Transcript: Taiwan Semiconductor Manufacturing (TSM) Q3 2026 Earnings Call

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 manufacturer in every region that we operate.

2026 Capital Budget

Next, let me make some comments on our 2026 capital budget. At TSMC, a higher level of capital expenditures is always correlated 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 $60 billion and $64 billion. 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.

Additionally, while the tool supply is tight, we always collaborate closely with our tool 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.

Near-Term Demand Outlook

C.C. WEI, Chairman and CEO, TSMC: 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$46.7 billion higher than our guidance in US dollar terms, driven by strong demand for our leading edge process technologies.

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.

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. 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.

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 term.

AI-Related Demand Outlook

Next, let me talk about 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 chatbot 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.

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. Therefore, semiconductor will remain essential in the AI megatrend.

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. 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 multiyear structural AI related demand. Therefore, all the AI players are working with TSMC.

Capacity Expansion Strategy

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.

To address the structural increase in the long term semiconductor market demand profile, TSMC collaborated closely with our customers, get our customers and customer to plan for our capacity. In addition, we are now going one step further and sending our own teams of people to check on the data center build out process, 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 improved 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. 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’ 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 assessed demand and stepping up our CapEx investment to support our customers’ future growth.

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.

N2 and A14 Technology Update

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

Global N3 Capacity Expansion

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 its targeted capacity. However, based on our assessment, we are executing well on our global capacity plan to add three new fabs to support the robust multiyear pipeline or demand for three nanometer technologies.

In Taiwan, volume production for our new three 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 customer, we have decided to add one additional three nanometer fab in Tainan. Volume production 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 tool 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 plant to utilize 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. 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, whenever 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 concluding our key message and thank you for your attention.

Question-and-Answer Session

JEFF SU, Director of Investor Relations, 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 as many participants as possible the 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 then one on your telephone keypad now. If at any time you’d like to remove yourself from the question in queue, please press 2. Now let’s begin the Q and A session.

Operator, can we proceed with the first caller on the line please?

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

AI Demand Outlook and Capacity Planning

LAURA CHEN, Analyst Citigroup: Thank you very much. Good afternoon. And 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 the customer’s 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 the HBM, ABF as advanced packaging, and also in the networking side, we see the tightness of laser as well.

So if this constraint create a mismatch between semiconductor supply and also actual AI development, how would TSMC adjust your minimize the potential overbuilding in the supply chain? Thank you. That’s my first question.

JEFF SU, Director of Investor Relations, TSMC: 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 C.C. said, seems to be very strong, but she’s worried or concerned.

How do we reconcile the strong demand of AI chips versus risks related to whether it be power supply, I think also different bottlenecks within the supply chain, etcetera. How do we make our assessment of what is the appropriate CapEx and capacity we need to prepare? Is that correct, Laura?

LAURA CHEN, Analyst Citigroup: Yes. Thank you.

C.C. WEI, Chairman and CEO, TSMC: That’s a long, long question. Laura, let me share with you. We have a very sophisticated capacity plan 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 CSPs CapEx, data centers, build up, financial, power supply, and also other component supply, etcetera into our consideration. And so we make our own judgment and then based on our assessment, the demand, we still think the demand is higher than the supply, and we are working very hard to narrow the gap. Did I answer your question, Laura?

LAURA CHEN, Analyst Citigroup: Sure. Thank you. Thank you very much. So so far from our comprehensive starting the supply chains, we are still quite positive on the demand in the longer term. Right? So in that case, can you also give us more color about that? What’s… Any update on your AI CAGR growth? I recall previously we’re talking about IS 50%. We… Sorry. Sorry.

JEFF SU, Director of Investor Relations, TSMC: 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 fifties percentage from 2024 to 2029. So Laura wants to know, do we have any update to that number today?

C.C. WEI, Chairman and CEO, TSMC: 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 a high 50 CAGR, it doesn’t matter. It probably will be higher.

High-NA EUV and Long-Term Profitability

LAURA CHEN, Analyst Citigroup: Sure. Okay. Yes. Thank you very much. Yeah. And my second question is also about 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 EUV around 2030. So should we think about that? That will be further improved productivity. That will be more meaningful for further 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, the capital efficiency return?

JEFF SU, Director of Investor Relations, TSMC: Okay. That’s actually two questions, but okay. We’ll…

LAURA CHEN, Analyst Citigroup: Just very quickly.

