TSMC (TSM) Q3 FY26 Earnings Call Transcript

Jeff Su00:00

大家午安。 我是台积电法人关系处的苏志凯。 欢迎您参加台积公司 2026 年第三季的法人说明会。 由于本法说会是向全球投资人同时连线转播，所以我们会全程使用英文请您见谅。Good afternoon everyone and welcome to TSMC's third quarter 2026 earnings conference call.

Jeff Su00:19

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. materials.

Jeff Su00:50

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 third quarter 2026 followed by our guidance for the fourth quarter 2026. Then, Mr. Huang and TSMC's Chairman and CEO, Doctor CC Wei will jointly provide the company's key messages.

Jeff Su00:58

That will be followed then we will open the line for the Q&A session.

Jeff Su01:13

As usual, I'd like to I would like to remind everybody that today's discussions may contain forward looking statements that are subject to significant risk and uncertainties which could cause the actual results to differ materially from those contained in the forward looking statements.

Jeff Su01:25

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 CFO, Mister Wendell Huang for the summary of operations and the current quarter guidance.

Prepared remarks

Wendell Huang01:42

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.

Wendell Huang01:54

Third quarter revenue increased 17.6% sequentially in NT supported by strong demand for our leading edge process technologies.

Wendell Huang02:06

In US dollar term, revenue increased 16.2% sequentially to 46.7 billion, above the high end of our third quarter guidance.

Wendell Huang02:20

Gross margin decreased by 1.3 percentage points sequentially to 66.4% primarily due to margin dilution from two nanometer ramp.

Wendell Huang02:40

Total operating expenses accounted for 7.8% of net revenue, operating margin was 58.7%. Overall, our third quarter EPS reached 29.43 NT and ROE was 45.5%.

Wendell Huang02:52

Now let's move on to revenue by technology. Two nanometer process technology contributed 8% of wafer revenue in the third quarter.

Wendell Huang03:04

While three nanometer, five nanometer and seven nanometer accounted for 33%, 28% and 10% respectively.

Wendell Huang03:13

Advanced technologies defined as seven nanometer and below accounted for 79% of wafer revenue.

Wendell Huang03:26

Moving on to revenue contribution by platform, HPC increased 22% quarter over quarter to account for 68% of our third quarter revenue.

Wendell Huang03:45

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%.

Wendell Huang03:57

Moving on to the balance sheet, we ended the third quarter with cash and marketable securities of 4 trillion NT or 126 billion US dollars.

Wendell Huang04:15

On the liability side, current liabilities increased by 110 billion NT quarter over quarter mainly due to the increase of 46 billion in current portions of bond payable and bank loans and 26 billions in dividend payable.

Wendell Huang04:34

In terms of financial ratios, accounts receivable turnover days decreased by one day to 28 days inventory days decreased by five days to 82 days primarily due to the increase in wafer shipment

Wendell Huang04:55

Regarding cash flow and capex during the third quarter we generated about 920 billion NT in cash from operations spent 443 billion in capex and distributed 156 billion for fourth quarter 2025 cash dividends.

Wendell Huang05:05

Overall, our cash balance increased 488 billion NT to 3.6 trillion at the end of the quarter.

Wendell Huang05:15

In US dollar terms, our third quarter capital expenditures total 13.8 billion.

Wendell Huang05:42

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 and 54.3 billion US dollars, which represents a 14% sequential increase or a 58% year over year increase at the midpoint.

Wendell Huang06:04

Based on the exchange rate assumption of one US dollar to 31.8 NT, gross margin is expected to be between 65 and 67%, operating margin between 56.5 and 58.5%. This concludes my financial presentation.

Wendell Huang06:36

Now let me turn to our key messages. I will start by talking about our third quarter 26 and fourth quarter of 26 profitability. Compared to 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 two nanometer technology.

Wendell Huang06:53

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 two nanometer technology.

Wendell Huang07:08

As well as dilution from overseas fabs. These impacts are expected to be partially offset by cost improvement efforts including productivity gains and across node capacity optimization.

Wendell Huang07:47

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, customers, more fabs will be ramping up in the US, thus we expect the dilution from our overseas fabs to widen to 3 to 4% in the next few years.

Wendell Huang08:03

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.

Wendell Huang08:23

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 manufacturer in every region that we operate.

Wendell Huang08:29

Next, let me make some comments on our 2026 capital budget.

