can share with you a company of our size, it's unlikely that you see CapEx dollar amount suddenly drop a lot in any given year. That's all I can share with you.
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Sunny LinanalystUBS
Got it.
It sounds like CapEx could be going higher in the coming years. My second question is on cloud AI. And so you think like earlier attribute most of the sales upside for 2025 to cloud AI. And therefore, I wonder if you have an update on the cloud AI growth in 2025, which you guided before to be about 100% for 2025 and the implication to your CoWoS capacity expansion, would you be — are you able to maybe expect a bit more CoWoS capacity for this year to support the stronger cloud AI growth for this year? And any early insight that you could share with us for your CoWoS capacity expansion for 2026?
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Jeff SuirTSMC
Okay.
So Sunny's second question is asking about our AI — well, she said cloud AI, basically our AI accelerated growth in 2025 and related the CoWoS capacity. So her question is, what is the AI accelerated revenue growth we expect in 2025? And then what is our CoWoS capacity expansion plan for 2025? And she asked a similar question to Charlie or someone earlier, what is the plan for CoWoS capacity in 2026?
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C. C. WeiCEOTSMC
Well, my answer stays the same.
We are trying very hard to narrow the gap for now and for 2026, the demand momentum are very healthy and very strong. And so we are building many new facilities in the back end to increase the CoWoS capacity to support our customers. AI demand is very strong. And so the CoWoS capacity, the demand is very strong.
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Q&A 7/10
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Jeff SuirTSMC
Okay. Thank you, Sunny. Then we'll move on to Laura Chen from Citi.
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Laura ChenanalystCiti
Congrats for the good results and outlook. My question is also about the AI chip. C. C. You mentioned that AI chip is getting bigger and bigger and also the power consumption is getting much more.
So I'm just wondering that among like your advanced technology, including like the advanced node, we also noted that during the symposium, TSMC also announced some of the new technology in advanced packaging as well. Just wondering how do you kind of prioritize your leading-edge advanced packaging. During the symposium, we see that system now wait for that kind of a new design. Do you have any like plan or time line for the new technology? And should we think about that, that should be kind of aligned with our most advanced node process like N2 or N16 going forward?
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Jeff SuirTSMC
Okay. So Laura's first question is on advanced packaging nodes. AI, the die sizes are increasing, the need for power consumption or energy efficiency is rising. So she wants to understand how our strategy for advanced packaging along with the advanced node development. Are there any specific packaging solutions that we're prioritizing?
What about the time line and road map? How does that match up with our advanced node road map?
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C. C. WeiCEOTSMC
Laura, I think TSMC's philosophy to develop a technology is working with the customer. The customer has such demand, we develop the technology, we increase the capacity for that. So priorities, every customer is important to TSMC.
So — and in the advanced packaging side, a lot of customers use different approaches. So we are developing a variety of different back-end packaging, advanced technology for all the customers. Whether it is related to the advanced leading edge technology, the answer is yes, okay? So we have a system integration. We have CoWoS [inaudible] that's terminology. We have a lot of different names that I cannot even remember, but there's a lot of varieties and we work with our customers to meet their demand. I can answer you.
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Laura ChenanalystCiti
Is that easy to kind of leverage or transfer different kind of technology from your perspective?
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Jeff SuirTSMC
So Laura is asking how fungible are these different packaging technologies, how interchangeable or easy to transfer the technology between different packaging solutions?
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C. C. WeiCEOTSMC
Of course, there are some similarities in between. Otherwise, we are going to put too much of the effort and did not get the return. Yes, there's a lot of similarities, but a lot of varieties also.
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Laura ChenanalystCiti
Okay.
And my second question is we know that obviously, the AI demand advanced node, advanced leading-edge packaging is very tight. And — but I'm just wondering that industry-wise, we still see probably overcapacity in mature nodes. Yet TSMC also have like more mature 16-nanometer or more above that kind of process. So can we kind of consolidate our mature nodes to kind of make better efficiency and capabilities to enhance the — like those capacity to fulfill the demand across the board.
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Jeff SuirTSMC
5 Okay.
So Laura's second question is on mature nodes. She notes that there is overcapacity on the industry-wide in older nodes. So she wants to understand for TSMC specifically, if we take, for example, 16-nanometer and older nodes, what is our strategy? Can we consolidate amongst the different nodes? How do we protect our profitability?
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C. C. WeiCEOTSMC
Good question. If you read the newspaper, there are so much of mature node capacity. TSMC's strategy actually is on the mature node technologies, we develop kind of specialties. For example, that RF technology or CMOS image sensor or the high voltage. So we develop the technology at the request of our customer.
So we don't worry too much about what you say, overcapacity. If it is really overcapacity, we will not build a fab in Japan. We will not build a fab in Germany. So it's not overcapacity. It's all related to customers' need, customers' demand, and those are all specialty technologies. Did I answer your question?
