Taiwan Semiconductor Manufacturing Q1 2026 Earnings Report

Taiwan Semiconductor Manufacturing EPS Results

• Actual EPS: $3.49
• Consensus EPS: $3.31
• Beat/Miss: Beat by +$0.18
• One Year Ago EPS: $2.12

Taiwan Semiconductor Manufacturing Revenue Results

• Actual Revenue: $35.49 billion
• Expected Revenue: $35.47 billion
• Beat/Miss: Beat by +$27.34 million
• YoY Revenue Growth: +40.60%

Taiwan Semiconductor Manufacturing Announcement Details

• Quarter: Q1 2026
• Date: 4/15/2026
• Time: Before Market Opens
• Conference Call Date: Thursday, April 16, 2026
• Conference Call Time: 2:00AM ET

Taiwan Semiconductor Manufacturing (NYSE:TSM) Company Limited (NYSE:TSM), commonly known as TSMC, is a Taiwan-based semiconductor manufacturer and the world’s leading dedicated semiconductor foundry. Founded in 1987 and headquartered in Hsinchu, Taiwan, the company pioneered the pure-play foundry business model, producing chips designed by other companies rather than developing and selling branded semiconductor products of its own.

TSMC manufactures semiconductor wafers using advanced and specialty process technologies. Its services support a broad range of applications, including high-performance computing, smartphones, the Internet of Things, automotive systems, consumer electronics and industrial equipment. The company also provides advanced packaging and other semiconductor manufacturing services that help customers integrate increasingly complex chips into electronic devices.

TSMC serves customers worldwide and operates manufacturing facilities and related operations in Taiwan, China, the United States and Japan, with additional international expansion underway. Its global customer base includes semiconductor designers and technology companies that rely on TSMC for the production of leading-edge and specialized integrated circuits. C.C. Wei serves as the company’s chairman and chief executive officer.

Taiwan Semiconductor Manufacturing Q1 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: TSMC reported a strong Q1 with revenue of $35.9 billion (up 6.4% sequential in USD), gross margin 66.2% (+390 bps QoQ), operating margin 58.1%, EPS TWD 22.08 and ROE 40.5%.
• Positive Sentiment: Q2 guidance is upbeat — revenue guidance of $39.0–$40.2 billion (≈10% sequential) and management now expects full‑year 2026 revenue growth of above 30% in USD, with gross margin guided to 65.5%–67.5%.
• Positive Sentiment: TSMC is accelerating investment to meet AI/HPC demand, guiding 2026 CapEx toward the high end of $52–$56 billion and executing global N3 expansions (new fabs in Tainan, Arizona, Japan) while ramping N2 and A14 technologies.
• Negative Sentiment: Management flagged margin headwinds — initial N2 ramp expected to dilute 2026 gross margin by ~2–3%, overseas fab ramps may dilute margins (2–3% early, widening to 3–4% later), and possible material/gas price increases from Middle East tensions could further pressure profitability.
• Neutral Sentiment: Demand/supply outlook — AI/HPC demand remains “extremely robust” and capacity is expected to stay tight into 2027; TSMC emphasizes supply‑chain resiliency (multi‑sourcing, safety stock) and government coordination on energy to avoid near‑term disruptions.

Presentation

[Jeff Su, Director of Investor Relations at TSMC]

Good afternoon, everyone, and welcome to TSMC's First Quarter 2026 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're 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 first quarter 2026, followed by our guidance for the second 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 the line for the Q&A session.

[Jeff Su, Director of Investor Relations at TSMC]

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. Now, I would like to turn the call over to TSMC CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.

[Wendell Huang, SVP and CFO at TSMC]

Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the first quarter 2026. After that, I will provide the guidance for the second quarter 2026. First quarter revenue increased 8.4% sequentially in TWD, supported by strong demand for our leading-edge process technologies. In U.S. dollar terms, revenue increased 6.4% sequentially to $35.9 billion, slightly ahead of our first quarter guidance. Gross margin increased 3.9 percentage points sequentially to 66.2%, primarily due to cost improvement efforts, a high capacity utilization rate, and a more favorable foreign exchange rate. Operating margin improved 4.1 percentage points sequentially to 58.1% due to operating leverage. Overall, our first quarter EPS was TWD 22.08 and ROE was 40.5%. Now, let's move on to revenue by technology.

[Wendell Huang, SVP and CFO at TSMC]

3 nm process technology contributed 25% of wafer revenue in the first quarter, while 5 nm and 7 nm accounted for 36% and 13% respectively. Advanced technologies, defined as 7 nm and below, accounted for 74% of wafer revenue. Moving on to revenue contribution by platform. HPC increased 20% quarter-over-quarter to account for 61% of our first quarter revenue. Smartphone decreased 11% to account for 26%. IoT increased 12% to account for 6%. Automotive decreased 7% and accounted for 4%, and DCE increased 28% to account for 1%. Moving on to the balance sheet. We ended the first quarter with cash and marketable securities of TWD 3.4 trillion, or $106 billion. On the liability side, current liabilities increased by TWD 256 billion quarter-over-quarter, mainly due to the increase of TWD 129 billion in accrued liabilities and others, and the increase of TWD 82 billion in accounts payable.

[Wendell Huang, SVP and CFO at TSMC]

On financial ratios, accounts receivable turnover days was flat at 26 days. Days of inventory increased 6 days to 80 days, reflecting the ramp-up of our 2 nm technology and strong demand for our 3 nm technology. Regarding cash flow and CapEx, during the first quarter, we generated about TWD 699 billion in cash from operations, spent TWD 351 billion in CapEx, and distributed TWD 130 billion for second quarter 2025 cash dividend. Overall, our cash balance increased TWD 268 billion to TWD 3 trillion at the end of the quarter. In U.S. dollar terms, our first quarter capital expenditures total $11.1 billion. I have finished my financial summary. Now let's turn to our current quarter guidance.

