TSMC posted third quarter 2025 revenue of $33.1 billion, up 10.1% sequentially in USD and slightly above guidance, with gross margin of 59.5% beating the top of guidance by 200 basis points and EPS up 39% year over year. Management raised full-year 2025 revenue growth to close to mid-30% in USD and said AI demand is even stronger than three months earlier, tracking a little above the mid-40s% AI accelerator CAGR. Q4 guidance implies a slight sequential revenue dip, and management stayed prudent on tariff and consumer price-sensitivity risks while continuing to expand Arizona and prepare N2 for volume production.
Good afternoon, everyone, and welcome to TSMC's Third Quarter 2025 Earnings Conference call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. TSMC is hosting our earnings conference call via live audio webcast through the company's website at www.tsmc.com, where you can also download the earnings release materials. If you are joining us through the conference call, your dial-in lines are in listen-only mode. The format for today's event will be as follows. First, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the third quarter 2025, followed by our guidance for the fourth quarter 2025. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. C.C. Wei, will jointly provide the company's key messages. We will open the line for Q&A.
As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our press release. I would like to turn the call over to TSMC CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.
Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the third quarter 2025. After that, I will provide the guidance for the fourth quarter 2025. Third quarter revenue increased 6% sequentially in NT, as our business was supported by a strong demand for our leading-edge process technologies. In U.S. dollar terms, revenue increased 10.1% sequentially to $33.1 billion, slightly ahead of our third quarter guidance. Gross margin increased 0.9% percentage point sequentially to 59.5%, primarily due to cost improvement efforts and a higher capacity utilization rate, partially offset by an unfavorable foreign exchange rate and dilution from our overseas fabs. Accordingly, operating margin increased 1.0 percentage point sequentially to 50.6%. Overall, our third quarter EPS was TWD 17.44, up 39% year-over-year, and ROE was 37.8%. Now, let's move on to revenue by technology.
3 nm process technology contributed 23% of wafer revenue in the third quarter, while 5 nm and 7 nm accounted for 37% and 14% respectively. Advanced Technologies defined as 7 nm and below accounted for 74% of wafer revenue. Moving on to revenue contribution by platform, HPC remained flat quarter-over-quarter to account for 57% of our third quarter revenue. Smartphone increased 19% to account for 30%. IoT increased 20% to account for 5%. Automotive increased 18% to account for 5%. DCE decreased 20% to account for 1%. Moving on to the balance sheet, we ended the third quarter with cash and marketable securities of TWD 2.8 trillion, or $90 billion. On the liability side, current liability decreased by TWD 101 billion, quarter-over-quarter, mainly due to the decrease of TWD 112 billion in accrued liabilities and others, as we paid out 2025 provisional tax of TWD 136 billion.
In terms of financial ratios, accounts receivable turnover days increased two days to 25 days. Days of inventory decreased two days to 74 days due to strong shipment in N3 and N5. Regarding cash flow and CapEx, during the third quarter, we generated about TWD 427 billion in cash from operations, spent TWD 287 billion in CapEx, and distributed TWD 117 billion for Q2 2024 cash dividend. Overall, our cash balance increased TWD 106 billion to TWD 2.5 trillion at the end of the quarter. In U.S. dollar terms, our third quarter capital expenditures totaled $9.7 billion. I have finished my financial summary. Now, let's turn to our current quarter guidance. Based on the current business outlook, we expect our fourth quarter revenue to be between $32.2 billion and $33.4 billion, which represents a 1% sequential decrease or a 22% year-over-year increase at the midpoint.
Based on the exchange rate assumption of $1 to TWD 30.6, gross margin is expected to be between 59% and 61%. Operating margin between 49% and 51%. This concludes my financial presentation. Now, let me turn to our key messages. I will start by talking about our third quarter 2025 and fourth quarter 2025 profitability. Compared to the second quarter, our third quarter gross margin increased by 90 basis points sequentially to 59.5%, primarily due to cost improvement efforts and a higher overall capacity utilization rate, partially offset by margin dilution from our overseas fabs and an unfavorable foreign exchange rate. Compared to our third quarter guidance, our actual gross margin exceeded the high end of the range provided three months ago by 200 basis points, mainly as the actual third quarter exchange rate was $1 to TWD 29.91, compared to our guidance of $1 to TWD 29.
