Taiwan Semiconductor (NYSE:TSM) released third-quarter financial results and hosted an earnings call on Thursday. Read the complete transcript below.
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View the webcast at https://investor.tsmc.com/english/quarterly-results/2026/q3
Summary
Taiwan Semiconductor Manufacturing Company Limited (TSMC) reported a 16.2% sequential revenue increase to $46.7 billion for Q3 2026, surpassing guidance, with a gross margin decrease to 66.4% due to 2-nanometer ramp-up.
Advanced technologies (7-nanometer and below) accounted for 79% of wafer revenue, with high demand noted in HPC and automotive segments.
For Q4 2026, TSMC anticipates revenue between $52.3 billion and $54.3 billion, a 14% sequential increase, driven by strong demand for 2-nanometer technology.
TSMC is investing significantly in capacity expansion, with capital expenditures projected to be between $60 and $64 billion for 2026 to support robust AI-related demand.
Despite overseas fab ramp-up costs, TSMC remains confident in maintaining cost efficiency and plans to expand operations in the U.S. and other regions.
Management emphasized continued collaboration with customers and suppliers to manage capacity and cost challenges, highlighting confidence in capturing AI-related demand.
Full Transcript
Jeff Hsu, Director of Investor Relations
Good afternoon everyone and welcome to TSMC’s third quarter 2026 earnings conference call. This is Jeff Hsu, 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 materials. If you’re joining us through the conference call, your dial-in lines are in listen-only mode. 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 CEO, Dr. C.C. Wei, will jointly provide the company’s key messages. That will be followed. Then we will open the line for the Q&A session as usual. I would like to remind everybody that today’s discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause results to differ materially from those contained in the forward-looking statements.
Please refer to the Safe Harbor notice that appears in our press release. And now I would like to turn the call over to TSMC CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.
Wendell Huang, Senior Vice President and CFO
Thank you, Jeff. Good afternoon everyone. Thank you for joining us today. My presentation will start with financial highlights for the third quarter of 2026. After that I will provide the guidance for the fourth quarter of 2026. Third quarter revenue increased 17.6% sequentially in NT, supported by strong demand for our leading-edge process technologies. In US dollar terms, revenue increased 16.2% sequentially to $46.7 billion, above the high end of our third quarter guidance.
Gross margin decreased by 1.3 percentage points sequentially to 66.4%, primarily due to margin dilution from 2-nanometer ramp. Total operating expenses accounted for 7.8% of net revenue. Operating margin was 58.7%. Overall, our third quarter EPS reached NT$29.43 and ROE was 45.5%. Now let’s move on to revenue by technology. 2-nanometer process technology contributed 8% of wafer revenue in the third quarter, while 3-nanometer, 5-nanometer, and 7-nanometer accounted for 33%, 28%, and 10% respectively.
Advanced technologies, defined as 7-nanometer and below, accounted for 79% of wafer revenue. Moving on to revenue contribution by platform, HPC increased 22% quarter over quarter to account for 68% of our third quarter revenue. Smartphone increased 10% to account for 21%. IoT increased 5% to account for 4%. Automotive increased 23% to account for 4%, while DCE declined 12% to account for 1%. Moving on to the balance sheet, we ended the third quarter with cash and marketable securities of NT$4 trillion, or US$126 billion.
On the liabilities side, current liabilities increased by NT$110 billion quarter over quarter, mainly due to the increase of NT$46 billion incurrence of bond payables and bank loans, and NT$26 billion dividend payable. In terms of financial ratios, accounts receivable turnover days decreased by 1 day to 28 days. Inventory days decreased by 5 days to 82, primarily due to the increase in wafer shipment. Regarding cash flow and CapEx, during the third quarter we generated about NT$903 billion in cash from operations, spent NT$443 billion CapEx, and distributed NT$156 billion for fourth quarter 2025 cash dividends.