JEFF SU, Director of Investor Relations, TSMC: So, Laura, part of it is on with the strong demand on our CapEx cycle, how do we view the adoption of High-NA, which we said we will in 2030. And then her question is on profitability, long term outlook.

LAURA CHEN, Analyst Citigroup: Yeah. Thank you.

C.C. WEI, Chairman and CEO, TSMC: Oh, okay. Let me answer that question. Yes. For the long term productivity, we continue to improve it. And High-NA 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’s no ceiling for TSMC’s profitability, but a dramatic increase will not happen overnight either. So our philosophy or our strategy always are working with our customer and we want to make them be successful and then we can gain our value.

LAURA CHEN, Analyst Citigroup: Thank you very, very helpful. Appreciate it and congrats for the great result. Thank you.

JEFF SU, Director of Investor Relations, TSMC: Thank you. Operator, can we move on to the next participant please?

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

Wafer Supply Tightness and Capacity Growth

GOKUL HARIHARAN, Analyst JPMorgan: Hi. Good afternoon, C.C., Wendell and Jeff. My first question, again, on capacity addition. Looks like the shortage, just wanted to hear, 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. I think if you look at our annual report, I think it’d be about ten years that you’ve 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 what is your planned wafer capacity growth in the next couple of years? That’s my first question.

JEFF SU, Director of Investor Relations, TSMC: Okay. So Gokul’s first question is regarding the capacity addition and the demand. So his question first is 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 and sometimes even lower. But anyways, regardless, those are the two questions. So first on just the demand outlook and then the supply, will next year be even more tight than this year?

C.C. WEI, Chairman and CEO, TSMC: 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 are customer, and then we do our own one more step to check the data centers are built out.

All the result we put into our judgment and our assessment, the result is that 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 it’s… The gap become bigger or the gap become narrow, we are working very hard. I cannot answer this question right now because of my customer continue to increase their demand.

WENDELL HUANG, Senior Vice President and CFO, TSMC: 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, 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?

U.S. Expansion, Texas and Terafab

GOKUL HARIHARAN, Analyst JPMorgan: Fair enough. Okay. Secondly, I think you alluded to more aggressive overseas expansion plans 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 one of your customers also talked about discussions with TSMC as well.

So, C.C., could you talk a little bit about your overseas plan, the more accelerated kind of capacity build out? And also any engagement with Texas or Tesla, given your customer did call you out last week in terms of some engagements here? 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 SU, Director of Investor Relations, TSMC: Okay. Thank you, Gokul. So Gokul’s second question, he knows that C.C. 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 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 one of our customers, we’re engaging in discussions. He wants to know what kind of framework or parameters of any cooperation may be or any comment on either of those two things.

C.C. WEI, Chairman and CEO, TSMC: Okay. Gokul, we work very hard to expand our capacity in US. This is necessary because of all our customer, most of our large customer in US and then they request the 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 expand our capacities consideration to see outside Arizona whether we can get another chance to expand our capacity. And Texas is the one. So we send the teams to Texas to do all the evaluation.

And we also talk to one of our customer who tried to build a fab, Terafab. Let me be more specific. And we are discussing 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.

GOKUL HARIHARAN, Analyst JPMorgan: Okay. But all these are going to be TSMC run fabs. Right? I think you’re not becoming part of the Terafab project or anything like that. Can you just help us understand what are the principles that you are using here? Is it a similar principle that you use for JASM or ESMC?

JEFF SU, Director of Investor Relations, TSMC: Okay. So Gokul’s question is not 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. WEI, Chairman and CEO, TSMC: We are still in discussion. Let me say that. It’s not either way, it won’t be possible, but the fab got to be run by TSMC.

JEFF SU, Director of Investor Relations, TSMC: Thank you. Operator, can we move on to the next participant, please?

OPERATOR: Yes. Next one, Krish Sankar, TD Cowen. Go ahead, please.

Secondary Wafer Market

KRISH SANKAR, Analyst TD Cowen: Yes. Hi, thanks for taking my question. I have to open first one, C.C. Some customers talk about a secondary wafer market where one customer passes their wafer allocation to another. Is this a very small portion of the business? Is it customer specific? Or do you see that as an emerging trend where customers who demand weak back some of the allocation to stronger customers? And then I have a quick follow-up.

