TSMC Q2 25 - top 10 holding-- the AI factory

 Summary of TSMC Q2 25 results call

Strong revenues and profitability growth. Better than my numbers. Some negatives from FX. Negatives for FX and dilution from new overseas fabs are expected to continue (fabs at previously disclosed rates). TSM commented that they are confident in operating metrics despite unfavourable FX-ie will hold profitability despite Taiwanese costs increasing in USD.

Growth in AI-derived demand continues to increase revenues, increasing to expected +30% (I had 25%) for FY2025 and at higher valued nodes, which should assist margins.

Continued positive progress on various overseas FABs is very encouraging, as is the development of further complex nodes required to advance AI. Growth in Taiwanese FABs continues as well.

TSM appears to be pulling further ahead, and Samsung and Intel do not appear as real competition at this time. TSM's execution and ability to leverage their scale and technological advantages and optionality make them difficult to compete with and protect returns. Importantly, the semi ecosystem is holding, and that allows good returns on capex with TSM operating at 34% ROE with no debt. Maintenance of high ROEs as capex is added is expected.

There are the usual macro and geopolitical risks. Guidance is conservative. The other risk is some slowdown or issues over further AI investment by the hyperscalers, GOOG META MSFT AMZN.

VALUATION

At $230ps, assuming 19% eps for 5 years and a 21X exit, Pe gives 9% return CAGR. That's ok/good. There is little cyclicality assumed in these numbers, and the industry has historically been cyclical, with the structural growth of AI superimposed over that at the moment. The low exit multiple partly reflects that risk. I would look to add on decent pullbacks. having said that, TSM remains a large holding, so I can be very opportunistic.  A leader in its field with outstanding management and not excessively priced, but with some potential volatility in its earnings over the medium term.

Please note disclaimer as always

Below is the revenue mix

Migration to more expensive and complex nodes continues.

	3nm	5nm	7nm	16nm	28nm	40-45nm	Other
Q2 25	24%	36%	14%	7%	7%	3%	9%
Q125	22%	36%	15%	7%	7%	3%	10%
q424	26%	34%	14%	7%	6%	3%	10%
q324	20%	32%	17%	8%	7%	4%	12%
q224	15%	35%	17%	9%	8%	5%	11%
q124	9%	37%	19%	9%	8%	5%	13%
q423	15%	35%	17%	8%	7%	4%	14%
q323	6%	37%	16%	9%	10%	6%	16%

 

 

 

 

 

Driven by high-performance computing (AI accelerators)

HP Comput	S/phone	IOT	Auto	Dig Con Elec	Other
60%	27%	5%	5%	1%	2%
59%	28%	5%	5%	1%	2%
53%	35%	5%	4%	1%	2%
51%	34%	7%	5%	1%	2%
52%	33%	6%	5%	2%	2%
46%	38%	6%	6%	2%	2%
43%	43%	5%	5%	2%	2%
42%	39%	9%	5%	2%	3%

 

Major customers NVDA AAPL AMD AVGO QCOM

NA	APAC	China	EMEA	Japan
75%	9%	9%	3%	4%	100%
77%	9%	7%	3%	4%	100%
75%	9%	9%	3%	4%	100%
71%	10%	11%	3%	5%	100%
65%	9%	16%	4%	6%	100%
69%	12%	9%	4%	6%	100%
72%	8%	11%	4%	5%	100%
69%	8%	12%	5%	6%	100%

 

 

 

Jen-Chau Huang CFO

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 unfavourable 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 unfavourable 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 turn to our current quarter guidance. Based on the current business outlook, we expect our third quarter revenue to be between 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.

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.

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.

C. C. Wei CEO

Looking into second half of 2025, we have not seen any change in our customers' behaviour 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.

Overseas FABs

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.

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.

Advanced Nodes

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,

With our strategy of continuous enhancement, we also introduced N2P as an extension of our N2 family, 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 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. 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.

Question-and-Answer Session

Demand and S/D balance, Guidance

the demand from the AI getting stronger and stronger, if you pay attention to what the client CEO said. And so the megatrend for the AI continue to be strong and so is

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.

We are a company that what we say we will achieve and achieve the high target. 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.

Ability to recover adverse FX in margin

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. 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.

H20 allowed into China

China is a big market and NVDA 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 for TSMC. Whether we are ready to increase our forecast, not yet. Another quarter will probably be more appropriate to answer your question.

N2 ramp and various node capacity

N2 will be a better price than N3. 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% reusable 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.

Is that easy to kind of leverage or transfer different kind of technology from your perspective?

Mature node outlook—over 16

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.

Demand from humanoid robotics

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 TSLA and he say that the EV car is nothing -- is robot will be 10x of that. I'm waiting for that.

Energy efficiency in nodes A16

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 centres industry, they want to use in A16.

Overseas FABs differences

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 the automotive industry. So they are all not in the same field. So actually, it's not effect. The investment in the U.S. or invest on the leading edge does not affect the investment in Japan or in Germany.