Taiwan Semiconductor Manufacturing Company Ltd.

Good afternoon, everyone, and welcome to TSMC's first 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 release materials. If you're joining us through the conference call, your dialing lines are in listen-only mode. The format for today's event will be as follows. First, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the first quarter of 2026, followed by our guidance for the second quarter of 2026. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. Cici Wei, will join me provide the company's key messages. 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 actual results to differ materially from those contained in the forward-looking statements. So 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.

Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the first quarter of 2026. After that, I will provide the guidance for the second quarter of 2026. First quarter revenue increased 8.4% sequentially in MT, supported by strong demand for our leading-edge process technologies. In U.S. dollar terms, revenue increased 6.4% sequentially to $35.9 billion, slightly ahead of our first quarter guidance. Gross margin increased 3.9 percentage points sequentially, to 66.2%, primarily due to cost improvement efforts, a high capacity utilization rate, and a more favorable foreign exchange rate. Operating margin improved 4.1 percentage points sequentially to 58.1% due to operating leverage. Overall, Our first quarter EPS was 22.08 NT and ROE was 40.5%. Now let's move on to revenue by technology. Three nanometer process technology contributed 25% of wafer revenue in the first quarter, while five nanometer and seven nanometer accounted for 36% and 13% respectively. Advanced technologies, defined as 7 nanometer and below, accounted for 74% of wafer revenue. Moving on to revenue contribution by platform. HPC increased 20% quarter over quarter to account for 61% of our first quarter revenue. Smartphone decreased 11% to account for 26%. IoT increased 12% to account for 6%. Automotive decreased 7% and accounted for 4%. And DCE increased 28% to account for 1%. Moving on to the balance sheet, we ended the first quarter with cash and marketable securities of 3.4 trillion NT, or 106 billion U.S. dollars. On the liability side, current liabilities increased by $256 billion NT quarter over quarter, mainly due to the increase of $129 billion in accrued liabilities and others and the increase of $82 billion in accounts repayable. On financial ratios, accounts receivable turnover days was flat at 26 days. Days of inventory increased 6 days to 80 days, reflecting the ramp-up of our 2-nanometer technology and strong demand for our 3-nanometer technology. Regarding cash flow and CAPEX, during the first quarter, we generated about 699 billion NT in cash from operations, spent 351 billion in CAPEX, and distributed 130 billion for second quarter 2025 cash dividend. Overall, our cash balance increased 268 billion NT to 3 trillion at the end of the quarter. In US dollar terms, our first quarter capital expenditures total 11.1 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 second quarter revenue to be between $39.0 billion and $40.2 billion, which represents a 10% sequential increase or a 32% year-over-year increase at the midpoint. Based on the exchange rate assumption of $1 to 31.7 NT, gross margin is expected to be between 65.5% and 67.5%, operating margin between 56.5% and 58.5%. Also, in the second quarter, we will need to accrue the tax on the undistributed retained earnings. As a result, our second quarter tax rate will be around 20%. We continue to expect the full-year tax rate to be between 17% and 18%. This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our first quarter 2026 and second quarter 2026 profitabilities. Compared to fourth quarter, our first quarter gross margin increased by 390 basis points sequentially to 66.2%, primarily due to cost improvement efforts, a higher overall capacity utilization rate, and a more favorable foreign exchange rate. Compared to our first quarter guidance, our actual gross margin exceeded the high end of the range provided three months ago by 120 basis points, mainly due to a higher than expected overall capacity utilization rate and better cost improvement efforts. We have just guided our second quarter gross margin to increase by 30 basis points to 66.5% at the midpoint, primarily driven by a higher overall utilization rate and continual cost improvement efforts, including productivity gains, partially offset by dilution from our overseas FAB. Looking ahead to the second half of the year, given the six factors that determine our profitability, there are a few puts and takes I would like to share. As we have said before, the initial ramp-up of our 2 nanometer technology will start to dilute our gross margin in the second half of this year, and we expect between 2 and 3 percent dilution for the full year of 2026. Furthermore, as the scale of our overseas expansion grows, we continue to forecast the gross margin dilution from the ramp-up of overseas fabs in the next several years to be 2 to 3 percent in the early stages and widened to 3% to 4% in the latter stages. In addition, given the recent situation in the Middle East, prices for certain chemicals and gases are likely to increase. Based on our current assessment, there may be impact to our profitability, but it is too early to quantify the impact. On the other hand, we will continue to leverage our manufacturing excellence to generate more wafer output and drive greater across-node capacity optimization in our FAB operations to support our profitability. Also, M3 gross margin is expected to cross over to the corporate average in second half 2026. Finally, we have no control over the foreign exchange rate, but that may be another factor. Next, let me talk about the materials and energy supply update, given the recent situation in the Middle East. ESMC operates a well-established enterprise risk management system to identify and assess all relevant risks and proactively implement risk mitigation strategies. In terms of material supply, DSMC's strategy is to continuously develop multi-source supply solutions to build a well-diversified global supplier base and to improve the local supply chain. For specialty chemicals and gases, including helium and hydrogen, we source from multiple suppliers in different regions, and we have prepared safety stock inventory on hand. We are also working closely with our suppliers to further strengthen the resiliency and sustainability of our supply chain. Thus, we do not expect any near-term impact on our operations for material supply. In terms of energy, TSMC works closely with Thai Power and the Taiwan government to ensure a stable and sufficient energy supply. With the recent situation in the Middle East, the Taiwan government has announced it has secured sufficient LNG supply through at least May. The government has also said it is actively working on securing further LNG supply, diversifying sourcing to other regions and other power backup plants. Therefore, we do not expect any near-term disruption or impact to our operations. Finally, let me talk about our 2026 capital budget. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. With our strong technology leadership and differentiation, we are well positioned to capture the multi-year structure demand from the industry megatrends of 5G, AI, and HPC. We now expect our 2026 capital budget to be towards the high end of our range of between $52 and $56 billion, as we continue to invest heavily to support our customers' growth. Even as we invest for the future growth with this level of CAPEX spending in 2026, 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 annual and quarterly basis. Now, let me turn the microphone over to CC.

Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. We concluded our first quarter with revenue of U.S. dollars $35.9 billion, slightly above our guidance in US dollar terms, driven by strong demand for our leading-edge process technologies. Moving into second quarter 2026, we expect our business to be supported by continued strong demand for our leading-edge process technologies. Looking ahead, we are very mindful of the impact of rising component prices especially in consumer and price sensitive end market segment. In addition, the recent situation in the Middle East also bring further macroeconomic uncertainties. As such, we are being prudent in our business planning while focusing on the fundamentals of our business to further strengthen our competitive position. Having said that, AI-related demand continues to be extremely robust. The shift from generative AI and the query mode to authentic AI and command and action mode is leading to another step up in the amount of token being consumed. This is driving the need for more and more computation, which supports the robust demand for leading as silicon. Our customers and customers of customers who are naming the cloud service providers continue to provide us with their very strong signal and passive outlook. Thus, our commission in the multi-year AI megatrend remains high, and we believe the demand for semiconductors will continue to be very fundamental. Supported by our robust technology differentiation, and broader customer base, we maintain strong confidence for our full-year 2026 revenue to now grow by above 30% in U.S. dollar terms. Next, let me talk about our M2 capacity expansion plan. Our practice is to prioritize the land in Taiwan to support the fast ramp of our newest node due to the need for tight integration with R&D operations. Today, our new node, Yantou, has already entered high-volume manufacturing in the fourth quarter of 2025, with good yield. Yantou is ramping successfully in multi-phases at both Hsinchu and Kaohsiung sites, supported by strong demand from both smartphone and HPC AI applications. With our strategy of continuous enhancement, such as N2P and A16, we expect our N2 family to be another large and long lasting node for TSMC. Now let me talk about TSMC's global N3 capacity expansion plan. Historically, we do not add additional capacity to a node once it reaches its target capacity. However, as a boundary, our first responsibility is to provide our customers with the most advanced technologies and necessary capacity to unleash their innovations. Based on our assessment, to meet the strong demand in AI application, we are stepping up our CAPEX investment to increase our N3 capacity. Thus, we are now executing a global capacity plan to support the robust multi-year pipeline of demand for 3nm technologies, which are used by smartphone, HPC AI, including HPM-based DICE, automotive and IoT customers. In Taiwan, we are adding a new 3 nanometer flap to our Giga Flap cluster in Tainan Science Park. Volume production is scheduled for the first half of 2027. In Arizona, our second flap will also utilize 3 nanometer technologies. Construction is already complete, and volume production will begin in the second half of 2027. In Japan, We now plan to utilize 3nm technology in our second plant and volume production is scheduled in 2028. In addition to all the new plants, we continue to convert 5nm tools to support 3nm capacity in Taiwan. We are also leveraging our manufacturing excellence to drive greater productivity across our plant in all locations to generate more vapor 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, wherever we can, however we can, to maximize the support to all our customers across all platforms. Also, let me emphasize that while the capacity is tight, we do not pick and choose or play favorites among our customers. Next, let me talk about our mature node strategies. TSMC's strategy and mature node has not changed. Our focus is to build high yield capacity for specialized technologies rather than just normal capacity. For example, we are increasing our mature node capacity, such as in JASM-5.1 in Japan for CMOS sensor application, and ESSMC in Germany for automotive and industrial applications. Meanwhile, we have a plan to wind down our FAC-2, which is a 6-inch FAC, and FAT5, which is an 8-inch FAT, focus on guideline choice, and use available space to optimize the support for leading-edge applications. Even without FAT2 and FAT5, we still have enough capacity to fully support our existing customers. In summary, our strategy will be to continue to optimize our capacity, capacity needs, and focus on the higher value-added strategic segment while ensuring we have a necessary capacity to support our customers' goals. Finally, let me talk about our A14 status. Featuring our second-generation nano-sheet transistor structure, A14 will deliver another four-node stride from N2, with performance and power benefit to a class to address the essential need for high-performance and energy-efficient computing. Compared with N2, A14 will provide 10 to 15 speed improvement at the same power, or 25 to 30 power improvement at the same speed, and close to 20% chip density gain. Our A14 technology development is on track and progressing well. We are observing a high level of customer interest and engagement from both smartphone and SPC applications. Volume production is scheduled for 2028. Our A14 technology and its derivative will further extend our technology leadership position and enable TSMC to capture the growth opportunities well into the future. This concludes our key message, and thank you for your attention. Thank you, CC. This concludes our prepared statements. Before we begin the question and answer session, I would like to remind everybody to please limit your questions to two at a time to allow all the participants an 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 1 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&A session. Operator, can we proceed with the first participant on the line, please? Thank you.

