Taiwan Semiconductor Manufacturing Co., Ltd. Q2 FY2026 earnings call

• Technology Roadmap

  • 2 nm (N2) volume production is ramping steeply in Q3 2026, and the 2 nm family is projected to have a larger, longer market lifespan than the 3 nm node
  • A14 (second-generation nanosheet technology, 1.5 generations beyond N2) development is on track and ahead of schedule: it delivers 10-15% speed improvement at equal power, 25-30% power improvement at equal speed, and ~20% density gain over N2; pre-production starts in 2027, volume production in 2028
  • A13 and A12 (derivatives of the A14 family) are scheduled for volume production in 2029, offering further area savings, performance improvements, and power efficiency
  • CoWoS advanced packaging development continues, with a pilot line for glass substrate technology that will take another year to reach production maturity
  • COUPE packaging platform is already in initial production and expected to see growing demand for AI data center networking applications over the next several years

• Capacity Expansion Strategy

  • Announced an additional $100 billion investment in Arizona, U.S. to build four additional fabs (front-end 2 nm and below logic, plus advanced packaging) to meet strong multi-year demand from U.S. customers, support U.S. semiconductor ecosystem development and strengthen supply chains
  • TSMC is also continuing to invest heavily in Taiwan, planning 13 new leading-edge and advanced packaging fabs over the next several years, and expanding capacity in Japan and Germany for mature/specialty nodes
  • For 3 nm: three new fabs are being added (one each in Taiwan, Arizona, Japan), plus existing 5 nm tools are being converted to 3 nm production and cross-node capacity optimization is implemented to maximize output
  • Disciplined multi-year capacity planning combines top-down market analysis and bottom-up customer input, with close collaboration with tool suppliers to avoid expansion bottlenecks

• Business & Product Strategy

  • AI remains a strong multi-year structural megatrend, with extremely robust demand; the emergence of agentic AI is driving additional CPU demand for AI data centers alongside existing AI accelerator demand, which is broadly positive for TSMC as nearly all CPU architectures (x86, Arm, RISC-V) are TSMC customers
  • Mature node strategy is unchanged: TSMC prioritizes and continues expanding capacity for higher value-added strategic segments, including CMOS image sensors at Japan's JASM and automotive/industrial at Germany's ESMC; no capacity expansion is planned for weak-demand commodity mature segments
  • Dividend commitment: 2026 cash dividend per share will be TWD 24 (up 33% year-over-year), with further dividend increases expected in 2027
  • Pricing strategy: TSMC prioritizes long-term customer partnership and sustainable growth, targeting gross margins sufficient to fund continued expansion while supporting customer success, rather than extreme short-term price increases

By process technology (wafer revenue): 2 nm contributed 3%, 3 nm contributed 30%, 5 nm contributed 33%, 7 nm contributed 11%. Advanced technologies (7 nm and below) accounted for 77% of total wafer revenue. By end market platform (revenue contribution): HPC (High Performance Computing) increased 20% quarter-over-quarter, contributing 66% of Q2 2026 revenue; Smartphones decreased 4% quarter-over-quarter, contributing 22%; IoT increased 4% quarter-over-quarter, contributing 5%; Automotive increased 15% quarter-over-quarter, contributing 4%; DCE increased 5% quarter-over-quarter, contributing 1%. Total Q2 2026 revenue came in at $40.2 billion, at the high end of prior guidance. Gross margin for Q2 2026 was 67.7%, 150 basis points higher sequentially than Q1 2026. Cash flow from operations was TWD 783 billion, capital expenditures were $15.7 billion (TWD 496 billion), ending cash balance was TWD 3.1 trillion (up TWD 99 billion quarter-over-quarter) with total cash and marketable securities of TWD 3.5 trillion ($110 billion).

