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 webcast 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.

Please refer to the safe harbor notice that appears in our press release. Now, I would like to turn the call over to TSMC's 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 US 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%, 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% due to operating leverage. Overall, our first quarter EPS was NT$22.08 and ROE was 40.5%.

Now let's move on to revenue by technology. 3nm process technology contributed 25% of wafer revenue in the first quarter, while 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%. DCE increased 28% to account for 1%.

Moving on to the balance sheet: We ended the first quarter with cash and marketable securities of NT$3.4 trillion, or $106 billion. On the liability side, current liabilities increased by NT$256 billion 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 6 days to 80 days, reflecting the ramp-up of our 2nm technology and strong demand for our 3nm technology.

Regarding cash flow and CapEx: During the first quarter, we generated about NT$699 billion in cash from operations, spent 351 billion in CapEx, and distributed 130 billion for second quarter 2025 cash dividend. Overall, our cash balance increased NT$268 billion to 3 trillion at the end of the quarter.

In US 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 US$1 to NT$31.7, 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%, primarily due to cost improvement efforts, a higher overall capacity utilization 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 put-and-takes I would like to share. As we have said before, the initial ramp-up of our 2nm technology will start to dilute our gross margin in the second half of this year, and we expect between 2% and 3% 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 2% to 3% in the early stages, and widen to 3% 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, N3 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 material and energy supply update given the recent situation in the Middle East. TSMC 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 work closely with Taipower 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 backup 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 structural 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 billion and $56 billion, 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 US$35.9 billion, slightly above our guidance in US 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 end-market segment.

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 continued to be extremely robust. The shift from generative AI and query mode to agentic AI and command and action mode is leading to another step-up in the amount of token being consumed.

This is driving the need for more and more computation, which supports the robust demand for leading-edge silicon. Our customers and customers' customers, who are mainly the cloud service providers, continue to provide us with their very strong signal and positive outlook.

Thus, our conviction 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 broad customer base, we maintain strong confidence for our full-year 2026 revenue to now grow by above 30% in US dollar terms.

Next, let me talk about our N2 capacity expansion plan. Our practice is to prioritize the land in Taiwan to support the fast 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 phases at both Hsinchu and Kaohsiung site, 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 target capacity. However, as a foundry, 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 meet the strong demand in AI application, we are stepping up our CapEx 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 base dies, automotive, and IoT customers.

In Taiwan, we are adding a new 3nm fab to our GIGAFAB cluster in Tainan Science Park. Volume production is scheduled for the first half of 2027.

In Arizona, our second fab will also utilize 3nm technologies. Construction is already complete, and volume production will begin in the second half of 2027.

In Japan, we now plan to utilize 3nm technology in our second fab, and volume production is scheduled in 2028. In addition to all the new fabs, we continue to convert 5nm tools to support 3nm 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 including flexible capacity support among the N7 and 5 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's strategy in 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 mature node capacity such as in JASM Fab 1 in Japan for CMOS image sensor application, and ESMC in Germany for automotive and industrial applications.

Meanwhile, we have a plan to wind down our Fab 2, which is a 6-inch fab, and Fab 5, which is an 8-inch fab, focused on gallium nitride, and use the available space to optimize the support for leading-edge applications. Even without Fab 2 and Fab 5, we still have enough capacity to fully support our existing customers.

In summary, our strategy will be to continue to optimize our capacity mix within mature nodes, and focus on the higher-value-added and strategic segment, while ensuring we have necessary capacity to support our customers' growth. Finally, let me talk about our A14 status.

Featuring our second-generation nanosheet transistor structure, A14 will deliver another full-node stride from N2, with performance and power benefit to address the insatiable 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 14 A14 technology and its derivative will further extend our technology leadership position, and enable TSMC to capture the growth opportunities well into the future.

This concludes our key messages, and thank you for your attention.

Thank you, C.C. 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 queue, please press star two.

Now let's begin the Q&A session. Operator, can we proceed with the first participant on the line, please?

Thank you.

