Taiwan Semiconductor Manufacturing Company Limited (2330) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to TSMC's Third Quarter 2026 Earnings Conference Call. This is Jeff Su, TSMC 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. [Operator Instructions] The format for today's event will be as follows: First, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the third quarter 2026, followed by our guidance for the fourth quarter 2026. Then Ms. [indiscernible] and TSMC's Chairman and CEO, Dr. C.C. Wei will jointly provide the company's key messages. That will be followed -- then we will open the line for the Q&A session. As usual, I'd like to -- I would like to remind everybody that today's discussions contain forward-looking statements that are subject to significant risks and uncertainties, which could cause the 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 call over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.

Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the third quarter of 2026. After that, I will provide the guidance for the fourth quarter of 2026. Third quarter revenue increased 17.6% sequentially in NT supported by strong demand for our leading-edge process technologies. In U.S. dollar term, revenue increased 16.2% sequentially to $46.7 billion, above the high end of our third quarter guidance. Gross margin decreased by 1.3 percentage points sequentially to 66.4%, primarily due to margin dilution from 2-nanometer ramp. Total operating expenses accounted for 7.8% of net revenue. Operating margin was 58.7%. Overall, our third quarter EPS reached TWD 29.43, and ROE was 45.5%. Now let's move on to revenue by technology. 2-nanometer process technology contributed 8% of wafer revenue in the third quarter, while 3-nanometer, 5-nanometer and 7-nanometer accounted for 33%, 28% and 10%, respectively. Advanced technologies, defined as 7-nanometer and below, accounted for 79% of wafer revenue. Moving on to revenue contribution by platform. HPC increased 22% quarter-over-quarter to account for 68% of our third quarter revenue. Smartphone increased 10% to account for 21%. IoT increased 5% to account for 4%. Automotive increased 23% to account for 4%. While DCE declined 12% to account for 1%. Moving on to the balance sheet. We ended the third quarter with cash and marketable securities of TWD 4 trillion or USD 126 billion. On the liability side, current liabilities increased by TWD 110 billion quarter-over-quarter, mainly due to the increase of TWD 46 billion in current portions of bond payable and bank loans and TWD 26 billion in dividend payable. In terms of financial ratios, accounts receivable turnover days decreased by 1 day to 28 days. Inventory days decreased by 5 days to 82 days, primarily due to the increase in wafer shipment. Regarding cash flow and CapEx, during the third quarter, we generated about TWD 920 billion. In cash from operations, spent TWD 443 billion in CapEx and distributed TWD 156 billion for fourth quarter 2025 cash dividends. Overall, our cash balance increased TWD 488 billion to TWD 3.6 trillion at the end of the quarter. In U.S. dollar terms, our third quarter capital expenditures totaled $13.8 billion. I have finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our fourth quarter revenue to be between $52.3 billion and $54.3 billion, which represents a 14% sequential increase or a 58% year-over-year increase at the midpoint. Based on the exchange rate assumption of USD 1 to TWD 31.8, gross margin is expected to be between 65% and 67%, operating margin between 56.5% and 58.5%. This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our third quarter and fourth quarter of 2016 profitability. Compared to the second quarter, our third quarter gross margin decreased by 130 basis points sequentially to 66.4%, primarily due to the margin dilution from the initial ramp-up of our 2-nanometer technology. We have just guided our fourth quarter gross margin to decrease by 40 basis points to 66% at the midpoint, primarily due to the continued margin dilution from the steep ramp-up of our 2-nanometer technology as well as dilution from overseas fabs. These impacts are expected to be partially offset by cost improvement efforts, including productivity gains and across no capacity optimization. While the cost of overseas fabs remain higher, thanks to the company's overall larger scale and cost improvement efforts, we now expect the gross margin dilution from the ramp-up of our overseas fabs to be closer to 2% for the full year 2026. As we put more effort to support the strong structural demand from our customers, more fabs will be ramping up in the U.S., thus, we expect the dilution from our overseas fabs to widen to 3% to 4% in the next few years. We will leverage our increasing size in Arizona and work on our operations to improve the cost structure. We will also continue to work closely with our customers and suppliers to manage the impact. Overall, with our fundamental competitive advantages of manufacturing technology leadership and large-scale production base, we are confident that TSMC continues to be the most cost-efficient manufacturing in every region that we operate. Next, let me make some comments on our 2026 capital budget. At TSMC, a higher level of capital expenditures is always related with higher growth opportunities in the following years. Given the continued robust multiyear demand from our customers, including the emerging Agentic AI market, we reiterate our full year 2026 capital budget to be between USD 60 billion and USD 64 billion. We continue to expect our CapEx dollars investment from 2026 to 2028 and to be even more significantly higher than the past 3 years as we continue to invest heavily to support our customers' growth. Additionally, while the tool supply is tight, we always collaborate closely with our 2 suppliers well in advance to prepare the capacity, just like our customers collaborate with us well in advance to plan our capacity. Even as we invest for the future growth with this level of CapEx spending in the next few years, we remain committed to delivering profitable growth to our shareholders. We also remain committed to a sustainable and steadily increasing cash dividend per share on both an annual and quarterly basis. Now let me turn the microphone over to C. C.

Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. We concluded our third quarter with a revenue of USD 46.7 billion [indiscernible] our guidance in U.S. dollar terms, driven by strong demand for our leading-edge process technologies. Moving into fourth quarter, we expect our business to be supported by continued strong demand for our leading-edge process technologies, including the still ramp-up of our 2-nanometer technology. Looking ahead, we continue to observe consumer and price-sensitive end market segment are being challenged due to the impact of rising component prices and more economic uncertainties. As such, we have been prudent in our business planning going into 2027 while focusing on the fundamentals of our business to further strengthen our competitive position. Having said that, demand for our leading-edge technologies continue to be extremely robust, supported by our strong technology differentiation and broader customer base. Therefore, we now expect our full year 2026 revenue growth to be around 44% year-over-year in U.S. dollar terms. Next, let me talk about the AI-related demand outlook. The AI market continues to be very strong. Recent developments are very positive to AI's long-term demand outlook we observed increasing AI demand fueled by the rising adoption of Agentic AI as we transition from chat bot to AI assistance. In addition, we are observing great adoption of open source AI models. This will drive greater efficiency and help lower the barrier to future AI usage and result in more and more demand for leading-edge silicon. The AI-related demand is being supported by strong underlying demand for AI accelerators. In addition, the emergence of Agentic AI CPUs and continued demand for networking chips are driving further silicon demand. Therefore, semiconductor will remain essential in the AI megatrend. The [indiscernible] of semiconductors in the global supply chain is set to continue to increase in our view. This will create more value opportunities for our customers to capture and more value opportunities for TSMC as well. No matter which approach is taken, it will require use of the most advanced semiconductor process technology. With our technology leadership, manufacturing excellence, global capacity expansion and customer trust, we are well positioned to capture to capture the full multiyear structural AI-related demand. Therefore, all the AI players are working with TSMC. Next, let me talk about TSMC's capacity expansion strategy. As of foundry, our first responsibility is to provide our customer with the best technologies and effective capacity support to unleash their innovations to address the structural increase in the long-term semiconductor market demand profile, TSMC collaborate closely with our customers and our customers or customers to plan for our capacity. In addition, we are now going 1 step further and sending our own teams of people to check on the data center build-out progress and power supply situation in the U.S. The feedback is so far so good, and the CSPs has been well prepared. Internally, TSMC employed [indiscernible] capacity planning system to assess the market demand from both a top down and bottom up approach. This is a continuous and ongoing process. Given the fundamental complexity of leading-edge technologies and the designing and time involved, we already have a very good idea of customers of multiyear product road map and production plans. Thus we continue to hold strong conviction in the AI megatrend. We are moving full speed ahead to increase our capacity to meet our assesses demand and stepping up our CapEx investment to support our customers' future growth. TSMC is expanding at an unprecedented as with a near 25 worldwide in progress. We are building 13 leading edge and advanced packing fab in Taiwan over the next several years and another 5 to 6 fabs overseas. Our new node, N2, has already entered a high-volume manufacturing in the fourth quarter of 2025 with good year. N2 is ramping successfully in multiple phases at both [indiscernible]. We expect our N2 family technologies at annual capacity to more than double in 2027, supported by strong demand from both smartphone and HPC AI applications. We are also leveraging our manufacturing excellence to generate more end to wafer output, further increasing our capacity support to customers. In addition, we have already begun preparing the capacity for our A14 technology. Risk production is well on track for 2027 and volume production was started in 2028. TSMC's semiconductor technologies and manufacturing will continue to play a pivotal role in supporting the global semiconductor industry while unleashing our customers' innovation. Now let me talk about TSMC's global capacity expansion update. As we said before, historically, we do not add additional capacity to a node once it reaches the targeted capacity. However, based on our assessment, we are executing will and our global capacity plan to add 3 new fabs to support a robust multiyear pipeline or demand for 3-nanometer technologies. In Taiwan, volume production for our new 3-nanometer fab in Tainan Science Park is well on track to begin the first half of 2027. In addition, driven by the strong demand from our customers, we have decided to add on additional 3-nanometer fab in Tainan, volume reduction is scheduled for the first half of 2028. In Arizona, we have completed the construction of our second fab and are in the process of moving and installation, volume production will begin in third quarter '27, slightly ahead of our previous schedule. In Japan, we are processing well to our plan to utilize 3-nanometer in our second fab and volume production is scheduled in 2028. In addition to all the new fabs, we continue to convert 5-nanometer to support 3-nanometer capacity in Taiwan. We are also leveraging our manufacturing excellence to greater productivity across our fab in all locations to generate more wafer output. We are also focusing on capacity optimization across nodes which including flexible capacity support among N7, N5 and N3 node. Thus we are using multiple levers to do everything we can wherever we can as fast as we can to maximize the support to our customers. We have no intention to leave food on the table for others, and we want to capture every pieces of business possible. This is concluding our key message, and thank you for your attention.

