Taiwan Semiconductor Manufacturing Company (NYSE: TSM)

TSMC’s Q2 2025 financial performance represents one of the strongest quarters in the company’s history, driven primarily by unprecedented demand for AI and HPC-related semiconductors. Revenue of NT$933.79 billion ($30.07 billion USD) increased 38.6% year-over-year in NT$ terms and an even more impressive 44.4% in USD terms, demonstrating both strong underlying business growth and favorable currency dynamics.

The sequential performance was equally impressive, with revenue increasing 11.3% from Q1 2025, well above typical seasonal patterns. This sequential growth was driven by continued ramp-up of advanced node production and strong customer demand across multiple platform segments. In USD terms, the sequential revenue growth of 17.8% was particularly strong, benefiting from both volume increases and favorable foreign exchange movements.

Profitability metrics reached exceptional levels, with net income of NT$398.27 billion representing a 60.7% year-over-year increase and a sequential increase of 10.2%. This growth significantly outpaced revenue growth, demonstrating the operational leverage inherent in TSMC’s business model as well as the premium pricing power associated with leading-edge process technologies. The company’s net profit margin of 42.7% ranks among the highest in the semiconductor industry.

Earnings per share performance was equally strong, with diluted EPS of NT$15.36 (US$2.47 per ADR unit) representing a 60.7% year-over-year increase. This EPS growth was driven both by higher absolute profits and a slight reduction in the weighted average share count. The company’s strong cash generation and disciplined capital allocation continue to drive shareholder value creation.

The margin profile demonstrates TSMC’s industry-leading position and operational excellence. Gross margin of 58.6% reflects the premium nature of advanced semiconductor manufacturing and the company’s technological moat. Operating margin of 49.6% and net profit margin of 42.7% showcase the highly profitable nature of TSMC’s foundry business model, particularly for leading-edge technologies where the company maintains pricing power.

3-nanometer technology continued its strong ramp, reaching 24% of total wafer revenue in Q2 2025. This represents significant growth from previous quarters and demonstrates the successful production scale-up of TSMC’s most advanced manufacturing process. The 3nm technology is primarily driven by next-generation AI processors and high-performance computing applications, where customers are willing to pay premium prices for the performance and efficiency benefits.

5-nanometer technology remained the largest contributor at 36% of total wafer revenue, reflecting its broad adoption across multiple customer segments including smartphones, data center processors, and automotive applications. The mature 5nm platform continues to provide strong margins and steady demand, serving as a stable foundation for TSMC’s revenue base.

7-nanometer technology accounted for 14% of wafer revenue, representing a mature but still important technology node for various high-performance computing and automotive applications. While 7nm’s revenue contribution has declined as newer nodes gain traction, it continues to serve important customer needs and maintains healthy margins.

The combined advanced technologies segment (7nm and more advanced) represented 74% of total wafer revenue, up from previous quarters and demonstrating TSMC’s successful strategy of leading in cutting-edge manufacturing processes. This high percentage of advanced node revenue provides significant competitive advantages including higher margins, stronger customer relationships, and barriers to entry for competitors.

The remaining 26% of revenue from specialty technologies serves diverse applications including IoT devices, automotive electronics, and industrial applications. While these technologies generate lower revenue per wafer, they provide important diversification and serve growing markets with specific reliability and performance requirements. TSMC’s broad technology portfolio allows the company to serve virtually every segment of the semiconductor market.

Looking ahead, TSMC’s technology roadmap includes 2nm technology currently in development, which is expected to begin risk production and eventually contribute to revenue growth. The company’s continued investment in R&D and advanced manufacturing capabilities ensures its position at the forefront of semiconductor technology advancement.

TSMC’s exceptional Q2 2025 performance was fundamentally driven by the continued acceleration of artificial intelligence and high-performance computing demand. The AI revolution has created unprecedented demand for advanced semiconductors, with customers requiring the most sophisticated manufacturing processes to achieve the performance and efficiency needed for AI workloads.

AI and HPC Market Dynamics

• AI Chip Demand: Training and inference applications driving demand for 3nm and 5nm technologies with specialized architectures
• Data Center Growth: Cloud providers investing heavily in AI infrastructure, requiring cutting-edge processors and accelerators
• Edge AI: Growing deployment of AI capabilities in mobile devices, automotive systems, and IoT applications
• HPC Applications: Scientific computing, financial modeling, and research applications requiring advanced processing capabilities

According to CFO Wendell Huang, “Our business in the second quarter was supported by continued robust AI and HPC-related demand”, and this trend is expected to continue driving business performance in Q3 2025 and beyond. The company expects strong demand for leading-edge process technologies to persist.