Wendell Huang08:40

At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years.

Wendell Huang08:58

Given the continued robust multi-year demand from our customers, including the emerging agentic AI market, we reiterate our full year 2026 capital budget to be between 60 and 64 billion US dollars.

Wendell Huang09:16

We continue to expect our capex dollars investment from 2026 to 2028 to be even more significantly higher than the past three years as we continue to invest heavily to support our customers' growth.

Wendell Huang09:33

Additionally, while the two supply is tight, we always collaborate closely with our two suppliers well in advance to prepare the capacity just like our customers collaborate with us well in advance to plan our capacity.

Wendell Huang09:47

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.

Wendell Huang10:00

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 CC.

C.C. Wei10:24

Thank you, Wendell. Good afternoon, everyone. First, let me start with our near term demand outlook. We concluded our third quarter with revenue of US dollar 46.7 billion, higher than our guidance in US dollar terms driven by strong demand for our leading edge process technologies.

C.C. Wei10:41

Moving into fourth quarter 2026, we expect our business to be supported by continued strong demand for our leading edge process technologies including the steep ramp up of our two nanometer technology.

C.C. Wei10:57

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 macroeconomic uncertainties.

C.C. Wei11:13

As such, we are being prudent in our business planning going into 2027 while focusing on the fundamentals of our business to further strengthen our competitive position.

C.C. Wei11:27

Having said that, demand for our leading edge technologies continue to be extremely robust supported by our strong technology differentiation and broad customer base.

C.C. Wei11:40

Therefore, we now expect our full year 2026 revenue growth to be around 44% year over year in US dollar terms.

C.C. Wei11:55

Next, 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.

C.C. Wei12:07

We observe increasing AI demand fueled by the rising adoption of agentic AI as we transition from chatbot to AI assistants.

C.C. Wei12:27

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.

C.C. Wei12:48

Thus, AI related demand is being supported by strong underlying demand for AI accelerators in addition the emergence of agentic AI CPUs and the continued demand for networking chips are driving further silicon demand.

C.C. Wei13:13

Therefore, semiconductor will remain essential in the AI mega trend. The value 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.

C.C. Wei13:45

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 the full multi-year structural AI related demand therefore all the AI players are working with TSMC.

C.C. Wei14:07

Next, let me talk about TSMC's capacity expansion strategy. As a foundry, our first responsibility is to provide our customer with the best technologies and effective capacity support to unleash their innovations.

C.C. Wei14:23

To address the structural increase in the long term semiconductor market demand profile, TSMC collaborate closely with our customers and our customers' customer to plan for our capacity.

C.C. Wei14:38

In addition, we are now going one step further and sending our own teams of people to check on the data center build out progress and power supply situation in the US.

C.C. Wei15:03

The feedback so far so good and the CSPs has been well prepared. Internally, TSMC implored a disciplined capacity planning system to assess the market demand from both a top down and bottom up approach this is a continuous and ongoing process.

C.C. Wei15:20

Given the fundamental complexity of leading edge technologies and the design in and lead time involved, we already have a very good idea of customers multi-year product roadmap and production plans.

C.C. Wei15:27

Thus, we continue to hold strong conviction in the AI mega trend.

C.C. Wei15:40

We are moving full speed ahead to increase our capacity to meet our assessed demand and stepping up our capex investment to support our customers future growth.

C.C. Wei16:02

TSMC is expanding at unprecedented pace with a near 25 worldwide in progress. We are building 13 leading edge and advanced packaging fab in Taiwan, over the next several years, and another five to six fabs overseas.

C.C. Wei16:21

Our new node N2 has already entered high volume manufacturing in the fourth quarter of 2025 with good yield. N2 is ramping successfully in multiple phases at both Hsinchu and Kaohsiung site.

C.C. Wei16:36

We expect our N2 family technologies annual capacity to more than double in 2027 supported by strong demand from both smartphone and HPC AI applications.

C.C. Wei16:56

We are also leveraging our manufacturing excellence to generate more N2 wafer output further increasing our capacity support to customers. In addition, we have already begun preparing the capacity for our A14 technology.

C.C. Wei17:19

Risk production is well on track for 2027 and volume production will start in 2028. Thus, TSMC's semiconductor technologies and manufacturing will continue to play a pivotal role in supporting the global semiconductor industry while unleashing our customers innovation.

