Taiwan Semiconductor Manufacturing Company - Earnings Call - Q1 2025

Transcript

Jeff Su (Director of Investor Relations)

Good afternoon, everyone, and welcome to TSMC's First Quarter 2025 Earnings Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. TSMC is holding our Earnings Conference Call via live audio webcast through the company's website at www.tsmc.com, where you can also download the earnings release materials. If you are joining us through the conference call, your dial-in lines are in listen-only mode. The format for today's event will be as follows. First, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the first quarter 2025, followed by our guidance for the second quarter 2025. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. C.C. Wei, will jointly provide the company's key messages. We will open the line for questions-and-answers.

As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risk 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. I would like to turn the call over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.

Wendell Huang (Senior VP and CFO)

Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the first quarter 2025. After that, I will provide the guidance for the second quarter of 2025. First quarter revenue decreased 3.4% sequentially in NT dollar, or 5.1% in U.S. dollars, as our business was impacted by smartphone seasonality, partially offset by continued growth in AI-related demand. In spite of the January 21 earthquake and several aftershocks, we worked diligently to recover much of the lost production. Thus, our revenue in the first quarter was slightly above the midpoint of our guidance. Gross margin decreased 0.2 percentage points sequentially to 58.8%, primarily due to the earthquake impact as well as the start of overseas dilution, partially offset by the cost improvement efforts. Total operating expenses accounted for 10.2% of net revenue. Operating margin decreased 0.5 percentage points sequentially to 48.5%.

Overall, our first quarter EPS was NT 13.94, and ROE was 32.7%. Now, let's move on to revenue by technology. Three-nanometer process technology contributed 22% of wafer revenue in the first quarter, while five-nanometer and seven-nanometer accounted for 36% and 15% respectively. Advanced technologies, defined as seven-nanometer and below, accounted for 73% of wafer revenue. Moving on to revenue contribution by platform. HPC increased 7% quarter-over-quarter to account for 59% of our first quarter revenue. Smartphone decreased 22% to account for 28%. IoT decreased 9% to account for 5%. Automotive increased 14% and accounted for 5%. DCE increased 8% to account for 1%. Moving on to the balance sheet, we ended the first quarter with cash and marketable securities of NT 2.7 trillion, or $81 billion.

On the liabilities side, current liabilities increased by TWD 135 billion quarter-over-quarter, mainly due to the increase of TWD 111 billion in accrued liabilities and others. The increase in accrued liabilities and others was mainly due to the accrual of income tax payables. On financial ratios, accounts receivable turnover days increased one day to 28 days. Days of inventory increased three days to 83 days, primarily due to the ramping of new overseas fabs. Regarding cash flow and CAPEX, during the first quarter, we generated about TWD 626 billion in cash from operations, spent TWD 331 billion in CAPEX, and distributed TWD 104 billion for second quarter 2024 cash dividend. In addition, we raised TWD 16 billion in cash from bond issuances. Overall, our cash balance increased TWD 267 billion-TWD 2.4 trillion at the end of the quarter. In U.S. dollar terms, our first quarter capital expenditures totaled $10.06 billion.

I've finished my financial summary. Now, let's turn to our current quarter guidance. Based on the current business outlook, we expect our second quarter revenue to be between $28.4 billion and $29.2 billion, which represents a 13% sequential increase or a 38% year-over-year increase at the midpoint. Based on the exchange rate assumption of $1 -NT 32.5, gross margin is expected to be between 57-59%. Operating margin between 47-49%. Also, in the second quarter, we will need to accrue the tax on the undistributed retained earnings. As a result, our second quarter tax rate will be around 20%. The tax rate will then fall back to the 14-15% level in the third and fourth quarter, and the full year tax rate will be between 16% and 17%. This concludes my financial presentation. Now, let me turn to our key messages.

I will start by talking about our first quarter 2025 and second quarter of 2025 profitability. Compared to fourth quarter, our first quarter gross margin slightly decreased by 20 basis points sequentially to 58.8%. This was primarily due to 60 basis points impact from the January 21 earthquake and its aftershocks, as well as the start of dilution from our Kumamoto fab, partially offset by cost improvement efforts. We have just guided our second quarter gross margin to decrease by 80 basis points to 58% at the midpoint, primarily as the margin dilution impact from our Arizona fab starts to kick in. We expect the impact from overseas fab to grow more pronounced throughout the year as we ramp up further in Kumamoto and Arizona and forecast 2-3% margin dilution impact for the full year 2025.

As we have said before, under today's fragmented globalization environment, overseas fabs' costs are higher for everyone, including TSMC and all other semiconductor manufacturers. With our additional $100 billion investment planned in Arizona, we forecast the gross margin dilution from the ramp-up of our overseas fabs in the next five years to start from 2-3% every year in the early stages and widen to 3-4% in the latter stages. We will leverage our increasing size in Arizona and work on our operations to improve the cost structure. We will also continue to work closely with our customers and suppliers to manage the impact. Overall, with our fundamental competitive advantages of manufacturing technology leadership and large-scale production base, we expect TSMC to be the most efficient and cost-effective manufacturer in the region that we operate.