• Q3 2026 revenue is expected to be between $44.6 billion and $45.8 billion, representing 12% sequential growth and 37% year-over-year growth at the midpoint
• Q3 2026 gross margin is guided between 65% and 67% (a 1.7 percentage point sequential decrease at the midpoint), with operating margin between 56% and 58%; gross margin dilution of 3-4 percentage points from the 2 nm ramp is partially offset by strong leading-edge demand and ongoing cost improvements
• Full year 2026 revenue growth is now expected to be slightly above 40% year-over-year (an upward revision from prior guidance)
• Full year 2026 capital budget is raised to $60 billion-$64 billion (an upward increase from prior guidance of $52 billion-$56 billion); 70-80% of the 2026 capital budget is allocated to advanced process technologies, 10% to specialty technologies, and 10-20% to advanced packaging, testing, mask making and other activities
• H2 2026 gross margin will see 3-4 percentage points of dilution from the 2 nm ramp, and 2-4 percentage points of dilution from overseas fab ramp-up over the next several years, partially offset by strong demand, capacity optimization and cost improvements
• AI demand CAGR is now stronger than the prior five-year guidance of mid-to-high 50%, though no updated numerical target was provided
• 2 nm capacity CAGR from 2026 to 2028 is now larger than the previously guided 70% CAGR, and 3 nm/5 nm capacity growth is also higher than prior targets
• No three-year numerical CapEx guidance was provided, but management confirmed that total CapEx over the next three years will be significantly higher than CapEx over the past three years

• Macroeconomic uncertainty and rising component prices are pressuring price-sensitive consumer end markets
• Foreign exchange rate fluctuations are outside of TSMC's control and can impact profitability
• There is a large gap between strong AI-driven demand and available manufacturing capacity that TSMC is working rapidly to close
• Power constraints and data center construction delays could impact near-term AI chip deployment; TSMC incorporates these factors into its capacity planning to avoid excess inventory
• Leading-edge technology development and capacity ramp takes 5-7 years, requiring long-term planning and carries inherent execution risk
• Competitive pressure exists from other foundries with access to large capital and government support, though management notes technology, manufacturing excellence and customer trust remain the core competitive differentiators with no shortcuts to market leadership
• Customer concentration has increased with the growth of large AI customers, though management notes this is not a concern and there is also growing participation from new AI market entrants

Q: Beyond 2026, will TSMC provide a three-year CapEx outlook similar to past cycles, and what is the time frame for the additional $100 billion Arizona investment? / A: Management did not provide a specific three-year CapEx number, but confirmed that next three years' CapEx will be significantly higher than the past three years, as the company will continue investing to match strong long-term AI demand. The Arizona investment timeline is flexible, dependent on customer demand and market conditions, with four additional fabs planned and the company working to speed up construction as much as possible to narrow the demand-supply gap.

Q: How does TSMC view competitive threats from Samsung Foundry and Intel with large capital/government support, and is the 5-year AI CAGR guidance still accurate? / A: Management stated that government support and capital are helpful, but core competitive success depends on technology leadership, manufacturing excellence, and customer trust, which take years of development with no shortcuts. The AI CAGR is now stronger than the prior mid-to-high 50% guidance, but no updated numerical target was shared given the rapidly growing demand.

Q: Competitors' EMIB-T advanced packaging is gaining traction; does this create a competitive threat to TSMC's front-end wafer business, and how will TSMC handle customer requests to support this technology? / A: TSMC's advanced packaging capacity is currently severely constrained, so additional packaging capacity from competitors helps free up bottlenecks and supports TSMC's front-end wafer business, which is the majority of TSMC's revenue. TSMC's core priority is supporting customer success, and will accommodate any reasonable customer requests related to packaging needs.

Q: What is driving the $10 billion increase in 2026 CapEx guidance compared to six months ago, and what is the supply-demand dynamic for mature nodes? / A: The main driver of the CapEx increase is continued growth in AI customer demand for more capacity, plus general inflation in equipment pricing. For mature nodes, only AI-related segments (power management ICs for data centers and sensors) are in shortage; most other consumer-focused commodity mature segments remain weak, aligned with soft consumer end-market demand.