JEFF SU, Director of Investor Relations, TSMC: All right, Krish, thank you. So Krish’s first question is asking, some of our customers are talking about a reseller, a 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?

C.C. WEI, Chairman and CEO, TSMC: Well, let me answer that. 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.

But in certain cases, customer can collaborate through mask licensing agreement, but this is not our common practice. And the amount is a very, very small. Krish, did I answer your question?

High-NA EUV Adoption and Competition

KRISH SANKAR, Analyst TD Cowen: Yes, you did. Thank you very much for that. And then a quick follow-up. You did touch upon it, High-NA agreement with ASML from 2030 onwards. I’m just curious, historically, TSMC was more ahead of the curve with the EUV adoption.

It looks like by the time you adopt High-NA EUV, it’d be 2030, 2031, but some of your 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? Thank you.

JEFF SU, Director of Investor Relations, TSMC: Okay. So Krish’s second question is looking at High-NA, he notes some of our competitors 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. WEI, Chairman and CEO, TSMC: 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 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’re also working very closely with ASML to establish 12 inch photomask by 2031. And in 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. Whether that our technology because we are using it later than our competitor, 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?

KRISH SANKAR, Analyst TD Cowen: Thank you very much. Okay. Yeah. Thank you very much.

C.C. WEI, Chairman and CEO, TSMC: Thank you, sir.

JEFF SU, Director of Investor Relations, TSMC: Okay. Operator, can we move on to the next participant, please?

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

IDM Customers and A14 Node Outlook

CHARLIE CHAN, Analyst Morgan Stanley: Hi, gentlemen. Thanks for taking my question. And also glad to hear very strong AI semi demand amid some recent market correction.

So my first question is really about your unit capacity expansion strategy. As far as I know, one of your IDM customers is spending capacity aggressively. So there are some concerns about this customer may in source more than outsource 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, C.C., 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, server CPU at A14? Thank you.

JEFF SU, Director of Investor Relations, TSMC: 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? Which…

C.C. WEI, Chairman and CEO, TSMC: Well, Charlie, we treat every customer fairly. So whether it’s IDM or is 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.

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

CHARLIE CHAN, Analyst Morgan Stanley: I see. So it doesn’t need to consider this IDM will also outsource. We can still have A14 to be a bigger node than… Until we set the right understanding.

JEFF SU, Director of Investor Relations, TSMC: Well, again, Charlie wants to know very specifically this customer’s outsourcing plan, which you probably may need to ask them, but…

C.C. WEI, Chairman and CEO, TSMC: Yeah. 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.

JEFF SU, Director of Investor Relations, TSMC: Okay. Do you have a second question, Charlie?

Advanced Packaging: CoWoS, SoW and Larger Reticle Sizes

CHARLIE CHAN, Analyst Morgan Stanley: Yes, I do. Thanks, Jeff. So the second question is kind of follow-up about your advanced packaging. From what we’re seeing that the reticle size is getting much bigger. C.C., you said last time or even two quarters ago about your response, SoW, 3.5D, so lots of initiative is going on.

So my question is that do you think those are kind of a CoWoS, SoW, 3.5D can really catch customers a very rapid development of their larger reticle sized chip like 14 reticle?

And secondly, if some customer, they initially choose to use Intel’s EMIB-T and for some reason cannot get to sufficient demand, are you okay to bail out or support customers for the CoWoS version or capacity? Thank you.

JEFF SU, Director of Investor Relations, TSMC: Alright. So Charlie’s second question is focused on the advanced packaging. I guess, Charlie, if I understand your question, summarize it. 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. WEI, Chairman and CEO, TSMC: All right, Charlie. Actually, I still think that TSMC’s advanced assembly or they say packaging technology are very, very competitive. But the most important thing is that we’re 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 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 the TSMC. And the yield 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 CoPoS and to make sure that in the future, we can offer a reasonable cost reduction. But so far, the CoWoS 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 make sure that the advanced packaging is a 5x reticle size. And still, we are very competitive. I want to emphasize that.

JEFF SU, Director of Investor Relations, TSMC: And then Charlie’s question, if the competitor cannot deliver on their solution, Charlie, I think you’re saying will you be willing to be a…

CHARLIE CHAN, Analyst Morgan Stanley: Something like a backup plan?

