TSMC capped 2025 with full-year revenue up 35.9% in USD to $122 billion and EPS up 46.4% to TWD 66.25, while Q4 gross margin rose 280 basis points to 62.3%, beating guidance. Management raised the AI accelerator revenue CAGR to the mid-to-high 50s% and lifted the overall long-term revenue CAGR toward 25%, backing a sharply higher 2026 CapEx budget of $52B-$56B. Guidance calls for continued strong Q1 2026 growth (+38% YoY at midpoint), though management flagged 2nm and overseas fab margin dilution, higher depreciation, and tariff and memory-price uncertainties in consumer-facing segments.
Good afternoon, everyone, and welcome to TSMC's Fourth Quarter 2025 Earnings Conference and Conference Call. My name is Jeff Su, TSMC's Director of Investor Relations and your host for today. Today's event is being webcast live through TSMC's website at www.tsmc.com, where you can also download the earnings release materials. If you are joining us through the conference call, your dial-in lines are in listen-only mode. The format for today's event will be as follows. First, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the fourth quarter 2025, followed by our guidance for the first quarter 2026. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. C.C. Wei, will jointly provide the company's key messages. Then we will open both the floor and the line for the question-and-answer session as usual.
I would like to remind everybody that today's discussions may contain forward looking statements that are subject to significant risks and uncertainties which would cause actual results to differ materially from those contained in the forward looking statements. Please refer to the safe harbor notice that appears in our press release.
And now I would like to turn the microphone over to TSMC CFO Mr. Wendell Huang for the summary of operations and the current quarter guidance.
Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the fourth quarter of 2025 and a recap of full year 2025 after that. I will provide the guidance for the first quarter of 2026. Fourth quarter revenue increased 5.7% sequentially in NT$ supported by strong demand for our leading-edge process technologies. In U.S. dollar terms, revenue increased 1.9% sequentially to $33.7 billion, slightly ahead of our fourth quarter guidance. Gross margin increased by 2.8 percentage points sequentially to 62.3%, primarily due to cost improvement efforts, favorable foreign exchange rate, and the high capacity utilization rate. The operating expenses accounted for 8.4% of net revenue compared to 8.9% in third quarter of 2025 due to operating leverage. Thus, operating margin increased sequentially by 3.4 percentage points to 54% overall. Our fourth quarter EPS was TWD 19.5 and ROE was 38.8%.
Now let's move on to revenue by technology. 3 nm process technology contributed 28% of wafer revenue in the fourth quarter while 5 nm and 7 nm accounted for 35% and 14% respectively. Advanced technologies defined as 7 nm and below accounted for 77% of wafer revenue on a full year basis. 3 nm revenue contribution came in at 24% of 2025 wafer revenue, 5 nm 36% and 7 nm 14%. Advanced technologies accounted for 74% of total wafer revenue up from 69% in 2024.
Moving on to revenue contribution by platform, HPC increased 4% quarter over quarter to account for 55% of our fourth quarter revenue. Smartphone increased 11% to account for 32%, IoT increased 3% to account for 5%, Automotive decreased 1% to account for 5% while DCE decreased 22% to account for 1% on a full year basis. HPC increased 48% year over year. Smartphone, IoT, and Automotive increased by 11%, 15%, and 34% respectively in 2025 while DCE remains flat. Overall, HPC accounted for 58% of our 2025 revenue, Smartphone accounted for 29%, IoT accounted for 5%, Automotive accounted for 5%, and DCE accounted for 1%.
Moving on to the balance sheet, we ended the fourth quarter with cash and marketable securities of TWD 3.1 trillion or $98 billion. On the liabilities side, current liabilities increased by TWD 182 billion quarter over quarter mainly due to the increase of TWD 95 billion in accrued liabilities and others and the increase of TWD 61 billion from the reclassification of bonds payable to current portion.
In terms of financial ratios, accounts receivable days increased by one day to 26 days. Inventory days remain steady at 74 days. Regarding cash flow and CapEx, during the fourth quarter we generated about TWD 726 billion in cash from operations, spent TWD 357 billion in CapEx and distributed TWD 130 billion for first quarter 2025 cash dividend. Overall, our cash balance increased TWD 297 billion to TWD 2.8 trillion at the end of the quarter. In U.S. dollar terms, our fourth quarter capital expenditures total $11.5 billion. Now let's look at the recap of our performance in 2025. Thanks to the strong demand for our leading edge process technologies, we continue to outperform the foundry industry. In 2025 our revenue increased 35.9% in U.S. dollar terms to $122 billion or increased 31.6% in NT dollar terms to TWD 3.8 trillion.
