Taiwan Semiconductor Manufacturing Co Ltd Earnings - Q4 2025 Analysis & Highlights
Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) reported strong financial results for Q4 2025 and full year 2025, driven by robust demand for leading-edge process technologies, particularly in AI-related applications. The company provided optimistic guidance for Q1 2026 and full year 2026, anticipating continued growth and increased capital expenditures to support customer demand and maintain technology leadership. Discussions also covered global manufacturing expansion, competitive positioning, and the long-term profitability outlook.
Key Financial Results
Q4 2025 Revenue: Increased by 5.7% sequentially in NT dollars and 1.9% sequentially in US dollars to $33.7 billion, slightly exceeding guidance.
Q4 2025 Gross Margin: Increased by 2.8 percentage points sequentially to 62.3%, primarily due to cost improvement efforts, a favorable foreign exchange rate, and a high capacity utilization rate.
Q4 2025 Operating Margin: Increased sequentially by 3.4 percentage points to 54%.
Q4 2025 EPS: TWD 19.5.
Q4 2025 ROE: 38.8%.
Full Year 2025 Revenue: Increased by 35.9% in US dollar terms to $122 billion, or 31.6% in NT dollar terms to TWD 3.8 trillion.
Full Year 2025 Gross Margin: Increased 3.8 percentage points to 59.9%, reflecting a higher capacity utilization rate and cost improvement efforts, partially offset by an unfavorable foreign exchange rate and margin dilution from overseas fabs.
Full Year 2025 Operating Margin: Increased 5.1 percentage points to 50.8%.
Full Year 2025 EPS: Increased 46.4% to TWD 66.25.
Full Year 2025 ROE: Increased 5.1 percentage points to 35.4%.
Business Segment Results
Q4 2025 Revenue by Technology:
3-nanometer: Contributed 28% of wafer revenue.
5-nanometer: Accounted for 35%.
7-nanometer: Accounted for 14%.
Advanced technologies (7-nanometer and below): Accounted for 77% of wafer revenue.
Full Year 2025 Revenue by Technology:
3-nanometer: Contributed 24% of wafer revenue.
5-nanometer: Contributed 36%.
7-nanometer: Contributed 14%.
Advanced technologies: Accounted for 74% of total wafer revenue, up from 69% in 2024.
Q4 2025 Revenue by Platform:
HPC: Increased 4% quarter-over-quarter to account for 55%.
Smartphone: Increased 11% to account for 32%.
IoT: Increased 3% to account for 5%.
Automotive: Decreased 1% to account for 5%.
DCE: Decreased 22% to account for 1%.
Full Year 2025 Revenue by Platform:
HPC: Increased 48% year-over-year.
Smartphone, IoT, and Automotive: Increased by 11%, 15%, and 34%, respectively.
DCE: Remained flat.
Overall HPC: Accounted for 58% of 2025 revenue.
Smartphone: Accounted for 29%.
IoT: Accounted for 5%.
Automotive: Accounted for 5%.
DCE: Accounted for 1%.
Advanced Packaging Revenue: Close to 10% (8%) in 2025, expected to be slightly over 10% in 2026.
Capital Allocation
Q4 2025 Cash from Operations: TWD 726 billion.
Q4 2025 CapEx: TWD 357 billion ($11.5 billion).
Q4 2025 Cash Dividend Distributed: TWD 130 billion for Q1 2025.
Full Year 2025 Operating Cash Flow: TWD 2.3 trillion.
Full Year 2025 Capital Expenditures: TWD 1.3 trillion or $40.9 billion.
Full Year 2025 Free Cash Flow: TWD 1 trillion, up 15.2% from 2024.
Full Year 2025 Cash Dividends Paid: TWD 467 billion, up 28.6% year-over-year.
2025 Cash Dividend per Share: TWD 18, up from TWD 14 in 2024.
2026 Cash Dividend per Share: Expected to be at least TWD 23.
Industry Trends and Dynamics
Foundry 2.0 Industry Growth (2025): Increased 16% year-over-year.
Foundry 2.0 Industry Growth (2026 Forecast): Expected to grow 14% year-over-year, supported by robust AI-related demand.
AI Megatrend: Strong conviction in the multi-year AI megatrend, with demand for semiconductors continuing to be very fundamental.