[Wendell Huang, SVP and CFO at TSMC]

Based on the current business outlook, we expect our second quarter revenue to be between $39.0 billion-$40.2 billion, which represents a 10% sequential increase or a 32% year-over-year increase at the midpoint. Based on the exchange rate assumption of one U.S. dollar to 31.7 NT, gross margin is expected to be between 65.5%-67.5%. Operating margin between 56.5%-58.5%. Also, in the second quarter, we will need to accrue the tax on the undistributed retained earnings. As a result, our second quarter tax rate will be around 20%. We continue to expect the full year tax rate to be between 17%-18%. This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our first quarter 2026 and second quarter 2026 profitability.

[Wendell Huang, SVP and CFO at TSMC]

Compared to fourth quarter, our first quarter gross margin increased by 390 basis points sequentially to 66.2%, primarily due to cost improvement efforts, a higher overall capacity utilization rate, and a more favorable foreign exchange rate. Compared to our first quarter guidance, our actual gross margin exceeded the high end of the range provided three months ago by 120 basis points, mainly due to a higher-than-expected overall capacity utilization rate and better cost improvement efforts. We have just guided our second quarter gross margin to increase by 30 basis points to 66.5% at the midpoint, primarily driven by a higher overall utilization rate and continued cost improvement efforts, including productivity gains, partially offset by dilution from our overseas fab. Looking ahead to the second half of the year, given the six factors that determine our profitability, there are a few puts and takes I would like to share.

[Wendell Huang, SVP and CFO at TSMC]

As we have said before, the initial ramp-up of our 2 nm technology will start to dilute our gross margin in the second half of this year, and we expect between 2% and 3% dilution for the full year of 2026. Furthermore, 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 2%-3% in the early stages and widen to 3%-4% in the latter stages. In addition, given the recent situation in the Middle East, prices for certain chemicals and gases are likely to increase. Based on our current assessment, there may be impact to our profitability, but it is too early to quantify the impact.

[Wendell Huang, SVP and CFO at TSMC]

On the other hand, we will continue to leverage our manufacturing excellence to generate more wafer output and drive greater across node capacity optimization in our fab operations to support our profitability. Also, N3 gross margin is expected to cross over to the corporate average in second half 2026. Finally, we have no control over the foreign exchange rate, but that may be another factor. Next, let me talk about the materials and energy supply update, given the recent situation in the Middle East. TSMC operates a well-established enterprise risk management system to identify and assess all relevant risks and proactively implement risk mitigation strategies. In terms of material supply, TSMC's strategy is to continuously develop multi-source supply solutions to build a well-diversified global supplier base and to improve the local supply chain.

[Wendell Huang, SVP and CFO at TSMC]

For specialty chemicals and gases, including helium and hydrogen, we source from multiple suppliers in different regions, and we have prepared safety stock inventory on hand. We are also working closely with our suppliers to further strengthen the resiliency and sustainability of our supply chain. Thus, we do not expect any near-term impact on our operations from material supply. In terms of energy, we work closely with Taipower and the Taiwan government to ensure a stable and sufficient energy supply. With the recent situation in the Middle East, the Taiwan government has announced it has secured sufficient LNG supply through at least May. The government has also said it is actively working on securing further LNG supply, diversifying sourcing to other regions, and other power backup plans. Therefore, we do not expect any near-term disruption or impact to our operations. Finally, let me talk about our 2026 capital budget.

[Wendell Huang, SVP and CFO at TSMC]

At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. With our strong technology leadership and differentiation, we are well positioned to capture the multiyear structural demand from the industry megatrends of 5G, AI, and HPC. We now expect our 2026 capital budget to be towards the high end of our range of between $52 billion-$56 billion as we continue to invest heavily to support our customers' growth. Even as we invest for the future growth with this level of CapEx spending in 2026, 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 annual and quarterly basis. Now, let me turn the microphone over to C.C.

[C.C. Wei, Chairman and CEO at TSMC]

Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. We concluded our first quarter with revenue of $35.9 billion, slightly above our guidance in U.S. dollar terms, driven by strong demand for our leading-edge process technologies. Moving into second quarter 2026, we expect our business to be supported by continued strong demand for our leading-edge process technologies. Looking ahead, we are very mindful of the impact of rising component prices, especially in consumer and price-sensitive end-market segment. In addition, the recent situation in the Middle East also bring further macroeconomic uncertainties. As such, we are being prudent in our business planning while focusing on the fundamentals of our business to further strengthen our competitive position. Having said that, AI related demand continued to be extremely robust.

[C.C. Wei, Chairman and CEO at TSMC]

The shift from generative AI and the query mode to agentic AI and the command and the action mode is leading to another step up in the amount of tokens being consumed. This is driving the need for more and more computation, which supports the robust demand for leading-edge silicon. Our customers and customers of customers, the cloud service providers, continue to provide us with their very strong signal and positive outlook. Thus, our conviction in the multi-year AI megatrend remain high, and we believe the demand for semiconductors will continue to be very fundamental. Supported by our robust technology differentiation and broader customer base, we maintain strong confidence for our full year 2026 revenue to now grow by above 30% in U.S. dollar terms. Next, let me talk about our N2 capacity expansion plan.

[C.C. Wei, Chairman and CEO at TSMC]

Our practice is to prioritize the land in Taiwan to support the fast ramp of our newest node, due to the need for tight integration with R&D operations. Today, our new node, N2, has already entered high-volume manufacturing in the fourth quarter of 2025 with good yield. N2 is ramping successfully in multi-phases at both Hsinchu and Kaohsiung site, supported by strong demand from both smartphone and HPC AI applications. With our strategy of continuous enhancement, such as N2P and A16, we expect our N2 family to be another large and long-lasting node for TSMC. Now let me talk about TSMC's global N3 capacity expansion plan. Historically, we do not add additional capacity to a node once it's reached its target capacity. However, as a foundry, our first responsibility is to provide our customers with the most advanced technologies and necessary capacity to unleash their innovations.

