Taiwan Semiconductor Manufacturing NYSE: TSM reported first-quarter 2026 results that topped its own outlook and offered an upbeat second-quarter forecast, with executives pointing to continued strength in leading-edge demand tied to AI and high-performance computing (HPC). Management also said it now expects full-year 2026 revenue to grow by above 30% in U.S. dollar terms, while increasing its capital spending expectations toward the high end of its prior range.
First-quarter results beat guidance as utilization and cost efforts lifted margins
Senior Vice President and CFO Wendell Huang said first-quarter revenue rose 8.4% sequentially in New Taiwan dollars and increased 6.4% sequentially in U.S. dollars to $35.9 billion, “slightly ahead of our first quarter guidance.” He attributed the performance to “strong demand for our leading-edge process technologies.”
Profitability improved sharply. Huang said gross margin increased 3.9 percentage points sequentially to 66.2%, driven “primarily due to cost improvement efforts, a high capacity utilization rate, and a more favorable foreign exchange rate.” Operating margin rose 4.1 percentage points sequentially to 58.1% “due to operating leverage.” He reported first-quarter EPS of TWD 22.08 and ROE of 40.5%.
By process node, 3-nanometer contributed 25% of wafer revenue, while 5-nanometer and 7-nanometer accounted for 36% and 13%, respectively. Advanced technologies (7-nanometer and below) made up 74% of wafer revenue.
HPC grew to 61% of revenue; inventory days rose amid N2 ramp
Huang said HPC revenue increased 20% quarter-over-quarter and represented 61% of first-quarter revenue. Smartphone declined 11% to 26%, while IoT rose 12% to 6%. Automotive decreased 7% to 4%, and DCE increased 28% to 1%.
On the balance sheet, Huang said cash and marketable securities ended the quarter at TWD 3.4 trillion (about $106 billion). Inventory days increased by six to 80 days, which he said reflected “the ramp-up of our two nanometer technology and strong demand for our three nanometer technology.”
In cash flow, TSMC generated about TWD 699 billion from operations, spent TWD 351 billion in capital expenditures, and paid TWD 130 billion in cash dividends. First-quarter capital expenditures were $11.1 billion in U.S. dollar terms.
Second-quarter guidance calls for double-digit sequential revenue growth
For the second quarter of 2026, Huang guided revenue to $39.0 billion to $40.2 billion, representing a 10% sequential increase at the midpoint and a 32% year-over-year increase at the midpoint. With an assumed exchange rate of 1 U.S. dollar to 31.7 NT, TSMC expects gross margin of 65.5% to 67.5% and operating margin of 56.5% to 58.5%.
Huang also noted a tax timing impact: “in the second quarter, we will need to accrue the tax on the undistributed retained earnings,” resulting in a second-quarter tax rate around 20%, while the company continues to expect a full-year tax rate of 17% to 18%.
Discussing profitability drivers, Huang said the company expects second-quarter gross margin to rise to 66.5% at the midpoint, citing higher utilization and continued cost improvement efforts, “partially offset by dilution from our overseas fab.” Looking to the second half, he said initial ramp of 2-nanometer will dilute gross margin and TSMC expects “between 2% and 3% dilution for the full year of 2026.” He added that overseas fab ramp dilution is expected to be 2% to 3% in early stages, widening to 3% to 4% later, and flagged potential but unquantified cost pressure from higher chemical and gas prices tied to the situation in the Middle East.
AI remains “extremely robust” as token growth shifts toward agentic workloads
Chairman and CEO C.C. Wei said demand in the near term remains supported by leading-edge technologies and that “AI related demand continued to be extremely robust.” Wei described a shift “from generative AI and the query mode to agentic AI and the command and the action mode,” which he said is increasing token consumption and driving “the need for more and more computation,” supporting demand for leading-edge silicon.
Wei said the company continues to receive strong signals from customers and cloud service providers and expressed confidence in the AI “megatrend.” Supported by technology differentiation and a broader customer base, Wei said TSMC “maintain strong confidence for our full year 2026 revenue to now grow by above 30% in U.S. dollar terms.” He also cautioned that TSMC is watching rising component prices in “consumer and price sensitive end market segment,” and said the Middle East situation adds macro uncertainty, prompting prudence in planning.
Capacity expansion: N2 in volume, N3 expansion across Taiwan, Arizona, and Japan
Wei said N2 entered high-volume manufacturing in the fourth quarter of 2025 “with good yield” and is ramping at Hsinchu and Kaohsiung, supported by demand from both smartphones and HPC AI. He said enhancements such as N2P and A16 are expected to make the N2 family “another large and long-lasting node.”
On 3-nanometer, Wei said TSMC is stepping up investment to meet “strong demand in AI application” and is executing a global capacity plan. He outlined several expansions:
- Taiwan: Adding a new 3-nanometer fab in the Tainan Science Park, with volume production scheduled for the first half of 2027.
- Arizona: The second fab will use 3-nanometer; construction is complete, with volume production expected in the second half of 2027.
- Japan: Plans to use 3-nanometer in a second fab, with volume production scheduled in 2028.
Wei also said TSMC continues converting 5-nanometer tools to support 3-nanometer capacity in Taiwan and is pursuing capacity optimization across N7, N5, and N3. He emphasized that where capacity is tight, “we do not pick and choose or play favorites among our customers.”
On the duration of supply constraints, Wei said building a new fab takes “2-3 years” and ramping takes additional time, adding that TSMC expects conditions to “continue to be very tight.”
Huang said the company now expects 2026 capital expenditures “towards the high end” of its $52 billion to $56 billion range. Wei attributed the move to demand: “the demand are very robust, especially from the HPC and AI applications,” adding that TSMC is working to pull in equipment but “still, our supply is very tight.” Huang said the past three years’ total capex was $101 billion and that the company expects capex over the next few years to be “significantly higher than the past three years,” though he did not provide a specific multi-year figure.
Addressing longer-term profitability targets, Huang reiterated prior updates: the company is targeting “gross margins will be 56% and higher through the cycle” and “ROE of a high 20% through the cycle,” adding that long-term planning is ongoing and that TSMC will update investors if those views change.
Wei also discussed mature-node strategy, describing a focus on specialized technologies, including increasing mature-node capacity at JASM Fab 1 in Japan for CMOS image sensors and ESMC in Germany for automotive and industrial. He said TSMC plans to wind down Fab 2 (six-inch) and Fab 5 (eight-inch), focus on gallium nitride, and use available space to support leading-edge applications, while maintaining enough capacity to support existing customers.
Finally, Wei said the company’s A14 technology, featuring a second-generation nanosheet structure, remains on track with volume production scheduled for 2028. He cited expected improvements versus N2 of “10-15” speed gain at the same power or “25-30” power improvement at the same speed, plus “close to 20%” chip density gain, and said the company is seeing customer engagement from both smartphone and HPC applications.
About Taiwan Semiconductor Manufacturing NYSE: TSM
Taiwan Semiconductor Manufacturing Company (TSMC) is a leading pure-play semiconductor foundry that provides wafer fabrication and related services to the global semiconductor industry. Founded in 1987 by Morris Chang and headquartered in Hsinchu, Taiwan, TSMC manufactures integrated circuits on behalf of fabless and integrated device manufacturers, offering contract chip production across a broad set of technologies and products.
TSMC's service offering covers logic and mixed-signal process technologies, specialty processes for radio-frequency, power management and embedded memory, and advanced nodes used in mobile, high-performance computing and AI applications.
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