TSMC (TSM) Q3 2026 Earnings: Gross Margin Holds 66% as N2 Ramps

TSMC's Q3 2026 earnings show gross margin holding at 66.4% while its 2-nanometer (N2) process ramped quickly. The company reported results for the third quarter ended September 30, 2026, on October 15, 2026, through a Form 6-K press release, results presentation and earnings call, and the main results came in ahead of what the company expected three months earlier [1][2][3].

Three questions framed the earlier view of TSMC: how much the N2 ramp would dilute gross margin, whether AI-related high-performance computing (HPC) was taking capacity from other platforms, and when the capital budget raised in mid-year would turn into depreciation. In Q3, N2 rose to 8% of wafer revenue while gross margin stayed at 66.4% [1]. HPC clearly outgrew smartphones during the smartphone build season, and the company raised its full-year US dollar revenue growth outlook to around 44% [2]. The capital spending question remains open: capex for the first three quarters was about $40.6 billion, and Q3 depreciation was not disclosed [3]. The quarter therefore strengthens the case on growth and profit conversion, while the timing of new investment flowing into costs awaits the annual report.

TSMC is a pure-play foundry. It does not sell its own chips and instead manufactures, packages and tests chips designed by customers. Revenue is roughly wafer shipments times average selling price, and price depends mainly on the process mix. In 2025, the HPC platform accounted for 58% of revenue and smartphones for 29% [4].

Change 1: N2 reached 8% of wafer revenue and gross margin fell less than guided

TSMC's Q3 gross margin declined by less than the company had guided in July. Its Q3 guidance called for a gross margin of 65% to 67% [5], and it expected N2 to dilute gross margin by about 3 to 4 percentage points in the second half, with the Q3 midpoint 1.7 points below the Q2 level of 67.7% [6]. Actual gross margin was 66.4%, down only 1.3 points from Q2, and management attributed the decline mainly to the initial N2 ramp [2][3]. Over the same period, N2 rose from 3% to 8% of wafer revenue, and advanced technologies at 7-nanometer and below rose from 77% to 79% [1].

Higher shipment volume offset part of the dilution, although TSMC did not break down the contribution of each factor. Q3 revenue was $46.72 billion, above the top of the $44.6 billion to $45.8 billion guidance range, and shipments rose 3.2% sequentially to 4.476 million 12-inch equivalent wafers [2]. Inventory days fell from 87 to 82, which the company attributed to higher wafer shipments, suggesting that work in process built up for N2 in Q2 is now shipping [3]. TSMC also said overseas fabs should dilute 2026 gross margin by closer to 2%, compared with its earlier description of 2% to 3% in the early stages [3][6].

The result shows that a fast N2 ramp can coexist with a gross margin around 66%, but the next quarter sets a harder test. TSMC guided Q4 gross margin to 65% to 67%, with a 66% midpoint, citing continued N2 dilution and overseas fab dilution partly offset by productivity gains and capacity optimization across nodes; it expects overseas fab dilution to widen to 3% to 4% over the next few years [3]. The source of the 0.4-point beat against guidance is not disclosed, and it would not automatically repeat if utilization fell.

Change 2: HPC outgrew smartphones in the build season

HPC kept gaining share in Q3, which means the Q2 shift between platforms was not a one-quarter seasonal effect. Q3 is usually the smartphone build season, yet smartphone revenue rose only 10% sequentially and its share fell to 21%, while HPC grew 22% and rose to 68% of total revenue [3].

Monthly revenue and the full-year outlook point the same way. Revenue for January through September totaled NT$3.90 trillion, up 41.1% year over year [7]. TSMC raised its full-year US dollar revenue growth outlook from slightly above 40% [8] to around 44% and guided Q4 revenue to $52.3 billion to $54.3 billion [2][3]. Management said demand for leading-edge technologies still exceeds supply and that back-end advanced packaging faces a large shortage [3].

The slower smartphone growth cannot be attributed entirely to HPC taking capacity. Management also said consumer and price-sensitive end markets are under pressure and that the company is being prudent in planning for 2027 [3]. Platform revenue amounts were not disclosed, so the effects of capacity allocation and weak end demand cannot be separated.

Conclusion

This quarter strengthens the view of TSMC's growth and profit conversion. On growth, the company expects Q4 revenue to rise 58% year over year at the midpoint [3]. On profit, gross margin landed above the guidance midpoint during a fast N2 ramp, and the 58.7% operating margin exceeded the top of its guidance range [2]. On cash, Q3 operating cash flow was about 2.1 times capital expenditures, so TSMC can fund its expansion internally [2].

The main unknown is when new investment flows into costs. TSMC reiterated its 2026 capital budget of $60 billion to $64 billion; with about $40.6 billion spent in the first three quarters, Q4 spending would need to reach about $19.4 billion to $23.4 billion, and Q3 depreciation was not disclosed [3]. The next tests are whether gross margin holds at 65% as N2's share keeps rising in Q4, whether HPC keeps its share, and what the annual report shows for full-year depreciation and the 2027 capital budget.

Sources

[1] TSM 6-K 2026-10-15 Exhibit 99.1 — third quarter 2026 results press release (October 15, 2026, TSMC Form 6-K) https://www.sec.gov/Archives/edgar/data/1046179/000104617926000726/a3q26e_withguidancexfinal.htm [2] TSM 6-K 2026-10-15 Exhibit 99.2 — third quarter 2026 earnings conference presentation (October 15, 2026, TSMC Form 6-K) https://www.sec.gov/Archives/edgar/data/1046179/000104617926000726/a3q26presentatione.htm [3] TSM Q3 2026 earnings call 2026-10-15 (October 15, 2026, TSMC earnings call) https://investor.tsmc.com/english/quarterly-results/2026/q3 [4] TSM 20-F FY2025 — net revenue by platform (April 16, 2026, TSMC Form 20-F) https://www.sec.gov/Archives/edgar/data/1046179/000162828026025362/tsm-20251231.htm [5] TSM 6-K 2026-07-16 — third quarter 2026 guidance (July 16, 2026, TSMC Form 6-K) https://www.sec.gov/Archives/edgar/data/1046179/000104617926000451/a2q26e_withguidancexfinal.htm [6] TSM Q2 2026 earnings call — 2-nanometer and overseas-fab gross margin dilution (July 16, 2026, TSMC earnings call) https://www.fool.com/earnings/call-transcripts/2026/07/16/tsm-tsm-q2-2026-earnings-call-transcript/ [7] TSM 6-K 2026-10-08 — September 2026 revenue report (October 8, 2026, TSMC Form 6-K) https://www.sec.gov/Archives/edgar/data/1046179/000104617926000680/tsm-revenue20261008.htm [8] TSM Q2 2026 earnings call — full-year 2026 revenue growth outlook (July 16, 2026, TSMC earnings call) https://www.fool.com/earnings/call-transcripts/2026/07/16/tsm-tsm-q2-2026-earnings-call-transcript/