AI Accelerator Revenue Growth (2024-2029): Forecast to approach a mid-to-high 30s percent CAGR.
Semiconductor Product Trends: Need for lower power consumption and high-speed performance.
Competitive Landscape
TSMC's Outperformance: TSMC's revenue increased 35.9% year-over-year in US dollar terms in 2025, outperforming the Foundry 2.0 industry growth.
Technology Leadership: TSMC is well-positioned to capture multiyear structural demand from 5G, AI, and HPC due to strong technology leadership and differentiation.
Competition: TSMC acknowledges formidable competitors but is confident in its ability to grow its business as estimated, citing the complexity of advanced technology and the time required for product design and ramp-up.
Customer Trust: TSMC works with customers to gain their trust, ensuring support for their growth opportunities.
Macroeconomic Environment
Uncertainties and Risks (2026): Potential impact of tariff policies and rising component prices, especially in consumer-related and price-sensitive end market segments.
Memory Price Increase: Expected to have a minimal impact on TSMC's high-end smartphone and PC customers, as they are less sensitive to component prices.
Growth Opportunities and Strategies
AI Accelerator Revenue: Accounted for high-teens percent of total revenue in 2025.
Increasing AI Model Adoption: Driving demand for leading-edge silicon across consumer, enterprise, and sovereign AI segments.
Capacity Planning: Disciplined capacity planning system using top-down and bottom-up approaches to assess market demand and determine appropriate capacity.
Global Manufacturing Footprint Expansion:
Arizona: Speeding up capacity expansion, with the first fab in high-volume production in Q4 2024. Second fab construction complete, tool move-in planned for 2026, and high-volume manufacturing expected in H2 2027. Third fab construction started, and applying for permits for fourth fab and first advanced packaging fab. Purchased a second large piece of land to support expansion and flexibility for AI-related demand.
Japan: First specialty fab in Kumamoto started volume production in late 2024. Second fab construction started.
Europe (Dresden, Germany): Construction of specialty fab progressing as planned.
Taiwan: Preparing multiple phases of 2-nanometer fabs in Hsinchu and Kaohsiung Science Park, and continuing to invest in leading-edge and advanced packaging facilities.
Technology Development:
2-nanometer (N2): Successfully entered high-volume manufacturing in Q4 2025 at Hsinchu and Kaohsiung sites with good yield, seeing strong demand from smartphone and HPC AI applications, with a fast ramp expected in 2026.
N2P: Extension of N2 family with further performance and power benefits, volume production scheduled for H2 2026.
A16: Features Super Power Rail (SPR), suitable for specific HPC products, volume production on track for H2 2026.
Productivity Improvement: Leveraging manufacturing excellence to drive greater productivity in fabs to generate more wafer output.
Cross-Node Capacity Optimization: Includes flexible capacity support among N7, N5, and N3 nodes to support profitability.
Financial Guidance and Outlook
Q1 2026 Revenue Guidance: Between $34.6 billion and $35.8 billion, representing a 4% sequential increase or a 38% year-over-year increase at the midpoint.
Q1 2026 Gross Margin Guidance: Between 63% and 65%.
Q1 2026 Operating Margin Guidance: Between 54% and 56%.
Full Year 2026 Revenue Growth: Expected to increase by close to 30% in US dollar terms.
Full Year 2026 Capital Budget: Between $52 billion and $56 billion.
70% to 80% allocated to advanced process technologies.
10% for specialty technologies.
10% to 20% for advanced packaging, testing, mask-making, and others.
Full Year 2026 Depreciation Expense: Expected to increase by high teens percentage year-over-year, mainly due to the ramp of 2-nanometer technologies.
Full Year 2026 Effective Tax Rate: Expected to be between 17% and 18%.
Long-Term Revenue Growth (2024 onwards): Expected to approach 25% CAGR in US dollar terms for the five-year period.
Long-Term Gross Margins: Belief that 56% and higher through the cycle is achievable.
Long-Term ROE: Expect to earn an ROE of high 20s percent through the cycle.
Gross Margin Dilution from Overseas Fabs: Expected to be between 2% to 3% in early stages and widen to 3% to 4% in later stages over the next several years.
Gross Margin Dilution from 2-nanometer Ramp: Expected to be between 2% to 3% for the full year 2026.