The first one to ask question has to be from .

Yes, good afternoon, C.C., Wendell, and Jeff. Congrats on the solid results and guidance, and thanks for taking my questions. I would like to start with your three-millimeter cross-margin outlook. You just mentioned the node is going to across the average cross-margin in second half this year, which is now at mid-60 percentage levels. And we understand that technology is severe under supply backed by strong AI demand, and we already forecasted the capacity expansion through conversion in Greenfield through 2028. We should be able to discuss more in detail on what kind of applications are driving such strong business for you and convince you to expand more. And the other thing on 3 millimeter as well is just the node started to ramp from 4.2 to 20.2, which means some of your equipment will be fully depreciated by 20.7. Should we expect the node margins to be trending even higher with very solid utilization and also pricing trend? Thank you.

Okay. So the first question from Ha-Slu of Bank of America is two parts on 3 nanometer. First, as CC described, we are executing a plan for expanding 3 nanometer capacity. So he wants to understand what are the applications to drive such a strong multiyear looking ahead pipeline of demand for three nanometers since it's already been around in volume production since late 22. That's the first part of his question. Well, let me answer that. I think the application is simple. It's still the HPC AI applications. Does that answer your question? And the second part of this question is on the gross margin for 3 nanometer. His question is really, you know, what is the gross margin outlook for 2 nanometer? Will it cross over in the second half of this year? To what level? And then once it becomes fully depreciated, what happens to the margin?

Okay, this is random. We expect the N3 gross margin to reach and cross the corporate gross margin level in the second half of this year. And we don't have a number to share with you, but after the fully depreciation, as our previous notes, the gross margin are generally very high.

Okay, Has, I'll take that as 1.5 questions. So if you have a quick follow-up for your second question.

Yes, thanks so much, Jeff. And the other, I think, just a 0.5 follow-up is probably just the K-tax. You revised up to the high end of your guidance for 52 to 56 billion US dollars for this year. Compared to three months ago, what gives you the incremental confidence when you discuss with your customers and also customers' customers regarding the demand outlook to support your stronger or the upper half of your guidance for the CAPEX this year.

Okay. Thank you, Ha. So his second question is he notes that indeed we have this time guided to the high end of our CAPEX range versus January. So what incrementally is driving this revision to the CAPEX? What gives us the confidence to go to the high end of the 52 to 56 billion range? Thank you. Well, again, this is Shih-Wei. Let me answer this question. A simple, a very simple answer is the demand are very robust, especially from the HPC and AI applications. And so we try very hard to speed it up and pulling all the equipment as we can. Still, our supply is very tight. and so we continue to work with our suppliers to speed it up, and that's why we are toward our end of forecast. Okay, Hush. Does that answer your question? Yes, thank you so much.