C.C. WEI, Chairman and CEO, TSMC: 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 are product can be introduced into the market smoothly, that’s a number one priority. Okay. And that give you enough hint.

CHARLIE CHAN, Analyst Morgan Stanley: Yes. Yes, indeed. So thanks for the early answers. I hope you don’t give any food to others including the advanced phase. Thank you.

C.C. WEI, Chairman and CEO, TSMC: Thank you.

JEFF SU, Director of Investor Relations, TSMC: Alright. Operator, let’s move on to the next participant, please.

OPERATOR: Next one, Sunny Lin, UBS. Go ahead, please.

CapEx Beyond 2026 and Tool Price Inflation

SUNNY LIN, Analyst UBS: Good afternoon. Thank you very much for taking my question. So my third 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 product demand had further strengthened and you’re also willing to support your clients with more substantial expansion. And therefore, wonder at this point, when you look at maybe the coming maybe in line with sales or even a third factor 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 a higher tool price also be a driver for higher CapEx as well? Thank you.

JEFF SU, Director of Investor Relations, TSMC: Higher… Sorry. What was the last part of your question, Sunny? A tool… Higher tool price, higher what?

SUNNY LIN, Analyst UBS: The… Well, so… Yeah. I 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 SU, Director of Investor Relations, TSMC: Understood. Okay. Sorry.

SUNNY LIN, Analyst UBS: Okay. Thank you.

JEFF SU, Director of Investor Relations, TSMC: So Sunny’s first question is about our CapEx beyond ’26, really, she’s asking ’27, ’28, the next two years. With the strong, extremely robust demand that C.C. 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 HUANG, Senior Vice President and CFO, TSMC: 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 megatrend. 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.

The tool price inflation is real. The tool price, material, labor costs, etcetera. 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 I 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.

Overseas Fab Margin Dilution

SUNNY LIN, Analyst UBS: 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, 6% to 4% starting from 2027, given faster overseas expansion.

But for the U.S., you’re 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 the 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 SU, Director of Investor Relations, TSMC: Okay. So Sunny’s question is kind of about the puts and takes to next year’s margin. Does note, as Wendell said in our prepared remarks, that the overseas fabs will widen a bit to 3% to 4% in the next few years. So she wonders what’s driving that wider dilution.

C.C. did say we are pulling in the schedule for the second fab for three nanometer. Her question is, are we also pulling in third fab? What’s leading to this wider dilution? And maybe, yeah.

WENDELL HUANG, Senior Vice President and CFO, TSMC: 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 U.S.

We did mention before that the latter part of the five year period, the dilution margin dilution from overseas fab will be three to four percentage point. And that still remain the case. So it’s three to four percentage point in the second part of the five year period.

SUNNY LIN, Analyst UBS: I see. Thank you very much for the clarification. My second question, I want to follow-up on the…

JEFF SU, Director of Investor Relations, TSMC: There 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 LIN, Analyst UBS: Sure.

JEFF SU, Director of Investor Relations, TSMC: Thank you for your understanding. Operator, can we move to the next participant, please?

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

Shift in AI Demand Mix: Accelerators, CPUs and Networking

HAAS LIU, Analyst Bank of America: Hi, C.C., 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 proliferating into an agentic AI demand, 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 computer solutions, especially monetization gets more important? And how should we think about the incremental opportunity for your manufacturing and packaging business? Thank you.

JEFF SU, Director of Investor Relations, TSMC: So, Haas’ 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.

C.C. WEI, Chairman and CEO, TSMC: Yeah. Well, all I can say is AI’s demand is extremely robust. Okay. Whether it’s come from accelerator or is it more from the CPU side, It’s not for me to make a comment. Although we did see the demand from agentic AI CPUs is continue to increase. Yes. That is a trend today.

But other than that, everything is very robust. And I want to emphasize again, in our judgment, we consider all the parameter and the demand actually is still far above our capability today to supply, and we are working very hard to narrow the gap. That’s all I can say.

Yield Learning Curve with Dual Technology Tracks

HAAS LIU, Analyst Bank of America: 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 a conventional power delivery for the applications like mobile and a consumer applications and Super Power Rail technology for HPC and AI chipsets. Could operating two process architectures at the same time make the learning curve more challenging or increase the manufacturing complexity? How should we think about the implication to your gross margins from the yield and also cost control perspective? Thank you.