Thus, even considering our global manufacturing expansion plans, we believe a long-term gross margin of 53% and higher is achievable. Next, let me talk about our 2025 capital budget. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. We reiterate our 2025 capital budget is expected to be between $38 billion and $42 billion as we continue to invest to support customers' growth. About 70% of the capital budget will be allocated for advanced process technologies. About 10%-20% will be spent for specialty technologies, and about 10%-20% will be spent for advanced packaging, testing, mask making, and others. Our 2025 CAPEX also includes a small amount related to our recently announced additional $100 billion investment plan to expand our capacity in Arizona.

Even as we invest for the future growth with this level of CAPEX spending in 2025, we remain committed to delivering profitable growth to our shareholders. We also remain committed to a sustainable and steadily increasing cash dividend per share on both an annual and quarterly basis. Now, let me turn the microphone over to C.C. Wei.

Che-Chia Wei (Chairman and CEO)

Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. Before that, I would like to mention the earthquake during Lunar New Year. On January 21, Taiwan experienced a 6.4 magnitude earthquake on the Richter scale, followed by several significant aftershocks. Although a certain number of wafers in process were impacted and had to be scrapped, we worked tirelessly and were able to recover much of the lost production, demonstrating the resilience of our operation in Taiwan. I want to recognize and deeply thank all of our employees and our suppliers for their dedication and hard effort over the Lunar New Year holidays. I would also like to extend our great appreciation to our customers for their understanding and support during this time. Now, let me talk about the first quarter's result. We concluded our first quarter with revenue of $25.5 billion.

Our business in the fourth quarter was impacted by smartphone seasonality, partially offset by continued growth in AI-related demand. Moving into second quarter 2025, we expect our business to be supported by strong growth of our 3-nanometer and 5-nanometer technologies. Looking at the full year of 2025, we expect Foundry 2.0 industry growth to be supported by robust AI-related demand and a mild recovery in other market segments. In January, we had forecast the Foundry 2.0 industry to grow 10 percentage points year-over-year in 2025, which is consistent with IDC's forecast of 11% year-over-year growth for Foundry 2.0. Now, let me talk about the recent tariffs. We understand there are uncertainties and risks from the potential impact of tariff policies. However, we have not seen any change in our customers' behavior so far.

Therefore, we continue to expect our full year 2025 revenue to increase by close to mid-20% in U.S. dollar terms. We might get a better picture in the next few months, and we will continue to closely monitor the potential impact to the end market demand and manage our business prudently. Amidst the uncertainties, we continue to focus on fundamentals of our business, which are technology leadership, manufacturing excellence, and customer trust, to further strengthen our competitive position. As such, we are confident TSMC can continue to outperform the Foundry 2.0 industry growth in 2025. Now, I will talk about our AI demand outlook. We continue to observe robust AI-related demand from our customers throughout 2025. We reaffirm our revenue from AI accelerators to double in 2025. The AI accelerators we define as AI GPU, AI ASIC, and HBM controllers for AI training and inference in the data center.

Based on our customers' strong demand, we are also working hard to double our CoWoS capacity in 2025 to support their needs. Recent developments are also positive to AI's long-term demand outlook. In our assessment, the impact from AI reasoning models, including DeepSeek, will drive greater efficiency and help lower the barrier to future AI development. This will lead to wider usage and greater adoption of AI models, which all require use of leading-edge silicon. Thus, these developments only serve to strengthen our conviction in the long-term growth opportunities from the industry mega trend of 5G, AI, and HPC. To address the structural increase in the long-term market demand profile, TSMC employs a disciplined and robust capacity planning system. This is especially important when we have such high forecasted demand from AI-related business. Externally, we work closely with our customers and our customers' customers to plan our capacity.

Internally, our planning system involves multiple teams across several functions to assess and evaluate the market demand from both a top-down and bottom-up approach to determine the appropriate capacity to build. Based on our planning framework, we are confident that our revenue growth from AI accelerators will approach a mid-40s-percentage CAGR for the next five years' period starting from 2024. Next, let me talk about TSMC's additional $100 billion investment planned to expand in Arizona. All our overseas decisions are based on our customers' needs. They value some geographic flexibility and necessary level of government support. This is also to maximize the value for our shareholders. With the strong collaboration and support from our leading U.S. customers and the U.S. federal, state, and city governments, we recently announced our intention to invest an additional $100 billion in advanced semiconductor manufacturing in the United States.

This expansion includes plans for three additional wafer manufacturing fabs, two advanced packaging fabs, and a major R&D center. Combined with our previously announced plan to build three advanced semiconductor manufacturing fabs in Arizona, this brings our total investment in the U.S. to $165 billion to support the strong multi-year demand from our customers. Our first fab in Arizona has already successfully entered high-volume production in Q4 2024, utilizing N4 process technology with a yield comparable to our fab in Taiwan. The construction of our second fab, which will utilize a 3-nanometer process technology, is already complete, and we are working on speeding up the volume production schedule based on the strong AI-related demand from our customers. Our third and fourth fab will utilize N2 and A16 process technologies, and with the expectation of receiving all the necessary permits, are scheduled to begin construction later this year.

Our fifth and sixth fab will use even more advanced technologies. The construction and ramp schedule for these fabs will be based on our customers' demand. We also plan to build two new advanced packaging facilities and establish an R&D center in Arizona to complete the AI supply chain. Our expansion plan will enable TSMC to scale up to a GIGAFAB cluster to support the needs of our leading-edge customers in smartphone, AI, and HPC applications. With this additional $100 billion investment planned to expand our leading-edge capacity in Arizona, I would also like to mention that TSMC is not engaged in any discussion with other companies regarding any joint venture, technology licensing, or technology transfer and sharing. After completion, around 30% of our two-nanometer and more advanced capacity will be located in Arizona, creating an independent leading-edge semiconductor manufacturing cluster in the U.S.

