Taiwan Semiconductor Manufacturing Co Ltd Q1 FY2026 Earnings Call

Good afternoon, everyone, and welcome to TSMC's first 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 webcasts through the company's website at www.tsmc.com, where you can also download the earnings release materials. If you are 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 first quarter 2026, followed by our guidance for the second quarter 2026. Afterwards, Mr. Huang and TSMC's Chairman and CEO, Dr. C.C. Wei, will jointly provide the company's key messages. 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 risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. So 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 first quarter, 2026. After that, I will provide the guidance for the second quarter, 2026. First quarter revenue increased 8.4% sequentially in NT, supported by strong demand for our leading-edge process technologies. In U.S. dollar terms, revenue increased 6.4% sequentially to $35.9 billion, slightly ahead of our first quarter guidance. Gross margin increased 3.9 percentage points sequentially to 66.2 percent, primarily due to cost improvement efforts, a high capacity utilization rate, and a more favorable foreign exchange rate. Operating margin improved 4.1 percentage points sequentially to 58.1 percent due to operating leverage. Overall our first quarter EPS was 22.0 a and t and ROE was 40.5%. Now let's move on to revenue by technology. 3 nanometer process technology contributed 25% of wafer revenue in the first quarter while 5 5nm and 7nm accounted for 36% and 13% respectively. Advanced technologies, defined as 7nm and below, accounted for 74% of wafer revenue. Moving on to revenue contribution by platform. HPC increased 20% quarter over quarter to account for 61% of our first quarter revenue. Smartphone decreased 11% to account for 26%. IoT increased 12% to account for 6%. Automotive decreased 7% and accounted for 4%. And DCE increased 28% to account for 1%. Moving on to the balance sheet, we ended the first quarter with cash and marketable securities of 3.4 trillion NT, or 106 billion U.S. dollars. On the liability side, current liabilities increased by 256 billion NT, quarter-over-quarter, mainly due to the increase of 129 billion in accrued liabilities and others, and the increase of 82 billion in accounts payable. On financial ratios, accounts receivable turnover days was flat at 26 days. Days of inventory increased six days to 80 days, reflecting the ramp up of our two nanometer technology and strong demand for our three nanometer technology. Regarding cash flow and CAPEX, during the first quarter, we generated about $699 billion NT in cash from operations, spent $351 billion in CAPEX, and distributed $130 billion for second quarter 2025 cash dividend. Overall, our cash balance increased $268 billion NT to $3 trillion at the end of the quarter. In U.S. dollar terms, our first quarter capital expenditures totaled $11.1 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 second quarter revenue to be between $39.0 billion and $40.2 billion, which represents a 10% sequential increase or a 32% year-over-year increase at the midpoint. Based on the exchange rate assumption of one US dollar to 31.7 NT, gross margin is expected to be between 65.5% and 67.5%, operating margin between 56.5% and 58.5%. Also in the second quarter, we will need to accrue the tax on the undistributed retained earnings. As a result, our second quarter tax rate will be around 20%. We continue to expect the full year tax rate to be between 17 and 18%. This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our first quarter 2026 and second quarter 2026 profitability compared to fourth quarter our first quarter gross margin increased by 390 basis points sequentially to 66.2 percent primarily due to cost improvement efforts a higher overall capacity utilization rate rate, and a more favorable foreign exchange rate. Compared to our first quarter guidance, our actual gross margin exceeded the high end of the range provided three months ago by 120 basis points, mainly due to a higher than expected overall capacity utilization rate and better cost improvement efforts. We have just guided our second-quarter gross margin to increase by 30 basis points to 66.5% at the midpoint, primarily driven by a higher overall utilization rate and continued cost-improvement efforts, including productivity gains, partially offset by dilution from our overseas FAB. Looking ahead to the second half of the year, given the six factors that determine our profitability, there are a few puts and takes I would like to share. As we have said before, the initial ramp up of our two nanometer technology will start to dilute our gross margin in the second half of this year and we expect between two and three percent dilution for the full year of 2026. Furthermore, 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 two to three percent in the early stages and widen to three to 4% in the latter stages. In addition, given the recent situation in the Middle East, prices for certain chemicals and gases are likely to increase. Based on our current assessment, there may be impact to our profitability, but it is too early to quantify the impact. On the other hand, we will 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 also m3 gross margin is expected to cross over to the corporate average in second half 2026. finally we have no control over the foreign exchange rate but that may be another factor. Next, let me talk about the materials and energy supply update, given the recent situation in the Middle East. DSMC operates a well-established enterprise risk management system to identify and assess all relevant risks and proactively implement risk mitigation strategies. In terms of material supply, TSMC's strategy is to continuously develop multi-source supply solutions to build a well-diversified global supplier base and to improve the local supply chain. For specialty chemicals and gases, including helium and hydrogen, we source from multiple suppliers in different regions, and we have prepared safety stock inventory on hand. We are also working closely with our suppliers to further strengthen the resiliency and sustainability of our supply chain. Thus, we do not expect any near-term impact on our operations from material supply. In terms of energy, TSMC worked closely with Thai Power and the Taiwan government to ensure a stable and sufficient energy supply. With the recent situation in the Middle East, the Taiwan government has announced it has secured sufficient LNG supply through at least May. The government has also said it is actively working on securing further LNG supply, diversifying sourcing to other regions and other power back-up plans. Therefore, we do not expect any near-term disruption or impact to our operations. Finally, let me talk about our 2026 capital budget. