TSMC Earnings Call: AI Boom Fuels Aggressive Expansion

Taiwan Semiconductor Manufacturing Company Limited ((TSM)) has held its Q4 earnings call. Read on for the main highlights of the call.

Taiwan Semiconductor Signals Powerhouse Growth Amid Cost Pressures

TSMC’s latest earnings call struck an upbeat tone, underscoring powerful revenue and earnings momentum fueled by AI demand and advanced-node leadership, while openly acknowledging the heavy investment and margin pressures needed to sustain that growth. Management highlighted strong 2025 financial performance, robust cash generation, improving margins and ambitious multi‑year growth targets. At the same time, they warned that rising CapEx, depreciation, overseas fab ramp‑up costs, and supply constraints will test execution and could dilute margins before the benefits of new capacity and technologies fully materialize.

Strong Revenue Momentum in Q4 and Full-Year 2025

TSMC reported another quarter of solid top-line expansion, with Q4 2025 revenue up 5.7% sequentially in Taiwan dollars and 1.9% in U.S. dollar terms. For the full year, revenue surged 35.9% in U.S. dollars (31.6% in NT) compared with 2024, confirming TSMC’s role as one of the key beneficiaries of AI and high-performance computing (HPC) spending. This growth came despite a still-mixed macro backdrop and pockets of end-market weakness, highlighting the strength of structural demand for cutting-edge semiconductors.

Margins and Profitability Push to New Highs

Profitability moved sharply higher in 2025. In Q4, gross margin expanded 2.8 percentage points sequentially to 62.3%, while operating margin rose 3.4 points to 54%. For the full year, gross margin climbed 3.8 points to 59.9%, and operating margin jumped 5.1 points to a robust 50.8%. These figures reflect favorable mix toward advanced processes, high utilization, and tight cost control, giving TSMC a substantial profitability cushion as it prepares for a phase of higher cost intensity and overseas ramp‑up drag.

Earnings, Returns and Cash Flow Remain Exceptional

Earnings and returns on equity remained standout. Q4 EPS reached TWD 19.5 with a quarterly ROE of 38.8%. For 2025, EPS grew 46.4% to TWD 66.25, while full‑year ROE rose to 35.4%, levels more typical of a software franchise than a capital-heavy manufacturer. Operating cash flow in 2025 reached TWD 2.3 trillion, and free cash flow climbed 15.2% year-on-year to TWD 1 trillion, providing ample funding for the company’s aggressive investment program and growing shareholder distributions.

Advanced Nodes Dominate Revenue, Cementing Technology Lead

TSMC’s technology mix underscores its leadership at the cutting edge. Advanced technologies at 7 nanometers and below made up 77% of Q4 wafer revenue, driven by N3 at 28%, N5 at 35% and N7 at 14%. For 2025, 3‑nanometer alone accounted for 24% of wafer revenue, showing rapid adoption by leading customers. Importantly, TSMC confirmed that its next‑generation N2 node entered high‑volume manufacturing in Q4 2025 at Taiwan sites with healthy yields, while N2P and the even more advanced A16 process are scheduled for volume production in the second half of 2026. This roadmap reinforces TSMC’s position as the foundry of choice for the most demanding AI and HPC workloads.

AI Engines Long-Term Growth Outlook

AI remains the primary growth engine. Management said AI accelerator revenue represented a high‑teens percentage of total revenue in 2025 and is now expected to grow at a mid‑ to high‑50s percent compound annual rate between 2024 and 2029. This explosive AI trajectory underpins TSMC’s forecast that overall company revenue can grow at roughly a 25% CAGR over the same period. As more compute-intensive AI models move into production and on‑device AI expands, TSMC sees sustained, multi‑year demand for its most advanced nodes and advanced packaging solutions.

HPC and Smartphones Drive Platform Performance

From a platform perspective, high‑performance computing continued to lead the way. In Q4, HPC accounted for 55% of TSMC’s revenue, growing 4% quarter-on-quarter, and for the full year HPC revenue rose 48% year-on-year, contributing 58% of 2025 sales. Smartphones also showed resilience, with Q4 smartphone revenue up 11% sequentially and full‑year smartphone revenue up 11% versus 2024. Together, these segments reinforce that AI and compute‑heavy devices are now central pillars of TSMC’s business, offsetting weakness in more traditional consumer categories.

Rising Dividends Signal Confidence in Cash Generation

TSMC is translating its strong financial performance into higher cash returns. Cash dividends in 2025 totaled TWD 18 per share, up from TWD 14 in 2024, with the company paying out TWD 467 billion in dividends, a 28.6% year-on-year increase. Management reiterated its commitment to at least TWD 23 per share in 2026 and an explicit intent to raise dividends steadily over time. This policy suggests confidence that even amid surging capital expenditures, TSMC can maintain strong free cash flow and reward long‑term shareholders.

Fortress Balance Sheet Supports Expansion

The balance sheet remains exceptionally strong. TSMC ended the period with TWD 3.1 trillion in cash and marketable securities, equivalent to roughly USD 98 billion. In Q4 alone, the company generated about TWD 726 billion in operating cash flow. This liquidity provides a strategic buffer as TSMC undertakes a massive global capex program and faces rising costs, giving it flexibility to navigate market volatility while preserving investment in future nodes and geographic diversification.