[C.C. Wei, Chairman and CEO at TSMC]

Based on our assessment, to meet the strong demand in AI application, we are stepping up our CapEx investment to increase our N3 capacity. Thus, we are now executing a global capacity plan to support the robust multi-year pipeline of demand for 3 nm technologies, which are used by smartphone, HPC AI, including HBM-based ASICs, automotive and IoT customers. In Taiwan, we are adding a new 3 nm fab to our GigaFab cluster in Tainan Science Park. Volume production is scheduled for the first half of 2027. In Arizona, our second fab will also utilize 3 nm technologies. Construction is already complete, and volume production will begin in the second half of 2027. In Japan, we now plan to utilize 3 nm technology in our second fab, and volume production is scheduled in 2028.

[C.C. Wei, Chairman and CEO at TSMC]

In addition to all the new fabs, we continue to convert 5 nm tools to support 3 nm capacity in Taiwan. We are also leveraging our manufacturing excellence to drive greater productivity across our fabs in all locations to generate more wafer output. We are also focusing on capacity optimization across nodes, which includes flexible capacity support among the N7, N5, and N3 nodes. Thus, we are using multiple levers to do everything we can, wherever we can, however we can, to maximize the support to all our customers across all platforms. Also, let me emphasize that where the capacity is tight, we do not pick and choose or play favorites among our customers. Next, let me talk about our mature-node strategies. TSMC's strategy in mature nodes has not changed. Our focus is to build high-yield capacity for specialized technologies rather than just normal capacity.

[C.C. Wei, Chairman and CEO at TSMC]

For example, we are increasing our mature node capacity, such as in JASM Fab 1 in Japan for CMOS image sensor application, and ESMC in Germany for automotive and industrial applications. Meanwhile, we have a plan to wind down our Fab 2, which is a six-inch fab, and Fab 5, which is an eight-inch fab, focus on gallium nitride, and use available space to optimize the support for leading-edge applications. Even without Fab 2 and Fab 5, we still have enough capacity to fully support our existing customers. In summary, our strategy will be to continue to optimize our capacity needs within mature nodes and focus on the higher value-added and strategic segment, while ensuring we have a necessary capacity to support our customers' growth. Finally, let me talk about our A14 status.

[C.C. Wei, Chairman and CEO at TSMC]

Featuring our second-generation nanosheet transistor structure, A14 will deliver another full-node stride from N2 with performance and power benefit to address the essential need for high performance and energy-efficient computing. Compared with N2, A14 will provide 10%-15% speed improvement at the same power, or 25%-30% power improvement at the same speed, and close to 20% chip density gain. Our A14 technology development is on track and progressing well. We are observing a high level of customer interest and engagement from both smartphone and HPC applications. Volume production is scheduled for 2028. Our A14 technology and its derivative will further extend our technology leadership position and enable TSMC to capture the growth opportunities well into the future. This concludes our key message, and thank you for your attention.

[Jeff Su, Director of Investor Relations at TSMC]

Thank you, C.C. This concludes our prepared statements. Before we begin the question and answer 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 and then one on your telephone keypad now. If at any time you'd like to remove yourself from the questioning queue, please press star two. Now let's begin the Q&A session. Operator, can we proceed with the first participant on the line, please? Thank you.

[Operator]

The first one to ask a question, Haas Liu from Bank of America.

[Haas Liu, Analyst at Bank of America]

Yes. Good afternoon, C.C., Wendell, and Jeff. Congrats on the solid results and guidance, and thanks for taking my questions. I would like to start with your three nm gross margins outlook. You just mentioned the node is going to achieve the appropriate average gross margin in the second half of this year, which is now at mid-60% levels. We understand the technology is in severe undersupply backed by strong AI demand, and you already forecasted the capacity expansion through conversion and greenfield through 2028. Would you be able to discuss more in detail on what kind of applications are driving such strong business for you and what convinces you to extend more? The other thing on three nm as well is just the node started to ramp from fourth quarter 2022, which means some of your equipment will be fully depreciated by 2027.

[Haas Liu, Analyst at Bank of America]

Should we expect the node margins to be trending even higher with very solid utilization and also pricing trend? Thank you.

[Jeff Su, Director of Investor Relations at TSMC]

Okay. The first question from Haas Liu of Bank of America is 2 parts on 3 nm. First, as C.C. described, we are executing a plan for expanding 3 nm capacity. He wants to understand what are the applications to drive such a strong multi-year, looking ahead pipeline of demand for 3 nm since it's already been around in volume production since late 2022. That's the first part of his question.

[C.C. Wei, Chairman and CEO at TSMC]

Well, let me answer that. I think the application is simple. It's still the HPC AI applications. Does that answer your question?

[Haas Liu, Analyst at Bank of America]

Okay, yes. That is the first part. The second part is probably more-

[Jeff Su, Director of Investor Relations at TSMC]

The second part of this question is on the gross margin for 3 nm. His question is really, what is the gross margin outlook for 3 nm? Will it cross over in the second half of this year? To what level? Once it becomes fully depreciated, what happens to the margin?

[Wendell Huang, SVP and CFO at TSMC]

This is Wendell. We expect the N3 gross margin to reach and cross the corporate gross margin level in the second half of this year. We don't have a number to share with you. After the full depreciation, as per our previous nodes, the gross margin are generally very high.

[Jeff Su, Director of Investor Relations at TSMC]

Okay, Haas. I'll take that as 1.5 questions. If you have a quick follow-up for your second question.

[Haas Liu, Analyst at Bank of America]

Yes, thanks so much, Jeff. The other, I think just a 0.5 follow-up, is probably just on the CapEx. You revised up to the high end of your guidance for $52 billion-$56 billion for this year. Compared to three months ago, what gives you the incremental confidence when you discuss with your customers and also customers' customers, regarding the demand outlook to support your stronger or the upper half of your guidance for the CapEx this year?