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years. With our strong technology leadership and differentiation, we are well positioned to capture the multi-year structured demand from the industry megatrends of 5G, AI, and HPC. We now expect our 2026 capital budget to be towards the high end of our range of between 52 and 56 billion U.S. dollars as we continue to invest heavily to support our customers' growth. 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 increasing cash dividend per share on both annual and quarterly basis. 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 first quarter with revenue of U.S. dollar $35.9 billion, slightly above our guidance in U.S. dollar terms, driven by strong demand for our leading-edge process technologies. Moving into second quarter 2026, we expect our business to be supported by continued strong demand for our leading-edge process technologies. Looking ahead, we are very mindful of the impact of rising component prices, especially in consumer and price-sensitive In addition, the recent situation in the Middle East also brings further macroeconomic uncertainties. As such, we are being prudent in our business planning while focusing on the fundamentals of our business to further strengthen our competitive position. Having said that, AI-related demand continues to be extremely robust. The shift from generative AI and query mode to authentic AI and command and action mode is leading to another step up in the amount of tokens being consumed. This is driving the need for more and more computation, which supports the robust demand for leading a silicon our customers and customers are customers who are mainly the cloud service providers continue to provide us with their very strong signal and positive outlook thus our condition in the multi-year ai megatrend remain high and we believe the demand for semiconductors will continue to be very fundamental supported by our robust technology differentiation and broader customer base we maintain strong confidence for our full year 2026 revenue to now grow by above 30 percent in u.s dollar terms next let me talk about our n2 capacity expansion plan our practice is to prioritize the land in Taiwan to support the first ramp of our newest node due to the need for tight integration with R&D operations. Today our new node N2 has already entered high volume manufacturing in the fourth quarter of 2025 with good yield. N2 is ramping successfully in multi-faces at both Sinshu and Kaohsiung side, supported by strong demand from both smartphone and HPC AI applications. With our strategy of continuous enhancement, such as N2P and A16, we expect our N2 family to be another large and long-lasting node for TSMC. Now let me talk about TSMC's Global N3 capacity expansion plan. Historically, we do not add additional capacity to a node once it reaches its target capacity. However, as a founder, our first responsibility is to provide our customers with the most advanced technologies and necessary capacity to unleash their innovations. Based on our assessment to mean the strong demand in AI application, we are stepping up our KPEX investment to increase our N3 capacity. Thus, we are now executing a global capacity plan to support the robust multi-year pipeline of demand for 3nm technologies, which are used by smartphone, HPC AI, including HBM-based size, automotive, and IoT customers. In Taiwan, we are adding a new 3nm flap to our GIGA flap cluster in Tainan Science Park. Volume production is scheduled for the first half of 2027. In Arizona, our second flap will also utilize 3nm technologies, Construction is already complete and volume production will begin the second half of 2027. In Japan, we now plan to utilize 3nm technologies in our second fab and volume production is scheduled in 2028. In addition to all the new fabs, we continue to convert 5nm tool to support 3 nanometer capacity in Taiwan. We are also leveraging our manufacturing excellence to drive greater productivity across our fab in all locations to generate more wafer output. We are also focusing on capacity optimization across nodes, which includes flexible capacity support among the N7, N5, and N3 nodes. Thus, we are using multiple levers to do everything we can, wherever we can, however we can, to maximize the support to all our customers across all platforms. Also, let me emphasize that while the capacity is tight. We do not pick and choose or play favorites among our customers. Next, let me talk about our mature node strategies. TSMC is a strategy that mature node has not changed. Our focus is to build high yield capacity for specialized technologies rather than just normal capacity. For example, we are increasing our material capacity such as in JASM5-1 in Japan for CMOS image sensor application and ESSMC in Germany for automotive and industrial applications. Meanwhile, we have a plan to wind down our FAB2, which is a 6-inch FAB, and FAB5, which is an 8-inch FAB, focus on gallium nitride, and use available space to optimize the support for leading-edge applications. Even without FAB2 and FAB5, we still have enough capacity to fully support our existing customers. In summary, our strategy will be to continue to optimize our capacity, capacity mix within material nodes, and focus on the higher value-added and strategic segment while ensuring we have a necessary capacity to support our customers' growth. Finally, let me talk about our A14 status. Figuring our second-generation nano-sheet transistor structure, A14 will deliver another full-node stride from N2 with performance and power benefit to a class to address the accessible need for high-performance and energy-efficient computing. Compared with N2, 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% chip density gain. Our A14 technology development is on track and progressing well. We are observing a high level of customer interest and engagement from both smartphone and HPC applications. Volume production is scheduled for 2028. Our A14 technology and its derivative will further extend our technology leadership position and enable TSMC to capture the growth opportunities will into the future. This concludes our key message and thank you for your attention.

