Taiwan Semiconductor Manufacturing Company (TSMC) reported Q1 2025 revenue of US$25.5 billion, down 5.1% quarter-over-quarter (QoQ), as seasonal weakness in smartphones was partially cushioned by persistent strength in AI-related demand. The quarter’s performance was also impacted by the January earthquake in Taiwan, though the company managed to recover much of the lost production. Gross margin came in at 58.8%, declining 0.2 percentage points, reflecting initial margin dilution from overseas fabs and earthquake-related disruptions, partially offset by cost improvements. Operating margin slid slightly to 48.5%, while EPS reached TWD 13.94 and return on equity stood at a robust 32.7%.

Despite these pressures, TSMC maintained a healthy balance sheet, ending the quarter with TWD 2.7 trillion (US$81 billion) in cash and marketable securities. Capital expenditures totaled US$10.06 billion, underscoring the company’s continued investment in advanced technologies and global capacity. Operating cash flow was also strong at TWD 626 billion.

From a technology perspective, advanced nodes (7nm and below) represented 73% of wafer revenue, led by 5nm (36%) and 3nm (22%) contributions. Platform performance was mixed: High Performance Computing (HPC) rose 7% QoQ and accounted for 59% of revenue, while smartphones dropped 22% to comprise 28%, reflecting typical seasonality. Automotive and DCE segments delivered healthy sequential growth of 14% and 8%, respectively.

Looking ahead to Q2 2025, TSMC guided for revenue between US$28.4 billion and US$29.2 billion, implying a 13% QoQ increase and a 38% year-over-year (YoY) gain at the midpoint. Gross margin is projected to remain between 57% and 59%, while operating margin is expected to range from 47% to 49%. Management noted a temporary increase in tax rate to ~20%, normalizing to 14%-15% in the second half of the year.

For the full year, TSMC expects revenue growth in the "mid-20s percent" range, fueled by booming AI demand. Revenue from AI accelerators is forecast to double in 2025, with a mid-40s CAGR projected through 2029. CapEx for the year is set at US$38–42 billion, with around 70% allocated to advanced process technologies, including the company’s Arizona and Kumamoto fabs. These overseas fabs, while strategically critical, are expected to create 2%-4% margin dilution in coming years due to elevated costs and potential tariffs. Still, TSMC aims to maintain a long-term gross margin of at least 53%.

Operationally, the company continues to scale advanced packaging capacity, with CoWoS output set to double in 2025 to meet insatiable AI-related demand. Management acknowledged persistent supply constraints but anticipates more balance in 2026.

TSMC’s overseas expansion is accelerating, notably in the U.S., where a new US$100 billion investment brings total planned investment to US$165 billion, supporting three new fabs and additional R&D and packaging facilities. Meanwhile, the first Kumamoto fab in Japan has entered volume production, with a second set to break ground later this year. A specialty fab in Dresden, Germany, remains on track. In Taiwan, plans for 11 new fabs and four advanced packaging plants are in motion, including N2 (2nm) production beginning in H2 2025 and A16 (1.6nm) on schedule for H2 2026.

Management reiterated a long-term commitment to dividend growth, favoring steady cash returns over buybacks. While margin pressures from overseas growth and potential tariffs remain key risks, TSMC is working with customers to reflect value in pricing.

In summary, TSMC delivered a resilient Q1 2025 amid external disruptions and continues to capitalize on surging AI demand. With advanced technology ramping and global expansion accelerating, the company is well-positioned for strong growth, albeit with tighter margins in the near term.