Overall, our cash balance increased NT$488 billion to NT$3.6 trillion at the end of the quarter. In US dollar terms, our third quarter capital expenditures totaled US$13.8 billion. I have finished my financial summary. Now let’s turn to our current quarter guidance. Based on the current business outlook, we expect our fourth quarter revenue to be between US$52.3 and US$54.3 billion, which represents a 14% sequential increase or a 58% year-over-year increase at the midpoint, based on the exchange rate assumption of US$1 to NT$31.8.
Gross margin is expected to be between 65% and 67%. Operating margin between 56.5% and 58.5%. This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our third quarter 2026 and fourth quarter 2026 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 2-nanometer technology.
We have just guided our fourth quarter gross margin to decrease by 40 basis points to 66% at the midpoint, primarily due to the continued margin dilution from the steep ramp-up of our 2-nanometer technology as well as dilution from overseas fabs. These impacts are expected to be partially offset by cost improvement efforts, including productivity gains and across-node capacity optimization. While the cost of overseas fabs remains higher, thanks to the company’s overall larger scale and cost improvement efforts, we now expect the gross margin dilution from the ramp-up of our overseas fabs to be closer to 2% for the full year 2026.
As we put more effort to support the strong structural demand from our customers, more fabs will be ramping up in the US. Thus, we expect the dilution from our overseas fabs to widen to 3% to 4% in the next few years. We will leverage our increasing size in Arizona and work on our operations to improve the cost structure. We will also continue to work closely with our customers and suppliers to manage the impact. Overall, with our fundamental competitive advantages of manufacturing technology leadership and large-scale production base, we are confident that TSMC continues to be the most cost-efficient manufacturer in every region that we operate.
Next, let me make some comments on our 2026 capital budget at TSMC. A higher level of capital expenditures is always correlated with higher growth opportunities in the following years. Given the continued robust multi-year demand from our customers, including the emerging generative AI market, we reiterate our full-year 2026 capital budget to be between US$60 and US$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.
C. C. Wei, CEO
Thank you, Wendell. Good afternoon everyone. Start with our near-term demand outlook. We concluded our third quarter with a 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-based technologies, including the steep ramp-up of our 2-nanometer technology.
Looking ahead, we continue to observe consumer and price-sensitive end market segments being challenged due to the impact of rising prices and macroeconomic uncertainties. As such, we will improve 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 continues to be equally robust, supported by our strong technology differentiation and broad customer base.
Therefore, we now expect our full-year 2026 revenue growth to be around 44% year over year in US dollar terms. 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 observe increasing AI demand fueled by the rising adoption of generative AI as we transition from chips to AI systems. In addition, we are observing greater adoption of open-source AI models.
This will drive greater efficiency and help lower the barrier to future AI usage that results 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 AI CPUs and the continued demand for networking chips are driving further silicon demand. Therefore, semiconductors 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 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.
Next, let me talk about TSMC’s capacity expansion strategy. As a foundry, our first responsibility is to provide our customers with the best technologies and effective capacity support to unleash their ambitions to address the structural increase in the long-term semiconductor market demand profile. TSMC collaborates closely with our customers and orders the 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 progress and power supply situation in the US.
The feedback is so far so good, and the CSP has been well prepared. Internally, TSMC employs 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’ multi-year product roadmaps and production plans. Thus we continue to hold strong vision 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 toward our customers’ future growth. TSMC is spending at an unprecedented, with near 20 fabs worldwide in progress, we We are building 13 leading-edge and advanced-packaging fabs in Taiwan over the next several years and another 5 to 6 fabs overseas. Our new node N2 has already entered high-volume manufacturing in the first half of 2025. With good yield, N2 is ramping successfully in multiple phases at both Hsinchu and Kaohsiung sites. We expect our N2 Family Technologies annual capacity to more than double by 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, Taiwan Semiconductor’s technologies and manufacturing will continue to play a pivotal role in supporting the global semiconductor industry while unleashing our customers’ innovation.
Now let me talk about Taiwan Semiconductor’s global entry 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 multi-year pipeline of demand for 3-nanometer technologies in Taiwan. Volume production for our new 3-nanometer fab in Tainan Science Park is well on track to begin in the first half of 2027.