C.C. Wei17:39

Now let me talk about TSMC's global N3 capacity expansion update. As we said before, historically we do not add additional capacity to a node once it reaches targeted capacity.

C.C. Wei17:56

However, based on our assessment, we are executing well on our global capacity plan to add three new fabs to support the robust multi-year pipeline of demand for three nanometer technologies.

C.C. Wei18:36

In Taiwan, volume production for our new three nanometer fab in Tainan Science Park is well on track to begin in the fourth half of 2027. In addition, driven by the strong demand from our customer, we have decided to add one additional three nanometer fab in Tainan volume production is scheduled for the fourth half of 2028. In Arizona, we have completed the construction of our second fab and are in the process of tool moving and installation.

C.C. Wei19:09

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 three three nanometer in our second fab and volume production is scheduled in 2028. In addition to all the new fabs, we continue to convert five nanometer tool to support three nanometer capacity in Taiwan.

C.C. Wei19:48

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 and 5 and N3 node thus we are using multiple levers to do everything we can whenever we can as fast as we can to maximize the support to our customers.

C.C. Wei20:04

We have no intention to leave foot on the table for others. And we want to capture every pieces of business possible. This concluding our key message and thank you for your attention.

Jeff Su20:22

Thank you, CC. 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 as many participants as possible the opportunity to ask their questions.

Questions and answers

Jeff Su20:38

Should you 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 then one on your telephone keypad now.

Jeff Su20:52

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 caller on the line, please?

Operator20:58

Yes. First one, Laura Chen, Citi. Go ahead, please.

Laura Chen21:45

Thank you very much. Good afternoon. And appreciate CC 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 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 HBM APF advanced packaging and also in the networking side we see the tightness of laser as well.

Laura Chen22:04

So if these concerns create a mismatch between semiconductor supply and also actual AI development, how would TSMC adjust your capacity allocation and also the strategy to minimize the potential overbuilding in the supply chain?

Laura Chen22:06

Thank you. That's my first question.

Jeff Su22:37

Okay, Laura. Laura has a very involved first question. I think she's asking how do we see the AI demand outlook, the AI demand, you know, as CC said, seems to be very strong, but she's worried or concerned, how do we reconcile the strong demand of chips, AI chips, versus, you know, risks related to whether it be power supply, you know, I think also like different bottlenecks within the supply chain etc.

Jeff Su22:45

How do we make our assessment of what is the appropriate capex and capacity we need to prepare? Is that correct, Laura?

Laura Chen22:48

Yes, thank you.

C.C. Wei22:54

That's a long question. Laura, let me share with you

C.C. Wei23:30

We have a very sophisticated capacity process and we also have a very disciplined on our consideration. And let me share with you, we put every possibility if we can talking about CSP's capex, data center's build up, financial power supply and also other component supply etc.

C.C. Wei23:45

Into our consideration and so we you know we make our own judgment and then based on our assessed demand we still think

C.C. Wei23:54

The demand is higher than the supply and we are working very hard to narrow the gap.

C.C. Wei23:58

Did I answer your question? Laura?

Laura Chen24:24

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

Laura Chen24:26

We sorry.

Jeff Su24:46

Sorry. Yeah. 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 50s percentage from 2024 to 2029. So Laura wants to know, do we have any update to that number today?

C.C. Wei25:05

Laura, 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.

C.C. Wei25:07

It it probably will be higher.

Laura Chen26:00

Sure. Okay. Yes. Thank you very much. Yeah. And my second question is also about like the given the very strong demand, the capex cycles, we see that definitely this round will be much higher than before and TSMC also announced that earlier you will adapt a high NA UV around 2030. 2030. so should we think about that that will be further improve the productivity thus will be more meaningful for further like accelerating revenue growth in the longer term and also given that the capex intensity are also getting much higher so how should we think about that the pricing power and also the long term gross margin and the capital efficiency return

Jeff Su26:21

Okay, that's actually two two questions but okay we'll just very quickly so Laura's part of it is on with the strong demand and our capex cycle how do we view the adoption of high NA which we said we will you know in 2030 and then her question is on profitability long term outlook

C.C. Wei26:23

Yeah, thank you.

C.C. Wei26:28

Oh, okay. Let me answer that question.

