TSMC (TSM) Q3 2025: Advanced Nodes Reach 74% of Revenue, Tight AI Capacity Drives Strategic Expansion

2025-10-16 | By EarningsIQ Research

TSMC’s Q3 revealed surging demand for advanced nodes, with AI-driven capacity constraints prompting aggressive expansion across Arizona, Japan, and Europe. Management’s conviction in the AI megatrend is strengthening, yet margin dilution from overseas fabs and rapid node transitions remain in focus. Investors should track TSMC’s evolving capital allocation and risk management as it juggles global expansion and technology leadership into 2026.

Summary

• Advanced Technology Mix Surges: Leading-edge nodes now dominate wafer revenue, reinforcing TSMC’s technology edge.
• AI Demand Tightens Capacity: Structural AI growth is outpacing supply, driving accelerated global fab and packaging investments.
• Margin Dynamics in Flux: Overseas expansion and node ramps introduce margin headwinds as TSMC balances scale with profitability.

Performance Analysis

TSMC delivered Q3 revenue ahead of guidance, powered by robust demand for its three-, five-, and seven-nanometer process technologies. Advanced nodes—defined as seven nanometer and below—accounted for a commanding 74% of wafer revenue, up from prior cycles and reflecting the company’s migration toward leading-edge production. Segment performance was mixed: smartphone revenue jumped 19% sequentially, now representing 30% of total revenue, while high-performance computing (HPC) held steady at 57%. Automotive and IoT platforms also posted double-digit sequential growth, though from smaller bases.

Gross margin improved to 59.5%, supported by higher capacity utilization and cost improvements, though partially offset by continued dilution from overseas fabs and currency headwinds. Operating margin climbed to 50.6%. Notably, management flagged that margin dilution from overseas expansion is now expected to be 1–2% for 2025, better than the previous 2–3% range, as scale efficiencies begin to materialize. Inventory days decreased, reflecting strong shipment momentum in N3 (three nanometer) and N5 (five nanometer) nodes. Capital expenditures (CapEx) for the quarter reached $9.7 billion, with the full-year CapEx outlook tightened to $40–42 billion, the majority earmarked for advanced technologies.

• Advanced Node Mix Shift: Three nanometer, five nanometer, and seven nanometer nodes now comprise nearly three-quarters of wafer revenue, underscoring TSMC’s leadership in process technology migration.
• AI-Driven Platform Growth: AI and HPC demand continue to anchor growth, while smartphone and automotive segments rebound sequentially, highlighting diversified end-market exposure.
• Margin Leverage and Dilution: Operational scale and cost discipline are offsetting some overseas fab dilution, but margin headwinds remain as global expansion accelerates.

TSMC’s balance sheet remains robust, with $90 billion in cash and marketable securities, providing ample firepower for continued investment and dividend commitments. The company’s ability to fund both aggressive CapEx and shareholder returns underscores its financial resilience amid industry transformation.

Executive Commentary

Strategic Positioning

1. Leading-Edge Node Dominance

TSMC’s advanced node portfolio (7nm and below) now accounts for 74% of wafer revenue, positioning the company as the go-to foundry for both AI and HPC workloads. The launch of N2 (2nm), N2P, and A16 process nodes, with volume production on track for late 2025 and 2026, signals continued technology leadership. Management expects these nodes to become another “large and long-lasting” revenue driver, with nearly all industry innovators engaged on these technologies.

2. AI Demand and Capacity Planning Discipline

AI-related demand continues to exceed even bullish expectations, with CEO Wei describing current customer signals as “insane.” TSMC is responding by accelerating capacity expansion, particularly for advanced packaging (CoWoS, chip-on-wafer-on-substrate) and front-end nodes. The company’s capacity planning is now informed by direct engagement with both customers and their downstream clients, enabling a deeper and broader demand perspective than prior cycles.

3. Global Manufacturing Footprint Expansion

TSMC’s overseas expansion is driven by customer geographic flexibility and government support, with Arizona, Kumamoto (Japan), and Dresden (Germany) all progressing. The company is securing additional land in Arizona for an “independent gigafab cluster” capable of supporting multi-year AI and smartphone demand. Advanced packaging fabs are also planned for Arizona, with collaboration from leading OSAT (Outsourced Semiconductor Assembly and Test) partners to bridge immediate supply gaps.