In addition, driven by strong demand from our customer, we have decided to add one additional 3-nanometer fab in Tainan. Volume production is scheduled for the first half of 2028. In Arizona, we have reached the construction of our second fab and are in the process of tool move-in and installation. Volume production will begin in third quarter ’27, slightly ahead of our previous schedule. In Japan, we are progressing well to our plan to utilize 3-nanometer in our second fab and volume production is scheduled in 2028.
In addition to all the new fabs, we continue to convert 5-nanometer tools to support 3-nanometer capacity in Taiwan. We are also leveraging our manufacturing excellence to greater productivity across our fabs in all locations to generate more wafer output. We are also focusing on capacity optimization across nodes, which includes flexible capacity support among N7, N5, and N3 nodes. 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, yet we want to capture every piece of business possible. This concludes our key message, and thank you for your attention.
Jeff Hsu, Director of Investor Relations
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 questioning queue, please press star 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. Go ahead please.
Laura Chen, Analyst
Thank you very much. Good afternoon, and I appreciate C. C. for sharing with us the Taiwan Semiconductor capacity expansion strategy. So may I follow up more on that? Given the increasing aggressive AI semiconductor demand, how does Taiwan Semiconductor now see the AI revenue CAGR growth and how does Taiwan Semiconductor return to 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, advanced packaging, and also in the networking side we see the tightness of the laser as well.
So if these constraints create a mismatch, adjust your capacity allocations and also the strategy to minimize the potential overbuilding in the supply chain. Thank you. That’s my first question.
Jeff Hsu, Director of Investor Relations
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 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, you know, risks related to whether it be power supply, different bottlenecks within the supply chain, etc. 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
Yes, thank you.
C. C. Wei, CEO
That’s a long question. Laura, let me share with you. We have a very sophisticated capacity planning process, and we also have a very disciplined consideration, and let me share with you. We put every possibility we can—talking about the CSPs, CapEx, data centers, Europe, financial, power supply, and also other components, etc.—into our consideration. And so we, you know, make our own judgment and then, based on our assessed 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
Sure. Thank you. Thank you very much. So, so far from our comprehensive study of the supply chain, we are still quite positive on the demand in the longer term. Right. So in that case can you also give us more color about that? Any update on your AI CAGR? Previously we talked about like 50%.
Jeff Hsu, Director of Investor Relations
Sorry, 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 very 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. Wei, CEO
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-50s CAGR, it doesn’t matter. It probably will be higher.
Laura Chen, Analyst
Okay. Yes, thank you very much. And my second question is, also given the very strong demand and the CapEx cycles, we see that definitely this round will be much higher than before, and Taiwan Semiconductor also announced that earlier it will adopt high-NA around 2030. So should we think about that will further improve the productivity, that will be more meaningful for further accelerating revenue growth in the longer term? And also, given that the CapEx intensity is also getting much higher, how should we think about the pricing power and also the long-term gross margin efficiency returns?
Jeff Hsu, Director of Investor Relations
Okay, that’s actually two questions, but okay, we’ll just very quickly. So part of it is on, with the strong cycle, how do we deal with the adoption of high-NA, which we said we will in 2030, and then her question is on profitability.
C. C. Wei, CEO
Thank you. 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 Taiwan Semiconductor’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 Chen, Analyst
Sure. Thank you very— Yeah, very helpful. Appreciate and congratulate for the great result. Thank you.
Jeff Hsu, Director of Investor Relations
Thank you, operator. Can we move on to the next participant, please?
OPERATOR
Next one. Gokul Hariharan, J.P. Morgan. Go ahead please.
Gokul Hariharan, Analyst at J.P. Morgan
Hi, good afternoon, C. C., Wendell, 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, C. C., your view on this, and I think it’s been quite some time since we have seen Taiwan Semiconductor add capacity at 10% every year. I think if you look at our annual report, I think it’s been like about 10 years that you’ve added capacity of more than 10%. Given this accelerated build-out, can we start getting VFA capacity growth closer to 10% or even higher than 10% in the next couple of years?
Any comment on what is your planned VFA capacity growth in the next couple of years? That’s my first message.