Thank you, C.C. This concludes our prepared statements. [Operator Instructions] Now let's begin the Q&A session. Operator, can we proceed with the first caller on the line, please?

Yes. First one, Laura Jane. Go ahead, please.

I appreciate C.C. for sharing with us the TSMC capacity expansion strategy. So may I follow up more on that. Given the increasing aggressive AI semiconductor demand, how does TSMC now see the AI revenue CAGR growth? And how does TSMC reconcile customers the capacity requirement with some of the potential concern on the data center power availability and also maybe funding recently and other critical components such as HVM, EPS advanced packaging. And also in the networking side, we see the tightness of laser as well. . So if this trend creates a mismatch between semiconductor supply and also to AI development, how would TSMC adjust your capacity allocation and also the strategy to minimize the potential overbuilding in the supply chain. Thank you. That's my first question.

Okay. Laura has a very involved first question. I think she's asking how do we see the AI demand outlook? The AI demand, as she said, seems to be very strong, but she's worried or concerned. How do we reconcile the strong demand of chips, AI chips versus risks related to whether it be power supply. I think also like different bottlenecks within the supply chain et cetera, how do we make our assessment of what is the appropriate CapEx and capacity we need to prepare. Is that correct, Laura? .

Yes. Thank you.

That's a long, long question. Laura, let me share with you. We have a very sophisticated capacity planning process. And we also have a very disciplined on our consideration. And let me share with you, to put every possibility weekend talking about the CSPs CapEx, data centers Europe, financial power supply and also other components of supply, et cetera, into our consideration. And so we make our own judgment -- and then based on our assessed demand, we still think that demand is higher than the supply, and we are working very hard to narrow the gap. Did I answer your question, Laura? .

Sure. Thank you. Thank you very much. So far from our -- like the comprehensive starting the supply chain, we are still quite positive on the demand in the longer term, right? So in that case, can you also give us like more counter about that but any update on your AI CAGR growth? I recall previously, we're talking about like high 50 %?

We -- sorry, sorry.

Yes. So part of Laura's question is then based on our assessment, we had previously guided our AI CAGR -- AI accelerator CAGR, which is a narrow definition to grow mid- to high 50 percentage from 2024 to 2029. So Laura wants to know, do we have any update to that number today.

Laura, all I can say right now is the demand is very extremely robust, okay? And we did not see any sign of slowdown whether it's high 50% CAGR, it doesn't matter, it probably will be higher.

Sure. Okay. Thank you . Yes. And my second question is also about the -- given the very strong demand in the CapEx cycle, we see that definitely this round will be much higher than before. And TSMC also announced that earlier you will adapt a high-end [indiscernible] around 2030. So should we think about that, that will be further improved the productivities thus will be more meaningful for further like accelerating revenue growth in the longer term. And also given that the CapEx entity are also getting much higher how should we think about that the pricing power and also the long-term gross margin, the capital efficiency return.