[Jeff Su, Director of Investor Relations at TSMC]

Okay, thank you, Haas. His second question is, he notes that, indeed, we have this time guided to the high end of our CapEx range versus January. What incrementally is driving this revision to the CapEx? What gives us the confidence to go to the high end of the $52 billion-$56 billion range? Thank you.

[C.C. Wei, Chairman and CEO at TSMC]

Well, again, this is C.C. Wei. Let me answer this question. A very simple answer is, the demand are very robust, especially from the HPC and AI applications. We try very hard to speed it up and pull in all the equipment as we can. Still, our supply is very tight. Demand is continue to increase, and so we continue to work with our suppliers to speed it up. That's why we are toward our high end of CapEx forecast.

[Jeff Su, Director of Investor Relations at TSMC]

Okay, Haas, does that answer your question?

[Haas Liu, Analyst at Bank of America]

Yes. Thank you so much, C.C.

[Jeff Su, Director of Investor Relations at TSMC]

Okay.

[Haas Liu, Analyst at Bank of America]

Wendell and Jeff. I will be back in the queue.

[Jeff Su, Director of Investor Relations at TSMC]

Sure. Thank you. Operator, can we move on to the next participant, please?

[Operator]

Next one to ask question, Gokul Hariharan, JPMorgan.

[Gokul Hariharan, Managing Director and Analyst at JPMorgan]

Hi, good afternoon, C.C., Wendell, and Jeff. My first question on your comments on demand. Clearly, demand is even better than what you predicted back in January, CC, and you also raised the CapEx. Now all your customers seem to be telling everybody they can tell that wafers still remain the biggest constraint. Given your expanded three nm capacity plan and faster CapEx, CC, what is your expectation that how long this supply constraint is likely to last? Do you have any visibility of when you can kind of bring some kind of balance here based on what you hear from customer? As a strategy, do you also plan to build out more clean room space? Because that seems to be a little bit of a constraint right now to bring on the capacity quickly. That's my first question.

[Jeff Su, Director of Investor Relations at TSMC]

Okay, Gokul. Please allow me to summarize your first question. His question is directed for C.C. He notes that the demand seems to be even stronger than our forecast in January. We have also raised the CapEx, and customers continue to say they need more chip supply. With our capacity plan, do we have a forecast or expectation of how long the constraint can last? And will we have a strategy to build up clean room space first? Is that correct, Gokul?

[Gokul Hariharan, Managing Director and Analyst at JPMorgan]

That's right, yes.

[C.C. Wei, Chairman and CEO at TSMC]

Okay. Gokul, let me answer the question. Again, it's very simple, because of demand continue to be robust and the number continued to be increased. We double-check with our customers or those CSPs. They gave us a very positive outlook, right? We have to speed it up with our build-up of clean room and buying the tools. We are working with construction and we are working with our equipment supplier. We want to pulling forward our forecasted schedule. That's a simple answer because of AI is so strong.

[Gokul Hariharan, Managing Director and Analyst at JPMorgan]

Any read, C.C., on when we can kind of meet this demand? Or you think the next couple of years is still going to be very challenging to meet? That supply is still going to be running below demand, let's say, into 2027 also.

[Jeff Su, Director of Investor Relations at TSMC]

Gokul would like to know when our supply can meet the demand. Do we have a forecast or a time frame?

[C.C. Wei, Chairman and CEO at TSMC]

Gokul, you know it takes 2-3 years to build a new fab. With the current schedule, we believe that 2027. We'll announce it anyway when we enter 2027. Let me say that it takes time to build a new fab. It takes time to ramp it up. We expect this to continue to be very tight. That's why we just announced that we try to build three new and three fab to meet the demand.

[Gokul Hariharan, Managing Director and Analyst at JPMorgan]

Okay. That's very clear. 2024 is also very tight. My second question on competition, so obviously you have the traditional competitor, Samsung, Intel. One of your customers, Elon Musk, also announced his Terafab initiative recently. What is TSMC's perspective on this initiative? They have also been a customer of yours, and they recently signed a deal with Samsung a few months back. What is TSMC's response here now that they are also trying to build chips on their own? How are you trying to win back this customer loyalty? What is your perspective here?

[Jeff Su, Director of Investor Relations at TSMC]

Okay. Gokul's second question is on competition. He notes that we have competition, and then recently, he notes that this Terafab. He wants to know what is our perspective on this initiative. This customer has also been a customer of TSMC, but has also signed a deal with one of our other competitors, Samsung. Gokul would also like to know what is our perspective on the Terafab and what is our view on winning back this customer's business.

[C.C. Wei, Chairman and CEO at TSMC]

Well, Gokul, actually, both Intel and Tesla, they are TSMC's customer. Again, they are our competitors, and we view Intel as our formidable competitors and do not underestimate them. Having said that, there are no shortcuts. The fundamental rule of the foundry game never change. They need the technology leadership, manufacturing excellence, and customer trust, and most of all, the service, which has been mentioned by Jensen. Well, thank you for his wording. Again, let me say that it takes 2-3 years to build a new fab. No shortcuts. It takes another 1-2 years to ramp it up. Again, that's a fundamental of foundry industry. Whether we try to win them back, actually, they are still our customer, and we are very confident in our technology position, and we work very hard to capture every piece of business possible. Gokul, did I answer your question?

[Gokul Hariharan, Managing Director and Analyst at JPMorgan]

Okay. That is quite clear. Do you think your faster ramp-up of capacity can kind of win some of these customers back? Because the reason seems to be mostly about capacity tightness rather than any other kind of big reasons, right? Is that your evaluation, that this is probably the most important thing to win some of these customers back?

[Jeff Su, Director of Investor Relations at TSMC]

Okay. Gokul's final question is then in winning customers back, his concern is because our capacity is tight. Is that the reason we're losing customers, and so can we win customers back?