In addition, we also delivered better than expected cost improvement efforts. We have just guided our fourth quarter gross margin to increase by 50 basis points to 60% at the midpoint, primarily driven by a more favorable foreign exchange rate, partially offset by continued dilution from our overseas fabs. While the cost of overseas fabs remains higher, thanks to the company's overall larger scale, we now expect the gross margin dilution from the ramp-up of our overseas fabs to be closer to 2% in the second half of 2025. For the full year 2025, we now expect it to be between 1%-2% as compared to 2%-3% previously.
Looking ahead, we continue to forecast the gross margin dilution from the ramp-up of our overseas fabs in the next several years to be 2%-3% in the early stages and widen to 3%-4% in the latter stages. We will leverage our increasing size in Arizona and work on our operations to improve the cost structure. We will also continue to work closely with our customers and suppliers to manage the impact. Overall, with our fundamental competitive advantages of manufacturing technology leadership and large-scale production base, we expect TSMC to be the most efficient and cost-effective manufacturer in every region that we operate. Now, let me make some comments on our 2025 CapEx. As the structured AI-related demand continues to be very strong, we continue to invest to support our customers' growth.
We are narrowing the range of our 2025 CapEx to be between $40 billion and $42 billion, as compared to $38 billion-$42 billion previously. About 70% of the capital budget will be allocated for advanced process technologies. About 10%-20% will be spent for specialty technologies. About 10%-20% will be spent for advanced packaging, testing, mask making, and others. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. Even as we invest for the future growth with this higher level of CapEx spending in 2025, we remain committed to delivering profitable growth to our shareholders. We also remain committed to a sustainable and steadily increasing cash dividend per share on both an annual and quarterly basis. Now, let me turn the microphone over to C.C.
Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. We concluded our third quarter with revenue of $33.1 billion, slightly above our guidance in U.S. dollar terms, mainly due to the strong demand for our leading-edge process technologies. Moving into the fourth quarter 2025, we expect our business to be supported by continued strong demand for our leading-edge process technologies. We continue to observe robust AI-related demand throughout 2025, while the non-AI end market segment has patterned out and is seeing a mild recovery. Supported by our strong technology differentiation and broad customer base, we now expect our full-year 2025 revenue to increase by close to mid-30% year-over-year in U.S. dollar terms.
While we have not observed any change in our customers' behavior so far, we understand there are uncertainties and risks from the potential impact of tariff policies, especially in the consumer-related and price-sensitive end market segments. As such, we will remain mindful of the potential impact and be prudent in our business planning going into 2026 while continuing to invest for the future megatrend. Amidst the uncertainty, we will also continue to focus on the fundamentals of our business, that is technology leadership, manufacturing excellence, and customer trust, to further strengthen our competitive position. Next, let me talk about the AI demand outlook and TSMC's capacity planning process disciplines. Recent developments in the AI market continue to be very positive. The explosive growth in token volume demonstrates increasing consumer AI model adoption, which means more and more computation is needed, leading to more leading-edge silicon demand.
Companies such as TSMC are leveraging AI internally to drive greater productivity and efficiency to create more value. As such, enterprise AI is another source of demand. In addition, we continue to observe the rising emergence of sovereign AI. We are also happy to see continued strong outlook from our customers. In addition, we directly receive very strong signals from our customers' customers, requesting the capacity to support their business. Thus, our conviction in the AI megatrend is strengthening, and we believe the demand for semiconductors will continue to be very fundamental. As a key enabler of AI applications, TSMC's biggest responsibility is to prepare the most advanced technologies and necessary capacity to support our customers' growth. To address the structural increase in the long-term market demand profile, TSMC employs a disciplined and robust capacity planning system.
Externally, we work closely with our customers and our customers' customers to plan our capacity. We have more than 500 different customers across all the end market segments. In addition, as process technology complexity increases, the engagement lead time with customers is now at least two to three years in advance. Therefore, we probably get the deepest and widest loop possible in the industry. Internally, our planning system involves multiple teams across several functions to assess and evaluate the market demand from both top-down and bottom-up approaches to determine the appropriate capacity to build. This is especially important when we have such high forecasted demand from AI-related businesses. As the world's most reliable and effective capacity provider, we will continue to work closely with our customers to invest in leading-edge specialty and advanced packaging technologies to support their growth.