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 3nm gross margin outlook. You just mentioned the node is going to cross the corporate average gross margin in second half this year, which is now at mid-60 percentage levels.

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 convinced you to extend more?

The other thing on 3nm as well is just the node started to ramp from fourth quarter 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. The first question from Haas Liu of Bank of America is two parts on 3nm.

First, as C.C. described, we are executing a plan for expanding 3nm capacity.

He wants to understand what are the applications to drive such a strong multi-year looking-ahead pipeline of demand for 3nm, since it's already been around in volume production since late '22. That's the first part of his question.

Let me answer that. I think the application is simple.

It's still the HPC AI applications. Is that answer your question?

Yes, that is the first part. The second part is

The second part of his question is on the gross margin for 3nm. His question is really what is the gross margin outlook for 3nm?

Will it cross over in the second half of this year, to what level? Then once it becomes fully depreciated, what happens to the margin?

Okay.

This is Wendell. We expect the N3 gross margin to reach and cross the corporate gross margin level in the second half of this year.

We don't have a number to share with you, but after the full depreciation, as our previous nodes, the gross margin are generally very high.

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

Yes, thanks so much, Jeff. I think just a 0.5 follow-up is probably just on the CapEx.

You revised up to the high end of your guidance for $52 billion to $56 billion 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.

His second question is he notes that indeed, we have this time guided to the high end of our CapEx range versus January. What incrementally is driving this revision to the CapEx?

What gives us the confidence to go to the high end of the 52 to 56 billion range? Thank you.

Again, this is C.C. Wei.

Let me answer this question. A very simple answer is the demand are very robust, especially from the HPC and AI applications.

Also, we try very hard to speed it up and pull in all the equipment as we can. Still, our supply is very tight.

Demand is continue to increase, and so we continue to work with our suppliers to speed it up. That's why we are towards our high end of CapEx forecast.

Haas, does that answer your question?

Yes, thank you so much, C.C., Wendell, and Jeff. I will be back in the queue.

Sure. Thank you.

Operator, can we move on to the next participant, please?

Hi. Good afternoon, C.C., Wendell, and Jeff.

My first question, on your comments on demand, clearly demand is even better than what you predicted back in January, C.C., and you've also raised the CapEx. Now all your customers seem to be telling everybody they can tell that wafers still remain the biggest constraint.

Given your expanded 3nm capacity plan and faster CapEx, C.C., what is your expectation that how long this 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?

As a strategy, do you also plan to build out more cleanroom 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.

Gokul, please allow me to summarize your first question. His question is directed for C.C.

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.

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 cleanroom space first? Is that correct, Gokul?

That's right. Yes.

Gokul, let me answer the question. Again, it's very simple, because of demand continue to be robust and the number continue to be increased.

We double check with our customers, customers' customers, all those CSPs, they gave us a very positive outlook, right? We have to speed it up with all our build-up of cleanroom and buying the tools.

We are working with construction and we are working with our equipment supplier, and so we want to pulling forward of our forecast schedule. That's a simple answer, because of AI is so strong.

Any reads, C.C., on when we can kind of meet this demand? Or you think the next couple of years is still going to be very challenging to meet, the supply is still going to be running below demand in 2027 also?

Gokul would like to know when supply can meet the demand. Do we have a forecast or a timeframe?

Gokul, takes 2 to 3 years to build a new fab. With the current schedule, we believe that 2027, well we are unannounced it anyway when we enter 2027, but let me say that it takes time to build a new fab, it takes time to ramp it up, and so we expect it's continue to be very tight.

That's why we just announced that we try to build three new N3 fab to meet the demand.

That's very clear. So '27 is also very tight.

My second question on competition: Obviously you have the traditional competitors, Samsung, Intel, but one of your customers, Elon Musk, also announced his Terafab initiative recently. What is TSMC's perspective on this initiative?

They've also been a customer of yours, and they recently signed a deal with Samsung a few months back. What is TSMC'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? C.C., what is your perspective here?

Okay. Gokul's second question is on competition.

He notes that we have competition, and then recently he notes that this Terafab, 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.