[C.C. Wei, Chairman and CEO at TSMC]

Well, again, let me emphasize, it takes 2-3 years to build a new fab. In this time, we are also building a new fab to meet our customers' stronger demand. No shortcuts. Anyway, the capacity is very tight, as I said, but we are working hard to make sure that we can meet customers' demand.

[Gokul Hariharan, Managing Director and Analyst at JPMorgan]

Got it. Thanks, C.C. No shortcuts. Got it.

[Jeff Su, Director of Investor Relations at TSMC]

All right. Thank you. Operator, can we move on to the next participant, please?

[Operator]

Next one, we have Charlie Chan from Morgan Stanley.

[Charlie Chan, Managing Director and Analyst at Morgan Stanley]

Hi. Good afternoon, C.C., Wendell, and Jeff. Thanks for taking my question, and also congratulations for a very, very strong result again. I think I would also address this competition topic from a little bit different angle. As you can see that those AI customers, they are developing a much larger reticle size chips. Some customers are considering to use EMIB, because it's a kind of substrate-based, more suitable for secular larger side of chip design. I'm not sure what the TSMC's strategy to address this competition. More strategically, is TSMC comfortable to open up your compute die to your competitors, for example, Intel, to do the package? What's the kind of sales process behind? Thank you.

[Jeff Su, Director of Investor Relations at TSMC]

All right. Charlie, thank you. Charlie's first question is also related to competition. He notes that AI customers are seeking for larger and larger reticle sizes. He wants to know what is our assessment of the competitive threat from solutions such as like EMIB, and what's our strategy to address this competition. Would we be willing to open up our front-end wafer and let someone else do the packaging, basically?

[C.C. Wei, Chairman and CEO at TSMC]

Well, Charlie, today TSMC is supplying the largest reticle size packaging. Yes, we understand that our competitors offer very attractive technology, but we welcome that so our customer can have more choices, and then we can do more business with our customers. That's our attitude. Saying that, we don't leave any business on the table. We are working very hard to meet all our customers' demand. We also are developing a very large reticle size packaging technologies. We are working with all the customers. It's so far so good.

[Charlie Chan, Managing Director and Analyst at Morgan Stanley]

Thanks, C.C. A follow-on this, when you mentioned about larger size packaging technology, are you referring to CoWoS or CoWoS-L 2.5D? Do you think a 3D stacking can resolve this kind of planar expansion problem?

[Jeff Su, Director of Investor Relations at TSMC]

Charlie is asking a follow-up, so he wants us to comment on, for larger reticle size, is it CoWoS-L? Is it panel level? What exact detailed solutions are we doing?

[C.C. Wei, Chairman and CEO at TSMC]

Charlie, so far today, we have a very large reticle size CoWoS. Of course, we are also working on CoWoS. Together we try to make sure that we give enough capacity to support our customer with a reasonable cost. That's why we build a CoWoS pilot line right now and expect production a couple years later. Today, the main approach or the main supplier is still a large-size CoWoS. Together with system and wafer technology, we think TSMC give our customer the best options for their product in the market.

[Charlie Chan, Managing Director and Analyst at Morgan Stanley]

Got it. Yeah, I would say we don't need to worry too much about this packaging competition. My second question is actually about your long-term CapEx plan. C.C., as you said, that it takes two to three years to build a new fab. You definitely have better visibility, right? I know we're sticking to the 2021 three-year CapEx guidance, $100 billion given very strong demand. I'm not sure if TSMC can provide a little bit longer term CapEx guidance. Because as you said, right, the equipment supply is also pretty tight. Yesterday, ASML reported very, very strong results. You said the EUV supply is an issue, and secondly, would the management provide a kind of long-term CapEx guidance to investors? Thank you.

[Jeff Su, Director of Investor Relations at TSMC]

All right, Charlie, that's a lot of questions, but on to the second one then on CapEx and building capacity. Again, Charlie notes C.C.'s comment, capacity is not born overnight. It takes time. He would like to know, besides this year's CapEx, which we have already said at the high end, can we provide a guidance for the next three years' CapEx, like we did back in 2021 in terms of the dollar amount?

[Wendell Huang, SVP and CFO at TSMC]

Okay, Charlie. We don't have a number to share with you. Look at it this way, in the past three years, our total CapEx was $101 billion. This year, we're already saying CapEx is towards the high end, which is $56 billion, which is already over 50% of the past three years in total. We have a strong conviction in the AI mega trend. We expect the CapEx in the next few years, in the next three years, will be significantly higher than the past three years.

[Jeff Su, Director of Investor Relations at TSMC]

The final part of Charlie's question, with such a long lead time, are we concerned about tools, securing tools or bottlenecks and such?

[C.C. Wei, Chairman and CEO at TSMC]

Well, Charlie, TSMC's culture, we always working with our supplier because we view them as partners. We continue to work with them, especially for those ASML, Applied Materials, Lam Research, et cetera. So far we are very happy with their support. That's all I can tell you.

[Jeff Su, Director of Investor Relations at TSMC]

Okay.

[Charlie Chan, Managing Director and Analyst at Morgan Stanley]

Thank you. Wendell. Thank you.

[Jeff Su, Director of Investor Relations at TSMC]

All right. Thank you, Charlie. Operator, can we move on to the next participant, please?

[Operator]

Next one we have Sunny Lin from UBS.

[Sunny Lin, Analyst at UBS]

Good afternoon. Thank you very much for taking my questions, and congrats on the steady results. My first question is, again, to follow up on CapEx. If you look at from 2024 to 2026, so in this current AI cycle, TSMC has been able to keep capital intensity at a healthy level of 30%+, given very strong technology leadership and operating leverage. I understand the company doesn't really have a specific target on capital intensity. For the coming few years, given the very strong revenue ramp of leading edge, how should we think about the revenue growth, compare with CapEx growth? Should we think top line will remain steady, and therefore CapEx could grow in line or even below? What's the best way for us to think about it?