Thank you CC. This concludes our prepared statements. Before we begin the question and answer session, I would like to remind everybody to please limit your questions to two at a time to allow all the participants an opportunity to ask their questions. Should you wish to raise your question in Chinese, I will translate it to English before our management answers your question. For those of you on the call, if you would like to ask a question, please press the star then one on your telephone keypad now. If at any time you'd like to remove yourself from the questioning in queue, please press star 2. Now, let's begin the Q&A session. Operator, can we proceed with the first participant on the line, please? Thank you.

The first one to ask question has been from Bank of America.

Yes. Good afternoon, C.C., Wendell, and Jeff. Congrats on the solid results and guidance, and thanks for taking my questions. I would like to start with your 3mm gross margins Outlook. You just mentioned the node is going to across the corporate average cross margin in the second half this year, which is now at 60 percentage levels. And we understand the technology is in severe under supply backed by strong AI demand, and you already forecasted the capacity expansion through conversion and greenfield through 2028. Would you be able to discuss more in detail on what kind of applications are driving such strong business for you and convince you to extend more and the other thing on three nanometer as well is just the node started to ramp from fourth quarter to 2022 which means some of your equipment will be fully depreciated by 2027. Should we expect the node margins to be trending even higher with very solid utilization

and also pricing trend? Thank you. Okay so the first question from Haas Liu of Bank of America It's two parts on 3 nanometer. First as CC described, we are executing a plan for expanding 3 nanometer capacity. So he wants to understand what are the applications to drive such a strong multi-year looking ahead pipeline of demand for 3 nanometer since it's already been around in volume production since late 22. That's the first part of his question.

Well, let me answer that. I think the application is simple. It's still the HPC AI applications. Does that answer your question?

Yes, that is the first part. And the second part is probably...

And the second part of this question is on the gross margin for 3 nanometer. His question is really, you know, what is the gross margin outlook for 3 nanometer? Will it cross over in the second half of this year? To what level? And then once it becomes fully depreciated, what happens to the margin?

Okay, this is Randall. We expect the N3 gross margin to reach and cross the corporate gross margin level in the second half of this year. And we don't have a number to share with you. But after the fully depreciation, as our previous note, the gross margin are generally very high.

Okay, Haas, I'll take that as 1.5 question. So if you have a quick follow-up for your second question.

Yes, thanks so much, Jeff. And the other, I think just a 0.5 follow-up is probably just the CAPEX. you revised up to the high end of your guidance for 52 to 56 billion US dollars for this year. Compared to three months ago, what gives you the incremental confidence when you discuss with your customers and also customers' customers regarding the demand outlook to support your stronger or the upper half of your guidance for the capex this year? Okay, thank you Haas. So his second

question is he notes that uh indeed we have uh this time guided to the high end of our capex range uh versus january so what incrementally is driving this uh revision to the capex what gives us the confidence to go to the high end of the 52 to 56 billion range thank you well uh again this

cc where let me answer this question a simple a very simple answer is the demand are very robust especially from the spc and ai applications and also we try very hard to speed it up and pulling all the equipment as we can still our supply is very tight demand needs continue to increase and so we continue to work with our suppliers to speed it up and that's why we are toward our high end of apex forecast.