Okay. That's actually two questions, but okay, just very quickly. So Laura, part of it is on -- with the strong demand on our CapEx cycle, how do we do the adoption of high NA, which we said we will in 2030? And then her question is on profitability, long-term outlook.

Yes. Thank you. .

Okay. Let me answer that question. Yes. For the long-term productivity, we continue to improve it and high-end definitely is a very good tool. And so far, I think our plan is to use it in 2030. Again, our CapEx will be much higher than today. And so you're talking about the gross margin or the profitability can be increased or not? Let me say that, there is no ceiling for TSMC's profitability, but a dramatic increase will not happen overnight either. So our philosophy or our strategy always working with our customer, and we want to make them be successful, and then we can gain our value.

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

Next one, Gokul Hariharan, JPMorgan.

My first question, again, on capacity addition. It looks like the shortage situation next year could be even more than 2026. Just wanted to hear set C. C. your view on this. And I think it's been quite some time since we have seen TSMC add capacity at more than 10% every year. If you look at our annual report, maybe like about 10 years that you have added capacity of more than 10%. Given this accelerated build-out, can we start getting wafer capacity growth closer to 10% or even higher than 10% in the next couple of years. Any comment on like what does your planned wafer capacity growth in the next couple of years? That's my first question.

Okay. So Gokul's first question is regarding the capacity addition and the demand. So his question first is the tightness in the wafer suppliers, do we think that will be even more or greater in 2027 than 2026? And then along with that, how do we see our overall capacity addition. Although you say 10%, I think every year, we just go in the annual report, it's been about mid- to high single digit and sometimes even lower. But anyways, regardless, those are the 2 questions. So first on just the demand outlook and then the supply will next year be even more tight than this year.

I just mentioned, the demand is extremely robust and getting higher and higher. Of course, we have our own judgment and we look at every angle. As I said, we talk to some customers, our customers, and then we do our own 1 more step to check the data centers a bureau. All the result we put into our judgment and our assessment, the result is the demand is very, very high. And so the gap between demand and supply are still quite big, and that's why we put all our strengths to increase the capacity, as I just mentioned, whether it's bigger or is the gap becomes bigger or the gap becomes narrow, we are working very hard. I cannot answer this question right now because of my customer continue to increase your demand.

Okay. Gokul, I think it's a bit too early to talk about capital capacity increase percentage going forward. But let me just remind you that the increase every year, although the number is even though the number may be small, but the increase in advanced packaging -- sorry, advanced nodes are really the main driver for the capacity increase, okay?

Fair enough. Okay. Secondly, could you -- you alluded to more aggressive overseas expansion plan in the U.S. especially. And I think recently, there's been a lot of discussion with potentially a new fab cluster in Texas as well as I think 1 of your customers also talked about discussions with Tier 1 as well. So C. C., could you talk a little bit about your overseas plan, like the more accelerated kind of capacity build out -- and also any engagement with SpaceX or Tesla given your customer did call you out last week in terms of some engagements you have, like what are the broad contours of this kind of engagement likely to be? Is it similar to what you've done with some of the customers in Japan and ESMS as well.

Okay. Thank you, Gokul. So Gokul's second question, he knows that C. C. said, we're expanding at unprecedented place, doing everything we can as fast as we can to increase the capacity. So this question is particularly to the U.S. what is the status or update. There's been reports that we are looking to expand in Texas. There's been reports that 1 of our customers, we are engaging in discussions. He wants to know what kind of framework or parameters of any cooperative maybe? Or any comment on either of those 2 things?

Okay. Gokul, we work very hard to expand our capacity in U.S. This is necessary because of all customers, most of large customer in U.S. and they required TSMC to increase the capacity. And also U.S. government now very helpful. So that's a pace we want to expand. So recently, we did expand our capacity situation to see outside Arizona where we can get another chance to expand our capacity. That Texas is one. So we send the teams to take us to do all the evaluation. And we also talk to 1 of our customers who tried to build a fab tariff, let me be more specific. And we discussion with them to see whether that we can be utilizing that actual capacity also. So we're showing discussion. If we have any solid conclusion, we will share with you. But today, and that's it. Yes, on Arizona to Texas, yes.