I'll be back in a few.

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

Next one to our question, , JP Morgan.

Hi. Good afternoon, . My first question on your comments on demand. Clearly, demand is even better than what you predicted back in January, and you also raised the CapEx. Now, all your customers seem to be telling everybody they can tell way for us to remain the biggest constraint. So given your expanded 3-nanometer capacity plan and faster CapEx, CC, what is your expectation that how long the supply constraint is likely to last? Do you have any visibility of when you can kind of bring some kind of balance here based on what you hear from customers? And As a strategy, do you also plan to build out a more clean room space? Because that seems to be a little bit of a constraint right now to bring on the capacity quickly. That's my first question.

Okay, please allow me to summarize your first question. So his question is directed for CC. He notes that the demand seems to be even stronger than our forecast in January. We have also raised the capex and customers continue to say they need more chip supply. So with our capacity plan, do we have a forecast or expectation of how long the constraint can last, and will we have a strategy to build a clean room space first? Is that correct, Goku?

That's right, yes.

Okay, Goku, let me answer the question. Again, it's very simple because demand continues to be robust, and the number continues to be increased. Then we double-check with our customers. Customers are customers, or those are CSPs. They give us a very positive outlook, right? And so we have to... speed it up with our build-up of playroom and buying the tools. And so we are working with construction and we are working with our equipment supplier and so we want to pulling forward of our forecasted schedule. That's a temporary answer because our AI is so strong.

Any reads, CP, on when we can kind of meet these demands? In the next couple of years, it's still going to be very challenging to meet that supply. It's still going to be running below demand into 2017 also.

So, Gokul would like to know when the supply can meet the demand. Do we have a forecast or a timeframe? Gokul, you know, it takes a couple of years to build a new farm. And with the current schedule, we believe that 27, well, we are announced anyway when we enter 27. But let me say that it takes time to build a new web. It takes time to ramp it up. And so we expect this to continue to be very tight. So, you know, so that's why. We just announced that we try to build three new and three fab to meet the demand.

Okay. That's very clear. The demand is also very tight. My second question, competition. The traditional competitor, Samsung Intel, but one of your customers, Elon Musk, also announced his data initiative recently. What is CSNC's perspective on this initiative? They have also been a customer of yours, and they recently signed a deal with Samsung a few months back. So what is CSNC's response here now that they are also trying to kind of build chips on their own? How are you trying to win back this customer? What is your perspective here?

Okay, so Google's second question is on competition. He notes that we have competition and then recently a competitor or he knows that this tariff app, so he wants to know what is our perspective on this initiative. This customer has also been a customer of TSMC, but has also signed a deal with one of our other competitors, Samsung. So Goku would also like to know what is our perspective on the TerraFab and what is our view on winning back this customer's business? Well, Goku, actually both Intel and Tesla, TSMC is a customer. So, but again, they are our competitors, and we view Intel as our formidable competitors and do not underestimate them. But having said that, there are no shortcuts. The fundamental rule of the boundary game never change. They need a technology leadership, manufacturing excellence, and customer trust. And most of all, the service, which has been mentioned by Jensen. Thank you for his wording. Again, let me say that it takes two to three years to build a new fire. No shortcuts. And it takes another one to two years to ramp it up. Again, that's a fundamental of the laundry industry. And whether we try to win them back, actually they are still our customers. and we are very confident in our technology position, and we work very hard to capture every piece of business possible. Roku, did I answer your question?

Okay, that is pretty good. So, do you think your faster run purpose capacity can kind of winning some of these customers back? Because the reason seems to be mostly about capacity-type things rather than any other kind of big reasons, right? So is that your evaluation that this is probably the most important thing to win some of these customers back?

Okay, so Gokul's final question is then in winning customers back, his concern is because our capacity is tight. Is that the reason we're losing customers and so can we win customers back? Well, again, let me emphasize, take two to three years to build a new fab. So, you know, in this time, we are also building a new fab to meet our customers' strong demand. No shortcuts. So, anyway, the capacity is very tight, as I said. We are working hard. to make sure that we can meet customers' demand.

Got it. Thanks, CC. No problem. Got it.

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

Next one, we have Charlie Chen from Morgan Stanley.