It will also create greater economies of scale and help foster a more complete semiconductor supply chain ecosystem in the U.S. Thus, TSMC will continue to play a critical and integral role in enabling our customers' success while remaining a key partner and enabling all the strength and leadership of the U.S. semiconductor industry. Next, in Japan, thanks to the strong support from the Japan Central Prefecture 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. In Europe, we have received strong commitment from the European Commission and the German federal, state, and city governments. We are on track with our plan to build a specialty technology fab in Dresden, Germany.

In Taiwan, with support from the Taiwan government, we plan to build 11 wafer manufacturing fabs and four advanced packaging facilities over the next several years. Volume production of N2 is expected to start in the second half of 2025, and we are preparing for multiple phases of two-nanometer fabs in both Hsinchu and Kaohsiung science parks to support the strong structural demand from our customers. By expanding our global footprint while continuing investment in Taiwan, TSMC can continue to be the trusted technology and capacity provider of the global logic IC industry for years to come while delivering profitable growth for our shareholders. Finally, I will talk about our N2 status and A16 introduction. Our two-nanometer and A16 technology leads the industry in addressing the insatiable need for energy-efficient computing, and almost all the innovators are working with us.

We expect the number of new tape outs for two-nanometer technology in the first two years to be higher than both three-nanometer and five-nanometer in their first two years, fueled by both smartphone and HPC applications. N2 will deliver full-on performance and power benefits, with 10-15% speed improvement at the same power or 20-30% 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 introduce N2P as an extension of N2 family. N2P features further performance and power benefits on top of N2, and volume production is scheduled for the second half of 2026. We also introduce A16 featuring Super Power Rail or SPR as a separate offering.

Compared with N2P, A16 provides a further 8-10% speed improvement at the same power, or 15-20% power improvement at the same speed, and additional 7-10% chip density gain. A16 is best suited for specific HPC products with complex signal route and dense power delivery network. Volume production is scheduled for the second half of 2026. We believe N2, N2P, A16, and its derivatives will further extend our technology leadership position and enable TSMC to capture the growth opportunities well into the future. This concludes our key message, and thank you for your attention.

Jeff Su (Director of Investor Relations)

Thank you, C.C. This concludes our prepared statements. Before we begin the Q&A session, I would like to remind everybody to please limit your questions to two at a time to allow all the participants an opportunity to ask their questions.

Should you wish to raise your question in Chinese, I will translate it to English before our management answers your question. For those of you on the call, if you would like to ask a question, please press the star then one on your telephone keypad now. If at any time you'd like to remove yourself from the questioning queue, please press star two. Now, let's begin the Q&A session. Operator, can we please proceed with the first caller on the line?

Operator (participant)

The first one to ask a question, Gokul Hariharan from JPMorgan.

Gokul Hariharan (Managing Director)

Thank you very much. Good afternoon. First of all, thanks for clearing the air on all those JV-related news reports. I think a lot of people needed that. Thank you. My first question is on AI demand. C.C., there has been a lot of talks about CoWoS order adjustments and some concerns about AI demand.

You did talk about CoWoS capacity doubling. Could you talk a little bit about how you see demand versus supply? I think last time we talked about this, you did indicate CoWoS demand is still well above supply. Could you talk a little bit about how the situation is looking for CoWoS demand versus supply this year? Maybe a little bit of early color on 2026 also as you plan for the capacity?

Jeff Su (Director of Investor Relations)

All right. Thank you, Gokul. For everyone's benefit, let me try to summarize your first question. Gokul's first question is on the AI-related demand. He notes there's been a lot of noise around CoWoS and order cuts and such. He would like to ask C.C., what is the thinking or strategy for TSMC? CoWoS still doubling this year? Is the demand still exceeding the supply?

How is the CoWoS capacity and supply, or supply and demand, I should say, look like going into 2026 if C.C. is able to provide any color?

Che-Chia Wei (Chairman and CEO)

Okay, Gokul. I know there is a lot of rumors about the CoWoS. The last time when we talked about the CoWoS, the demand is almost insane and much, much higher than we can prepare. Now it is a little bit better. I think still we need to build a lot of capacity to meet the demand. As I said, we have to double our CoWoS capacity. Still fully loaded. For 2026, I cannot say the number, but it is still a heresy momentum while we continue. Okay? Did that answer your question?

Gokul Hariharan (Managing Director)

Do you still think 2026 is going to be supply limited still? That demand is still going to be much more than supply even in 2026?

Is that your current expectation, C.C.?

Jeff Su (Director of Investor Relations)

Gokul is asking, do we still see demand exceeding supply for CoWoS in 2026?

Che-Chia Wei (Chairman and CEO)

We will work very hard to make sure that we do not have this kind of demand being much, much higher than the capacity. We are working very hard, and I believe that it will be more balanced next year.

Gokul Hariharan (Managing Director)

Thank you. My second question is on the U.S. investment and all these persistent rumors about involvement in your competitors' operations, etc. You have interacted with the U.S. government, the new administration for the last several months, and C.C. made the big announcement at the White House as well. I just wanted to understand what is TSMC's impression in terms of what is required now that there is also the semiconductor tariff litigation going on?