Jeff Hsu, Director of Investor Relations
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 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, CEO
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’ customers, and then we do our own one more step to check the data centers. All the results 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 is still quite big. And that’s why we put all our strengths to increase the capacity.
As I just mentioned, whether the gap becomes bigger or the gap becomes narrower, we are working very hard. I cannot answer this question right now because my customer continues to increase their demand.
Jeff Hsu, Director of Investor Relations
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 may be small—the increase in advanced packaging, sorry, advanced nodes are really the main driver for the capacity increase.
Gokul Hariharan, Analyst at J.P. Morgan
Okay, fair enough. Okay, thank you. Secondly, could you—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 F cluster in Texas, as well as I think one of your customers also talked about decisions with YP as well. Can you talk a little bit about your overseas plan, like the more accelerated kind of square passive business doubt? 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 Taiwan Semiconductor as well?
Jeff Hsu, Director of Investor Relations
Okay, thank you, Gokul. So Gokul’s second question: he notes that C. C. said we’re expanding at an unprecedented pace, 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, CEO
Okay, Gokul, we work very hard to expand our capacity in the U.S. This is necessary because most of our large customers are in the U.S. and they request Taiwan Semiconductor to increase capacity. And also, the U.S. government is 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 where we can get another chance to expand our capacity. And Texas is the one. So we sent teams to Texas to do all the evaluation and we also talked to one of our customers who tried to build a fab, Terafab.
Let me be more specific. And we discussed with them whether we can utilize that extra 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.
Gokul Hariharan, Analyst at J.P. Morgan
Yes. Okay, but all of these are going to be Taiwan Semiconductor-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’re using here? The similar principles that you use for JASM or…
Jeff Hsu, Director of Investor Relations
Okay, so Gokul’s question is not in particular to the potential cooperation with this customer. Would it be Taiwan Semiconductor-owned? What’s the principles that we have, if anything?
C. C. Wei, CEO
We are still in discussion. Let me say that it’s not the way it would be possible, but the fab has got to be run by Taiwan Semiconductor.
Gokul Hariharan, Analyst at J.P. Morgan
Understood. Yeah.
Jeff Hsu, Director of Investor Relations
All right, thank you, operator. Can we move on to the next person please?
OPERATOR
Yes, next one. Krish Sankar. Go ahead please.
Krish Sankar, Analyst at TD Cowen
Yeah, thanks for taking the question. I heard that post 1-3, some customers talk about a secondary wafer market, when 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 will demand and give back some of their allocation to stronger customers? Then I had a quick follow-up.
Jeff Hsu, Director of Investor Relations
All right, Krish, thank you. So Krish’s first question is asking, you know, some of our customers are talking about 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, CEO
Well, let me answer that. To say whether this is a new strategy, new methodology—the answer is no. The principle of Taiwan Semiconductor is we do not allow our customers to sublet or auction the capacity. But in certain cases customers can collaborate through a mask licensing agreement.
But this is not our common practice. The amount is very, very small. Krish, did I answer your question?
Krish Sankar, Analyst at TD Cowen
Yes, thank you very much for that. And then a quick follow-up: you did touch upon it—the High-NA agreement with ASML for from 2030 onwards. I’m just curious. Historically Taiwan Semiconductor was more ahead of the curve with EUV adoption. It looks like by the time you adopt High-NA EUV, 2030, 2031, some of your competitors are already using it by then. So do you see that as a disadvantage, or are you not worried about competition getting ahead with High-NA?
Jeff Hsu, Director of Investor Relations
Okay, so Krish’s second question is looking at High-NA. He notes some of our competitors have both already adopted or will adopt High-NA earlier than Taiwan Semiconductor. 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, CEO
Krish, let me answer that. We always evaluate a new tool, and if we want to put it into mass production, it has to be the best technology with a very reasonable cost, and most important is the best maturity. Okay, so we say in 2030 we’ll start to use it because we also think at that time High-NA will be mature, and we are also working very closely with ASML to establish 12-inch photomasks by 2031. At that time we think that the High-NA cost will be reasonable for Taiwan Semiconductor to make it into mass production.