Hi. Good afternoon, CC, Wendell, and Jeff. Thanks for taking my question, and also congratulations for a very, very strong result again. So I think I would also address the competition topic from a really different angle. So as you can see that there's AI customers that are developing much larger, radical-sized chips, right, and some customers are considering to use the eMIB because it's a kind of substrate-based, more suitable for larger-sized chip design. So I'm not sure what the TSMC's strategy to address this competition. And more strategically, is TSMC comfortable to open up your compute side to your, for example, Intel to do the package? What's the kind of thought process behind? Thank you. All right, Charlie, thank you. So Charlie's first question is also related to competition. He notes that, you know, AI customers are seeking for larger and larger theoretical sizes. So he wants to know what is our assessment of the competitive threat from solutions such as like eNib, and what's our strategy to address this competition? Will we be willing to open up our front-end wafer and let someone else do the packaging, basically? Well, Charlie, you know, today TSMC is supplying the largest radical size packaging. And, yes, we understand that our competitors also offer very attractive technology. But we welcome that so our customers can have more choices and then we can do more business with our customers. That's our attitude. But seeing that, we don't leave any business on the table. We are working very hard to meet all our customers' demand. We also are developing a very large vertical size packaging technologies. We are working with all the customers. It's so far so good. So a follow-up on this. When you mentioned about larger size staking, are you referring to COPUS or cross-LC.5D? Do you think a 3D staking can resolve this kind of planner extension problem? So Charlie is asking a follow-up. So he wants us to comment on for larger radical size, is it coarser? Is it panel level? What exact detailed solutions are we doing? Charlie? So far today, we have a very large radical size coarser. Of course, we are also working on coarser. And together, we try to work. make sure that we give enough capacity to support our customer with reasonable cost. So that's why we build a co-pilot line right now and expect production a couple years later. But today, the main approach or the main supplier is still a large-size co-op. and together with a system on waiver technology we we think tsmc give the our customer the best options for their product in the market all right so yeah i i i will take uh we don't need to worry too much about this uh stage competition so my second question is actually about your long-term test plan uh cc as you said that it takes about two to three years to build a new stat but they're working at that uh visibility right so remember baking uh 2021 management also provides three-year campus guidance 100 us hours given very strong demand uh i'm not sure if the tsnc can provide a little bit longer term check as guidance uh because as you said right those uh Equipment supply is also pretty tight. Yesterday, ASM reported very, very strong results. So you said the EOV supply an issue, and secondly, would the management provide a kind of a long-term CAPEX guidance to investors? Thank you. All right, Charlie. That's a lot of questions, but the second one then on CAPEX and building capacity, again, Charlie knows CC's comment capacity is not blown overnight. It takes time. So he would like to know, besides this year's CAPEX, which we have already said at the high end, can we provide a guidance for the next three years' CAPEX like we did back in 2021 in terms of the dollar amount?

Okay, Charlie. We don't have a number to share with you, but look at it this way. In the past three years, our total CAPEX was $101 billion. This year, we're already saying, CAPEX is towards the high end, which is $56 billion, which is already over 50% of the past three years in total. So we have a strong conviction in the AI megatrend. So we expect the CAPEX in the next few years, in the next three years, will be significantly higher than the past three years.

And then the final part of Charlie's question, with such a long lead time, are we concerned about tools, securing tools or bottlenecks and such? Well, Charlie, we always, TSMC's culture, we always work with our supplier because we use them as partners. So we continue to work with them, especially for those ASML, applied material, then research, et cetera. So, so far, we are very happy their support. That all I can tell you. Okay. Thank you, Wendell. Thank you. All right. Thank you, Charlie. Operator, can we move on to the next participant, please?

Next one we have , from .

Thank you very much for taking my questions and congrats on the study results. So my first question is, again, to follow up on key packs. So if you look at from 2024 to 2026, so in this cloud AI cycle, TSMC has been able to keep capital intensity at a healthy level of 30% plus, given very strong technology leadership and operating leverage. I understand the company doesn't really have a specific target on capital intensity. but for the coming few years, given the very strong revenue ramp of leading edge, how should we think about the revenue growth compared with KPAC growth? Should we think top line will remain steady and therefore KPAC will grow in line or even below? What's the best way for us to think about it?

Okay, Sunny, thank you for your question. So please allow me to summarize. Sunny's first question is on... Well, I think CAPEX and really capital intensity, she notes in the past few years we've been able to keep capital intensity around the 30 plus, you know, 30 something percent level. She notes that we don't have a specific capital intensity target per se, but her specific question looking ahead the next several years, how do we see revenue growth versus CAPEX growth? Is it likely to be higher, flat, lower, and therefore what type of intensity does that imply? Is that correct, Sunny?