C.C. Wei27:01

Yes, for the long term productivity, we continue to improve it. And high 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 talking about the gross margin or the profitability can be increased or not

C.C. Wei27:24

Let me say that there's 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.

Laura Chen27:31

Thank you very, very, yeah, very helpful. Appreciate it.

Laura Chen27:33

And congrats for the great result. Thank you.

Jeff Su27:39

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

Operator27:44

Next one, Gokul Hariharan, JPMorgan. Go ahead, please.

Gokul Hariharan28:34

Hi, good afternoon, and Jeff, my first question again on capacity addition. Looks like the shortage situation next year could be even more than 2026. Just wanted to hear CC your view on this and I think it's been quite some time since we've seen TSMC add capacity at more than 10% every year. I think if you look at our your annual report, I think it's been like about 10 years that you've added capacity at more than 10%. uh 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 um any comment on like what does your planned wafer capacity growth in the next couple of years that's my first question

Jeff Su29:20

Okay so Gokul's first question is regarding the capacity addition and the demand so his question first is you know the tightness in the wafer supply 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 disclose in the annual report it's been about mid to high single digit um and sometimes even lower but anyways regardless those are the two questions so first on just the demand outlook and then the supply um will next year be even more tight than this year?

C.C. Wei30:16

Uh 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 customer customers customer and then we do our own one more step to check the data centers build out 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 strength to increase the capacity as I just mentioned

C.C. Wei30:31

Whether it's bigger or it's the gap become bigger or the gap become narrower we are working very hard I cannot answer this question right now because of my customer continue to increase their demand

C.C. Wei31:00

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.

C.C. Wei31:04

Okay?

Gokul Hariharan31:33

Fair enough. Okay. Thank you. Secondly, could you I think you alluded to more aggressive overseas expansion plans. In the US 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 one of your customers also talked about discussions with TSMC as well.

Gokul Hariharan32:01

So CC could you talk a little bit about your overseas plans 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 here 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 ESMC as well

Jeff Su32:35

Okay thank you Gokul so Gokul's second question he notes that CC said we're expanding at an unprecedented place doing everything we can as fast as we can to increase the capacity so his question is particularly to the US what is the status or update there's been reports that we are looking to expand in Texas there's been reports that one of our customers we're engaging in discussions he wants to know what kind of you know framework or parameters of any cooperation may be or any comment on either of those two things.

C.C. Wei33:20

Gokul uh we work very hard to expand our capacity in US uh this is necessary because of all our customer most of large customer in US and then they request TSMC to increase the capacity and also US government are very helpful so that's a place we want to expand so recently we did you know expand our capacity consideration to see outside Arizona whether we can get another chance to expand our capacity.

C.C. Wei33:25

And Texas is the one. So

C.C. Wei34:04

We send teams to Texas to do all the evaluation. And we also talk to one of our customer who try to build a fab Terra fab let me be more specific and we discussion with them see whether that we can be utilizing that actual capacity also so we're still in discussion if we have any solid conclusion we'll share with you but today and that's it yes from Arizona to Texas yes

C.C. Wei34:08

Okay.

Gokul Hariharan34:26

But all these is going to be TSMC run fabs, right? I think you're not becoming part of the Terra Fab project or anything like that. Could you just help us understand what is the principles that you are using here? This is the similar principles that you use for JASM or ESMC.

Jeff Su34:40

Okay, so Gokul's question is not, you know, in particular to the potential cooperation with this customer, would it be TSMC owned? What's the principles that we have if anything?

C.C. Wei34:56

We are still in discussion let me say that it's not a you know either way it will be possible but the fab got to be run by TSMC

Gokul Hariharan34:58

Okay,

Gokul Hariharan34:59

Understood. thank you

Jeff Su35:06

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

Operator35:12

Yes, next one, Krish Sankar, TD, Cohen. Go ahead, please.

Unidentified speaker35:36

Yeah, hi, thanks for taking my question. I have two of them. First one, CC, some customers talk about a secondary wafer market where one 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 as a emerging trend where customers whose demand is weak pass some of the allocation to stronger customers? Then I had a quick follow up.

Jeff Su35:58

Alright, Krish, thank you. So Krish's first question is asking, you know, some of our customers are talking about a resale or a secondary wafer market where they can pass their allocation on. So is this, you know, 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?

C.C. Wei36:03

Well, let me answer that.

