TSMC Q3 2025 Executive Summary and Analysis
1. Stellar Financial Performance
TSMC delivered third-quarter results that exceeded expectations, driven primarily by robust demand for advanced process technologies.
- Revenue: Consolidated revenue reached approximately NT$989.92 billion (US$33.1 billion), representing a 6.0% sequential increase (10.1% in USD terms) and a 30.3% year-over-year growth.
- Profitability: Gross margin hit 59.5%, surpassing the high end of previous guidance. This success was attributed to higher capacity utilization, cost optimization, and favorable exchange rates (actual rate of 29.91 vs. estimated 29.0). The operating margin stood at 50.6%.
- Earnings Per Share (EPS): Q3 EPS rose to NT$17.44, up 13.6% from the previous quarter and 39.0% year-over-year. Return on Equity (ROE) reached 37.8%.
2. Revenue Structure: Advanced Nodes and HPC Lead
- Process Technology: Advanced technologies (7nm and below) accounted for 74% of total wafer revenue. Specifically, 3nm technology contributed 23%, while 5nm contributed 37%.
- Platforms: High-Performance Computing (HPC) remained the largest revenue driver at 57%. Smartphones followed at 30% (a 19% sequential increase), while IoT and Automotive each represented 5%.
- Geography: Revenue from North American customers surged to 76%, highlighting the heavy reliance of US tech giants on TSMC. China-based customers accounted for 8%.
3. Outlook for Q4 2025 and Beyond
- Q4 Guidance: Revenue is expected to be between US$32.2 billion and US$33.4 billion (reflecting a median sequential decrease of 1% or a 22% year-over-year increase). Gross margin is projected to remain high between 59% and 61%.
- Full-Year Forecast: The company revised its 2025 full-year USD revenue growth projection upward to close to the mid-30s percentage range.
- Capital Expenditure (CapEx): The 2025 CapEx range has been tightened to US$40 billion to US$42 billion. Roughly 70% of this will be allocated to advanced process technologies, with 10-20% dedicated to advanced packaging and mask making.
4. Key Strategic Insights
Insane and Structural AI Demand
CEO C.C. Wei described AI demand as “insane” and stated that the industry is only at the beginning of this trend.
- Demand Sources: Growth is driven not just by direct customers, but also by strong signals from “customers’ customers,” primarily Cloud Service Providers (CSPs).
- Growth Dynamics: Revenue from AI server processors is expected to grow significantly. The exponential increase in “Token” generation for AI computing suggests that semiconductor demand is real and sustainable.
- Capacity Constraints: CoWoS advanced packaging capacity remains extremely tight. Despite doubling capacity, demand continues to outstrip supply. TSMC is working to bridge this gap through internal expansion and collaboration with OSAT partners.
Technology Leadership (N2 and A16)
- 2nm (N2): Development is on track, with mass production scheduled to begin in late Q4 2025. A rapid ramp-up is expected in 2026, fueled by Smartphone and HPC AI applications.
- A16 Technology: Featuring Super Power Rail technology, A16 is optimized for HPC products and is scheduled for production in the second half of 2026.
- Foundry 2.0: Addressing claims that “Moore’s Law is dead,” TSMC emphasized that performance now requires system-level optimization. This is the core of “Foundry 2.0,” which integrates wafer fabrication with advanced packaging.
Global Expansion and Profitability
- Overseas Dilution: As the Arizona plant begins production, a gross margin dilution of approximately 2% is expected in the second half of 2025. This could reach 3-4% in later years as more overseas capacity comes online, though TSMC plans to mitigate this through scale and cost management.
- Arizona Progress: The company is accelerating capacity expansion in Arizona and preparing to introduce N2 technology there to meet AI demand. Local advanced packaging capabilities are also being established with partners.
