Taiwan Semiconductor Manufacturing Company Ltd.

Good afternoon, everyone, and welcome to TSMC's third quarter 2026 earnings conference call. This is Jeff Su, 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 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 third quarter, 2026, followed by our guidance for the fourth quarter, 2026. Then, Mr. Huang and TSMC's Chairman and CEO, Dr. Cici 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 risk and uncertainties, which could cause the 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 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 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 U.S. dollar term, 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 29.43 NT and ROE was 45.5%. Now, let's move on to revenue by technology. Two 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 4 trillion NT or 126 billion US dollars. On the liability side, current liabilities increased by 110 billion NT quarter over quarter, mainly due to the increase of 46 billion in current portions of bond payable and bank loans and 26 billions in dividend payable. In terms of financial ratios, accounts receivable turnover days decreased by one day to 28 days. Inventory days decreased by five days to 82 days, primarily due to the increase in wafer shipment. Regarding cash flow in CAPEX, during the third quarter, we generated about $920 billion NT dollars. In cash from operations, spent $443 billion in CAPEX and distributed $156 billion for fourth quarter 2025 cash dividends. Overall, our cash balance increased $488 billion NT to $3.6 trillion at the end of the quarter. In U.S. dollar terms, our third quarter capital expenditures totaled $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 52.3 and 54.3 billion US dollars, which represents a 14% sequential increase or a 58% year-over-year increase at the midpoint. Based on the exchange rate assumption of one US dollar to 31.8 NT, 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 26 and fourth quarter of 26 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 two 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 two 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 remain 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 U.S., Thus, we expect the dilution from our overseas fabs to widen to 3-4% 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 agentic AI market, we reiterate our full-year 2026 capital budget to be between 60 and 64 billion U.S. dollars. 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, Thank you, Wendell. Good afternoon, everyone.

First, let me start with our near-term demand outlook. We concluded our third quarter with a revenue of U.S. dollar 46.7 billion higher than our guidance in U.S. dollar terms, driven by strong demand for our leading-edge process technologies. Moving into first quarter 2026, we expect our business to be supported by continued strong demand for our leading edge process technologies, including the steep ramp up of our two nanometer technology. Looking ahead, we continue to observe consumer and price sensitive end market segment are being challenged and many more. As such, we are being prudent in our business planning going into 2027, while focusing on the fundamentals of our business to further strengthen our competitive position. Having said that, demand for our leading-edge technologies continues to be extremely 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 U.S. dollar terms. Next, let me talk about the 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 authentic AI as we transition from chatbot to AI assistance. In addition, We are observing great adoption of open source AI models. This will drive greater efficiency and help lower the barrier to future AI usage and result in more and more demand for leading-edge silicon. Thus, AI-related demand is being supported by strong underlying demand for AI accelerators. In addition, The emergence of agentic AI CPUs and the continued demand for networking chips are driving further silicon demand. Therefore, 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 our 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 boundary, our first responsibility is to provide our customer with the best technologies and effective capacity support to unleash their innovations. To address the structural increase in the long-term semiconductor market demand profile, TSMC collaborate closely with our customers, and our customers are customers to plan for our capacity. In addition, we are now going one step further and sending our own teams of people to check on the data center build-out process, progress, and power supply situation in the U.S. The feedback is so far so good, and the CSP has been well prepared. Internally, TSMC employed 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 designing and lead time involved, we already have a very good idea of customers' multi-year product roadmap and production plans. Thus, we continue to hold strong conviction in the AI megatrend. We are moving full speed ahead to increase our capacity to meet our excessive demand and stepping up our capex investment to support our customers' future growth. TSMC is expanding at an unprecedented pace with a near 25th worldwide in progress. We are building 13 leading-edge and advanced packaging fab 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 fourth quarter of 2025, which is a good year. 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 in 2027, supported by strong demand from both smartphone and HPC AI applications. We are also leveraging our manufacturing excellence to generate more N2 wafer output, further increasing our capacity support to customers. In addition, we have already begun preparing the capacity for our A14 technology. Risk production is well on track for 2027, and volume production will start in 2028. Thus, TSMC's semiconductor technologies and manufacturing will continue to play a pivotal role in supporting the global semiconductor industry while unleashing our customers' innovation. Now, let me talk about TSMC's Global N3 Capacity Expansion Update. As we said before, historically we do not add additional capacity to a node once it reaches its targeted capacity. However, based on our assessment, we are executing well on our global capacity plan to add three new fabs to support the robust multi-year pipeline or demand for three nanometer technologies. In Taiwan, volume production for our new three nanometer fab in Tainan Science Park is well on track to begin the first half of 2027. In addition, driven by the strong demand from our customers, we have decided to add one additional three nanometer fab in Tainan. Volume production is scheduled for the first half of 2028. In Arizona, We have completed the construction of our second farm and are in the process of tool moving and installation. Volume production will begin in third quarter 27, slightly ahead of our previous schedule. In Japan, We are processing well to our plan to utilize 3 nm in our second fab and volume production is scheduled in 2028. In addition to all the new fabs, we continue to convert 5 nm tools to support 3 nm capacity in Taiwan. We are also leveraging our manufacturing excellence to greater productivity across our fab in all locations. To generate more wafer output, we are also focusing on capacity optimization across nodes, which include flexible capacity support among N7, N5, and N3 node. Thus, We are using multiple levers to do everything we can, whenever we can, as fast as we can to maximize the support to our customers. We have no intention to leave food on the table for others, and we want to capture every piece of business possible. This concluding our key message, and thank you for your attention.