C.C. Wei36:20

To say whether this is a new strategy, new methodology, the answer is no. The principle of TSMC is we do not allow our customer to sublet or auction off the capacity.

C.C. Wei36:35

But in certain cases, customer can collaborate through mask licensing agreement but this is not our common practice and the amount is very, very small.

C.C. Wei36:38

Chris, did I answer your question?

Unidentified speaker37:08

Yes, thank you very much for that. And then a quick follow up um you did touch upon it high NA agreement with ASML from 2030 onwards I'm just curious you know historically TSMC was more ahead of the curve with the EUV adoption it looks like by the time you adopt high NA EUV it'll be 2030 2031 but some of your competitors are 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 thank you

Jeff Su37:32

Okay, so Krish's second question is looking at high NA, he notes some of our competitors you know are both using already adopted or will adopt high NA 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?

C.C. Wei38:35

Chris let me answer that we always you know evaluate a new tool and if we want to put into the mass production it got to be the best technology with very reasonable cost and we most important is the best maturity okay so we say in 2030 we'll start to use it because we also think at that time high NA will be mature and we also working very closely with ASML to establish a 12 inch photo mask by 2031 and at that time we think that 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 advantage.

C.C. Wei38:59

Whether that our technology because we are using it later than our competitor so disadvantage to TSMC no because we have confidence that we are still the best company to offer the most advanced technology to our customers.

C.C. Wei39:03

Chris, does that answer your question?

Unidentified speaker39:03

Thank you very much.

C.C. Wei39:04

Yeah. Okay.

Unidentified speaker39:06

Yes, thank you very much. Thank you, sir.

Jeff Su39:11

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

Operator39:16

Yes. Charlie Chan, Morgan Stanley. Go ahead, please.

Charlie Chan39:35

Uh, hi, gentlemen. Thanks for taking my question and also glad to hear a very strong AI semi demand amid some recent stock market correction. So my first question is really about your energy capacity expansion strategy.

Charlie Chan40:13

As far as I know, one of your IDM customer is expanding capex very aggressively so there are some concern about this customer may insource more and outsource to you, right? So first of all, I'm not sure how you're going to deal with this sort of business opportunity and secondly, I remember last time CC you mentioned about A14 could be a bigger node than N2 may I know whether that assume the big IDM company will outsource more CPU like server CPU at A14. Thank you.

Jeff Su40:43

Okay, so Charlie's first question is around IDM competitor he wants to know very specifically if we see this competitor moving to insource 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 which

C.C. Wei41:14

Well Charlie we treat every customer fairly so whether it's IDM or is you know purely fabless 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 build up according to our own judgment

C.C. Wei41:36

Actually in our A14 we have see more and more customer actually higher than the two nanometers activities so far and we expect that A14 will be a bigger node than our current N2 technologies.

Charlie Chan41:54

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

Jeff Su42:01

Well, again, Charlie wants to know very specifically this customers outsourcing plan which you probably may need to ask them but yeah

C.C. Wei42:15

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

C.C. Wei42:16

Okay,

Jeff Su42:20

Okay do you have a second question Charlie?

Charlie Chan42:48

Yes, I do thanks Jeff so the second question is a kind of follow up about your advanced packaging from what we're seeing that the is getting much bigger CC you said last time or even two quarters ago about your response you know SOW 3.5D so so lots of initiative is going on.

Charlie Chan43:23

So my question is that do you think those are kind of a corpus SOW 3.5D can really catch customers very rapid development of their larger scale chip like 14 reticle and secondly if some customer they initially choose to use Intel and for some reason cannot get to sufficient demand are you okay to bail out or support customers for the cost version for capacity thank you

Jeff Su43:58

Alright so Charlie's second question is focused on the advanced packaging I guess Charlie if I understand your question summarize it is of course customers are moving to larger and larger reticle size 14x so he wants to know TSMC's roadmap and solutions and how competitive we can be against I think he mentioned specifically our competitors EMIB T so how do we view our solution is it as competitive as our competitor that's the first part of his question