4. Margin Management Amid Overseas Ramp

While overseas fabs introduce margin dilution, TSMC’s scale and operational discipline are partially offsetting these pressures. The company now expects full-year gross margin dilution from overseas fabs to be 1–2%, lower than previously guided, but warns that dilution could widen to 3–4% in later ramp stages. Currency volatility remains a swing factor, with every 1% move in USD/NT impacting gross margin by 40 basis points.

5. Capital Allocation and Shareholder Returns

CapEx intensity remains high, with 70% of the 2025 budget targeted at advanced process technologies. Management reiterated its commitment to “sustainable and steadily increasing” dividends, balancing aggressive investment with shareholder returns. The company’s strong cash position enables flexibility as it navigates industry cycles and global expansion.

Key Considerations

This quarter’s results highlight TSMC’s ability to capitalize on AI-driven demand while managing the operational and financial complexities of rapid global expansion. The company’s strategic discipline in capacity planning, technology migration, and capital allocation will be critical as it enters a new era of semiconductor competition.

Key Considerations:

• Capacity Tightness in AI Supply Chain: Persistent shortages in advanced packaging and front-end nodes may constrain near-term upside and require ongoing investment and partner collaboration.
• Margin Volatility from Overseas Fabs: While dilution is moderating, the ramp of new facilities outside Taiwan introduces structural cost and execution risks.
• Technology Migration Pace: Rapid customer migration to N3 and N2 nodes is both an opportunity and a risk, as technology cycles shorten and capital intensity rises.
• Customer and End-Market Diversification: Smartphone, automotive, and IoT platforms are rebounding, but AI and HPC remain the primary growth engines, underscoring the importance of balanced exposure.
• Geopolitical and Regulatory Uncertainty: Export controls and shifting government policies, particularly regarding China, could impact demand and supply chain strategy.

Risks

TSMC faces several material risks as it executes its global expansion and technology roadmap. Margin dilution from new fabs, currency volatility, and the unpredictability of AI demand cycles could pressure profitability. Geopolitical tensions, especially US-China export controls, remain a persistent overhang, potentially limiting addressable market size and increasing operational complexity. Management’s ability to maintain discipline in capacity investments and risk management will be tested as the company scales globally and navigates a rapidly evolving competitive landscape.

Forward Outlook

For Q4 2025, TSMC guided to:

• Revenue of $32.2 to $33.4 billion, a slight sequential decrease but up 22% YoY at the midpoint
• Gross margin of 59–61%, with operating margin of 49–51%

For full-year 2025, management raised revenue growth expectations to “close to mid-30%” YoY, reflecting robust AI demand and a mild recovery in non-AI end markets. Key factors influencing outlook include:

• Continued strong AI and leading-edge process demand
• Potential risks from tariff policies and consumer market volatility

Takeaways

TSMC’s Q3 results reaffirm its central role in the AI and advanced semiconductor supply chain, but also spotlight the operational and margin challenges of global expansion and rapid technology migration.

• Advanced Node Leadership: Three-, five-, and seven-nanometer nodes now dominate revenue, anchoring TSMC’s competitive moat and customer stickiness.
• Disciplined Capacity Expansion: Direct engagement with customers and their downstream partners is enabling more accurate demand forecasting and risk management.
• Margin Headwinds Persist: Overseas fab ramp and node transitions will continue to pressure margins, requiring vigilant cost and capital management into 2026.

Conclusion

TSMC’s Q3 showcased the company’s ability to harness AI-driven demand and execute on global expansion, but also underscored the need for disciplined margin and risk management as the industry enters a new phase of complexity. The coming quarters will test TSMC’s ability to balance scale, profitability, and technology leadership amid accelerating change.

Industry Read-Through

TSMC’s results and commentary provide a clear read-through for the entire semiconductor supply chain: Advanced node migration and AI-driven demand are accelerating, with capacity tightness across both front-end and advanced packaging. Foundry peers and equipment suppliers should anticipate sustained investment cycles and supply chain constraints, while fabless customers will face continued competition for leading-edge capacity. The margin pressures from overseas expansion and the need for geographic diversification are likely to shape capital allocation and partnership strategies across the industry. Geopolitical risks and technology migration cycles will remain central themes for all ecosystem participants into 2026.

TSM Information Technology Semiconductors Advanced Nodes AI CapEx Packaging Global Expansion