Gross margin increased 3.8 percentage points to 59.9% mainly reflecting a higher capacity utilization rate and cost improvement efforts partially offset by an unfavorable foreign exchange rate and margin dilution from our overseas fabs. With operating leverage, our operating margin increased 5.1 percentage point to 50.8%. Overall full year EPS increased 46.4% to TWD 66.25 and ROE increased 5.1 percentage point to 35.4%. In 2025 we generated TWD 2.3 trillion in operating cash flow, spent TWD 1.3 trillion or $40.9 billion on capital expenditures. As a result, free cash flow amounted to TWD 1 trillion, up 15.2% from 2024. Meanwhile, we paid TWD 467 billion in cash dividends in 2025, up 28.6% year over year as we continue to increase our cash dividend per share.
TSMC shareholders receive a total of TWD 18 cash dividend per share in 2025 up from TWD 14 in 2024 and they will receive at least TWD 23 per share in 2026. I have finished my financial summary. Now let's turn to our current quarter guidance. We expect our business to be supported by continued strong demand for our leading edge process technologies. Based on the current business outlook, we expect our first quarter revenue to be between $34.6 billion and $35.8 billion which represents a 4% sequential increase or a 38% year-over-year increase. At the midpoint. Based on the exchange rate assumption of $1 to TWD 31.6, gross margin is expected to be between 63% and 65%. Operating margin between 54% and 56%. Lastly, our effective tax rate was 16% in 2025. For 2026 we expect our effective tax rate to be between 17% and 18%.
This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our fourth quarter 2025 and first quarter 2026 profitability. Compared to third quarter, our fourth quarter gross margin increased by 280 basis points sequentially to 62.3% primarily due to cost improvement efforts, a more favorable foreign exchange rate and a higher overall capacity utilization rate. Compared to our fourth quarter guidance, our actual gross margin exceeded the high end of the range provided three months ago by 130 basis points mainly as we delivered better than expected cost improvement efforts. In addition, the actual fourth quarter exchange rate was $1 to TWD 31.01 as compared to our guidance of $1 to TWD 30.6.
We have just guided our first quarter gross margin to increase by 170 basis points to 64% at the midpoint primarily driven by continued cost improvement effort including productivity gains and a higher overall capacity utilization rate partially offset by continued dilution from our overseas fabs. Looking at full year 2026, given the six factors, there are a few puts and takes I would like to share. On the one hand, we expect our overall utilization rate to moderately increase in 2026. N3 gross margin is expected to cross over to the corporate average sometime in 2026 and we continue to work hard to earn our value. In addition, we are leveraging our manufacturing excellence to drive greater productivity in our fabs to generate more wafer output. We are also increasing across node capacity optimization which includes flexible capacity support among N7, N5 and N3 nodes to support our profitability.
On the other hand, as the scale of our overseas expansion grows, we continue to forecast the gross margin dilution from the ramp up of overseas fabs in the next several years to be between 2%-3% in the early stages and widen to 3%-4% in the latter stages. Furthermore, the initial ramp up of our 2 nanometer technology will start to dilute our gross margin in the second half of the year and we expect between 2%-3% dilution for the full year of 2026. Finally, we have no control over the foreign exchange rate, but that may be another factor in 2026.
Next, let me talk about our 2026 capital budget and depreciation at TSMC. A higher level of capital expenditures is always correlated to the high growth opportunities in the following years. With our strong technology, leadership and differentiation, we are well positioned to capture the multi year structure demand from the industry megatrends of 5G, AI and HPC. In 2025 we spent $40.9 billion as compared to $29.8 billion in 2024 as we began to raise our level of capital spending in anticipation of the growth that will follow in the future years. In 2026 we expect our capital budget to be between $52 billion-$56 billion as we continue to invest to support our customers growth. About 70%-80% of the 2026 capital budget will be allocated to advanced process technologies, about 10% will be spent for specialty technologies and about 10%-20% will be spent for advanced packaging, testing, mask making and others.
Our depreciation expense is expected to increase by high-teens percentage year over year in 2026 mainly as we ramp our 2 nanometer technologies. Even as we invest in the future growth with this level of CapEx spending in 2026, we remain committed to delivering profitable growth to our shareholders. Finally, let me talk about TSMC's long-term profitability outlook. As a foundry, our biggest responsibility is to support our customers' growth and we always view them as partners. Having said that, we are in a very capital-intensive business. In the last five years alone our CapEx totaled $167 billion. Our R&D investments totaled $30 billion. Therefore, it is important for TSMC to earn a sustainable and healthy return as we continue to invest in leading-edge specialty and advanced packaging technologies to support our customers' growth.
Thank you, Wendell. Good afternoon everybody. First let me start with our 2026 outlook. In 2025 we observed robust AI related demand throughout the whole year while non AI end market segment bottomed out and saw a mild recovery. Concluding 2025, the Foundry 2.0 industry which we define as all logic, wafer manufacturing, packaging, testing, mask making and others increased 16% year over year supported by our strong technology differentiation and broader customer base. TSMC's revenue increased 35.9% year over year in U.S. dollar terms outperforming the Foundry 2.0 industry growth entering 2026. We understand there are uncertainties and risk from the potential impact of tariff policies and rising component prices, especially in consumer related and price sensitive other bucket segment. As such, we will be prudent in our business planning while focusing on the fundamentals of our business to further strengthen our competitive position.