C.C. Wei44:09

Alright Charlie actually I still think that TSMC's advanced

C.C. Wei45:55

Assembly or let's say packaging technology are very very competitive but the most important thing is we using that one to help us help our customers product can be introduced in the market smoothly that's our number one priority and so we have to offer them the best technology with enough capacities so far let me share with you our today's situation we are in the real world production of 5x reticle size I don't believe that anybody can do that today except TSMC and the year is excellent so our customer are very satisfied with the result and then we are working on the 9x reticle size and moving into the 14x reticle size of course we are also working on the COPaS and to make sure that in the future we can offer a reasonable cost reduction but so far the cost is still the number one choice for our customer as time goes by yes our competitor offer a very competitive solution still I want to say that today's situation we are the only one that you know make sure that the advanced packaging is a 5x reticle size and still we are very competitive I want to emphasize that

Jeff Su46:05

And then Charlie's question if the competitor cannot deliver on their solution Charlie I think you're saying will he be willing to be a something like a backup plan

C.C. Wei46:05

I

C.C. Wei46:29

I I try to avoid to answer it directly but let me say that yes we will be number one priority I already indicate that TSMC's customers product can be introduced into the market smoothly that's a number one priority okay and that give you enough hint

Charlie Chan46:40

Yes yes indeed yeah so so thanks for all the answers I I hope you don't leave any food to others including the advanced package thank you thanks everyone

Jeff Su46:46

Thank you alright operator let's move on to the next participant please

Operator46:51

Next one Sunny Lin UBS go ahead please

Sunny Lin47:51

Good afternoon thank you very much for taking my question so my first question is to have a bit more color on how we should think about capex beyond 2026. Recall a few quarters ago you mentioned if you are doing your job well then you may be able to drive capex to grow a bit less than top line but now obviously the overall capex demand has further strengthened and you also willing to support your clients with more substantial expansion and therefore wonder at this point when you look at maybe the coming two years would you expect maybe capex to grow a bit faster maybe in line with sales or even a bit faster just like for 2026 and then meanwhile obviously the tool price is also increasing given a very tight supply and therefore going to 2027 would the higher tool price also be a driver for higher capex as well thank you

Jeff Su47:59

Higher sorry what was the last part of your question Sunny higher tool price higher what pop

Sunny Lin48:10

So yeah, wonder when we think about 2027 capex, should we also consider tool price inflation to be a meaningful variable for a lot higher capex compared with this year?

Jeff Su48:45

Understood. Okay, sorry. Okay, thank you. So Sunny's first question is about our capex beyond 26 really she's asking 27, 28 the next two years with the you know strong extremely robust demand that CC indicated question is around our capital intensity the next two years how do we see the capital intensity trending revenue growth versus a capex growth part one and then also the impact of tool inflation on the capex outlook as well.

Wendell Huang49:23

Okay Sunny this is Wendell it's a bit too early to share the capex number beyond this year's but as we said in the prepared remarks we have very strong conviction in the AI mega trend therefore our capex from 2026 to 2028 is expected to be significantly higher than the past three years and this is a step up of our investment to support the customers growth we have no intention to leave any food on the table for others

Wendell Huang49:58

The tool price inflation is real the tool price material labor cost etc however the majority of the capex is always related to the long term demand so that will be the composition going forward and capital intensity wise as we always said if our do our job right the increase in revenue will outpace the increase in capex and that is still the case from what we are looking at

Sunny Lin49:59

Okay.

Sunny Lin50:38

Got it. Thank you very much if I may have a very quick follow up on the capex side earlier Wendell you raised the margin dilution from overseas to I think six to 4% starting from 2027 given faster overseas expansion but for the US you still so far focused on Arizona so does that imply for Arizona the expansion for the second phase will happen very quickly or you are actually accelerating expansion for the third phase or even the other phases as well is there for the result for higher margin dilution for next year

Jeff Su51:09

Okay so Sunny's question is kind of about the puts and takes to next year's margin she does note as Wendell said in our prepared remarks that the overseas fabs will widen a bit to three to 4% in the next few years so she wonders what's driving that wider dilution CC did say we are pulling in the schedule for the second fab for three nanometer her question is is you know are we also pulling in third fab what's leading to this wider dilution and maybe yeah

Wendell Huang51:51

Okay Sunny as we mentioned we are doing everything we can wherever we can to increase our capacity to meet the strong demand from the customers and we are also accelerating everywhere including in the US we did mention before that the later part of the five year period the dilution margin dilution from overseas will be three to 4 percentage point and that still remain the case so it's three to 4 percentage point in the second part of the five year period

Sunny Lin51:58

I see. Thank you very much for the clarification. My second question I want to follow up on the

Jeff Su52:09

That was two questions Sunny so that's already two questions can we sorry but we probably just to accommodate as many as we can we're going to move on

Sunny Lin52:10

Sure

Jeff Su52:16

Thank you for your understanding operator can we move to the next participant please

Operator52:21

Next one, Haas Liu, Bank of America. America. Go ahead, please.