We will also remain disciplined and robust in our capacity planning approach to ensure we deliver profitable growth for our shareholders. Now, let me talk about TSMC's global manufacturing footprint update. All our overseas decisions are based on our customers' needs, as they value some geographic flexibility and the necessary level of government support. This is also to maximize the value for our shareholders. With a strong collaboration and support from our leading U.S. customers and the U.S. federal, state, and city governments, we continue to speed up our capacity expansion in Arizona. We are making tangible progress and executing well to our plan. In addition, we are preparing to upgrade our technologies faster to end-to-end and more advanced process technologies in Arizona, given the strong AI-related demand from our customers.
Furthermore, we are close to securing a second large piece of land nearby to support our current expansion plans and provide more flexibility in response to the very strong multi-year AI-related demand. Our plan will enable TSMC to scale up to an independent gigafab cluster in Arizona to support the needs of our leading-edge customers in smartphone, AI, and HPC applications. Next, in Japan, thanks to the strong support from the Japan Central, Prefectural, and Local Government, our first specialty fab in Kumamoto has already started volume production in late 2024 with very good yield. The construction of our second fab has begun, and the ramp schedule will be based on our customers' needs and market conditions. In Europe, we have received strong commitment from the European Commission and the German federal, state, and city governments.
Construction of our specialty fab in Dresden, Germany, has also started, and we are progressing smoothly with our plans. The ramp schedule will be based on our customers' needs and market conditions. In Taiwan, with support from the Taiwan government, we are preparing for multiple phases of 2 nm fab in both Xinchu and Kaohsiung Science Parks. We will continue to invest in leading-edge and advanced packaging facilities in Taiwan over the next several years. By expanding our global footprint while continuing to invest in Taiwan, TSMC can continue to be the trusted technology and capacity provider of the global logic IC industry for years to come. Finally, let me talk about our N2 and S16 status. Our 2 nm and S16 technologies lead the industry in addressing insatiable demand for energy-efficient computing, and almost all innovators are working with TSMC. N2 is well on track for volume production later this quarter.
With good yield, we expect a faster ramp in 2026, fueled by both smartphone and HPC AI applications. With our strategy of continuous enhancement, we also introduce N2P as an extension of our N2 family. N2P features further performance and power benefits on top of N2 and volume production scheduled for the second half of 2026. We also introduced A16 featuring our best-in-class superpower rail, or SPR. A16 is best suited for a specific HPC product with a complex signal route and dense power delivery networks. Volume production is on track for the second half of 2026. We believe N2, N2P, A16, and its derivatives will propel our N2 family to be another large and long-lasting node for TSMC. This concludes our key message, and thank you for your attention.
Thank you, C.C. This concludes our prepared statements. Before we begin the Q&A session, I would like to remind everybody to please limit your questions to two at a time to allow all the participants an opportunity to ask their questions. Should you wish to raise your question in Chinese, I will translate it to English before our management answers your question. For those of you on the call, if you would like to ask a question, please press the star, then one on the telephone keypad now. If at any time you'd like to remove yourself from the questioning queue, please press star, then two. Now, let's begin the Q&A session. Operator, can we please proceed with the first caller on the line? Thank you.
Yeah, thanks. Good afternoon, C.C., Wendell, and Jeff. Great result again. On the AI front, C.C., I think you have met with pretty much everybody who is driving the Gen AI revolution over the last couple of months. As you said, everybody seems to be a lot more positive. I think we gave a guidance of mid-40% data center AI growth CAGR earlier this year until 2029. Anything that you see which should kind of change that number? It definitely feels like the growth today seems to be much stronger. Related to that, you did talk about the very detailed capacity expansion planning that TSMC does. In past technology cycles, TSMC CapEx has gone up significantly to prepare for the next upgrade or next leading-edge node. In this cycle, TSMC revenues have grown 50% from the previous peak in 2022. CapEx has only grown about 10%.
How should we think about the CapEx over the next couple of years? I know that you're not giving numerical guidance yet, but I just wanted to understand, like are we looking at much higher CapEx in the next couple of years given all these conversations you've had? I had a follow-up after that. Thank you.