What is TSMC's impression of what is required over the next two, three years in terms of reassuring of capacity, both from a U.S. administration perspective, also from your U.S. customers' perspective? I think Wendell also indicated that the margin dilution may be slightly bigger as we go along. Could you talk a little bit about how much of the value can you pass on to the customers as the expansion becomes a little bit more accelerated? Thank you.

Jeff Su (Director of Investor Relations)

Okay. Gokul's second question is a bit involved, but he's asking about, again, a lot of talk about our recent announcement for an additional $100 billion expansion in the U.S. Again, talk about this involving the competitors. C.C. has been speaking to the U.S. government. There's still potential semiconductor tariffs.

His question is really from TSMC's point of view, what do we think is required for more onshoring in the U.S.? Can we share the perspective from the U.S. government, or more directly, what our customers are asking us to do in terms of reshoring? That's the first part. The second part, maybe Wendell can address on the margin.

Che-Chia Wei (Chairman and CEO)

Really? Okay. I saw that's a very long, long question. Let me answer that. Yes, indeed, we have talked with U.S. government officials. The reason we are expanding in Arizona, actually, let me say again, is all because of our customers' request. That's because of their very high, high demands. I announced it in other occasions, said that very strong AI demand from U.S. customers such as Apple, Nvidia, AMD, Qualcomm, and Broadcom.

We need to expand our capacity in the U.S. to support them. We talked with the U.S. government to ask for their help in getting the necessary permits so we can start the fab. As a result, I would expect our two-nanometer capacity, around 30%, will be in Arizona. That will be also an independent leading-edge semiconductor manufacturing cluster. Okay?

Jeff Su (Director of Investor Relations)

Gokul, the second part of your question is related to, sorry, Wendell had mentioned that the margin may widen. Gokul's second part of the question, I think, was related to pricing and what is our strategy or approach here as we expand overseas. Is that correct?

Gokul Hariharan (Managing Director)

Yeah, that's right. Yeah.

Wendell Huang (Senior VP and CFO)

Hey, Gokul. You're asking about the pricing. As we always said, reflecting our value is a continuous and ongoing process for TSMC, as we're in a very capital-intensive business.

Che-Chia Wei (Chairman and CEO)

We need to have a very high gross margin to earn the sustainable and healthy return. That is why we set up our pricing strategy. Geographic manufacturing flexibility is an important part of our value proposition to the customers. We are already discussing this with our major customers, and the progress is so far so good.

Jeff Su (Director of Investor Relations)

Okay, Gokul?

Gokul Hariharan (Managing Director)

Okay, understood. Thank you.

Jeff Su (Director of Investor Relations)

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

Operator (participant)

The next to ask question, Bruce Lu from Goldman Sachs. Please ask a question.

Bruce Lu (VP and Equity Analyst)

Okay, thank you for taking my question. I think the geopolitical micro concerns is one of the major uncertainties nowadays. The last two days, we have H20 being banned in China, blah, blah, blah. How does that impact TSMC's forecast and production planning?

Do we have enough other customers and demand to keep our advanced node capacity fully utilized? Or how does that change our long-term production planning moving forward?

Jeff Su (Director of Investor Relations)

Okay, Bruce, thank you. Your first question is related. He's talking about geopolitical risk or, I guess, some of the recent rules and announcements, specifically the ban on H20. So his question is, how does this impact TSMC's business? How does this impact our capacity planning and our strategies?

Che-Chia Wei (Chairman and CEO)

Bruce, let me answer this question. Of course, we do not comment on specific customers' products, but let me assure you that we have taken this into consideration when providing our four-year gross outlook. Did I answer the question?

Bruce Lu (VP and Equity Analyst)

Yes, but I want a little bit more about, you know, I'm sure you guys did a lot of sensitive analysis, like what kind of impact it's going to be.

Can you share with us how much buffer we got that you've assumed, like how comfortable we have to maintain our current capacity planning moving forward or current utilization right now?

Jeff Su (Director of Investor Relations)

Bruce is asking for some more color in terms of what type of buffer or what type of room we have in making our decisions for the long-term capacity planning.

Che-Chia Wei (Chairman and CEO)

Actually, we know a lot of people right now speculate a lot of things. Again, we certainly are mindful of the potential impact from all the recent tariff announcements, especially the potential impact to the end market demand. We will continue to watch it carefully. Having said that, we have not seen any change in our customers' behavior so far. We stick on our forecast.

Bruce Lu (VP and Equity Analyst)

I see. Thank you. Let me switch gears a little bit for the non-U.S. capacity expansion.

I think, as we understand that the current capacity utilization for mature node is underutilized, right? Do we consider to slow down the capacity expansion in Japan or Europe, or just relocate the current equipment from Taiwan to Japan or Europe instead of building the new one? We do not want—why do we want to expand the capacity for the mature node, which management already mentioned that it is an oversupply industry, though? If we relocate them, we can squeeze more space, clean room in Taiwan for more advanced nodes.

Jeff Su (Director of Investor Relations)

Okay, so Bruce's second question is around mature node and our expansion into Europe and Japan. His question really is, given that the capacity of mature node and 7-nanometer are underutilized, number one, are we concerned to slow down our expansions in these places?

Number two, would we consider using current relocate equipment from Taiwan to overseas rather than just the pure new expansion or greenfield expansion?