We forecast the Foundry 2.0 industry to grow 14% year-over-year in 2026 supported by robust AI-related demand underpinned by strong demand for our leading-edge specialty and advanced packaging technologies. We are confident we can continue to outperform the industry growth. We expect 2026 to be another strong growth year for TSMC and forecast our full-year revenue to increase by close to 30% in U.S. dollar terms. Next, let me talk about AI demand and TSMC's long-term growth outlook. Recent development in the AI market continue to be very positive. Revenue from AI accelerator accounted for high-teens percentage of our total revenue in 2025. Looking ahead, we observe increasing AI model adoption across consumer enterprise and sovereign AI segment. This is driving need for more and more computation which supports the robust demand for leading-edge silicon.
Our customers continue to provide us with their positive outlook. In addition, our customers, and many of the cloud service providers, are also providing strong signals and reaching out directly to request the capacity to support their business. Thus, our conviction in the multi-year AI megatrend remains strong, and we believe the demand for semiconductors will continue to be very fundamental. As a foundry, our first responsibility is to fully support our customers with the most advanced technology and necessary capacity to unleash the AI innovations to address the structural increase in the long-term market demand profile. TSMC works closely with our customers to plan our capacity. This process is continuous and ongoing. In addition, as process technology complexity increases, the engagement time with customers is now at least two to three years in advance.
Internally, as we have said before, TSMC employs a disciplined capacity planning system to assess the market demand from both a top down and bottom up approaches. We focus on the overall addressable megatrend to determine the appropriate capacity to build. Based on our assessment, we are preparing to increase our capacity and stepping up our CapEx investment to support our customers' future growth. We are also putting forward existing fab schedule to the extent possible both in Taiwan and in Arizona. We are also leveraging our manufacturing excellence to drive greater productivity in our fabs to generate more output, convert N5 capacity to support N3 wherever necessary and focus on capacity optimization across nodes to maximize the support to our customers.
Based on our planning framework, we raise our forecast for the revenue growth from AI accelerator to approach a mid to high 50%s CAGR for the five years period from 2024 to 2029. Underpinned by our technology differentiation and broader customer base, we now expect our overall long-term revenue growth to approach 25% CAGR in U.S. dollar terms for the five year period starting from 2024. While we expect AI Accelerators to be the largest contributor in terms of our incremental revenue growth, our overall revenue growth will be fueled by all four of our growth platforms which are smartphone, HPC, IoT and automotive in the next several years. 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 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 a 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 government, we are speeding up our capacity expansion in Arizona and executing well to our plan. Our first fab has already successfully entered high volume production in 4Q 2024.
Construction of our second fab is already complete and tool moving and installation is planned in 2026. Due to the strong demand from our customers, we are also pulling forward the production schedule and now expect to enter high volume manufacturing in the second half of 2027. Construction of our third fab has already started and we are in the process of applying for permits to begin the construction of our fourth fab and fourth advanced packaging fab. Furthermore, we have just completed the purchase of a second large piece of land nearby to support our current expansion plan and provide more flexibility in response to the very strong multi-year AI-related demand. Our plan will enable TSMC to scale up 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 Japanese central government and the 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 started and the technologies and ramp schedule will be based on our customers need and market conditions in Europe. We have received strong commitment from the European Commission and the German federal, state and city government. Construction of our specialty fab in Dresden, Germany is progressing in our plan. The ramp schedule will be based on our customers need and market conditions in Taiwan. With support from Taiwan government, we are preparing multiple phases of 2 nm fabs in both Hsinchu and Kaohsiung Science Park.
We will continue to invest in leading edge and advanced packaging facilities in Taiwan over the next few years. By expanding our global footprint while continuing to invest in Taiwan, TSMC can continue to be better to be the trusted technology and capacity provider of the global large industry for years to come. Last, let me talk about N2 and A16 status. Our 2 nanometer and A16 technologies lead the industry in addressing the insatiable demand for energy efficient computing. Yet almost all the innovators are working with TSMC. N2 successfully enter high volume manufacturing in 4Q 2025 at both our Hsinchu and Kaohsiung site with good yield. We are seeing strong demand from smartphone and HPC AI applications and expect a fast ramp in 2026. With our strategy of continuous enhancement, we also introduced N2P as an extension of N2 family.
N2P features further performance and power benefit on top of N2, and volume production is scheduled for the second half of this year. We also introduced A16 featuring our best in class Super Power Rail or SPR. A16 is best suitable for specific HPC products with complex signal route and the dense power delivery network. Volume production is on track for second half 2026. We believe N2, N2P, A16 and its derivatives will prepare our N2 family to be another large and long lasting node for TSMC while further extending our technology leadership position well into the future.
This concludes our key message, and thank you for your attention.