Yeah, thank you very much, Jeff.

Okay, Sunny. So in the past few years, as you correctly pointed out, the revenue growth outpaced the CAPEX growth. That's because if we do our job right, then we will continue to see that happen in the next several years. The revenue growth outpaced the CAPEX growth, okay? Now, therefore, we do not expect, in the next several years, a sudden surge in capital intensity.

Okay. I see. Maybe a very quick follow-up. A lot of questions on competitions already, but also from a competition point of view, even a very tight supply, IPF and HSI in recent years, Would T&V actually consider maybe spending K-PACs or spend more so that clients will need to diversify given a tight supply?

All right, so Sunny's 1.5 question is, In terms of the CAPEX, will we consider accelerating or spending more given the competitive threat from the competitors? If there's not enough capacity, then our customers will go to competitors. That's your question, correct?

Yeah, thank you, Jeff.

Well, Sunny? Yes. we repeatedly saying that we prepare the capacity to meet customers' demand, not because of our competitor or not because of our other consideration. The most important one is our customers' demand, and they work with TSMC, and so that we plan our capacity, and so our capital expense. Annie, did I answer your question? Yeah.

Yeah, very clear. Thank you. So maybe my 0.5 question. And so if you look at this share, earlier you just got it, but they're higher than 30% growth for top line. But indeed, there's ongoing supply tightness. And so for 20.6, how much upside could you realize for top line? And at this point, have you started to see some impact of consumer demand and demand coming from platform and PC.

Okay. So Sunny's second question is regarding 2026 full-year outlook. She knows now that we have increased the guidance to about 30%. How much more upside can there be? Or maybe the first part also, how much, how do we see the impact the memory price hike to the end market, and how do we see with above 30%, is there more upside? Well, Sanlin, memory price hike definitely has some impact to price sensitivity of the end market, especially in PC and smartphone markets. But we did see a little bit softer market. But to share with you, all the high-end smartphones continue to do better. And this is to take services advantage. And as you're asking about how much higher than, you know, above 30% year-over-year growth rate, We will share with you in July. How about that? Then we will have a more accurate or some more precise number to share with everybody.

No problem. Thank you very much, CC.

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

Yes. Next one, Jim Fonsanelli, Advertise.

Yeah, thank you. Thanks for taking the question. So my first question is to do with demand.

So you commented earlier in the call that, you know, demand continues to outsource supply, leading into capacity, and obviously you've just delivered a very strong print and guide for growth margins. So against this backdrop, has management's thinking changed about the sustainable margin structure and what appropriate long-term returns might be for the business? Okay, so Jim's first question is looking, asking on the margin structure. He notes, as we said, that demand continues to be extremely robust and very strong. So how does this change? I think your question is our margin, our view on the long-term margin profile and the return profile. Is that correct? That's correct.

Okay, Jim. As we said in the last earning course, we've revised up our long-term margin targets and ROE targets from 2024 to 2029, we're now saying the gross margins will be 56% and higher through the cycle, and we're looking at ROE of a high 20% through the cycle. That's what we're currently looking at, and that's already higher than before.

Thank you. And that thinking is not changing against a backdrop where other parts of the AI supply chain are clearly starting to print supernormal returns.

That doesn't impact how you think about margin structure for the next two or three years?

Yeah, Jim, this is a long-term planning. It's an ongoing and continuous process. So we do that all the time. And we will update you when there is a change.

Okay, thank you. And my second question is, it looks like the Arizona site is becoming more strategic in terms of leading edge commitment for TSNC, you know, particularly with the recently added second parcel of land. Could you talk about how you see mid- to long-term capacity opportunity and also how confident you are that the U.S.

fab economics will match Taiwanese-produced races?

Okay, so Jim's second question is on Arizona. FAB expansion plans. He notes that it is becoming more and more strategic. We have recently, as we said, acquired a second large piece of land. So what is the plan or the purpose behind this? And then what is the possibility of a margin outlook as well? Well, Jim, let me answer the question. We acquired the second land because we need it. We want to build more FABs. in Arizona, and this is actually to meet the multi-year demand from our leading edge U.S. customers. And again, let me emphasize again that we are working very hard to speed it up. We already gained a lot of experience in Arizona. And so now we have much more confidence than last year that we can make it a good progress and moving aggressively forward. And we expect we can improve the cost structure, of course. Okay, Jim. Thank you. All right. Thank you. Operator, can we move on to the next participant, please?