Che-Chia Wei (Chairman and CEO)

Bruce? Let me answer the first part of the question. Are we considering slowing down? The answer is no. We execute our plan as scheduled. The reason is very simple because of this kind of mature node is a specialty technology that demand, which my competitor did not have capacity or capability to support. It is kind of free from, you mentioned, the underloading of the mature node. Again, I would emphasize, no, we are not going to slow down our plan in Japan or in Germany. The second question is how to do it. We have a good idea, but it is TSMC's confidential information. I'll let you know later.

Bruce Lu (VP and Equity Analyst)

Thank you.

Jeff Su (Director of Investor Relations)

All right, thanks, Bruce.

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

Operator (participant)

Now the line is open to Charlie Chan, Morgan Stanley.

Charlie Chan (Managing Director)

Hi, good afternoon, gentlemen. Thanks for taking my question. My first question is really very specific on the semiconductor tariff on either Taiwan or TSMC's leading edge. I am wondering, first of all, does TSMC get involved in all those tariff negotiations between Taiwan government and the U.S. government? Secondly, do you believe that your commitment of $165 billion U.S. dollars investments can get a spare on this semiconductor tariff? In your previous comment, you seem to only concern about the tariff impact on consumer tech demand. I think global investors are also very concerned about additional tariffs on this semiconductor category. Can you give us some color?Thank you.

Jeff Su (Director of Investor Relations)

Okay, let me summarize your question. First question, Charlie.

Charlie's first question is on semiconductor tariffs. He wants to know what is our comment or view on potential tariffs on Taiwan, reciprocal tariffs, or semiconductor-specific tariffs. His question specifically, is TSMC getting involved in the negotiations between the Taiwan government and the U.S. government?

Che-Chia Wei (Chairman and CEO)

Charlie, this kind of tariff discussion is between countries. We are a private company. Certainly, no, we are not getting involved. What is the second question?

Charlie Chan (Managing Director)

Yeah, actually, do you have any visibility that semiconductor-specific tariffs can be exempt?

Jeff Su (Director of Investor Relations)

Charlie is saying that—sorry, Charlie, I think your question was with our total investment of $165 billion in Arizona. Do we believe, does TSMC believe semiconductors will be exempt from these tariffs?

Che-Chia Wei (Chairman and CEO)

Yes. Yes. Charlie, all policy, especially these tariff decisions, are government's responsibility to decide.

As a private company, we are fully respectful of this, but we are not getting involved.

Charlie Chan (Managing Director)

Okay, got you. I think you're too moderate, but let's move on to my second question. Based on your second quarter guidance, which is very strong at 13% quarter-on-quarter, I can't help to think whether there are customers pulling given tariffs, or is there really demand? Also, based on your full-year guidance, so-called ME 20%, it seems like the second half recovery will be very, very gradual or flat-ish. I'm wondering if you're already baking those kinds of consumer tech demand impacts. If a tariff has some kind of turnaround, meaning some exemption on, for example, major smartphone brands, is there a chance for you to revise your full-year revenue guidance? Thank you.

Jeff Su (Director of Investor Relations)

Okay, Charlie's second question is on the revenue outlook.

Che-Chia Wei (Chairman and CEO)

His first part is on the second quarter. He notes second quarter 13% at the midpoint in U.S. dollar terms, Q on Q is very strong. He wonders, are we seeing already some tariff pulling impact, or is this part of that guidance? I'll stop here first.

Wendell Huang (Senior VP and CFO)

Yeah, Charlie, as we said in the prepared remarks, we haven't seen any changes in customers' behavior so far. Our second quarter growth is driven mainly by strong demand for the 3-nanometer and 5-nanometer technologies, underpinned by the growth in our HPC platform. As I said, we haven't observed any changes in customer behavior in terms of pulling or due to tariffs. It's probably better to ask them directly.

Jeff Su (Director of Investor Relations)

The second part then, Charlie, is asking about what the second quarter guidance implies of limited half-on-half growth.

Is that also because we are assuming something from a tariff impact to consumer demand, or why is that?

Wendell Huang (Senior VP and CFO)

Charlie, as we also said in the prepared remarks, there are uncertainties and potential risks from tariffs exist. So far, what we are able to share with you is we stick to the mid-20% or close to mid-20% year-over-year growth, no different from the previous quarter.

Charlie Chan (Managing Director)

I see. I think that's really what we want. I think your answer to Gokul's previous question on long-term margin dilution was a little bit unclear because we thought that the 2-3% margin dilution from overseas staff should remain to be the case, but it seems like it's widening.

I'm not sure if it is because you are further accelerating your U.S. staff expansion or some cost item or pricing item are not in your expectations versus maybe one or two months ago.

Jeff Su (Director of Investor Relations)

Okay, I think so. Charlie is asking basically how come the dilution in the latter period widens to 3-4%. What are the drivers or reasons behind it?

Wendell Huang (Senior VP and CFO)

Yeah, Charlie, the widening of dilution on the gross margin in the later part of the five-year period is mainly from inflation in cost and also potential tariff-related cost increases. Those are the reasons. Okay.

Charlie Chan (Managing Director)

Oh, I see. Okay, thank you.

Jeff Su (Director of Investor Relations)

Okay, thank you, Charlie. Okay, Operator, let's move on to the next participant, please.

Operator (participant)

Next one, Charles Shi from Needham. Go ahead, please.

