Taiwan Semiconductor Manufacturing Co., Ltd. Q3 FY2026 earnings call

• Profitability & Margins: Gross margin dilution from N2 ramp and overseas fabs is expected to continue in Q4, with a midpoint expectation of 66%. Full-year 2026 overseas fab dilution is estimated at ~2%, widening to 3-4% in future years as more U.S. fabs ramp. Management remains confident in TSMC’s cost efficiency despite higher overseas costs.
• Capital Expenditures: Reiterated full-year 2026 capital budget of $60-$64 billion USD. Capex from 2026 to 2028 is expected to be significantly higher than previous years to support robust multi-year demand, including agentic AI.
• AI Demand Outlook: AI demand is described as 'extremely robust' with no signs of slowdown. Growth is driven by the transition from chatbots to AI assistants, open-source model adoption, and emerging Agentic AI CPUs. AI-related demand growth is expected to exceed previous high-50s percentage estimates.
• Capacity Expansion: TSMC is expanding at an unprecedented pace. N2 is in high-volume manufacturing and ramping successfully. N3 capacity will add three new fabs in Taiwan and one in Arizona (Q3 2027), plus one additional Taiwan fab (H1 2028). A14 risk production is on track for 2027, volume in 2028.
• Advanced Packaging: TSMC is currently in real-world production of 5X reticle size with excellent yields. Moving into 9X and 14X reticle sizes. Cold-wafer bonding remains the primary choice, but efforts are ongoing to reduce costs.
• Global Strategy: Teams are actively evaluating data center build-outs and power supply in the U.S., including Texas, to support customer needs. TSMC-run fabs remain the priority, though discussions with partners like TerraFab are ongoing.

Revenue increased 17.6% sequentially in New Taiwan Dollars (NTD) and 16.2% to $46.7 billion USD, exceeding guidance. Gross margin decreased 130 basis points sequentially to 66.4%, primarily due to margin dilution from the initial ramp-up of 2-nanometer (N2) technology. Operating margin was 58.7%. Revenue contribution by platform: High-Performance Computing (HPC) accounted for 68% (up 22% quarter-over-quarter); Smartphone accounted for 21% (up 10%); IoT accounted for 4% (up 5%); Automotive accounted for 4% (up 23%); Desktop, Consumer Electronics (DCE) accounted for 1% (down 12%). Advanced technologies (7nm and below) accounted for 79% of wafer revenue, with N2 contributing 8%, N3 33%, N5 28%, and N7 10%.

• Q4 2026 Revenue: Expected between $52.3 billion and $54.3 billion USD, representing a 14% sequential increase and ~58% year-over-year increase at the midpoint.
• Q4 2026 Gross Margin: Expected between 65% and 67%, with a midpoint decrease of 40 basis points to 66%, driven by N2 ramp and overseas fab dilution.
• Q4 2026 Operating Margin: Expected between 56.5% and 58.5%.
• Full-Year 2026 Revenue Growth: Expected to be around 44% year-over-year in USD terms.
• Capex Budget: Maintained at $60-$64 billion USD for full-year 2026; investment levels for 2026-2028 expected to be significantly higher than past three years.

• Margin Dilution: Continued pressure on gross margins from the steep ramp-up of N2 technology and higher operating costs associated with overseas fabs (U.S., Japan).
• Supply Chain Constraints: Tight tool supply and potential bottlenecks in critical components such as HBM, advanced packaging, and lasers could create mismatches between semiconductor supply and AI development.
• Power Supply: Data center power availability in the U.S. is a key consideration, though current assessments indicate CSPs are well-prepared.
• Customer In-Sourcing: Potential risk from large IDM customers shifting some production in-house, although TSMC treats all customers fairly and calculates support based on internal capacity judgments.
• Yield Learning Curve: Increased manufacturing complexity from supporting both conventional power delivery and Super Power Rail Technology simultaneously may impact yield learning curves and cost control.

Q: How does TSMC reconcile strong AI demand with risks like power supply constraints and component shortages? / A: Management emphasized a sophisticated, disciplined capacity planning process that evaluates every possibility, including CSP capex, data center build-outs, financial health, and power supply. Despite these checks, they assess that demand remains significantly higher than supply, and they are working hard to narrow the gap. They remain positive on long-term demand and expect AI accelerator growth to potentially exceed previous high-50s estimates.

Q: What is the status of TSMC's expansion in the U.S., specifically regarding Texas and partnerships? / A: TSMC is aggressively expanding in the U.S. due to customer requests and government support. Teams have evaluated Texas as a potential location for new capacity. Discussions are ongoing with TerraFab to utilize existing capacity. Any resulting fabs would be TSMC-run, ensuring operational control while addressing local customer needs.

Q: Will TSMC allow customers to sublet or auction off their allocated wafer capacity? / A: No. TSMC does not allow customers to sublet or auction off capacity. While there is interest from some customers in this practice, it violates TSMC's principles. The company maintains strict control over allocation to ensure fairness and reliability for all clients.

Q: How does TSMC view the competitive landscape regarding High-NA EUV and IDM competitors? / A: TSMC plans to adopt High-NA EUV in 2030 once the technology is mature and costs are reasonable, aiming to provide the best value. Regarding IDMs, TSMC treats all customers equally but adjusts capacity support based on each client's internal capabilities. A14 is expected to be a larger node than N2, reflecting strong demand across various segments, not just specific competitor shifts.

Q: What is the outlook for advanced packaging solutions like SOW 3.5D and handling competitor failures? / A: TSMC is leading in reticle size expansion, currently producing 5X reticle chips with excellent yields and moving toward 9X and 14X. If competitors fail to deliver sufficient capacity or performance, TSMC views supporting customers as its number one priority and is prepared to step in to ensure smooth product introductions, offering a reliable backup solution.