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Laura ChenanalystCiti
Yes.
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Q&A 8/10
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Jeff SuirTSMC
Okay. Thank you, Laura. I think in the interest of time, we'll go to Brad Lin from Bank of America. Then we'll take one more from the line and then if there's one more from the floor.
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Brad LinanalystBank of America
I have 2 questions. My first one is on the humanoid robot. So we have learned that humanoid robot started to contribute to TSMC and it is gaining momentum as the next frontier of the AI hardware. How does TSMC evaluate the market size of humanoid robot in the semiconductor and in terms of the potential market TAM, compute and also sensor requirements? And what do you think that might be another driver potentially for mature nodes, too.
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Jeff SuirTSMC
Okay. Thank you, Brad. So Brad's first question is around humanoid robot. We're starting to see some contribution. He wants to understand how do we evaluate the market size? What is the addressable opportunities for TSMC in the long term at the leading edge and also on the mature nodes with certain type of specialty?
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CW
C. C. WeiCEOTSMC
Brad, it's too early — actually, it's too early to say the humanoid robot will play a role in this year. Next year, probably still too early because it's so complicated.
You know that humanoid robot will be most of the time will be used. I think the first one will be used in the medical industry to taking care of the people getting over like me. And I probably someday I need some humanoid robot to help me.
But it's very complicated because it's not — we are talking about the brand only. Actually, you are talking about a lot of sensor — sensor technology, the image sensor, the pressure sensor, the temperature sensor and all the feedback to the CPU. And so it's very complicated. And since it's dealing with human being directly, has to be very, very careful. But then once you start to fly, it was a big, big plus. I talked to one of my customers and he say that the EV car is nothing — is robot will be 10x of that. I'm waiting for that. Does that answer your question?
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Brad LinanalystBank of America
Yes, yes.
I believe the client definitely owns EV cars and robots, too, so he knows it well. So my second question will be on the potential pulling ahead of the so-called recycling the value into 2026. So we know — well, normally, we continue to recycle value into our pricing. So given the potentially higher pricing into 2026, are you observing any signs of demand pulling from the customers in the second half of the year and potentially, well, given the tight pipeline of N3, N5, would we see a continuous trend into 4Q, even though we already guided potential decline, but yes, any pull in potentially.
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Jeff SuirTSMC
Okay. Brad second question, very specifically, he's asking as we — C.C. talked about that we will continue to earn our value do we see any customers trying to pull in their demand ahead of 2026 into the second half of this year? And do we have any additional comments to offer on the fourth quarter besides what we have already shared?
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C. C. WeiCEOTSMC
Well, the answer is no, we did not see any different customers behavior so far, okay? But let me share with you, add more color. If you are talking about the 3-nanometer's demand, for example, the cycle time is still what takes about 4 months. So there's no way you can pull in anything. I mean that's — yes. And we have — as I said, our capacity is very, very tight. So we already have all the schedules. And so breakeven room for full year, let me say that, even [inaudible]. But, no. The answer is no. So 2026 is 2026, we will share with you.
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Jeff SuirTSMC
Thank you C. C. Thank you, Brad. All right. Operator, let's go to the — we'll take questions from the last participant on the line.
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Q&A 9/10
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Operatoroperator
Yes. The last one to ask question from Mehdi Hosseini from SIG.
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Mehdi HosseinianalystSIG
The first one has to do with capital intensity. When I look at the past 5 years when you were ramping N3 and N5, the capital intensity was at or above 40%. And you also highlighted how N2 tape-out is tracking better than N3 and N5 combined. Does that imply that the capital intensity would need to go back up to 40% — in other words, an initial investment for N2 to accommodate these tape-outs? Is that the right way of thinking about how investment are going to play out? And I have a follow-up.
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Jeff SuirTSMC
Okay, Mehdi.
Sorry, — we couldn't hear you exactly clearly. Let me try to summarize your question, all right, which is Mehdi's question is around capital intensity. He notes that in the past, when we invest in new nodes or structural the megatrends like we have with N3 and N5, our capital intensity has jumped up to greater than 40%. So if I heard you correctly, Mehdi, your question is this time, we talked about the strong demand for 2-nanometer multiyear upcoming, what is our expectation on capital intensity. Is that correct, Mehdi?
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Mehdi HosseinianalystSIG
Yes, that's correct.
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Wendell HuangCFOTSMC
Okay. Mehdi, let me answer this question.
As we just said, the capital expenditure invested in any year is the future growth opportunities. So if we do our job right, the growth in the next few years is likely to exceed the growth in CapEx dollars, even though, as I said, the CapEx dollars is unlikely to drop significantly in any given year. So you see a higher growth in revenue than the growth in capital expenditure, then you don't have it such a high capital intensity. And we actually demonstrated that in the past few years. And also, let me just share with you that because of this, we're not operating setting a capital intensity as a goal. It's the dollar amount invested is really on the structural demand growth in the following years. So talking about capital intensity is also less meaningful than before.