Charles Shi (Analyst)

Thanks for taking my questions. Maybe I'll ask a relatively higher-level question. It's a two-part question.

Both are regarding your expansion plan in the U.S. I think management, another occasion that what TSMC wants the most is really fairness. Nothing monetary, nothing about tariffs, but fairness. Can management kind of elaborate a little bit what fairness means? Give us a little bit more specifics. The other part of the question regarding the U.S. expansion is about the R&D team center you announced. We understand, yes, the TSMC's R&D in the U.S. does need to start from somewhere, right? You said it's more about the production improvements related to R&D on derivative nodes.

Che-Chia Wei (Chairman and CEO)

Since this seems to be something the U.S. really cares about, that the R&D capability on U.S. soil, on the leading edge, is there any longer-term plan to have the U.S. R&D center to be involved, let's say, in the primary R&D, let's say, brand new processes, the major nodes development? That is my two-part question. Thank you.

Jeff Su (Director of Investor Relations)

All right. Thank you, Charles. Again, to summarize, both questions are related to the expansion in the U.S. The first part of the question is, C.C. has mentioned all we want is fair treatment. What do we mean by fair or fairness?

Che-Chia Wei (Chairman and CEO)

Let me answer this question. What we mean by fair treatment is very simple. If anybody gets the subsidy or gets the incentive, everybody should get the same. Either we get all or we get zero, all right?

That is what we call fair. Again, I would like to assure you that we will be very competitive in either condition.

Jeff Su (Director of Investor Relations)

The second part of the question is regarding the R&D. Charles is saying he understands the R&D needs to start from somewhere, but with our major R&D center in Arizona, what will be the purpose or the focus, and will it be involved at some point in ramping new technologies?

Che-Chia Wei (Chairman and CEO)

As I said before, TSMC's fair will never be stagnant. We always continue to improve it. We need to establish a major R&D center in Arizona with about 1,000 engineers. That is a big amount. The focus will be to support our manufacturing cluster, improve its technology, and allow it to operate independently. Did I answer the question?

Charles Shi (Analyst)

Maybe let me just really follow up because there has been a good amount of chatters about the U.S. R&D center more supporting manufacturing rather than doing major R&D on the brand new nodes. It looks like that's not the plan. Over the longer term, is there any thoughts of our management? Maybe they will get involved in brand new nodes development one way or the other. I think that's a question people have been discussed about over the last quarter.

Jeff Su (Director of Investor Relations)

Okay, so Charles is asking, will the R&D center over the mid to long term can it also focus on things like new node development or pathfinding opportunities, long-term research, these types of things?

Che-Chia Wei (Chairman and CEO)

Actually, the first purpose is to let Arizona's fab we can operate independently. Of course, we have done and we are doing it right now.

We'll do some kind of pest funding, exploratory work, and cooperate with university, blah, blah, blah. It actually a lot of activities. 1,000 engineers is not a small amount. Of course, it's not comparable to TSMC's right now. It's a 10,000 R&D people, but it's a beginning. Okay, so we do a lot more.

Jeff Su (Director of Investor Relations)

Okay, Charles, do you have a second question?

Charles Shi (Analyst)

No, I don't. Thank you.

Jeff Su (Director of Investor Relations)

Okay, great. Thank you. Operator, the next participant, please.

Operator (participant)

Next one to ask questions, Sunny Lin from UBS.

Sunny Lin (Analyst)

Good afternoon. Thank you very much for taking my questions. My first question is to follow up on the Arizona expansions. First part is on the timeline or the pace of your expansions. Now, given the stronger demand for your U.S. capacities, to what extent could you pull in the rep of the original second and third phase?

For your fourth phase, you earlier mentioned that you will be constructing the fascial layer lister. Would that be possible that you start to wrap the fourth phase at the same time as the third phase?

Jeff Su (Director of Investor Relations)

Sunny's first question is regarding our GIGAFAB cluster in Arizona. She wants to understand the timeline of expansion, particularly given the strong AI-related demand. Can we pull in the timing for both the second fab and the third fab? Also, can we at the same time start the production of the third and fourth fab simultaneously?

Che-Chia Wei (Chairman and CEO)

Sunny, we are working very hard to speed it up of our production in the second fab and the construction on the third fab. All I can say now is customers' demand is strong. We have to really do speed it up.

The following, all the fab definitely will depend on our customers' demand, of course.

Jeff Su (Director of Investor Relations)

Okay, Sunny?

Sunny Lin (Analyst)

Sorry, just to clarify. The second phase originally is planning for production in 2028. Now should we assume it to be from maybe mid-2027 or even first of 2027? For the third phase, since you are building the fascial this year, will the production start maybe one year ahead versus the original timeline of 2030?

Jeff Su (Director of Investor Relations)

Sunny, specifically, the second one, we said we're speeding up. Can we give some context of a timeframe? For the third fab, will we also speed it up? Could that also be moved forward?

Che-Chia Wei (Chairman and CEO)

Yes, we are speeding it up. How fast? The second fab, as you said, it should be pulling.

This one, we are working hard to pull in at least a couple of quarters. That's at least. On the third fab, actually, I did not speak the whole thing. It is also being constrained by the labor shortage over Arizona, and we need to get all the permits, everything, etc. I cannot give you a very definite date yet, but we are going to update you probably in the next quarter or one quarter after that.

