Taiwan Semiconductor Manufacturing Company Ltd. 2026 Q2 Earnings Call

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 2026, followed by our guidance for the third quarter 2026. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. C.C. Wei, will jointly provide the company's key messages. 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 risks 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. 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. 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 TWD 3.5 trillion, or $110 billion. On the liability side, current liabilities increased by TWD 144 billion quarter-over-quarter, mainly due to the increase of TWD 58 billion in accounts payable and the increase of TWD 48 billion in accrued liabilities and others. In terms of financial ratios, accounts receivable days increased by three days to 29 days. Inventory days increased seven days to 87 days, primarily due to the ramp of N2 technology. Regarding cash flow and CapEx, during the second quarter, we generated about TWD 783 billion in cash from operations, spent TWD 496 billion in CapEx, and distributed TWD 156 billion for third quarter 2025 cash dividends. Overall, our cash balance increased TWD 99 billion to TWD 3.1 trillion at the end of the quarter. In US dollar terms, our second quarter capital expenditures total $15.7 billion.

I finished my financial summary. 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, which represents a 12% sequential increase or a 37% year-over-year increase at the midpoint. Based on the exchange rate assumption of $1 to TWD 32, gross margin is expected to be between 65% and 67%. Operating margin between 56% and 58%. This concludes my financial presentation. Let me turn to our key messages. I will start by talking about our second quarter 2026 and third quarter 2026 profitability. Compared to the 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 point to 66% at the midpoint. Primarily as we expect the steep ramp-up of our 2-nanometer technology to dilute our gross margin by about 3-4 percentage points. This dilution is expected to be partially offset by very strong demand for our leading-edge technologies and continued cost improvement efforts, including productivity gains and across-node capacity optimization. Looking at the second half of the year, given the 6 factors that determine our profitability, there are a few puts and takes that I would like to share. First, we expect the steep ramp-up of our 2-nanometer to dilute our gross margin by about 3-4 percentage points in the second half of the year.

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%-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. 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 continued 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 billion and $64 billion as we continue to invest heavily to support our customers' growth. We always collaborate closely with the tool suppliers well in advance to prepare the capacity, whether it is a strong upcycle or downcycle, just like our customers collaborate with us well in advance to plan our capacity. We do not foresee any bottlenecks to our capacity expansion plans. About 70%-80% of the 2026 capital budget will be allocated for advanced process technologies.

About 10% will be spent for specialty technologies, and about 10%-20% will be spent for advanced packaging, testing, mask making, and others. 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 increased cash dividend per share on both an annual and quarterly basis. In 2025, we paid TWD 467 billion in cash dividends, up 28.6% year-over-year, as TSMC shareholders receive a total of TWD 18 cash dividend per share. In 2026, they will receive TWD 24 per share, up another 33% year-over-year. We expect a continued and increasing cash dividends per share in 2027 as well. Now let me turn the microphone over to CC.

Thank you, Window. Good afternoon, everyone. First, let me start with our near-term demand outlook. We concluded our second quarter with revenue of $40.2 billion at the high end of our guidance in U.S. dollar terms, driven by strong demand for our leading-edge process technologies. Moving into third quarter, 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 due to the impact of rising component prices and macroeconomic uncertainties. As such, we are being prudent in our business planning while focusing on our fundamentals of our business to further strengthen our competitive position. Having said that, AI related demand continues to be extremely robust.

The AI megatrend continue to drive the need for more and more computation, which supports the robust demand for leading-edge silicon. Our customers and customers' customer, 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 full year 2026 revenue growth to be slightly above 40% year-over-year in U.S. dollar terms. Let me talk about the acceleration of agentic AI. The AI market continue to be very dynamic. The emergence of agentic 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 CPU approach is taken, whether it's a x86, Arm-based, or RISC-V architecture, they are almost all TSMC's customers. 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 agentic AI market opportunities. Let me talk about TSMC's capacity expansion strategies. To address the structural increase in overall long-term semiconductor market demand profile, TSMC collaborate closely with our customer and our customer's customer to plan our capacity. Given the fundamental complexity of leading-edge technologies and the design-in and lead 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 5 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. 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 investment in Arizona. This is to build several more semiconductor logical wafer fab for 2 nanometer and below technologies, as well as advanced packaging fabs 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, high-paying jobs in the United States. At the same time, we are building 13 leading-edge and advanced packaging fab in Taiwan over the next several years, and we will continue to further invest in Taiwan. Therefore, TSMC's semiconductor technology and manufacturing will continue to play a pivotal role in supporting the global semiconductor industry while unleashing our customers' innovations. Let me talk about the current N3 capacity expansion. We are executing well on our global plan to add 3 additional 3 nanometer fabs, one in Taiwan, one in Arizona, and one in Japan to support the robust multi-year pipeline of demand for 3 nanometer technologies.