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Mehdi HosseinianalystSIG
Okay. And a follow-up for me. You highlighted N2P — I'm sorry, you highlighted A16, which will be very applicable for high- performance compute. Is that the node where AI and HPC would actually be at par with smartphone as an end market that would drive demand for the most leading-edge nodes?
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Jeff SuirTSMC
Sorry, Mehdi, again, I apologize. We apologize.
I could not hear you clearly, but I think his question is about on A16, where we said it's more for specific HPC-related offering. So his question is, I think, Mehdi, your question is, is that where the AI demand also comes in for the 2-nanometer family?
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Mehdi HosseinianalystSIG
Yes. I don't know answer because so far, AI has been N+1, N+2. Is that A16 the first node where AI would move to the leading edge?
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Jeff SuirTSMC
Okay. His question — okay, maybe let me rephrase it.
I think I understand better. His question is really about AI adoption of the leading-edge node, the N node. We see smartphone, we see HPC. This question very specifically, how do we see the AI adoption of the most leading node for TSMC. He observed in the past, it has generally been one node behind. So how do we see that going forward with things such as A16?
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C. C. WeiCEOTSMC
Well, Mehdi, you are right. Usually, the HPC's customers are always one step behind using N+1 or N+2 technologies.
Now because of AI demand is so strong, that's one thing. But the most important thing is we need some kind of performance, but the power consumption is very, very important. And when we talk about A16, we have another power efficiency improvement close to 20%. That's a big value for all the AI data center applications. So that help my customer moving faster because of — every time when we talk about the AI data center, if you notice that the first thing they talk about is power supply, electricity, right? So they did not tell you say the power efficiency is very important, but they tell you that we have to build a very big electricity power plant to support the AI data centers.
So that tells you how important it is. And TSMC is the technology, by the way. A16 is a further improvement of the N2 node. So it's not a surprise for TSMC to expect for those people in AI data centers industry, they want to use in A16.
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Q&A 10/10
JS
Jeff SuirTSMC
Okay. Thank you, C. C. Thank you, Mehdi. We'll take the last question from the floor. We have one participant here, Felix Pan from KGI.
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Felix PananalystKGI
I only have one question about the overseas expansion.
I think C.C. earlier mentioned that the second fab for the N3, there's a strong demand. So you guys need to speed up several quarters for that. Together with, I think the U.S. government also raised the investment tax credit cap for next year. So I wonder how this shape or how this speed up your ramping schedule for the second fab and how this impact to the overseas fab dilution for the guidance windows given earlier. And I think the follow-up question will be if you guys speed up the U.S. investment, how — is that impact to other regional investment like Japan and Germany as well? And lastly, is that possible to break down the overseas CapEx and domestic CapEx going forward? That's all my questions.
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Jeff SuirTSMC
Okay. Yes, that's pretty much 2 questions. But okay.
So — but Felix's question on our overseas expansion plans. He notes that, yes, C. C. said we're speeding up the schedule for the second fab in the U.S. So how — and he also notes the recent passage of the U.S. ITC bill. So how does this impact or affect our ramp schedules in our U.S. expansion? And what is the implication or impact to the overseas dilution? That's number one.
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C. C. WeiCEOTSMC
Well, that's 2 questions. Okay. Let me share with you about our ramp-up schedule. It's totally because of our customers' demand. We appreciate the U.S. government increased the ITC from 25% to 35%. We appreciate that. It helps.
But the real schedule is because of our customers' demand. So we have to prepare the capacity to meet the demand. That's the #1 consideration.
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Wendell HuangCFOTSMC
The margin impact, it is positive, although not that significant in the 5-year period. Think about this, the ITC is used to offset the asset value. And the benefit comes when depreciation starts. So it gets amortized.
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Jeff SuirTSMC
And then Felix's second question is how does the ramp and speed up of the U.S. cluster expansion, how is this impacting our expansion plans in Japan and Europe, if it does at all?
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C. C. WeiCEOTSMC
Well, you think about the TSMC expansion, the overseas fab in the U.S. is leading edge.
In Japan, it's on specialty technology. To be specific, most of the time, it's for the CMOS image sensor. For Germany, it's automotive industry. So they are all not in the same field. So actually, it's not affect. The investment in the U.S. or invest on the leading edge does not affect the investment in Japan or in Germany.
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Closing Remarks
JS
Jeff SuirTSMC
Thank you, C.C. Thank you, Felix. Okay, everyone. So this concludes our question-and-answer session. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within 30 minutes from now. The transcript will become available 24 hours from now, and both are going to be available through TSMC's website at www.tsmc.com.
So thank you very much for joining us today. We hope everyone continues to stay well, and we hope you will join us again next quarter. Goodbye, and have a good day. Thank you.
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