Next one, from Goldman Sachs.

Thank you for taking my question. I think I want to follow up on Tim's question for the profitability. I think earlier last year when I asked why GSMC did not raise the profitability target when GSMC continued to . I think he told me that to focus on the, you know, above version of 53% and above. I think last quarter, you know, we raised it to 56% and above. So the question is that do you believe the current profitability fully reflects KFCG's value?

So I'm guessing CG might be, you know, ask me to focus on the higher portion of the profitability target again.

So the real question is that given the uniqueness of the dominant position for TSMC, it's not easy to find the perfect benchmark for TSMC's profitability.

So can you tell us how we should think the profitability benchmark for TSMC or what is the best way to see TSMC value to be fully reflected into the gross margin and operating margins? Okay, Bruce, his first question is he wants to know what profitability benchmark he should be looking at and whether we believe our current profitability level fully reflects TSMC's true value. Well, Bruce, actually, you asked about our pricing strategy. Let me say that we always... view our customer as our partners. Of course we know that our value. Of course we know our position. But we also view that our partner as a very important business partner so that we don't change our pricing dramatically or something like that. We just try to make sure that our customer can be successful in their market, and at the same time we grow together, then we also earn our value so that we can continue to expand our capacity to support them. That fundamentally is, number one, our customer has to be successful. That's our consideration, number one. Then we grow together. And again, there's a keyword please pay attention to. Customer is our partners. Okay. So if your customer continues to be successful, maybe in a couple of quarters we can see the, you know, higher target again.

Bruce, what's your second question?

My second question is that management has been guiding the AI-accelerated revenue to grow about mid to high 50s in 2022 and 2029. So how does TSMC plan and forecast AI-related demand? I mean, does TSMC incorporate the metrics such as program consumption growth, in your assumption, because, you know, the reason potent consumption in the first quarter is definitely accelerated and faster than earlier expectations. Do we see the changes or the accelerated revenue growth in the coming years?

Okay, so Bruce's second question is on our AI accelerator long-term CAGR guidance, which, yes, we have guided mid to high 50s. He knows with the strong token growth and demand for tokens, do we have any changes to this long-term guidance? Bruce, actually, I think I say now that it's a very strong demand, and we continue to receive the very positive signal from our customer, and customers are customers. And so what you say is whether we change our anchor on AI accelerator. Essentially, we continue to see strong demand, but again, let me say that it's toward a higher 30s of our anchor that we observe. Okay. Thank you, C.C. Thank you, Bruce. Operator, can we move on? To the next caller, please.

Next one to ask question, Loreshan from Citi.

Hello, hi, Gretchen, Cece, Wendell, and James. May I take more details on TSMC's strategy in advanced packaging and what will be the business model working with your OSEC partners? We see that there are various different solutions provided by your peers and also the OSEC makers. Yet TSMC is also expanding more in the advanced packaging. So how would TSMC work with your customers planning their advanced no-waiver demand but also align with their advanced packaging demand at TSMC?

Okay, so thank you, Laura. Laura's first question is on advanced packaging. She would like to know, We work with customers, collaborate with customers to plan our front-end wafer capacity. How do we work with the customers to plan the advanced packaging capacity is what she would like to understand, and also in the context of working with our OSAP partners on the advanced packaging businesses. Our priority actually, again, is to support our customers. Right. And whenever we can or wherever we can, we want to make sure that their product can be, their demand of their product can be met by TSMCs or guangyan and high-end packaging. So we certainly, let me say that our otherwise packaging capacity is very tight also. So we have to work with our OSAP partners. We hope that we can increase capacity to support our customer. Again, let me emphasize again, we support our customers. So we try very hard to increase our own capacity also, but certainly it just has been very tight. That's what our situation today.

Sure, sure, understood. My second question is also about advanced packaging. As Citi highlighted before many times that AI chips are growing into super chips with very large die size and TSMC now working at the biggest radical in the world. But at the same time, there's potential technical challenges such as wattage. So do you think that the following roadmap like SOIC or like COPLOS can solve these kind of technical issues? And based on TSMC's technology roadmap, do we see any like technology like SOIC or COPLOS will be a bigger ramp in a couple years can solve this problem?

Okay, so Laura's second question is also related to advanced packaging, AI in larger reticle sizes, close potential technical challenges such as warpage. So she would like to know how do we see SOIC or panel level packaging? What's the key to solving these issues and what is the outlook in the next several years?