And this is a very good tool—let me emphasize that. In the smaller geometry it definitely has some advantages. Whether our technology because we are using it is greater than our competitor—so disadvantage to Taiwan Semiconductor? No, because we have confidence that we are still the best company to offer the most advanced technology to our customers.
Jeff Hsu, Director of Investor Relations
Krish, does that answer your question?
Krish Sankar, Analyst at TD Cowen
Thank you very much.
Jeff Hsu, Director of Investor Relations
Okay, thank you very much. Thank you, sir. Okay, operator, can we move on to the next participant please?
OPERATOR
Yes, Charlie Chan, Morgan Stanley. Go ahead please.
Charlie Chan, Analyst at Morgan Stanley
Hi gentlemen, thanks for taking my question, and also glad to hear very strong AI semi demand amid some recent stock market correction. So my first question is really about your U.S. capacity expansion strategy. As far as I know, one of your IDM customers is expanding capacity aggressively, so there are some concerns about this customer may insource more and outsource less to you, right? So first of all, I’m not sure how you’re going to deal with this third business opportunity.
And secondly, I remember last time, C.C., you mentioned A14 could be a bigger node than N2. May I know whether that assumes the big IDM company will outsource more CPU, like server CPU, at A14?
Jeff Hsu, Director of Investor Relations
Okay, so Charlie’s first question is around the 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—does this include the server CPU from this IDM competitor?
C. C. Wei, CEO
Well, Charlie, we treat every customer fairly. So whether it’s IDM or purely fabless, we treat them the same. But of course we take into consideration 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 customers, actually higher than the 2nm activities so far, and we expect that A14 will be a bigger node than our current N2 technologies.
Charlie Chan, Analyst at Morgan Stanley
I see. So it doesn’t need to consider this IDM will also outsource more. We can still have A14 to be a bigger node than N2—did I set the right understanding?
Jeff Hsu, Director of Investor Relations
Well, again, Charlie wants to know very specifically this customer’s outsourcing plan, which you probably may need to ask them. But you know—
C. C. Wei, CEO
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.
Jeff Hsu, Director of Investor Relations
Okay? Okay. Okay. Do you have a second question?
Charlie Chan, Analyst at Morgan Stanley
Yes, I do. Thanks, Jeff. So the second question is a kind of follow-up about your advanced packaging. From what I’ve seen, the reticle size is getting much bigger. C.C., you said last time or even two quarters ago about your response—you know, CoWoS 3.5D—so lots of initiative is going on. So my question is: do you think those are kind of purpose-built—CoWoS 3.5D—can really catch competitors’ very rapid development of their larger regular—like 14 reticle?
And secondly, if some customer initially chooses to use, in terms of EMIB, and for some reason cannot get sufficient demand, are you okay to bail out or support customers for the cooperation or capacity?
Jeff Hsu, Director of Investor Relations
All right, so Charlie’s second question is focused on advanced packaging. I guess, Charlie, if I understand your question, to summarize: customers are moving to larger and larger reticle sizes—14x. So he wants to know Taiwan Semiconductor’s roadmap and solutions and how competitive we can be against—I think he mentioned specifically—our competitor’s EMIB. So how do we view our solution? Is it as competitive as our competitor?
C. C. Wei, CEO
All right, Charlie, actually I still think that Taiwan Semiconductor’s advanced assembly—or you could say packaging—technologies are very, very competitive. But the most important thing is we use them to help our customers’ products be introduced to the market smoothly. That’s our number one priority. And so we have to offer them the best technology with enough capacity. So far, let me share with you today’s situation. We are in real-world production of 5x reticle size.
I don’t believe that anybody can do that today except Taiwan Semiconductor. And the yield is excellent, so our customers are very satisfied with the result. Then we are working on the 9x reticle size and moving into the 14x reticle size. Of course, we are also working on the CoWoS 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 customers. As time goes by, yes, our competitor offers a very competitive solution.
Still I want to say that in today’s situation we are the only one that makes sure that advanced packaging is at 5x reticle size. And still we are very competitive. I want to emphasize that.