The AI boom has created a unique demand environment where customers are prioritizing performance and efficiency over cost, enabling TSMC to maintain premium pricing for its most advanced technologies. This dynamic has contributed significantly to the company’s margin expansion and profitability growth.

Beyond AI and HPC, TSMC continues to benefit from steady demand across other key sectors including smartphones, automotive electronics, and IoT devices. The diversified demand base provides stability and reduces dependence on any single market segment, while the AI surge provides exceptional growth momentum.

The technology transition cycles in semiconductors align well with TSMC’s advanced manufacturing capabilities. As customers require increasingly sophisticated chips for AI and other applications, they naturally gravitate toward TSMC’s leading-edge processes, reinforcing the company’s competitive position and pricing power.

TSMC’s margin performance in Q2 2025 demonstrates exceptional operational excellence and the value of its technological leadership position. The company achieved industry-leading profitability metrics across all key measures:

• Gross Margin: 58.6% gross margin reflects premium pricing power and operational efficiency at the world’s most advanced semiconductor manufacturing facilities
• Operating Margin: 49.6% operating margin demonstrates disciplined cost management while investing appropriately in R&D and capacity expansion
• Net Profit Margin: 42.7% net profit margin represents one of the highest in the semiconductor industry, showcasing the fundamental profitability of TSMC’s business model

These margin levels are sustainable due to several structural advantages. First, TSMC’s technological leadership in advanced nodes creates significant barriers to entry and allows for premium pricing. Second, the capital-intensive nature of semiconductor manufacturing creates natural oligopoly dynamics. Third, the company’s scale advantages in R&D, manufacturing, and customer relationships reinforce its competitive position.

The company’s manufacturing excellence is evident in its ability to deliver consistent, high-quality results while scaling production of the world’s most complex semiconductor manufacturing processes. TSMC’s global operations span multiple facilities and geographic regions, providing both capacity and risk diversification.

Capacity utilization remained high across TSMC’s advanced technology platforms, reflecting strong customer demand and efficient production planning. The company continues to invest in additional capacity to meet growing demand, particularly for advanced nodes where customer demand significantly exceeds current supply capacity.

Quality metrics and customer satisfaction remain at industry-leading levels, supporting TSMC’s position as the preferred foundry partner for the world’s leading semiconductor companies. The company’s comprehensive design ecosystem and manufacturing support services provide additional value to customers beyond pure manufacturing capabilities.

TSMC provided strong guidance for Q3 2025, reflecting continued confidence in the business momentum and market demand environment:

• Revenue expected between US$31.8 billion and US$33.0 billion, representing sequential growth from Q2 2025’s $30.07 billion
• Gross profit margin expected between 55.5% and 57.5% (based on 1 USD to 29.0 NT$ exchange rate assumption)
• Operating profit margin expected between 45.5% and 47.5%

The Q3 guidance implies continued strong demand for TSMC’s leading-edge technologies, with revenue growth expected to continue despite the typical seasonal patterns in the semiconductor industry. The midpoint of the revenue guidance range suggests approximately 6% sequential growth, which would be exceptional for the semiconductor industry.

Management commentary highlighted that “Moving into third quarter 2025, we expect our business to be supported by strong demand for our leading-edge process technologies”, indicating confidence that the AI and HPC demand trends will persist through at least the near term.

The guided margin ranges, while slightly below Q2 levels, remain exceptionally strong by industry standards and reflect the continued premium nature of TSMC’s technology offerings. The margin guidance accounts for typical quarterly variations in product mix, capacity utilization, and other operational factors.

Looking beyond Q3, TSMC’s long-term strategic position appears increasingly strong. The company’s technology roadmap includes continued advancement in process technologies, with 2nm development progressing and future nodes in various stages of research and development. The sustained investment in R&D ensures TSMC’s continued technological leadership.

Capital expenditure plans support capacity expansion to meet growing demand, particularly for advanced nodes where customer requirements significantly exceed current supply. The company’s disciplined approach to capacity investment balances growth opportunities with capital efficiency and return on investment considerations.