Okay, Haas, does that answer your question?

Yes, thank you so much. I'll be back in the queue.

Sure, thank you. Operator, can we move on to the next participant, please?

Next one to ask question, Gokhu Haring-Halan, Jeffy Morgan.

Hi, good afternoon, thank you, Wendell, and Jeff. My first question on your comments on demand, clearly demand is even better than what you predicted back in January, and you've also raised the capex. Now all your customers seem to be telling everybody they can tell that that wafers still remain the biggest constraint. So given your expanded three nanometer capacity plan and faster capex, CC, what is your expectation that how long the supply constraint is likely to last? Do you have any visibility of when you can kind of bring some kind of balance here based on what you hear from customers? And as a strategy, do you also plan to build out a more clean room space because that seems to be a little bit of a constraint right now to bring

on the capacity quickly. That's my first question. Okay, cool, cool. Please allow me to summarize your first question. So his question is directed for CC. He notes that the demand seems to be even stronger than our forecast in January. We have also raised the capex and customers continue to say They need more chip supply. So with our capacity plan, do we have a forecast or expectation of how long the constraint can last? And will we have a strategy to build up clean room space first? Is that correct, Goku?

That's right, yes.

Okay, Goku, let me answer the question. Again, it's very simple because demand continues to be robust, and the number continues to be increased, and we double-check with our customers, customers are customers, or those CSPs, they gave us a very positive outlook, right? And so we have to speed it up with our build-up of clean room and buying the tools. And so we are working with construction and we are working with our equipment supplier. And so we want to pull forward our forecast schedule. That's a simple answer because AI is so strong.

Any read on when we can kind of meet these demands? Or do you think in the next couple of years, it's still going to be very challenging to meet that supply is still going to be running below

demand, let's say, into 27 also? So, Goku would like to know when the supply can meet the demand.

Do we have a forecast or a time frame? Goku, you know, it takes two to three years to build a new fab and with the current um schedule uh we believe that 27 oh we are announced anyway when we enter 27 but let me say that uh it takes time to build a new fab it takes time to ramp it up And so we expect this to continue to be very tight. So that's why we just announced that we tried to build three new and three fabs to meet the demand.

Okay. That's very clear. Twenty-seven dollars are very tight. My second question on competition, so you have the traditional competitors Samsung Intel, but one of your customers Elon Musk also announced his TerraFab initiative recently. What is KS&C's perspective on this initiative? They have also been a customer of yours and they recently signed a deal with Samsung a few months back. So what is the S&C's response here, now that they are also trying to kind of build chips on their own? How are you trying to win back this customer like Hrithi, what is your perspective here?

Okay, so Gokul's second question is on competition. He notes that we have competition and then recently a competitor or he notes that this TerraFab, so he wants to know what is our perspective on this initiative. this customer has also been a customer of TSMC but has also signed a deal with one of our other competitors Samsung so Goku would also like to know what is our perspective on the TerraFab and what is our view on winning back this customer's business well Goku

uh actually both intel and tesla they are tsmc's a customer so but again they are our competitors and we view intel as a formidable competitors and do not underestimate But having said that, there are no shortcuts. The fundamental rule of the boundary game never changes. They need technology leadership, manufacturing excellence, and customer trust. And most of all, the service, which has been mentioned by Jensen. Thank you for his wording. uh again let me say that it takes two to three years to build a new fire no shortcuts and it takes another one to two years to ramp it up again that's a fundamental of voluntary industry and whether we try to win them back actually they are still our customer and And we are very confident in our technology position, and we work very hard to capture every piece of business possible. Goku, did I answer your question?

That is pretty clear. So do you think your faster ramp-up of capacity can kind of win some of these customers back? because the reason seems to be mostly about capacity tightness rather than any other kind of big reasons, right? So is that your evaluation that this is probably the most important thing to win some of these customers back?