Haas Liu52:37

Yes, hi, CP, Wendell, and Jeff, thanks for taking my questions and congrats on the great results. My first question will be on your view regarding the potential shift in AI demand mix. You mentioned in the prepared remarks that the AI accelerator chipset demand is probably radiating into agentic AI demand.

Haas Liu52:54

Including CPUs and networking switches. We understand the overall AI investment is still pretty strong and even trending stronger across the board. But can we get more clarity that are you seeing your customers demand shifting toward more efficient compute solutions especially monetization gets more important.

Haas Liu53:00

And how should we think about the incremental opportunity for your manufacturing and packaging business? Thank you.

Jeff Su53:18

So Haas's first question is on the AI related demand his question is are we seeing a shift in the AI related demand more and more to CPU or networking switches and away from AI accelerators or any type of comment yeah

C.C. Wei54:22

Well all I can say is AI's demand is extremely robust okay whether it's come from accelerator or is more from the CPU side it's not for me to make a comment although we did see the demand from agentic AI CPUs continue to increase yes that is a trend today but other than that that everything is very robust and I want to emphasize again in our judgment we consider all the parameter and the demand actually still far above our capability today to supply and we are working very hard to narrow the gap that's all I can say

Haas Liu54:57

Okay thank you that's very clear and my second question is just regarding the yield learning curve going forward for your dual technology tracks strategy going forward so historically I think you have been ramping up the yield of a new node through producing the chipsets with smaller die size and simpler design to improve the learning curve of a new node but for the future node families supporting both conventional power delivery for the applications like mobile and consumer applications and superpower well technology for HPC and AI chipsets.

Haas Liu55:12

Should operating tool process architectures at the same time make the learning curve more challenging or increase the manufacturing complexity and how should we think about the implication to your gross margins from the yield and also cost control perspective? Thank you.

Jeff Su55:57

Okay so Haas's second question is his question is really about ramping a new node the learning curve of yield and cost and therefore the implication to gross margin really I think is what he's driving at and his question is that in the past a new node is mostly ramped you know with smaller die size and simpler design but you know so you know today we have you know both the smartphone and also with the AI and HPC applications coming in does that increase the complexity of the node process architecture make the learning curve more challenging or difficult and therefore the implication to the margin

C.C. Wei56:12

Well, today's situation actually is a little bit different from previous years. Yes, we now have a very strong demand from smartphone and also AI HPC applications.

C.C. Wei56:52

And so the smaller die size per se or the big die size in the accelerator they happen at the same time and this is to TSMC's advantage let me say that because we are good we have been prepared for this kind of thing and our result are very excellent and customer are very happy to working with us and so the learning curve yes but we are doing a reasonable job and so the customer are very happy today

Haas Liu56:55

Okay, thank you so much

Jeff Su57:03

Okay thank you operator let's move on to the next participant please

Operator57:08

On the line, Macquarie, go ahead please.

Arthur Lai57:42

Uh hi I really appreciate me taking my question I have a question on the power is getting vector so so I want to understand the have a power grid constraint lead to reduce your customer forecast in the history and also could this tighter and tighter power grid supplies make your customer actually assessing adoption of your superpower rail products?

Arthur Lai57:47

For the later better performance tower thank you

Jeff Su58:15

Okay, so Arthur's first question is about the power supply or electricity supply is it a gating factor and have we seen that lead to a reduction in customers forecast and with the tighter on the other side or the other hand with the tighter power electricity supply have we seen more customers adoption of superpower rail technologies

C.C. Wei58:38

Well, let me update that definitely power supply situation is one of the consideration factor that we look into and that's why also we do one more step to double check whether the power supply situation in the US

C.C. Wei58:48

And you know we have done all the study and so far so good let me say that and whether this kind of situation

C.C. Wei59:29

Change our customers behavior and move more into the backside power rail the answer is no you know whether you use the backside power those kind of metallization scheme is based on your need for your product okay so some of the accelerator might be using it some of the product like mobile phones they don't use it so it depends on customers product

C.C. Wei59:31

Did I answer the question?