TSMC Consolidated Statement of Comprehensive Income Q3 2025
(Unit: NT$ Billion, except EPS in NT$)
| Item | Amount (NT$ Bn) | % of Revenue | QoQ | YoY |
| Net Revenue | 989.92 | 100.0% | +6.0% | +30.3% |
| Cost of Revenue | (401.38) | -40.5% | +3.9% | +25.3% |
| Gross Profit | 588.54 | 59.5% | +7.5% | +34.0% |
| Operating Expenses | (87.76) | -8.9% | +3.9% | +11.0% |
| R&D Expenses | (63.74) | -6.5% | +4.0% | +20.8% |
| SG&A Expenses | (24.02) | -2.4% | +3.4% | -8.6% |
| Other Operating Income/Exp | (0.09) | 0.0% | – | – |
| Operating Income | 500.69 | 50.6% | +8.0% | +38.8% |
| Non-operating Items | 24.68 | 2.5% | -16.6% | +5.4% |
| Income Before Tax | 525.37 | 53.1% | +6.6% | +36.7% |
| Income Tax Expenses | (73.61) | -7.5% | -23.0% | +24.5% |
| Net Income to Parent | 452.30 | 45.7% | +13.6% | +39.1% |
| Earnings Per Share (EPS) | 17.44 | – | +13.6% | +39.0% |
Financial Highlights and Analysis
- Robust Revenue GrowthTotal consolidated revenue for Q3 reached NT$989.92 billion, a 30.3% year-over-year increase. This growth was primarily fueled by strong demand for advanced process technologies (7nm and below), which accounted for 74% of total wafer revenue.
- Enhanced Gross Margin and Profitability
- Gross Margin at 59.5%: Increased by 0.9 percentage points sequentially and 1.7 percentage points annually. The improvement was driven by higher capacity utilization and cost optimization, which successfully offset potential dilution from overseas expansion and currency fluctuations.
- Operating Margin at 50.6%: Rose by 1.0 percentage point from the previous quarter, indicating effective management of operating expenses. Operating expenses as a percentage of revenue decreased from 9.1% to 8.9% during this period.
- Record-Breaking Net Income and EPS
- Net income reached NT$452.3 billion, representing a significant 39.1% year-over-year increase, with a net profit margin of 45.7%.
- Single-quarter EPS hit a record high of 17.44, surpassing market expectations.
- Sustained Investment in R&DR&D expenses grew 20.8% year-over-year to NT$63.74 billion, representing 6.5% of total revenue. This reflects TSMC’s ongoing commitment to investing in 2nm and A16 technologies to maintain its global technological leadership.
TSMC Consolidated Balance Sheet Q3 2025
(Unit: NT$ Billion)
| Item | Amount (NT$ Bn) | % of Assets | QoQ | YoY |
| Current Assets | 3,436.02 | 46.7% | +5.2% | +23.9% |
| Cash & Marketable Securities | 2,751.06 | 37.4% | +4.4% | +26.9% |
| Accounts Receivable | 307.81 | 4.2% | +30.6% | +23.1% |
| Inventories | 288.69 | 3.9% | -5.1% | -1.4% |
| Other Current Assets | 88.46 | 1.2% | -2.4% | +39.4% |
| Non-current Assets | 3,918.09 | 53.3% | +4.7% | +15.5% |
| Property, Plant and Equipment (PP&E) | 3,499.34 | 47.6% | +3.3% | +13.9% |
| Long-term Investments | 148.98 | 2.0% | +8.4% | +17.0% |
| Other Non-current Assets | 269.77 | 3.7% | +23.9% | +39.9% |
| Total Assets | 7,354.11 | 100.0% | +5.0% | +19.3% |
| Current Liabilities | 1,275.91 | 17.3% | -7.4% | +18.1% |
| Accounts Payable | 86.39 | 1.2% | +1.9% | +22.0% |
| Payables to Contractors/Suppliers | 175.43 | 2.4% | +8.7% | +40.2% |
| Cash Dividends Payable | 259.33 | 3.5% | +5.1% | +25.0% |
| Accrued Expenses & Others | 678.54 | 9.2% | -14.1% | +9.8% |
| Non-current Liabilities | 1,042.62 | 14.2% | +3.0% | -1.9% |
| Bonds Payable | 880.43 | 12.0% | +3.8% | -3.2% |
| Total Liabilities | 2,318.53 | 31.5% | -3.0% | +8.2% |
| Shareholders’ Equity | 5,035.58 | 68.5% | +9.1% | +25.2% |
Balance Sheet Highlights and Analysis
- Strong Cash PositionCash and marketable securities totaled NT$2.75 trillion, accounting for 37.4% of total assets, a 26.9% increase year-over-year. This demonstrates TSMC’s ability to maintain exceptional liquidity and financial resilience despite ongoing high capital expenditures.