Okay, so Gokul's final question is then in winning customers back, his concern is because our capacity is tight. Is that the reason we're losing customers and so can we win customers back?

well again let me emphasize take two to three years to build a new fab so you know in this time we are also building a new fab to meet our customers stronger demand no shortcuts so anyway the capacity is very tight as i said but we are working hard to make sure that we can meet

customers at demand got it thank you no shortcuts got it all right thank you uh operator can we

move on to the next participant please next one we have charlie chan from morgan stanley hi good

afternoon cc window and jeff thanks for taking my question and also congratulations for a very very strong results again. So, I think I would also address the competition topic from a little bit different angle. As you can see, those AI customers are developing much larger radical-sized chips, and some customers are considering to use eMeep because it's a kind of substrate-based, more suitable for so-called larger-sized chip design. So, I'm not sure what the TSMC's strategy to address this competition and more strategically is a TSMC comfortable to open up your compute die to your competitors for example Intel to do the package what what the kind of process behind thank you all right Charlie thank you so Charlie's

first question is also related to competition. He notes that, you know, AI customers are seeking for larger and larger reticle sizes. So he wants to know what is our assessment of the competitive threat from solutions such as like EMIB, and what's our strategy to address this competition? Would we be willing to open up our front-end wafer and let someone else do the packaging,

basically well charlie uh you know today tsmc is supplying the largest radical size packaging and yes we we we understand that our competitor also offer very attractive technology but we welcome that so our customer can have more choices and then we can do more business with our customers that's our attitude and that but seeing that we don't leave any business on the table uh we are working very hard to meet all our customers at demand we also are developing a very large vertical size packaging technologies we are working with all the customers it's so far so

When you mentioned about larger size technology, are you referring to COPUS or COS-L 3.5D? Do you think 3DE staking can resolve this kind of a planner extension problem?

So, Charlie is asking a follow-up. So, he wants us to comment on for larger radical size. Is it COSL? Is it panel level? What exact detailed solutions are we doing?

Charlie, so far today we have a very large radical size cohorts. Of course, we are also working on copas and together we try to make sure that we give enough capacity to support our customer with a reasonable cost so that's why we build a copas pilot line right now and expect production a couple years later but today the main the main approach or the main supplier still large size cohorts and together with a system of wafer technology we we think TSMC give the our customer the best options for their product in the market so

yeah I would take we don't need to worry too much about this competition so my My second question is actually about your long-term care test plan. Since you said that it takes two to three years to build a new FAB, so you definitely have better visibility, right? So I know that back in 2021 management also provides three-year care test guidance as 100 billion US hours given restaurant demand. I'm not sure if the TSMC can provide a little bit longer-term CAPEX guidance because, as you said, the equipment supply is also pretty tight. Yesterday, ASM reported very, very strong results. So, you said the EUV supply is an issue and, secondly, would the management provide a kind of long-term CAPEX guidance to investors.

All right, Charlie, that's a lot of questions. But the second one then on CAPEX and building capacity. Again, Charlie notes CC's comment capacity is not born overnight. It takes time. So he would like to know besides this year's CAPEX, which we have already said at the high end, can we provide a guidance for the next three years CAPEX like we did back in 2021 in terms of the dollar amount?

Okay, Charlie, we don't have a number to share with you, but look at it this way. In the past three years, our total CAPEX was 101 billion. This year, we're already seeing CAPEX is towards the high end, which is 56 billion, which is already over 50% of the past three years in total. so we have a strong conviction in the ai megatrend so we expect the capex in the next few years in the next three years will be significantly higher than the past three years and then the

final part of charlie's question with such a long lead time do we are we concerned about

tools securing tools or bottlenecks and such well Charlie we always TSMC's culture we always working with our supplier because we view them as a partners so we continue to work with them especially for those asml apply material then research etc so so far we are very happy

their support. That's all I can tell you. Okay. Thank you, Charlie. Operator, can we move on to the next participant, please?

Next one, we have Pani Ling from UBIOS.

Thank you very much for taking my questions and congrats on the steady results. So my first question is again to follow up on KPEX. So if you look at from 2024 to 2026, so in this cloud ESI code, TSMC has been able to keep capital intensity at a healthy level of 30% plus, given very strong technology leadership and operating leverage. The company doesn't really have a specific target on capital intensity, but for the coming few years, given the very strong revenue ramp of leading edge, how should we think about the revenue growth compared with KPEX growth? Should we think the timeline will remain steady and therefore KPEX could grow in line or even What's the best way for us to think about it?