CapEx Surges as TSMC Builds Future Capacity

TSMC’s growth ambitions come with an enormous capital bill. CapEx in 2025 reached USD 40.9 billion, up from USD 29.8 billion in 2024. Management signaled an even bigger step-up in 2026, guiding capital spending to USD 52–56 billion. Roughly 70–80% of this will go to advanced processes like 3nm and below, with about 10% to specialty technologies and roughly 10–20% to advanced packaging, testing, mask-making and related areas. This elevated capital intensity reflects both the cost of leading-edge equipment and the company’s determination to stay ahead in AI and HPC manufacturing capacity.

Margin Dilution from Overseas Fabs and N2 Ramp

Management cautioned that profitability will face headwinds as new overseas fabs and the N2 node ramp. Overseas facilities are expected to dilute gross margins by roughly 2–3 percentage points in their early stages, widening to 3–4 points later, due to higher operating costs and lower initial utilization. In addition, the early N2 ramp is expected to shave about 2–3 percentage points off the 2026 gross margin. While these pressures are meaningful, TSMC still targets a long‑term gross margin of at least 56%, indicating confidence that scale, yield improvements and pricing power will eventually offset the initial drag.

Supply Tightness and Capacity Constraints Persist

One of the most immediate challenges is supply tightness. Management described wafer supply as the current bottleneck amid red‑hot AI demand, with capacity for advanced nodes running extremely tight. Because new high‑volume fabs typically take two to three years to construct and ramp, significant new supply will not fully relieve the bottleneck until 2026–2027. This constrained environment supports pricing and utilization but also means TSMC must carefully allocate scarce capacity among key customers and navigate potential demand spikes.

Rising Operating Costs and Depreciation

The company warned that the cost environment is worsening. Advanced manufacturing tools are becoming more expensive, process complexity is rising, and TSMC’s expanding global footprint brings higher labor, energy and compliance costs, compounded by inflation. Depreciation is expected to increase by a high‑teens percentage year-on-year in 2026 as N2 and other advanced assets ramp. These trends will pressure margins in the near term, reinforcing the need for high utilization and disciplined pricing to sustain profitability.

Macro and End-Market Risk Factors

Despite strong structural drivers, TSMC flagged several macro and end-market risks. Potential changes in tariff policies, rising component costs—especially memory price inflation—and softness in price‑sensitive consumer segments could weigh on unit demand in PCs and smartphones. Higher memory prices, for example, may constrain overall system affordability and limit volume growth even as AI and premium devices remain robust. Investors should recognize that TSMC’s growth sits at the intersection of powerful secular tailwinds and cyclical or policy risks that can affect demand in specific segments.

Ongoing Weakness in Display and Consumer Electronics

Not all segments are benefiting from the current upcycle. Display and Consumer Electronics (DCE) revenue dropped 22% sequentially in Q4 and represented only about 1% of quarterly revenue. For the full year 2025, DCE revenue was essentially flat, highlighting ongoing softness in more traditional consumer electronics. While DCE is now a very small part of TSMC’s mix, its weakness underscores the divergence between booming AI/HPC demand and slower legacy consumer categories.

Execution and Talent Constraints in Global Expansion

Scaling TSMC’s global footprint brings operational challenges. Management cited issues such as obtaining permits, planning reliable power infrastructure, and the difficulty of recruiting enough engineering talent quickly in both Taiwan and the U.S. These factors could constrain the pace of capacity expansion and complicate execution of overseas projects. Successfully managing these logistical and human-capital hurdles will be crucial to turning TSMC’s record CapEx into sustainable, profitable volume across multiple geographies.

Guidance Points to Strong 2026 Growth Despite Headwinds

Looking ahead, TSMC’s guidance for 2026 is notably bullish. For Q1 2026, revenue is projected at USD 34.6–35.8 billion, implying roughly 4% sequential and about 38% year-on-year growth at the midpoint, with gross margin between 63–65% and operating margin at 54–56%. For the full year, management expects revenue growth close to 30% in U.S. dollar terms, even as depreciation rises by a high‑teens percentage and gross margins are temporarily diluted by overseas fab ramps (2–3% margin hit early, 3–4% later) and N2 startup (about 2–3% drag in 2026). Despite these near-term pressures, TSMC reiterated long‑term targets of at least 56% gross margin and a through‑cycle ROE in the high‑20s, anchored by a mid‑ to high‑50s% AI accelerator revenue CAGR and an overall company revenue CAGR approaching 25% from 2024 to 2029.

In sum, TSMC’s earnings call painted the picture of a company at the center of a powerful AI and HPC supercycle, combining rapid revenue growth, industry‑leading margins and a strong balance sheet with a willingness to invest heavily for the future. While soaring CapEx, rising depreciation, overseas ramp costs and macro uncertainties create a more demanding operating environment, management’s guidance and dividend commitments suggest confidence that TSMC can manage these headwinds while extending its technology lead. For investors, the story remains one of high growth and high returns, tempered by the execution risks inherent in building the world’s most advanced chip manufacturing network at unprecedented scale.