Arthur Lai59:31

Yeah.

Arthur Lai59:32

Okay.

Arthur Lai59:34

Yes, thank you.

Jeff Su59:38

Do you have a second question?

Arthur Lai1:00:18

Yeah, thanks. Yes. So just recall the previous discussion on the agentic AI demand on the CPU so I wonder you know according to our previous framework demand focus framework the middle high 50 growth including the CPU or not and if we heard our clients increase the CPU forecast significantly, when is the next time we refresh our AI demand growth numbers?

Jeff Su1:00:45

Okay, so Arthur's second question is on his question is really on our we already stated but anyway our AI accelerator definition he wants to know with the emergence of agentic AI and CPU does that AI accelerator definition include CPUs or not and if when we will provide a inclusion for him

C.C. Wei1:01:26

Let me answer the question it's not including in our AI demands calculation the reason is very simple because we cannot identify which CPU used in the conventional server CPU or AI server CPU and also that it depends on our customers application and their own allocation also so no so far today we stick to our initial very narrow definition on the AI's demand

Arthur Lai1:01:39

Understand and so if we have seen a very strong CPU driven demand when we will revise up the

Jeff Su1:01:52

I think Arthur I think we already said very clearly it's not part of the AI accelerator definition it's a narrow definition but it is certainly part of our business okay

Arthur Lai1:01:55

Yeah sure

Jeff Su1:02:02

Okay operator in the interest of time can we take question from the last participant on the line please

Operator1:02:08

Yes, Sahil Singh, Stifel Financial. Go ahead, please.

Unidentified speaker1:02:49

Hello, thank you for the question. Um you know into 2027 you have N3 turning accretive and now that's crossed over N2 still in its dilutive ramp and the overseas dilution is widening so on the opposite side there have been reports of significant price increases across your mature and advanced nodes could you provide some color into perhaps some of that conversation and where pricing does move does it typically apply across the existing contracted book or is it mainly being applied to incremental capacity above what customers have already committed to

Jeff Su1:03:05

Yeah, okay, so the first question is talking about I guess you're asking about the potential puts and takes for next year or you're asking specifically on pricing, sorry. pricing

Unidentified speaker1:03:06

Specifically on pricing

Jeff Su1:03:25

Okay, so it's a very specific question that there's reports that we are increasing the price he wants to know does it apply across the existing contracted commitments from customers or is it mainly for the incremental capacity

C.C. Wei1:04:20

Well we have discussed this kind of thing before that our pricing strategy is very strategic it also depends on the market segment depend on the location and depends on the technology and something once we offer the flexibility of the physical location like in the US it will be a little bit different from the one we produce in Taiwan so no matter what well we try to get our value to be recognized and we will give our shareholder the maximum value of our technologies.

Unidentified speaker1:05:00

Understood. Thank you. For the second question, you know, something you said in your prepared remarks stuck out to me was we will not be leaving food on the table. And you know earlier I think it was maybe one or two weeks ago there was the announcement via Global Foundries that they would be providing silicon interposers to TSMC and so would love some color into you know how are you thinking through these strategic decisions in terms of procuring from some of the specialty foundries versus providing in-house thank you

Jeff Su1:05:15

Okay, so his second question is again he notes that recently we had an announcement with Global Foundry on interposer so how do we view these partnerships and what is our approach strategically?

C.C. Wei1:06:16

But let me answer the question we design a deal with Global Foundry and this is part of our overall strategy in the back end supply actually our number one priority is to help our customer to be successful in their market we want them to be fully supported by all the supply including the front end and back end definitely we have a little bit shortage on the back end and we like to work with our so-called partner with Global Foundry so that we can both TSMC and Global Foundry can support TSMC's customer for their product to be introduced with enough support on the capacity.

Unidentified speaker1:06:23

Understood. Thank you very much for my questions.

Jeff Su1:06:57

Okay. Thank you for your questions. Thank you for all the participants this does conclude our question and answer session before we conclude today's conference please be advised that the replay of the conference will be accessible within 30 minutes from now the transcript will become available 24 hours from now and you can find both will be available through TSMC's website at www.tsmc.com so again thank you for joining us today we hope everyone continues to stay well have a good autumn and we hope you will join us again next quarter thank you and have a good day