Jeff Hsu, Director of Investor Relations
And then Charlie’s question: if the competitor cannot deliver on the solution—Charlie, I think you’re saying are we willing to be something like a backup plan?
C. C. Wei, CEO
I try to avoid answering it directly, but let me say that yes, we will—the number one priority, I already indicated, is that Taiwan Semiconductor’s customers’ products can be introduced into the market smoothly. That’s the number one priority. Okay, and that gives you enough hint?
Charlie Chan, Analyst at Morgan Stanley
Yes, yes indeed. So thanks for all the answers. I hope you don’t give any food to other things in the advantage.
Jeff Hsu, Director of Investor Relations
Thank you. All right, operator, let’s move on to the next participant please.
OPERATOR
Next one, Sunny Lin, UBS. Go ahead please.
Sunny Lin, Analyst at UBS
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 further strengthened and you also are willing to support your clients with more substantial expansion. And therefore, I 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 a higher tool price also be a driver for higher CapEx as well? Thank you.
Jeff Hsu, Director of Investor Relations
Sorry, what was the last part of your question, Sunny? Higher tool price. Higher what?
Sunny Lin, Analyst at UBS
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 Hsu, Director of Investor Relations
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 C.C. indicated, the question is around our capital intensity the next two years. How do we see the capital intensity trend in revenue growth versus 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
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 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 we 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 Lin, Analyst at UBS
Okay, thank you very much. If I may have a very quick follow-up on the capacity side. Earlier, Wendell, you raised the margin dilution from overseas to, I think, 3 to 4% starting from 2027, given faster overseas expansion. But for the US, 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 that therefore the reason for higher margin dilution for next year?
Jeff Hsu, Director of Investor Relations
Okay, so Sunny’s question is kind of about the puts and takes to next year’s margin. She notes, 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 3-nanometer. Her question is: are we also pulling in a third fab? What’s leading to this wider dilution?
Wendell Huang, Senior Vice President and CFO
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 margin dilution from overseas will be 3 to 4 percentage points, and that still remains the case. So it’s 3 to 4 percentage points in the second part of the five-year period.
Sunny Lin, Analyst at UBS
I see. Thank you very much for the clarification. My second question I want to follow—
Jeff Hsu, Director of Investor Relations
There were two questions, Sunny, so that’s already two questions. Sorry, but to accommodate as many as we can, we’re going to move on. 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.
Haas Liu, Analyst at Bank of America
Yes, 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 demand is probably flowing into 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?
Are you seeing your customers’ demand shifting toward more efficient compute solutions, especially as monetization gets more important, and how do we think about the incremental opportunity for your manufacturing and packaging business? Thank you.
Jeff Hsu, Director of Investor Relations
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, CEO
Yeah, well, all I can say is AI’s demand is extremely robust. Whether it’s coming from accelerators 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, everything is very robust. And I want to emphasize again, in our judgment, we consider all the parameters 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.
Haas Liu, Analyst at Bank of America
Thank you. That’s very clear. And my second question is related to the yield learning curve going forward for your dual technology tracks strategy. 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 applications like mobile and 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? And how should we think about the implication to your gross margins from the yield and also cost control perspective? Thank you.
Jeff Hsu, Director of Investor Relations
Okay, so Haas’ second 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. His question is that in the past a new node is mostly ramped, you know, with smaller die size and simpler design. But today we have both the smartphone and also 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, CEO
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. 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 Taiwan Semiconductor’s advantage. Let me say that, because we are good, we have been prepared for this kind of thing, and our results are very excellent, and customers are very happy to work with us.
And so the learning curve, yes, but we are doing a reasonable job, and so the customers are very happy today.
Haas Liu, Analyst at Bank of America
Okay, thank you so much.
Jeff Hsu, Director of Investor Relations
Okay, thank you, operator. Let’s move on to the next participant, please.
OPERATOR
Arthur Lang, Macquarie. Go ahead, please.
