TSMC and ASML earnings diverged notably again this quarter; TSMC management finally raised full-year revenue guidance.
TSMC Q2 Earnings:
Revenue of $30.1B in USD terms, up 44% year over year and 18% sequentially, above the guidance range of $28.4-29.2B, a new all-time high; in NTD terms, revenue of NT$937.8B, up 39% year over year and 11% sequentially, also a record high.
Amid severe FX headwinds, gross margin of 58.6%, up 5.4 percentage points year over year, down 0.2 percentage points sequentially, still at the upper end of the 57%-59% guidance range.
Operating income of $14.9B in USD terms, up 68% year over year and 21% sequentially; operating margin of 49.6%, up 7.1 percentage points year over year and 1.1 percentage points sequentially.
Net income of $12.8B in USD terms, up 67% year over year and 17% sequentially; net margin maintained at 43%.
Equivalent 12-inch wafer shipments of 3.718M (approx. 1.24M/month), up 19% year over year, the 5th consecutive quarter of year-over-year growth, up 14% sequentially.
Capex of $9.63B in USD terms, up 51% year over year; full-year capex guidance maintained at $38-42B.
Process and Platform Breakdown, Q2:
3nm at 24%, 5nm at 36%, 7nm at 14%, 16/20nm at 7%, 28nm at 7%, 40/45nm at 3%, 65nm at 3%, 90nm at 1%, 0.11/0.13µm at 2%, 0.15/0.18µm at 3%; advanced nodes (3nm/5nm/7nm) at 74%, with 3nm/5nm combined at 60%.
HPC at 60%, smartphone at 27%, IoT at 5%, auto at 5%; HPC has exceeded smartphone for 11 consecutive quarters; HPC up 60% year over year and 14% sequentially; smartphone up 12% year over year and 7% sequentially; IoT up 14% sequentially; auto flat sequentially; TSMC's 2024 top customer Apple at 22%, second customer (likely NVIDIA) at 12%; watching whether 2025 sees NVIDIA overtake Apple as the largest customer.
Outlook:
Guiding Q3 revenue of $31.8-33.0B, up 35%-40% year over year, driven primarily by strong HPC demand led by AI; Q3 gross margin of 55.5%-57.5%, operating margin of 45.5%-47.5%.
Guiding 2025 full-year USD revenue growth in the low-30% range (raised); guiding 2025 capex of $38-42B (unchanged).
Long-term gross margin guidance of 53%+ (unchanged); if Q3 NTD appreciates 6.6%, estimated impact would reduce TSMC's Q3 NTD revenue by ~6.6% and lower gross margin by ~2.6 percentage points.
Regarding the recent NVIDIA H20 and AMD MI308 license approvals, TSMC management views this as positive given the size of the Mainland China AI chip market; however, the near-term impact has not been incorporated into guidance, maintaining the 2025 AI revenue (GPU + ASIC + HBM controller) doubling target ($25.2-28.8B) and the 2024-2029 CAGR of 44%-46% (unchanged).
TSMC is using some N7 capacity to support N5 because N5 capacity is extremely tight (most AI chips use 4N/N4 nodes, which belong to the N5 family); management notes that across N7, N5, N3, and future N2, approximately 85%-90% of equipment is common.
Virtually all of TSMC's revenue is denominated in US dollars, while approximately 75% of its costs are in New Taiwan dollars. Fluctuations in the NT dollar exchange rate have a significant impact on TSMC's revenue and profit.
A mild recovery is expected across the overall non-AI end markets in 2025. Tariff policies may introduce uncertainty and risk, particularly in consumer-facing and price-sensitive markets. However, customer behavior in the second half has not changed materially. On the AI front, demand remains strong in the second half, with sovereign AI demand continuing to grow.
N2 is on track for volume production in H2 2025. Tape-out volume in its first two years far exceeds that of N3/N5 at the same stage, and its yield ramp curve resembles N3E. N2P targets volume production in H2 2026 for mobile and HPC. A16 SPR (backside power delivery/BSPDN), suited for HPC, also targets H2 2026 volume production. N2, N2P, A16, and their derivatives all belong to the N2 family. A14 is a second-generation nanosheet structure, expected for volume production in 2028, with A14 SPR in 2029.
Arizona Fab 1 (N4 node) began volume production in Q4 last year, with yields comparable to Taiwan fabs. Fab 2 (N3 node) is complete, with volume production pulled forward by several quarters. Fab 3 (N2, A16 nodes) is under construction, and Fab 4 (N2, A16 nodes) has begun preliminary work simultaneously. Fabs 5 and 6 will adopt even more advanced nodes based on customer demand. This will form a GIGA Fab Cluster in Arizona, with 2nm becoming the mainstream process node, eventually contributing approximately 30% of TSMC's total 2nm-and-below capacity.
Overall, TSMC — with its large AI exposure — remains steady, despite persistent noise from tariffs and FX. Management remains optimistic on the long-term AI outlook and, for the first time this quarter, referenced the sovereign AI demand surge that Jensen Huang has repeatedly emphasized.
The certainty of TSMC's growth is built on the certainty of demand growth from its many customers. Put differently, the certainty of TSMC's performance lies primarily in its floor, not its ceiling — similar to ASML's role for TSMC, or Arm's for its downstream customers.
Fundamentally, while Q3 growth looks optimistic, combining it with the full-year guidance implies Q4 revenue growth of only 6-21%, a notable deceleration. Management cited tariff uncertainty potentially impacting consumer electronics, and expects overall non-AI end markets to see only a mild recovery in 2025.
Of course, TSMC management habitually gives conservative guidance. Based on current guidance, 2025 revenue is expected at $117-120B, net income at $47-50B, implying a current-market-cap PE of 25-27x. Looking back, the drop to 14x PE at the Q1 report now seems ironic.