Okay, Sunny, thank you for your question. So please allow me to summarize Sunny's first question is on, well, I think CAPEX and really capital intensity. She notes in the past few years we've been able to keep capital intensity around the 30-something percent level. She notes that we don't have a specific capital intensity target per se, but her specific question, looking ahead the next several years, how do we see revenue growth versus CAPEX growth? is it likely to be higher, flat, lower, and therefore what type of intensity does that imply? Is that correct, Sunny?

Yeah, thank you very much, Jeff.

Okay, Sunny. So in the past few years, as you correctly pointed out, the revenue growth outpaces the CAPEX growth. That's because if we do our job right, then we will continue to see that happen in the next several years the revenue growth outpace the capex growth okay now therefore we do not expect in the next several years a sudden surge in capital intensity okay I see maybe a very quick

follow-up a lot of questions on competitions already but also from competition point of view, even a very tight supply at TSNC side in recent years, would definitely actually consider maybe spending capex more so that clients will need to diversify given

a tight supply? All right, so Sunny's 1.5 question is, in terms of the capex, will we consider accelerating or spending more, given the competitive threat from the competitors, if there's not enough capacity, then our customers will go to competitors. That's your question, correct?

Yeah, thank you, Jeff.

Well, Sunny, we repeatedly saying that we prepare the capacity to meet customers' demand, not because of our competitor or not because of our other consideration the most important one is our customers demand and they work with TSMC and so that we plan our capacity and so our capital expense. Sunny, did I answer your question?

Yeah yeah very clear thank you so maybe my 0.5 question and so if we look at earlier you just got a bit higher than 30% growth for top line, but indeed there's ongoing supply tightness. And so for 20.6, how much upside could you realize for top line? And at this point, have you started to see some impact of consumer and demand and therefore on your demand coming

on smartphone and pc okay so sunny's uh second question is uh regarding 2026 uh full year outlook um she notes now that we have increased the guidance to above 30 percent uh how much more upside can there be or maybe the first part also how much uh how do we see the impact from uh the memory price hike to the end market and how do we see with above 30 percent is there more

upside. Well Sunny, memory price hike definitely has some impact to price sensitive yen market, especially in PC and smartphone market. But we did see a little bit softer market. But But to share with you, all the high-end smartphones continue to do better. And this is to TSMC's advantage. And as you're asking about how much higher than, you know, above 30% year-over-year growth, we will share with you in July. How about that? that we will have a more accurate or more precise number to share with everybody.

No problem. Thank you very much, CT. Okay, thank you, Sunny. Operator,

can we move on to the next participant on the line? Yes, the next one, Jim Fontanelli.

Yeah, thank you. Thanks for taking the question. So my first question is to do with demand. So you commented earlier in the call that, you know, demand continues to outstrip supply for leading edge capacity. And obviously, you've just delivered a very strong print and guide for gross margins. So against this backdrop, has management's thinking changed about the sustainable margin structure and what appropriate long-term returns might be for the business?

Okay. So Jim's first question is looking, asking on the margin structure. He notes, as we said that demand continues to be extremely robust and very strong so how does this change I think your question is our margin our view on the long-term margin profile and the return profile is that correct that's correct okay Jim as

we said in the last earning cost we've revised up our long-term margin targets and ROE targets from 2024 to 2029, we're now saying the gross margins will be 56% and higher through the cycle. And we're looking at ROE of high 20% through the cycle. That's what we're currently looking at. That's already higher than before. Thank you. And that thinking is

is not changing against a backdrop where uh other parts of the ai supply chain are clearly starting to print super normal returns that doesn't impact how you think about um margin structure for the

next two or three years yeah jim this is a the long-term planning uh is ongoing and continuous process so we do that all the time and we will update you when there is a change okay thank you

My second question is, it looks like the Arizona site is becoming more strategic in terms of leading-edge commitment for TSMC, particularly with the recently added second parcel of land. Could you talk about how you see mid- to long-term capacity opportunity, and also how confident you are that the U.S. fab economics will match Taiwanese-produced wastes?

Okay, so Jim, second question is on our Arizona fab expansion plans. He notes that it is becoming more and more strategic. We have recently, as we said, acquired a second large piece of land. So what is the plan or the purpose behind this? And then what is the profitability or margin outlook as well?