[Jeff Su, Director of Investor Relations at TSMC]

Okay, Sunny. Thank you for your question. Please allow me to summarize. Sunny's first question is on, well, I think CapEx and really capital intensity. She notes in the past few years, we've been able to keep capital intensity around the 30-something% level. She notes that we don't have a specific capital intensity target per se, but her specific question, looking ahead the next several years, how do we see revenue growth versus CapEx growth? Is it likely to be higher, flat, lower? And therefore, what type of intensity does that imply?

[Sunny Lin, Analyst at UBS]

Okay.

[Jeff Su, Director of Investor Relations at TSMC]

Is that correct, Sunny?

[Sunny Lin, Analyst at UBS]

Yeah. Thank you very much, Jeff.

[Wendell Huang, SVP and CFO at TSMC]

Okay, Sunny. In the past few years, as you correctly pointed out, the revenue growth outpaced the CapEx growth. That's because if we do our job right, then we will continue to see that happen in the next several years. The revenue growth outpace the CapEx growth. Okay. Now, therefore, we do not expect in the next several years a sudden surge in capital intensity. Okay.

[Sunny Lin, Analyst at UBS]

I see. Well, maybe a very quick follow-up. Lot of questions on competition already. Also from competition point of view, given a very tight supply at TSMC side in recent years, would TSMC actually consider maybe spending CapEx a bit more so that clients will need to diversify, given a tight supply?

[Jeff Su, Director of Investor Relations at TSMC]

All right. Sunny's 1.5 question is, in terms of the CapEx, will we consider accelerating or spending more, given the competitive threat from the competitors? If there's not enough capacity, then our customers will go to competitors. That's your question, correct?

[Sunny Lin, Analyst at UBS]

Yeah. Thank you, Jeff.

[C.C. Wei, Chairman and CEO at TSMC]

Well, Sunny, we repeatedly saying that we prepare the capacity to meet customers' demand, not because of our competitor or not because of other consideration. The most important one is our customer's demand, and they work with TSMC, and so that we plan our capacity and so our capital expense. Sunny, did I answer your question?

[Sunny Lin, Analyst at UBS]

Yeah. Very clear. Thank you. maybe my 0.5 question. if we look at this year, earlier you just guided at the higher than 30% growth, for top line. indeed, there is ongoing supply tightness. for 2026, how much upside could you realize, for top line? at this point, have you started to see some impact of consumer demand, and therefore on your demand coming from smartphone and PC?

[Jeff Su, Director of Investor Relations at TSMC]

Okay. Sunny's second question is regarding 2026 full year outlook. She notes now that we have increased the guidance to above 30%. How much more upside can there be? Or maybe the first part also, how do we see the impact from the memory price hike to the end market, and how do we see with above 30%, is there more upside?

[C.C. Wei, Chairman and CEO at TSMC]

Well, Sunny, memory price hike definitely has some impact to price sensitive end market, especially in PC and smartphone market. We did see a little bit softer market. To share with you, all the high-end smartphone continue to do better, and this is to TSMC's advantage. As you asking about how much higher than above 30% year-over-year growth, we will share with you in July. How about that? We will have a more accurate or a more precise number to share with everybody.

[Sunny Lin, Analyst at UBS]

No problem. Thank you very much, C.C.

[Jeff Su, Director of Investor Relations at TSMC]

Okay. Thank you, Sunny. Operator, can we move on to the next participant on the line?

[Operator]

Yes. The next one, Jim Fontanelli, Arete.

[Jim Fontanelli, Senior Analyst at Arete Research]

Yeah. Thank you. Thanks for taking the question. My first question is to do with demand. You commented earlier in the call that demand continues to outstrip supply for leading edge capacity, and obviously you've just delivered a very strong print and guide for gross margins. Against this backdrop, has management's thinking changed about the sustainable margin structure and what appropriate longer term returns might be for the business?

[Jeff Su, Director of Investor Relations at TSMC]

Okay. Jim's first question is asking on the margin structure. He notes, as we said, that demand continues to be extremely robust and very strong. How does this change? I think your question is our view on the long-term margin profile and the return profile. Is that correct?

[Jim Fontanelli, Senior Analyst at Arete Research]

That's correct.

[Wendell Huang, SVP and CFO at TSMC]

Okay, Jim. As we said in the last earnings calls, we've revised up our long-term margin targets and ROE targets from 2024 to 2025. We're now saying the gross margins will be 56% and higher through the cycle, and we're looking at ROE of a high-20% through the cycle. That's what we're currently looking at, and that's already higher than before.

[Jim Fontanelli, Senior Analyst at Arete Research]

Thank you. That thinking is not changing against a backdrop where other parts of the AI supply chain are clearly starting to print supernormal returns. That doesn't impact how you think about margin structure for the next two or three years?

[Wendell Huang, SVP and CFO at TSMC]

Yeah. Jim, the long-term planning is ongoing and continuous process. We do that all the time, and we will update you when there is a change.

[Jim Fontanelli, Senior Analyst at Arete Research]

Okay. Thank you. My second question is, it looks like the Arizona site is becoming more strategic, in terms of leading edge commitment for TSMC, particularly with the recently added second parcel of land. Could you talk about how you see mid to long-term capacity opportunity? And also how confident you are that the U.S. fab economics will match Taiwanese-produced wafers?

[Jeff Su, Director of Investor Relations at TSMC]

Okay. Jim, second question is on our Arizona fab expansion plans. He notes that it is becoming more and more strategic. We have recently, as we said, acquired a second large piece of land. What is the plan or the purpose behind this, and then what is the profitability or margin outlook as well?

[C.C. Wei, Chairman and CEO at TSMC]

Well, Jim, let me answer the question. We acquired the second land because we need it. We want to build more fabs in Arizona. This is actually to meet the multi-year demand from our leading-edge U.S. customers. Again, let me emphasize again that we are working very hard to speed it up. We already gain a lot of experience in Arizona, and so now we have much more confidence than last year that we can make it a good progress and moving aggressively forward. We expect we can improve the cost structure, of course.

