Taiwan Semiconductor Manufacturing Company Ltd.

Good afternoon everyone and welcome to TSMC's second quarter 2026 earnings conference and conference call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. Today's event is being webcast live through TSMC'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 dial-in lines are in listen-only mode. The format for today's event will be as follows. First, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the second quarter of 2026, followed by our guidance for the third quarter of 2026. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. Cici Wei, will join me to provide the company's key messages. Then we will open both the floor and the line for the question and answer session. As usual, I'd like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risk and uncertainties, which could cause actual 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 microphone 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 second quarter of 2026. After that, I will provide the guidance for the third quarter of 2026. Now let's move on to revenue by technology. 2 nanometer process technology contributed 3% of wafer revenue in the second quarter. 3 nanometer, 5 nanometer, and 7 nanometer accounted for 30%, 33%, and 11% respectively. Advanced technology, defined as 7 nanometer and below, accounted for 77% of wafer revenue. Moving on to revenue contribution by platform. HPC increased 20% quarter over quarter to account for 66% of our second quarter revenue. Smartphone decreased 4% to account for 22%. IoT increased 4% to account for 5%. Automotive increased 15% to account for 4%. DCE increased 5% to account for 1%. Moving on to the balance sheet, we ended the second quarter with cash and marketable securities of 3.5 trillion NT or 110 billion US dollars. On the liability side, current liabilities increased by 144 billion NT quarter over quarter mainly due to the increase of $58 billion in accounts payable and the increase of $48 billion in accrued liabilities and others. In terms of financial ratios, accounts receivable days increased by 3 days to 29 days. Inventory days increased 7 days to 87 days primarily due to the ramp of N2 technology. Regarding cash flow and CAPEX, during the second quarter, we generated about 783 billion NT in cash from operations, spent 496 billion in CAPEX, and distributed 156 billion for third quarter 2025 cash dividend. Overall, our cash balance increased 99 billion NT to 3.1 trillion at the end of the quarter. In U.S. dollar terms, our second quarter capital expenditures total $15.7 billion. I finished my financial summary. Now let's turn to the current quarter guidance. Based on the current business outlook, we expect our third quarter revenue to be between $44.6 billion and $45.8 billion U.S. dollars. which represents a 12% sequential increase or a 37% year-over-year increase at the midpoint. Based on the exchange rate assumption of US$1 to 32 NT, gross margin is expected to be between 65% and 67%, operating margin between 56% and 58%. This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our second quarter 26 and third quarter 26 profitability. Compared to its first quarter, our second quarter gross margin increased by 150 basis points, sequentially to 67.7%, slightly ahead of our guidance, primarily due to cost improvement efforts and a slightly higher overall capacity utilization rate. Partially offset by dilution from our overseas fabs. We have just guided our third quarter gross margin to decrease by 1.7 percentage points with 66% at the midpoint, primarily as we expect the steep ramp up of our 2 nanometer technology to dilute our gross margin by about 3 to 4 percentage points. This dilution is expected to be partially offset by very strong demand for our leading-edge technologies and continue cost-improvement efforts, including productivity gains and across-node capacity optimization. Looking at the second half of the year, given the six factors that determine our profitability, there are a few puts and takes that I would like to share. First, we expect a steep ramp-up of our two-nanometer To dilute our gross margin by about 3-4 percentage points in the second half of the year. Furthermore, as the scale of our overseas expansion grows, we continue to forecast the gross margin dilution from the ramp-up of overseas FAS in the next several years to be 2-3% in the early stages and widen to 3-4% in the latter stages. On the other hand, demand for our leading-edge technologies is very strong. In addition, we 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. Finally, we have no control over the foreign exchange rate, but that may be another factor. Next, let me talk about our 2026 capital budget. At TSMC, a higher level of capital expenditures is always correlated to higher growth opportunities in the following years. With our strong technology leadership and differentiation, we are well positioned to capture the multi-year structural demand from the industry megatrends of 5G, AI, and HPC. Given the continuous strong structural demand from our customers, including the newly emerging agentic AI market, we have decided to raise our full year 2026 capital budget to be between 60 and 64 billion US dollars as we continue to invest heavily to support our customers' growth. We always collaborate closely With the two suppliers well in advance to prepare the capacity, whether it is a strong up cycle or down cycle. Just like our customers collaborate with us well in advance to plan our capacity. Thus, we do not foresee any bottlenecks to our capacity expansion plans. About 70 to 80% of the 2026 capital budget will be allocated for advanced process technology. About 10% will be spent for specialty technologies, and about 10% to 20% will be spent for advanced packaging, testing, mask making, and others. Even as we invest for the future growth with this level of KPAC spending in 2026, we remain committed to delivering profitable growth to our shareholders. We also remain committed to a sustainable and steadily increased Thank you for joining us. and we expect a continued and increasing cash dividends per share in 2027 as well. Now let me turn the microphone over to C.C.