Well, Jim, let me answer the question. We acquired the second land because we need it. We want to build more flats in Arizona. and this is actually to meet the multi-year demand from our leading edge u.s customers and again let me emphasize again that we are working very hard to speed it up we already uh gain a lot of experience in arizona and so now we have much more confidence than last year that we can make it a good progress and moving aggressively forward. And we expect we can improve the cost structure of course. Okay, Jim. Thank you. All right,

thank you. Operator, can we move on to the next participant, please? Next one, Bruce Liu from

Goldman Sachs. Well thank you for taking my question. I think I want to follow up on Jim's question for the profitability. I think earlier last year when I asked why TSMC did not raise the profitable target when TSMC continued to sell the value. I think CC told me that to focus on the you know above version of 53 percent and above. I think last quarter you know we raised it to 56 So the question is that do you believe the current profitability fully reflects TSMC's value? So I'm guessing that you might ask me to focus on the higher portion of the profitability again. So the real question is that given the uniqueness of the dominant position for TSMC, it's not easy to find a perfect benchmark for TSMC's profitability. So, can you tell us how we should think the profitability benchmark for TSMC, or what is the best way to see TSMC value to be fully reflected into the growth margin and operating margins?

Okay, Bruce, his first question is, he wants to know what profitability benchmark he should be looking at and whether we believe our current profitability level fully reflects tsmc's true

value well bruce you actually you ask about our pricing strategy let me say that we always view our customer as our partners of course we know that our value of course we know our position but we also view that our partner as a very important business partner so that we don't we don't change our pricing dramatically or something like that we just try to make sure that our customer can be successful in their market and at the same time we grow together then we also earn our value so that we can continue to expand our capacity to support them that fundamentally is number one our customer has to be successful that's our consideration number one and we grow together and again there's a key word please pay attention to

customer is our partners. Okay, so if your customer continues to be successful, maybe in a couple quarters we can see the, you know, our profitability target again. Bruce, what's your second question? Okay, my second question is that management has been guided by AI accelerator revenue to grow about like mid to high 50s in in 2024-29. So how does TSMC trend and forecast AI-related demand? I mean, does TSMC incorporate metrics such as potent consumption growth in your assumption? Because, you know, the recent potent consumption in the first quarter is definitely accelerated and faster than earlier expectation. Do we see the changes for the accelerated revenue growth in the coming years?

Okay, so Bruce's second question is on our AI accelerator long-term CAGR guidance, which, yes, we have guided mid to high 50s. He notes with the strong token growth in demand for tokens, do we have any changes to this long-term guidance?

Bruce, actually, I think I say now that it's a very strong demand. and we continue to receive the very positive signal from our customer and customers are customers and so what you say is whether we change our trigger on air accelerator it it's actually we continue to see strong demand but again let me say that is towards a higher expertise of our CAGR that we observe.

Okay, thank you, C.C. Thank you, Bruce. Operator, can we move on to the next caller, please?

Next one, to ask question, Laura Chen from Citi.

Hello, hi, Graph Center, C.C. Wendell, and Jax. May I take more details on TSMC's strategy in advanced packaging? And what will be the business model working with your OSEC partners? We see that there are various different solutions provided by your peers and also the OSEC makers. Yet TSMC is also expanding more in the advanced packaging. So how would TSMC work with your customers planning their advanced no-wafer demand but also align with their advanced packaging demand at TSMC?

Okay, so thank you, Laura. Laura's first question is on advanced packaging. She would like to know, we work with customers, collaborate with customers to plan our front-end wafer capacity. How do we work with the customers to plan the advanced packaging capacity is what she would like to understand, and also in the context of working with our OSAP partners on the advanced packaging businesses.

Well, Laura, our priority, actually, again, is to support our customers, right, and whenever we can, wherever we can, we want to make sure that their product can be, their demand of their product can be met by TSMC and high-end packaging. So we certainly, let me say that our advanced packaging capacity is very tight also. So we have to work with all set partners. we we hope that we can increase the capacity to support our customer that's a again let me emphasize again we support our customers uh so so we uh we we try very hard to increase our own capacity also but certainly it just i have been very tight and so that's what our situation today

Sure, understood. My second question is also about advanced packaging as CT highlighted before many times that AI chips are going into superchips with very large die size and TSMC now working at the biggest radical in the world, but at the same time there is potential technical challenges such as warpage. So, do you think that the following roadmap like SOIC or like COPOS can solve this kind of technical issue? And based on TSMC's technology roadmap, do we see any like technology like SOIC or COPOS will be a bigger ramp in a couple of years can solve this problem?