[Jeff Su, Director of Investor Relations at TSMC]

Okay, Jim?

[Jim Fontanelli, Senior Analyst at Arete Research]

Thank you.

[Jeff Su, Director of Investor Relations at TSMC]

All right. Thank you. Operator, can we move on to the next participant, please?

[Operator]

Next one, Bruce Lu from Goldman Sachs.

[Bruce Lu, Analyst at Goldman Sachs]

Hello. Thank you for taking my question. I think I want to follow up on Jim's question for the profitability. I think earlier last year when I asked why TSMC did not raise the profitability target when TSMC continued to sell the value, I think CC told me that to focus on the aspiration of 53% and above. I think last quarter, we raised it to 56% and above. The question is that, do you believe the current profitability fully reflect TSMC's value? I'm guessing CC might ask me to focus on the highest portion of the profitability target again. The real question is that given the uniqueness of the dominant position for TSMC, it's not easy to find a perfect benchmark for TSMC's profitability. Can you tell us how we should think the profitability benchmark for TSMC?

[Bruce Lu, Analyst at Goldman Sachs]

What is the best way to see TSMC value to be fully reflected into the gross margin and operating margins?

[Jeff Su, Director of Investor Relations at TSMC]

Okay. Bruce, his first question is, he wants to know what profitability benchmark he should be looking at, and whether we believe our current profitability level fully reflects TSMC's true value.

[C.C. Wei, Chairman and CEO at TSMC]

Well, Bruce, actually, you ask about our pricing strategy. Let me say that we always view our customer as our partners. Of course, we know that our value, of course we know our position, but we also view that our partner as a very important business partner, so that we don't change our pricing dramatically or something like that. We just try to make sure that our customer can be successful in their market. At the same time, we grow together, then we also earn our value so that we can continue to expand our capacity to support them. That fundamentally is, number one, our customer has to be successful. That's our consideration, number one. We grow together. Again, there's a keyword please pay attention to. Customer is our partners.

[Bruce Lu, Analyst at Goldman Sachs]

Okay. If your customer continue to be successful, maybe in couple quarter, we can see the higher profitability target again.

[Jeff Su, Director of Investor Relations at TSMC]

Bruce, what's your second question?

[Bruce Lu, Analyst at Goldman Sachs]

Okay. My second question is that management has been guided by AI accelerator revenue to grow about mid- to high-50s% CAGRs in 2024, 2029. How does TSMC plan and forecast AI-related demand? I mean, does TSMC incorporate a metric such as token consumption growth in your assumption? Because the recent token consumption in the first quarter is definitely accelerated and faster than earlier expectation. Do we see the changes for the AI accelerator revenue growth in the coming years?

[Jeff Su, Director of Investor Relations at TSMC]

Bruce's second question is on our AI accelerator long-term CAGR guidance, which, yes, we have guided mid- to high 50s%. He notes, with the strong token growth and demand for tokens, do we have any changes to this long-term guidance?

[C.C. Wei, Chairman and CEO at TSMC]

Bruce Lu, actually, I think I say now that it's a very strong demand, and we continue to receive the very positive signal from our customer and customers of customers. What you say is whether we change our CAGR on AI accelerator. Essentially, we continue to see strong demand, but, again, let me say that it's toward higher 50s% of our CAGR that we observe.

[Jeff Su, Director of Investor Relations at TSMC]

Okay. Thank you, C.C. Thank you, Bruce. Operator, can we move on to the next caller, please?

[Operator]

Next one to ask question, Laura Chen from Citi.

[Laura Chen, Analyst at Citi]

Hello. Hi. Good afternoon, C.C., Wendell, and Jeff. May I ask for more details on TSMC's strategy in advanced packaging, and what will be the business model working with your OSAT partners? We see that there are various different solutions provided by your peers and also the OSAT makers. Yet TSMC is also expanding more in the advanced packaging. How would TSMC work with your customers planning their advanced node wafer demand, but also align with their advanced packaging demand at TSMC?

[Jeff Su, Director of Investor Relations at TSMC]

Okay. Thank you, Laura. Laura's first question is on advanced packaging. She would like to know, we work with customers, collaborate with customers to plan our front-end wafer capacity. How do we work with the customers to plan the advanced packaging capacity? Is what she would like to understand, and also in the context of working with our OSAT partners on the advanced packaging businesses.

[C.C. Wei, Chairman and CEO at TSMC]

Well, Laura. Our priority actually, again, is to support our customers, right? Whenever we can or wherever we can, we want to make sure that their demand of their product can be met by TSMC's front-end and high-end packaging. We certainly, let me say that our advanced packaging capacity is very tight also. We have to work with our OSAT partners. We hope that we can increase capacity to support our customer. Again, let me emphasize again, we support our customers. We try very hard to increase our own capacity also, but certainly it just have been very tight. That's what our situation today.

[Laura Chen, Analyst at Citi]

Sure. Understood. My second question is also about advanced packaging. As C.C. highlighted before many times that AI chips are growing into a super chips with very large die size and TSMC now working at the biggest reticle in the world. At the same time, there is potential technical challenges, such as warpage. Do you think that the following roadmap, like SOIC or like CoWoS can solve this kind of technical issue? Based on TSMC's technology roadmap, do we see any technology like SOIC or CoWoS will be a bigger trend in couple years, can solve this problem?

[Jeff Su, Director of Investor Relations at TSMC]

Okay. Laura, second question is also related to advanced packaging. AI and larger reticle sizes pose potential technical challenges such as warpage. She would like to know how do we see SOIC or panel level packaging? What's the key to solving these issues, and what is it outlook in the next several years?

[Laura Chen, Analyst at Citi]

Yes. Thank you.