Sunny Lin (Analyst)

Got it. No problem. My second question is on the pricing and margin of the overseas expansions. Now with the especially stronger demand for the U.S capacities, would you be able to sell more value given the stronger onshoring requirements?

For margin, earlier you mentioned this 2-3% margin dilution for the coming two to three years, and then expanding to 3-4% maybe into 2029 to 2030. I just wondered what the underlying wafer price assumption for that gross margin dilution estimates is. If you are able to raise the Arizona pricing a bit, would the gross margin dilution be less?

Jeff Su (Director of Investor Relations)

Sunny's question is on the overseas expansion in both pricing and margin. Given the strong demand in terms of pricing, can we reflect even greater value to our customers? Also, her question is given that the dilution from overseas will widen to 3-4% in the latter stages of the five-year period. She wants to know what is our underlying wafer price assumption behind this.

Wendell Huang (Senior VP and CFO)

Sunny, let me answer that. These two things actually go together.

As we said, reflecting our value is a continuous and ongoing process. Because of our business nature, we need very high gross margin to earn a sustainable and healthy return. Now, geographic manufacturing flexibility is an important part of our value proposition to the customers. Therefore, we are already discussing this with our major customers, and the progress is so far so good. At the same time, the margin dilution from the overseas fabs, the additional dilutions come from the cost inflation as well as potential cost increases from the tariff policies. Of course, with that, we also want to reflect the value, and therefore the discussion with the customers are continuous.

Jeff Su (Director of Investor Relations)

Okay, Sunny?

Sunny Lin (Analyst)

Got it.

Jeff Su (Director of Investor Relations)

All right. Thank you.

Sunny Lin (Analyst)

All right. Very clear. Thank you very much.

Jeff Su (Director of Investor Relations)

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

Operator (participant)

Next one to ask question, Brett Simpson, Arete Research

Brett Simpson (Partner and Co-Founder)

Yes, thanks very much. I have a two-part question on this year's guidance for C.C. First, C.C., you mentioned that AI is still expected to double this year despite the U.S. ban on AI GPUs into China. I guess China was a meaningful portion of accelerator shipments, well over 10% of volumes. Factoring this in, it would imply your AI outlook this year still doubling would mean that the AI orders have improved meaningfully outside of China in the last three months. Is that how we should interpret your comment about you still expect the business to double? Second, we're in a June quarter where tariffs have been paused for 90 days. To what extent does your above-seasonal June quarter guidance reflect customer pullings ahead of potential tariffs being applied in the September quarter? Thank you.

Jeff Su (Director of Investor Relations)

Okay, so Brett, his question is on, again, the one part is on the AI demand that although there's a ban in China on certain AI chips or products, that we reiterated our AI accelerator growth will double this year. His assumption is that implies a strong non-China AI-related demand and wondering what is the mechanics or can we comment behind that?

Che-Chia Wei (Chairman and CEO)

Brett, three months ago, now I can tell you that three months ago, we just cannot supply enough wafer to our customer. Now it's a little bit balanced, but still, the demand is very strong. You are right. Other than China, the demand is still very strong, especially in the U.S. We are confident that we are going to double our AI revenue this year.

Brett Simpson (Partner and Co-Founder)

Yeah.

Then very quickly, he was asking about the second quarter revenue guidance and do we see any tariff-related pulling? I think Wendell answered this earlier.

Wendell Huang (Senior VP and CFO)

Yeah, I think that we have, as C.C. Wei said in the prepared remarks, we haven't seen any changes in customer behavior. The growth in second quarter was primarily due to the demand from our 3-nanometer and 5-nanometer technologies underpinned by the demand from the HPC platform.

Jeff Su (Director of Investor Relations)

Okay, do you have a second question, Brett? Sorry.

Brett Simpson (Partner and Co-Founder)

Yeah, yeah, thanks, Jeff. My second question was for Wendell, and thanks for clarifying that, Wendell. Follow-up is on shareholder returns. TSMC traditionally has always favored growing the dividends as the main policy. Many shareholders would argue that the dividend payouts are not having that much of an impact on the discounted multiple that TSMC trades at versus some of your U.S. big tech peers.

My question is, why does TSMC management not adopt a buyback framework, particularly with the strength of the cash position on your balance sheet at the moment? Thank you.

Jeff Su (Director of Investor Relations)

Thank you, Brett. Brett's second question is circulated on shareholder return. He notes TSMC's policy has always been a stable and steadily increasing cash dividend and focused on cash dividend payout. His question is, why do we consider? Why do we not consider adopting more of a buyback policy, share buyback policy?

Wendell Huang (Senior VP and CFO)

Brett, we've done studies a long time ago, and we continue to revisit that. We also talked to investors. Our conclusion stays the same. The sustainable and steadily increasing dividends is a better way of returning cash to the shareholders. We're maintaining the policy.

Brett Simpson (Partner and Co-Founder)

Thank you.

Jeff Su (Director of Investor Relations)

All right.

Operator, in the interest of time, can we take the questions from the last two participants, please?

Operator (participant)

Yes. Now the line is open to Laura Chen, Citi.

Laura Chen (Research Analyst)

Hello, hi. Thank you very much for taking my question. Can you hear me clearly?

Jeff Su (Director of Investor Relations)

Yes.