Arthur Lang, Analyst at Macquarie
Hi, I really appreciate my question. I have a question on power as a gating factor. So I want to understand: have power grid constraints led you to reduce your customer forecast in the history? And also, could this tighter and tighter power supply make your customers actually accelerate adoption of your super power rail products for better performance?
Thank you.
Jeff Hsu, Director of Investor Relations
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 on the other hand, with the tighter power, have we seen more customers’ adoption of super power rail technologies?
C. C. Wei, CEO
Well, let me update that. Definitely, power supply situation is one of the consideration factors that we are looking into. And that’s why also we took one more step to double-check the power supply situation in the US, and, you know, we have done all the studies and so far so good, let me say that. Whether this kind of situation changes our customers’ behavior and moves more into the backside power rail, the answer is no. Whether you use the backside power metallization scheme is based on your need for your product.
So some of the accelerators might be using it. Some of the products, like mobile phones, don’t use it. So it depends on customers’ products. Did I answer the question?
Arthur Lang, Analyst at Macquarie
Yeah. Okay. Yes, thank you.
Jeff Hsu, Director of Investor Relations
Arthur, do you have a second question?
Arthur Lang, Analyst at Macquarie
Yeah. Thanks, Jeff. So just to recall the previous discussion on the agentic AI demand on the CPU: according to our previous framework, demand forecast framework, the MITO Hygiene 50 rules, including the CPU or not? And if we’ve heard our clients increase the CPU forecast significantly, when is the next time we refresh our AI demand growth numbers?
Jeff Hsu, Director of Investor Relations
Okay, so Arthur’s second question is really on 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 when we will provide inclusion for him.
C. C. Wei, CEO
Let me answer the question. It’s not included in our AI demand calculation. The reason is very simple, because we cannot identify which CPU is used in the conventional server CPU or AI server CPU. And also, 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 demand.
Arthur Lang, Analyst at Macquarie
Understand? And so if we have seen a very strong CPU-driven demand, when will we revise up the—
Jeff Hsu, Director of Investor Relations
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.
Arthur Lang, Analyst at Macquarie
Okay, yeah, sure. Okay.
Jeff Hsu, Director of Investor Relations
Operator, in the interest of time, can we take a question from the last participant on the line, please?
OPERATOR
Yes. Sahij Singh, Stifel Financial. Go ahead, please.
Sahij Singh, Analyst at Stifel Financial
Hello, thank you for the question. You know, into 2027 you have N3 turning accretive and now that’s crossed over. N2 is still in its dilutive brand and the overseas dilution is widening. So on the offset side, there have been reports of significant, broad-based 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 Hsu, Director of Investor Relations
Okay, so the first question is— I guess you’re asking about the potential puts and takes for next year, or you’re asking specifically on pricing? Sorry, pricing. Specifically on pricing. Okay, so it’s a very specific question that there are 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?
Wendell Huang, Senior Vice President and CFO
Well, we have discussed this kind of thing before, that our pricing strategy is very strategic. It also depends on the market segment, depends on the location, and depends on the technology. And once we offer the flexibility of the physical location, then in the US it will be a little bit different from the one we produce in Taiwan. So no matter what, we try to get our value to be recognized, and we will give our shareholders the maximum value of our technology.
Sahij Singh, Analyst at Stifel Financial
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, you know, 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 Taiwan Semiconductor. And so would love some color into how you are thinking through these strategic decisions in terms of procuring from some of the specialty foundries versus providing in-house.
Thank you.
Jeff Hsu, Director of Investor Relations
Okay, so his second question is, again, he notes that recently we had an announcement with GlobalFoundries on interposers. So how do we view these partnerships, and what is our approach strategically?
C. C. Wei, CEO
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 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 of shortage on the back end, and we’d like to work with our partner, GlobalFoundries, so that both GlobalFoundries and Taiwan Semiconductor can support Taiwan Semiconductor’s customers for their product to be introduced with enough support and capacity.
Sahij Singh, Analyst at Stifel Financial
Understood. Thank you very much for my questions.
Jeff Hsu, Director of Investor Relations
Okay, thank you for your questions. Thank you to 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 both will be available through Taiwan Semiconductor’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—
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