Yes, right there.

Well, Laura, you are good. Actually, that's all the challenges that we have advanced packaging technology, mechanical stress, which is a very tough challenge to the electrical engineering like I am. However, we accumulated a lot of experience already today because we have supplied most of the leading edge in packaging area. And we continue to increase the die size and continue to meet all the challenges from the mechanical stress, like you said, actually the wall PG or the thermal limitation. It's quite challenging. And we like it. The harder, the better because of TSMC's strength in technical aspects. engineering, and we have a confidence that we can work with our customer to solve all the issues and continue to move on.

So should we expect that SOI phase TSMC may introduce that earlier to solve this kind of a challenge because we already have the learning curve and already have the products in production. So that should go faster than other technologies, I suggest.

Again, sorry. Yeah. So Laura's question is very specific. I don't even, yeah, on SOIC, what is, how do we see that developing, I guess? Well, we work with our customer, and we meet their demand, and that's all I can tell you. Speed it up or slow down, no, no, no, no, no. We work with our customer to meet their demand.

Okay, Laura? Thank you, very clear.

Okay, thank you. Operator, in the interest of time, can we take the questions from the last participant, please?

This one to ask question from .

Thanks for taking my question. KSMC's definition of AI revenue, includes data-centered GPU, AI accelerator, HBM-based, maybe I left out a few others, but it specifically excludes data-centered CPU. I think you made that definition very clear for a couple years now, but with the CPU, there's more and more conversation about CPU now becoming part of the AI infrastructure, especially for agentic workloads. any chance for TSMC to maybe provide us a revised numbers for AI revenue and maybe AI revenue growth take a projection going into 2029, 2030 and maybe hopefully give us some sense how the historical AI revenue numbers would have been if some of the data kind of CPU numbers, especially for agentic AI workloads, are included there. That's my first question. Okay. Thank you, Charles. So, Charles, first question, please let me summarize, is regarding our definition of AI accelerator, which is, of course, we have said, GPU, ASIC, and HPM controllers for training imprints in the data center. He knows now with agentic AI, he wants to know where we start to Could CPUs in this definition, if so, can we provide the historical data with CPU included, and what would be the AI accelerator guidance be if it includes CPU? Charles, certainly CPUs becomes more and more important in today's AI data center. But actually, let me share with you, this is a good question, by the way. Let me share with you that we are not able to identify which CPU goes to where, right? It's a PC or a desktop or it's an AI data center. So today, we still not include the CPUs in our AI HPC's calculation. Someday later, we might consider. Okay, Charles, do you have a second question? Thanks, Stacey. I guess maybe it's kind of also tied to the recent development in overall AI infrastructure, how things have been evolving. So NVIDIA, of course, they recently added more CPU content to the overall Vera Rubin SuperPAR, but I think that most people are focusing on that brand new LPU They recently added, we understand and appreciate that the KSMC is very strong in CPU and will definitely participate in that upside in CPU. But the LPU business, it's an acquired business. Well, for historical reasons, it's still at your competitor's financial boundary. Investors are looking at that and the thing that maybe looks like Samsung Foundry finally made the first or two inroads into AI. So any thoughts from TSMC side? How should we think about whether and how TSMC will win back that LTE business or any future difference to a business coming from your customers. And, yeah, give us some thoughts there. We appreciate that. Thank you. Okay. Charles, second question is a very specific question about a very specific customer and very specific product, which is we typically do not comment on. He wants to know for this customer's LPU product, which he notes is made at one of our competitors, how do we see this business going through the competitor? You know, do we have plans to win this LPU business back in the future? Charles, I think Jeff already gave me a number one. He said very specific and a very specific customer, very specific area, that's it. Let me answer your question. We are working with our customer for their next generation inside your PU anyway, and we are very confident in our technology position, and we will work hard to capture every piece of business possible. How about that? Very good. Thank you, CC. That's a very good comment. Thank you. I appreciate that. Okay. Thank you, Charles. Thank you, Cece. Thank you, Wendell. This concludes our prepared statements. Oh, sorry. I should say this concludes our Q&A session. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within 30 minutes from now, and the transcript will become available 24 hours from now. Both are going to be available through TSMC's website at www.tsmc.com. So, again, thank you, everyone, for taking the time to join us today. We hope you continue to stay well, and we'll hope you join us again next quarter. Goodbye and have a good day.