- Optimized Inventory ManagementInventory stood at NT$288.7 billion, down 5.1% from the previous quarter. Days of inventory decreased from 76 to 74 days, driven by strong shipments of 3nm and 5nm products. This indicates healthy inventory turnover and dispels concerns regarding excessive pre-building of stock.
- Asset Expansion and Advanced Process InvestmentProperty, Plant and Equipment (PP&E) reached NT$3.5 trillion, representing nearly half (47.6%) of total assets, up 13.9% year-over-year. This reflects TSMC’s aggressive capacity expansion in 2nm technology and advanced packaging (CoWoS) to meet surging demand for AI and High-Performance Computing (HPC).
- Reduction in LiabilitiesCurrent liabilities decreased by 7.4% sequentially, primarily due to a reduction of approximately NT$112 billion in accrued expenses and other current liabilities. This was mainly attributed to the payment of corporate income tax provisional payments for 2025.
- Robust Financial Structure
- Current Ratio: Improved to 2.7x (compared to 2.4x in the previous quarter), indicating excellent short-term debt-paying ability.
- Shareholders’ Equity Ratio: Shareholders’ equity represents 68.5% of total assets, showing that the company maintains its financial leverage at a very conservative and healthy level.
Based on the TSMC Q3 2025 earnings call, the increase in capacity utilization rate was not merely an internal production adjustment but a result of strong market demand and disciplined capacity planning.
1. Robust Demand for Advanced Nodes (Core Driver)
This is the primary factor pushing capacity utilization higher. TSMC’s gross margin reached 59.5% in Q3, largely due to “higher capacity utilization.”
- Explosion in AI and HPC Demand: AI-related demand was described as “insane” and real. This led to extremely strong demand for advanced processes, specifically 3nm and 5nm, which together accounted for 60% of total revenue.
- Smartphone Recovery: The smartphone segment grew 19% sequentially in Q3, providing additional support for capacity utilization.
- Bottoming Out of Non-AI Sectors: While AI remains the main engine, management noted that non-AI end markets have bottomed out and are showing a mild recovery, helping to fill overall capacity.
2. Capacity Optimization and Flexible Scheduling
To address supply shortages, TSMC maximized output through internal adjustments:
- Process Optimization: For N3 (3nm) and N5 (5nm) nodes where capacity is extremely tight, TSMC continues to optimize its operations to meet customer demand.
- Conversion and Upgrades: While new facilities are primarily designated for N2, the company enhances output efficiency on existing nodes through technical upgrades and production line rescheduling.
3. Disciplined Capacity Planning
To prevent utilization drops caused by overcapacity (idleness), TSMC adopted a more rigorous planning approach:
- Engaging with “Customers’ Customers”: To ensure that expanded capacity is utilized, TSMC now communicates not only with direct customers but also directly with hyperscalers and Cloud Service Providers (CSPs) to verify the reality and scale of AI demand.
- Avoiding Prebuilding Inventory: Management explicitly stated they are not concerned about customers “prebuilding” inventory, as current inventory levels are very healthy and capacity expansion is based on actual end-demand. This ensures that new capacity is utilized for real orders rather than building up stock.
4. Cost Improvement Efforts
While not a direct method of “increasing” utilization, higher capacity utilization and cost improvement efforts were cited together as the main drivers for the gross margin increase. This implies that while increasing volume, TSMC also reduced unit costs by improving yields and production efficiency, making every unit of utilized capacity more economically beneficial.
According to the TSMC Q3 2025 earnings call, management provided updated figures and long-term forecasts regarding the Overseas Fabs Dilution effect on gross margins.
1. Short-term Impact (2025)
The higher operational costs of overseas facilities act as a headwind to the company’s overall gross margin. However, the impact for 2025 is trending better than initially feared.
- Q3 Status: The 59.5% gross margin was achieved despite dilution from overseas fabs, which was offset by strong capacity utilization and cost-reduction efforts.
- H2 2025 Projection: As capacity continues to ramp up, the dilution effect is expected to be closer to 2% in the second half of the year.
- Full-Year 2025 Revision: Management has lowered the full-year dilution estimate to 1–2% (previously 2–3%), indicating that cost management and ramp-up efficiency are ahead of schedule.