JEFF SU, Director of Investor Relations, TSMC: Okay. So Haas’ 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, new node is mostly ramped with smaller die size and simpler design, but so today we have 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. WEI, Chairman and CEO, TSMC: Well, today’s a 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. 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 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 LIU, Analyst Bank of America: Okay. Thank you so much.

JEFF SU, Director of Investor Relations, TSMC: Okay. Thank you. Operator, let’s move on to the next participant, please.

OPERATOR: Arthur Lai, Macquarie, go ahead please.

Power Supply Constraints and Super Power Rail Adoption

ARTHUR LAI, Analyst Macquarie: Hi. I really appreciate me taking my question. I have a question on the power is getting better. So I want to understand have a power grid constraint lead to reduce your customer forecast in the history? And also, could this tighter and tighter power be the surprise, make your customer actually assess letting adoption of your Super Power Rail products for the better performance power? Thank you.

JEFF SU, Director of Investor Relations, TSMC: 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 on the other hand, with the tighter power electricity supply, have we seen more customers adoption of Super Power Rail technologies?

C.C. WEI, Chairman and CEO, TSMC: Well, let me update that. Definitely, the power supply situation is one of the consideration factor that we are looking into. And that’s why also we do one more step to double check whether the power supply situation in the US. And we have done all the study and so far so good. Let me say that.

And whether this kind of situation change our customers’ behavior and move more into the backside power rail? Yes or no. Whether you use the backside power, those kind of a 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. Did I answer your question?

ARTHUR LAI, Analyst Macquarie: Yeah. Okay. Yes. Thank you, C.C.

JEFF SU, Director of Investor Relations, TSMC: Do you have a second question?

AI Accelerator Definition and CPU Demand

ARTHUR LAI, Analyst Macquarie: Yes. Thanks, Jeff. So just to recall the previous discussion on the agentic AI demand on the CPU. So I want to, according to our previous framework, demand focus framework, the mid to high teens 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 SU, Director of Investor Relations, TSMC: 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 what the emergence of agentic AI and CPU, does that AI accelerator definition include CPUs or not? And if, when, we will provide inclusion for him.

C.C. WEI, Chairman and CEO, TSMC: 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 user in the conventional server CPU or AI server CPU. And also that it depend on our customers application and their own location also. So no, so far today, we stick to our initial very narrow definition on the AI’s demand.

ARTHUR LAI, Analyst Macquarie: Understand. And so if we have seen a very strong CPU driven demand, when we will revise up the AI program?

JEFF SU, Director of Investor Relations, TSMC: 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 LAI, Analyst Macquarie: Yeah. Sure.

JEFF SU, Director of Investor Relations, TSMC: Okay. Operator, in the interest of time, can we take question from the last participant on the line, please?

OPERATOR: Yes. Sahej Singh, Stifel Financial. Go ahead, please.

Pricing Strategy

SAHEJ SINGH, Analyst Stifel: Hello, thank you for the question. 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 offset 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 SU, Director of Investor Relations, TSMC: Yes. 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.

SAHEJ SINGH, Analyst Stifel: Pricing. Specifically on pricing.

JEFF SU, Director of Investor Relations, TSMC: 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. WEI, Chairman and CEO, TSMC: 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 that 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.

GlobalFoundries Silicon Interposer Agreement

SAHEJ SINGH, Analyst Stifel: Understood. Thank you. For the second question, something you said in your prepared remarks, which stuck out to me was, “we will not be leaving food on the table.”

And earlier, I think it was maybe one or two weeks ago, there was the announcement via GlobalFoundries that they would be providing silicon interposers to TSMC. And so would love some color into 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 SU, Director of Investor Relations, TSMC: Okay. So his second question is again, he notes that recently we had an announcement with GlobalFoundries on Interposer. So how do we view these partnerships and what is our approach strategically?

C.C. WEI, Chairman and CEO, TSMC: Well, let me answer the question. We designed a deal with GlobalFoundries, and this is part of our overall strategy in the back end supply. Actually, our number one priority is to hear of 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 GlobalFoundries so that we can both TSMC and the GlobalFoundries can support TSMC’s customer for their product to be introduced with enough support and the capacity.

SAHEJ SINGH, Analyst Stifel: Understood. Thank you very much for my questions.

Closing Remarks

JEFF SU, Director of Investor Relations, TSMC: 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 thirty minutes from now. The transcript will become available twenty four 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.

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