[C.C. Wei, Chairman and CEO at TSMC]

Well, Laura, you are good. Actually, that's all the challenges that we have in advanced packaging technology. Mechanical stress, which is a very top challenge to the electrical engineering like I am. However, we accumulated a lot of experience already today because we have supplied most of the leading edge in packaging area. We continue to increase the die size and continue to meet all those challenges from the mechanical stress, like you said, actually is a warpage or the thermal limitation. A good challenge, and we like it. The harder, the better because of TSMC's strength in technical engineering. We have a confidence that we can work with our customer to solve all the issues and continue the road one.

[Laura Chen, Analyst at Citi]

Should we expect that SOICs, TSMC may introduce that earlier than to solve this kind of a challenge? Because we already have the learning curve and already have the products in production. That should go faster than other technologies, I suggest.

[C.C. Wei, Chairman and CEO at TSMC]

Again, the...

[Jeff Su, Director of Investor Relations at TSMC]

Sorry. Laura's question is very specific. Yeah, on SOIC, how do we see that developing, I guess?

[C.C. Wei, Chairman and CEO at TSMC]

Well, we work with our customer, and we meet their demand, and that's all I can tell you. Speed it up or slow down. No. We work with our customer to meet their demand.

[Jeff Su, Director of Investor Relations at TSMC]

Yeah. Okay, Laura?

[Laura Chen, Analyst at Citi]

Thank you. Very clear. Yes.

[Jeff Su, Director of Investor Relations at TSMC]

Okay. Thank you. Operator, in the interest of time, can we take the questions from the last participant, please?

[Operator]

Next one to ask question, Charles Shi from Needham.

[Charles Shi, Managing Director and Analyst at Needham & Company]

Hi. Thanks for taking my question. TSMC's definition of AI revenue includes AI-centric GPU, AI accelerator, HBM base die. Maybe I left out a few others, but it specifically excludes data center CPU. I think you made that definition very clear for a couple of years now. With the CPU, there's more and more conversation about CPU now becoming part of the AI infrastructure, especially for agentic workloads. Any chance for TSMC to maybe provide us revised numbers for AI revenue and maybe the AI revenue growth CapEx projection going into 2029, 2030? Maybe hopefully give us some sense how the historical AI revenue numbers would have been if some of the data center CPU numbers, especially for agentic AI workloads, are included there. That's my first question.

[Jeff Su, Director of Investor Relations at TSMC]

Okay. Thank you, Charles. Charles' first question, please let me summarize, is regarding our definition of AI accelerator, which is, of course, we have said GPU, ASIC, and HBM controllers for training inference in the data center. He notes now with the agentic AI, he wants to know, will we start to include CPUs in this definition? If so, can we provide the historical data with CPU included, and what would be the AI accelerator guidance if it includes CPU?

[C.C. Wei, Chairman and CEO at TSMC]

Charles, certainly CPU becomes more and more important in today's AI data center. Actually, let me share with you. This is a good question, by the way. Let me share with you that we are not able to identify which CPU goes to where, right? It's a PC or a desktop, or it's AI data center. Today, we still not include the CPUs in our AI HPC's calculation. Sometime later, we might consider.

[Jeff Su, Director of Investor Relations at TSMC]

Okay. Charles, do you have a second question?

[Charles Shi, Managing Director and Analyst at Needham & Company]

Thanks, C.C. Yes. Maybe it's kind of also tied to the recent development in overall AI infrastructure, how things have been evolving. NVIDIA, of course, they recently added more CPU content to their overall NVIDIA Rubin SuperPOD, but I think that most people are focusing on that brand new LPU they recently added. We understand and appreciate that the TSMC very strong in CPU and will definitely participate in that offsetting CPU. The LPU business, it's acquired business, well, for historical reasons, it's still at your competitor, Samsung Foundry. I think investors are looking at that and the theme that maybe looks like Samsung Foundry finally made the first true inroads into AI. Any thoughts from TSMC side, how should we think about whether and how TSMC will win back that LPU business or any future difference to your business coming from your customers?

[Charles Shi, Managing Director and Analyst at Needham & Company]

Yeah, give us some thoughts there. I would appreciate that. Thank you.

[Jeff Su, Director of Investor Relations at TSMC]

Okay. Charles' second question is a very specific question about a very specific customer and very specific product, which is we typically do not comment on, but he wants to know for this customer's LPU product, which he notes is made at one of our competitors, how do we see this business going to the competitor? Do we have plans to win this LPU business back in the future?

[C.C. Wei, Chairman and CEO at TSMC]

Charles, I think Jeff already gave me enough warning, said very specific and a very specific customer, very specific area. Now let me answer your question. We are working with our customer for their next generation inside LPU anyway, and we are very confident in our technology position, and we will work hard to capture every piece of business possible. How about that?

[Charles Shi, Managing Director and Analyst at Needham & Company]

Very good. Thank you, C.C. That's very good color. Thank you. Appreciate that.

[Jeff Su, Director of Investor Relations at TSMC]

Okay. Thank you, Charles. Thank you, C.C. Thank you, Wendell. This concludes our prepared statements. Oh, sorry. I should say this concludes our Q&A session. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within 30 minutes from now, and the transcript will become available 24 hours from now. Both are going to be available through TSMC's website at www.tsmc.com. Again, thank you everyone for taking the time to join us today. We hope you continue to stay well, and we'll hope you join us again next quarter. Goodbye and have a good day.

Participants

Analysts

• Jeff Su, Director of Investor Relations at TSMC
• Wendell Huang, SVP and CFO at TSMC
• C.C. Wei, Chairman and CEO at TSMC
• Haas Liu, Analyst at Bank of America
• Gokul Hariharan, Managing Director and Analyst at JPMorgan
• Charlie Chan, Managing Director and Analyst at Morgan Stanley
• Sunny Lin, Analyst at UBS
• Jim Fontanelli, Senior Analyst at Arete Research
• Bruce Lu, Analyst at Goldman Sachs
• Laura Chen, Analyst at Citi
• Charles Shi, Managing Director and Analyst at Needham & Company