2. Long-term Outlook (Next Several Years)
As TSMC expands its global footprint, the dilution will evolve through different stages:
- Initial Stages: Over the next few years, the dilution is expected to remain between 2% and 3% as the first fabs in Arizona and Japan reach high-volume production.
- Later Stages: As more advanced capacity comes online across multiple global sites (including Germany and further Arizona phases), the dilution is projected to widen to 3–4%. This reflects a larger proportion of total manufacturing occurring in higher-cost regions.
3. Management Strategies to Mitigate Dilution
TSMC is leveraging its scale and technical expertise to maintain its long-term gross margin target of 53% or higher:
- GIGAFAB Clusters: In Arizona, TSMC is transforming its site into a massive “Gigafab” cluster. This scale allows for shared infrastructure and centralized management, reducing the unit cost of production compared to smaller, isolated plants.
- Digital Excellence: The company is deploying AI and big data analytics to drive “engineer-centric” fab operations. This allows them to manage global fab efficiency from anywhere in the world and improve yields faster.
- Government and Customer Partnerships: TSMC works closely with local governments (such as through the CHIPS Act) and customers to share the “value of geographic flexibility.” By pricing its services to reflect the value of regional manufacturing, TSMC aims to pass on some of the structural cost increases.
Summary of Gross Margin Dilution Forecast
| Period | Dilution Impact | Primary Drivers |
| FY 2025 | 1% – 2% | Initial ramp of Arizona Fab 1 and Kumamoto Fab 1. |
| Next 3–5 Years | 2% – 3% | Ramp-up of N3/N2 capacity in the US and Japan. |
| Long-term | 3% – 4% | Full operation of multi-fab clusters in US, Japan, and Europe. |
Based on the records of TSMC’s Q3 2025 earnings call, the impact of US government policies is multi-faceted, primarily involving tariff risks, export controls, and support for localized production.
Below is a detailed analysis:
1. Uncertainty of Tariff Policies
Management explicitly identified tariff policies as a potential risk variable for future operations.
- Scope of Impact: Chairman C.C. Wei noted that the potential impact of tariffs would likely be concentrated in consumer-related and price-sensitive market segments.
- Company Stance: While no immediate changes in customer behavior have been observed, TSMC is aware of the risks and stated it would remain “prudent” and “mindful” when formulating its business plans for 2026.
2. Export Controls and the China Market
Regarding US policies restricting China’s access to advanced AI chips (such as NVIDIA GPUs), TSMC has demonstrated significant resilience.
- Unimpeded Growth: In response to analyst questions about whether chip bans would hinder long-term AI growth (CAGR), C.C. Wei replied that even if opportunities in the China market are “limited” or “not available,” global AI demand remains “dramatic” and extremely strong.
- Maintaining High Growth Forecasts: TSMC remains confident that by relying on robust demand from the rest of the world, the company can still achieve its goal of a mid-40s% or higher CAGR for AI server processor revenue.
3. Support for “Made in the US” and Arizona Expansion
US government policy support is a key consideration for TSMC’s global footprint.
- Accelerated Progress via Support: TSMC stated that overseas fab decisions depend on customer demand and “necessary government support.” Strong commitments from federal, state, and local governments have allowed the Arizona campus to accelerate its expansion.
- Introduction of Leading-Edge Technology: To meet the intense AI demand from US customers, TSMC plans to accelerate the introduction of 2nm (N2) and even more advanced processes at its Arizona site.
- Building a Local Ecosystem (Foundry 2.0): To achieve the goal of “Made in the US,” TSMC is not only building wafer fabs but also plans to establish advanced packaging facilities in Arizona. Furthermore, TSMC is collaborating closely with a major OSAT (Outsourced Semiconductor Assembly and Test) partner that has already broken ground in the area to support local advanced packaging needs.
Summary
US government policy acts as a “double-edged sword” for TSMC: On one hand, tariffs and export controls introduce market uncertainty and revenue constraints in specific regions. On the other hand, strong support and subsidy policies (such as the CHIPS Act) have prompted TSMC to accelerate the creation of a comprehensive ecosystem in the US—including advanced manufacturing and packaging—deepening its partnership with major US customers (who account for 76% of its revenue).