Okay. But all of these are still going to be TSMC run fabs, right? I think you're not becoming part of the Terra fab project and things like that. Can you just help us understand what are the principles that you are using to the smaller principle that you used for [indiscernible] or TSMC?

Okay. So Gogo's question is not in particular to the potential collaboration with this customer. Would it be TSMC owned? What's the principles that we have if anything?

We are still in discussion. We will say that it's not either way, it will be possible, but the fab got to be run by TSMC.

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

Yes. Next one, Krish Sankar, TD Cohen.

I have 2 of them. The first one, some customers talk about a secondary wafer market where 1 customer passes their wafer allocation to another? Is this like a very small portion of the business? Is it customer specific? Or do you see that an emerging trend where customers whose demand is weak, back some of the allocation to stronger customers. And then I had a quick follow-up.

All right, Krish, thank you. So Krish's first question is asking some of our customers are talking about a reseller secondary wafer market where they can pass their allocation on. So -- is this a very small portion of our business? Or is this more of a trend for us to do? And is this something that we allow our customers to do.

Well, let me answer that. To say whether this is a new strategy, new methodology, the answer is no. The principal of TSMC is we do not allow our customer to sublet or auction of the capacity. But in certain cases, customers can collaborate through master licensing agreement, but this is not our common practice. And the amount is very, very small. Krish, did I answer your question? .

Yes. And then a quick follow-up. You did touch upon it the INA agreement with ASML from 2030 onwards. I'm just curious to know historically [indiscernible] towards more ahead of the curve with the EUV adoption. It looks like by the time you adopt high-end EUV, be it 2030 for 2031, but some of the competitors have already been using it by then. So do you see that as a disadvantage? Or you're not worried about competition getting ahead with high-NA EUV?

Okay. So Krish, your second question is looking at high-NA. He notes some of our competitors are both using already adopted or will adopt high any earlier than TSMC. So his question, does this put us at a competitive disadvantage or risk compared to our competitors in terms of technology leadership.

Krish, let me answer that. We always evaluate a new tool -- and if we want to put into the mass production, it got to be the best technology with a very reasonable cost. And most important is the best maturity okay? So we say in 2030, we'll start to use it because we also think at the time, high-NA will be mature. And we're also working very closely with [indiscernible] to establish a 12-inch photomask by 2031. And at that time, we think that the high-NA's cost will be reasonable and for TSMC to make it into the mass production. And this is a very good tool. Let me emphasize that. And in the smaller geometry, it definitely has some advantages. Whether that our technology because we are using is later than our competitor. So a disadvantage to TSMC no, because we have confidence that we are still the best company to offer the most advanced technology to our customers.

Krish, does that answer your question? .

Thank you very much. .

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

Yes. Charlie Chan, Morgan Stanley. .

And also [indiscernible] to hear a very strong AI semi some recent car market correction. So my first question is really about your net capacity expansion strategy. As far as I know 1 of your IDM customer is spending CapEx very aggressively. So there are some concern about this kind of may insource more and also to you, right? So first of all, I'm not sure how we're going to deal with this sort of business opportunity? And secondly, I remember, last time in C. C., you mentioned about A14 could be a bigger node than N2. I mean I know whether they assume big IDM company will outsource more like server CPU at A14?

Okay. So Charlie's first question is around IDM competitor. He wants to know very specifically if we see this competitor moving to in-source more. So his question is then our prior comment of A14 being a larger bigger node than N2 has even been. Does this include the server CPU from this IDM competitor?

Well, Charlie, we treat every customer fairly. So whether it's IDM or is purely fabs, we treat them the same. But of course, we take into consideration of their internal capacity. So we calculate our support. We calculate our capacity buildup -- got you Actually, in our A14, we have seen more and more customers actually higher than the 2-nanometer activities so far. And we expect that the A14 will be a bigger node in our current N2 technologies .

I see. So it doesn't need to consider this and will also also small. We can still have A14 to be a bigger node than N2. Is that the right understanding?

Well, again, Charlie wants to know very specifically this customer's outsourcing plan, which you probably may need to ask them, but yes.

Well, Charlie, as I said, to be frank with you, I don't comment on a specific customer, but let me get you that we take everything into consideration. Okay?