Laura Chen (Research Analyst)

Yeah, thank you. My question is also about the AI and also the U.S. expansion. C.C., you just mentioned that the core supply demand will be more balanced into 2026. Do you see any structural change in the future AI chip design when moving to N3, such as a chip like that kind of a design? Also, in that kind of new trend, what is TSMC's view on the new technology, such as CPO or PLP panel base? Will that still start from Taiwan first, or would you also consider to further invest the new backend technology in Arizona?

Since C.C., you just mentioned that you would also start to build up the fab in advanced packaging in Arizona.

Che-Chia Wei (Chairman and CEO)

Okay, Laura, first question. Thank you. First question is a very broad question, but basically, if I just try to distill, she wants to know, do we see any changes in the chip design, particularly moving to chiplets with N3? Do we see this more and more? What about the role of things like co-package optics and panel-level packaging? I think the essence of her question, will we continue to use our leading or, sorry, advanced packaging technologies like CoWoS or SRIC in Taiwan first, or is this also part of the plan for the expansion in Arizona?

That is a long question. Laura, yes. Our customers, they continue to use TSMC's leading-edge technology, and they also adopt the advanced packaging technologies more and more, and also are more advanced.

This year is probably most of CoWoS S, then next year, CoWoS Europe, etc. We can see that customers start to pick up the SRIC and the more advanced packaging technologies. As for what we call panel-level packaging, we are aggressively developing it. Today it still is a feasibility study stage. Too early to say it will be in Taiwan or in the U.S., but most likely it will be in Taiwan first. We ramp it up and then bring it to the U.S.

Laura Chen (Research Analyst)

Thank you very much. That is very clear. Also, my second question is about the capacity allocation between Taiwan and also Arizona. C.C., you just shared with us that about 30% of N2 capacity will be in Arizona. We know it will be starting from when or what kind of a timeframe you are looking for.

Can we also assume that the same scale, like 30% of your Arizona fab for the advanced node in the longer term?

Jeff Su (Director of Investor Relations)

Okay, so Laura's second question is about the capacity allocation between how do we allocate between Taiwan and the U.S.? Maybe is it duplicative or extra capacity? Then very specific, C.C. had mentioned that N2 and more advanced capacity, 30%, around 30% will be in Arizona once we scale up to the cluster. Will that be kind of the percentage for the leading node in the future?

Che-Chia Wei (Chairman and CEO)

We have right now we plan a six fab in Arizona. And in that six fab, the two nanometer will be a major node. That is what I say, 30% will be there. As time goes by, after the two nanometer will be 1.4 and 1.0. That has not been discussed yet.

Laura Chen (Research Analyst)

Okay, thank you. Thank you very much.

That's very clear.

Jeff Su (Director of Investor Relations)

All right, thanks, Laura. Operator, can we take the last questions from the last participant, please?

Operator (participant)

The last one to ask questions, Chris Asankar Cohen. Go ahead, please.

Krish Sankar (Managing Director and Senior Research Analyst)

Yeah, thanks for taking my question. My first one is, it's very impressive given uncertainty, you're still maintaining full revenue guidance and also your N2 capacity plan for this year and next year. Kind of curious, what is your visibility on second-half revenues and also N2 demand for wafers into next year? And then I have a follow-up.

Jeff Su (Director of Investor Relations)

Okay, so Chris's first question is sort of in the near term, what is our visibility into the second-half business outlook? And then also, how do we see the demand for N2 progressing this year and also next year?

Wendell Huang (Senior VP and CFO)

Okay, let me talk about the first one. We're only at second quarters.

I think it's too early to talk about the second half. We did mention that the uncertainties and risks from tariffs exist, and we might get a better picture in the next few months. We can probably update you in the next earnings call.

Jeff Su (Director of Investor Relations)

The second part of it is on the demand visibility of our two nanometer.

Che-Chia Wei (Chairman and CEO)

So far, actually, so far is very strong, as we said. All the new tape-out customers, the number of the tape-outs is exceeding what we expected. As we said, the number of the new tape-outs is much higher than the three nanometer and five nanometer in the same period of time.

Jeff Su (Director of Investor Relations)

Okay, did you have a second question, Chris?

Krish Sankar (Managing Director and Senior Research Analyst)

Got it. Very helpful. Yes, Jeff, yeah. Just one quick follow-up. You spoke about the Japan fab. I'm curious, what is the capacity installed in Japan today?

How do you think about the revenue contribution this year from Japan?

Jeff Su (Director of Investor Relations)

Okay. Chris's second question is related to our first specialty technology fab in Japan. He wants to know what is the capacity installment for this specialty technology fab and also the revenue contribution from JASM.

Wendell Huang (Senior VP and CFO)

The capacity for the fab will be 40K when it is ramped up. The revenue for this year compared to the whole company is really not significant at this moment.

Jeff Su (Director of Investor Relations)

Okay, Chris?

Krish Sankar (Managing Director and Senior Research Analyst)

Got it. Thank you, Wendell. Thank you, Jeff.

Jeff Su (Director of Investor Relations)

Thank you very much. No problem. Thank you, everyone. This concludes our question and answer session. Before we conclude today's conference, please be advised that the replay of the conference call will be accessible within 30 minutes from now. The transcript will become available 24 hours from now, and both will be available through TSMC's website at www.tsmc.com.

Thank you again for joining us today. We hope everyone continues to stay well and hope you will join us again next quarter. Goodbye and have a good day. Take care. Thank you.