Okay, so Laura's second question is also related to advanced packaging, AI in larger radical sizes, pose potential technical challenges such as warpage. So she would like to know how do we see SOIC or panel level packaging, what's the key to solving these issues, and what is it outlook in the next several years?

Well, Laura, you are good. Actually, that's all the challenges that we have in advanced packaging technology. Mechanical stress, which is a very tough challenge to the electrical engineering like I am. However, we accumulated a lot of experience already today because we have supplied most of the leading edge or end up in packaging area and we continue to increase the die size and continue to meet all the challenges from the mechanical strays like you said actually it's a wall pg or the thermal limitation a good challenge and we like it the harder the better because of TSMC's strengths in technical engineering, and we have confidence that we can work with our customers to solve all the issues and continue to move on.

So should we expect that SOIC's TSMC may introduce that earlier than to solve these kind of a challenge because we already have the learning curve and already have the products in production. So that should be go faster than other technologies I suggest.

Again, sorry. So Moro's question is very specific. I don't even, yeah, Yeah, on SOIC, how do we see that developing, I guess?

Well, we work with our customer, and we meet their demand, and that's all I can tell you. Speed it up or slow down. No, no, no, no, no. We work with our customer to meet their demand.

Okay, Laura? Very clear.

Okay, thank you. Operator, in the interest of time, can we take the questions from the last participant, please?

Next one to ask a question, Chow Hsu from Nidem.

Thanks for taking my question. TSMC's definition of AI revenue includes data center GPU, AI accelerator, HBM-based, that maybe I left out a few others, but it specifically excludes data-centered CPU. I think you make that definition very clear for a couple of years now. But with the CPU, there's more and more conversation about CPU now becoming part of the AI infrastructure, especially for agentic workloads. um any chance for tsmc to maybe provide us a revised uh numbers for ai revenue and maybe the ai revenue growth take the projection going into 20 20 29 2030 and maybe hopefully give us some sense how the historical ai revenue numbers would would have been just from some of the data kind of cpu numbers especially for agentic ai workloads are included there that's my first

question okay thank you charles so charles first question please let me summarize is regarding our definition of ai accelerator which is of course we have said gpu asic and hbm controllers for training inference in the data center he notes now with agentic ai he wants to know So, will we start to include CPUs in this definition? If so, can we provide the historical data with CPU included? And what would be the AI accelerator guidance be if it includes CPU?

Jeff, certainly CPUs become more and more important in today's AI data center. but actually uh let me share with you this is a good question by the way let me show with you that we are not able to identify identify which cpu goes to where right it's a pc or a desktop or is a ai data center so today we still not include the cpus in our ai hpc's uh calculation someday later we might consider. Okay, Charles, do you have a second question?

Thanks, CC. Yes, maybe it's kind of also tied to the recent development in overall AI infrastructure, how things have been evolving. So NVIDIA, of course, they recently added more CPU content to the overall Vera Rubin super part, but I think that most people are focusing on that brand-new LPU. They recently added, we understand, appreciate that the TSMC is very strong in CPU and will definitely participate in that upside in CPU, but the LPU business, it's acquired business, well, for historical reasons, it's still at your competitors' Samsung Foundry, and i think that investors are looking at that and the theme that maybe look looks like samsung foundry finally made the first for true inroads into ai um so any thoughts uh from tsmc side how should we think about whether and how tsmc will win back that ltu business or any future different share business coming from your customers. And yeah, give us some thoughts there.

We appreciate that. Thank you. Okay. Charles' second question is a very specific question about a very specific customer and very specific product, which is we typically do not comment on, but he wants to know for this customer's LPU product, which he notes is made at one of our competitors. How do we see this business going to the competitor? You know, do we have plans to win this LPU business back in the future? Charles, I think Jeff already gave me enough warning,

said very specific and very specific customer, very specific area. Now let me answer your question. we are working with our customer for their next generation inside your PU anyway and we are very confident in our technology position and we will work hard to capture every piece of business

possible how about that very good thank you cc that's that's a very good comment thank you

appreciate that okay thank you charles uh thank you cc thank you wendell this concludes our prepared statements. I should say this concludes our Q&A session. Before we can conclude today's conference, please be advised that the replay of the conference will be accessible within 30 minutes from now and the transcript will become available 24 hours from now. Both are going to be available through TSMC's website at www.tsmc.com. So again, thank you everyone for taking the time to join us today we hope you continue to stay well and we'll hope you join us again next quarter goodbye and have a good day