Thank you, Wendell. Good afternoon, everyone. First, let me start with our near-term demand outlook. We concluded our second quarter with revenue of US$40.2 billion at the high end of our guidance in US dollar terms. We expect our business to be supported by continuous strong demand for our leading edge process technologies, including the steep ramp of our 2 nanometer technology. Looking ahead, we observe consumer and the price sensitive end market segment are being challenged. Thank you for joining us today. The AI megatrend continues to drive the need for more and more computation, which supports the robust demand for leading-edge silicon. Our customers, and customers are customers, who are mainly the cloud service provider, continue to provide us with their very strong signal and positive outlook. Thus, our conviction in the multi-year AI megatrend remains very high. Supported by our robust technology differentiation and broad customer base, we now expect our four-year 2026 revenue growth to be slightly above 40% year-over-year in U.S. dollar terms. Now let me talk about the acceleration of authentic AI. The AI market continues to be very dynamic. The emergence of authentic AI is leading to a resurgence in the role of CPUs in AI data centers, which drive more silicon demand in addition to AI accelerators. We believe this is positive for TSMC, as no matter what We are already collaborating closely with our CPU customers and working to support them with the most advanced technologies and necessary capacity So they can capture the authentic AI market opportunities. Next, let me talk about TSMC's capacity expansion strategies. To address the structural increase in overall long-term semiconductor market demand profile, TSMC collaborates closely with our customers and our customers' customers to plan our capacity. Given the fundamental complexity of leading-edge technologies and the designing that this time involved, we also have a very good idea of their multi-year product roadmap and production plans. This is important because it takes more than five years to develop the technology and product, prepare the capacity, and ramp it up to high-volume production. 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. Based on our assessment, we are stepping up our capex investment to increase our capacity to support our customers' future growth. Now, with the strong collaboration and support from our leading U.S. customers and the U.S. federal, state, and city government, we would like to announce an additional $100 billion U.S. dollar investment in Arizona. This is to build several more semiconductor logical wafer plants for two nanometer and below technologies, as well as an advanced packaging class to support the strong multi-year demand from our leading U.S. customers. We believe this investment will help to further foster the development of the U.S. semiconductor ecosystem, strengthen the supply chain, and support an increasing number of high-tech are paying jobs in the United States. At the same time, we are building 13 leading edge and advanced packaging plants in Taiwan over the next several years, and we will continue to further invest in Taiwan. Therefore, the SMC's semiconductor technology and manufacturing will continue to play a pivotal role in supporting the global semiconductor industry Our customers are innovative. Now let me talk about the current N3 capacity expansion. We are executing well on our global plan to add three additional three nanometer plants, one in Taiwan, one in Arizona, and one in Japan to support the robust multi-year pipeline of demand for 3 nanometer technologies. In addition to all the new plants, we continue to convert 5 nanometer tools to support 3 nanometer capacity in Taiwan. We are also leveraging our manufacturing excellence to drive greater productivity across our plant in all locations to generate more waiver output. We are also focusing on capacity optimization across nodes, which includes flexible capacity support among N7, N5 and N3 nodes. In summary, we are using multiple levers to do everything we can, wherever we can, however we can to maximize The support to all our customers. Now let me talk about our mature node strategy. TMC's strategy at mature node has not changed. Our first priority is to fully support our customer. And now we continue to increase, not decrease, our mature node capacity in the higher value entry segment. For example, we are increasing our material load capacity through JASM-Vec-1 in Japan for CMOS image sensor application and ESMC in Germany for automotive and industrial applications. In today's market, outside of specific areas such as power management IC and CMOS image sensor, The regional demand in other commodity areas is not that strong. Thus, TSMC will continue to focus on the higher value-added and strategic segment by ensuring we have a necessary capacity to support our customer support. Finally, let me talk about our A14 status. As I mentioned a few minutes ago, The complexity of leading-edge technology continues to increase. The lead time to develop a new technology such as the N14, building the capacity, and then ramping it up now takes 5 to 7 years. There are no shortcuts. Our N14 technology representing the second generation of narrow-seed transistors can deliver another full node stride from N2 with performance and power benefit to address the insatiable need for high-performance and energy-efficient computing. Compared with IN2, 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% shift density gain. A14 technology development is on track and Poverty Will. Internal product like the vehicle demonstrated close to 90% device performance and close to 90% 256 megabits SRAM yield. We are observing a strong level of customer interest and engagement from both smartphone and SPC AI applications and customer now tap out activities ongoing and ahead of schedule. Reproduction was started in 2027 and volume production is scheduled for 2028. With our strategy of continuous enhancement, we also introduced A13 and A12 as extension of the A14 family. A13 represents a further advancement over A14 Achieving an over 6% high area saving through an innovative 97% optical strength. Through continuous design technology co-optimization, A13 also drives further performance and power efficient improvement. A13 design rules are backward compatible with the A14 to ensure smooth IP migration. We also introduced A12, which will bring our innovative superpower rail technology to the A14 platform for superior performance, power, and area benefits. Both A13 and A12 are scheduled for volume production in 2029. We believe A14 and its derivative technologies will prepare our A14 Thank you, C.C.