Gokul would also like to know what is our perspective on the Terafab, and what is our view on winning back this customer's business.

Gokul, actually both Intel and Tesla, they are TSMC's customer. Again, they are our competitors, and we view Intel as a formidable competitor and do not underestimate them.

Having said that, there are no shortcuts. The fundamental rule of the foundry game never changed.

They need a technology leadership, manufacturing excellence, and customer trust. Most of all, the service, which has been mentioned by Jensen, well, thank you for his wording.

Again, let me say that it takes 2 to 3 years to build a new fab, no shortcuts, and it takes another 1 to 2 years to ramp it up. Again, that's a fundamental of foundry industry.

Whether we try to win them back, actually they are still our customer, and we are very confident in our technology position. We work very hard to capture every piece of business possible.

Gokul, did I answer your question?

Okay. That's pretty clear.

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?

Is that your evaluation that this is probably the most important thing to win come of these customers back?

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

Again, let me emphasize, takes 2 to 3 years to build a new fab. In this time, we are also building a new fab to meet our customers' strong demand.

No shortcuts. Anyway, the capacity is very tight, as I said, but we are working hard to make sure that we can meet customers' demand.

Got it. Thanks, C.C.

No shortcuts. Got it.

All right. Thank you.

Operator, can we move on to the next participant, please?

Hi, good afternoon, C.C., Wendell, and Jeff. Thanks for taking my question, and also congratulations for very, very strong results again.

I think I would also address this competition topic from a really different angle. As you can see that those AI customers, they are developing much larger reticle size chips, and some customers are considering to use EMIB because it's a kind of substrate-based, more suitable for sort of larger size of chip design.

I'm not sure what TSMC's strategy to address this competition. More strategically, is TSMC comfortable to open up your compute die to your competitors, for example, Intel, to do the package?

What kind of thought process behind? Thank you.

All right, Charlie. Thank you.

Charlie's first question is also related to competition. He notes that AI customers are seeking for larger and larger reticle sizes, he wants to know what is our assessment of the competitive threat from solutions just as 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?

Charlie, today TSMC is supplying the largest reticle size packaging, and yes, we understand that our competitor also offer very attractive technology. We welcome that, our customer can have more choices and then we can do more business with our customers.

That's our attitude. Saying that, we don't leave any business on the table.

We are working very hard to meet all our customers' demand. We also developing a very large reticle size packaging technologies, and we are working with all the customers.

It's so far so good.

Thanks, C.C. A follow-up on this: When you mentioned about larger size packaging technology, are you referring to CoWoS or CoWoS-L 3.5D, or do you think a 3D stacking can resolve this kind of planar extension problem?

Charlie is asking follow-up, he wants us to comment on for larger reticle size, is it CoWoS-L, is it panel level, what exact detailed solutions are we doing?

Charlie, so far today, we have a very large reticle size CoWoS. Of course, we are also working on CoPoS, and together we try to make sure that we give enough capacity to support our customer with a reasonable cost.

That's why we build a CoPoS pilot line right now, and expect the production a couple years later. Today, the main approach or the main supplier still a large size CoWoS.

Together with a system-on-wafer technology, we think TSMC give our customer the best options for their product in the market.

Got it. I would take we don't need to worry too much about this advanced packaging competition.

My second question is actually about your long-term CapEx plan. C.C., as you said, it takes 2 to 3 years to build a new fab, you definitely have better visibility, right?

I remember back in 2021, management also provided 3-year CapEx guidance as $100 billion given a strong demand. I'm not sure if TSMC can provide a bit longer-term CapEx guidance, because as you said, right, those equipment supply is also pretty tight.

Yesterday, ASML reported very, very strong results. Is that EUV supply an issue, and secondly, would the management provide a kind of a long-term CapEx guidance to investors?

Thank you.

All right, Charlie. That's a lot of questions.

On the second one then, on CapEx and building capacity, again, Charlie notes C.C.' s comment capacity is not born overnight, it takes time.

He would like to know, besides this year's CapEx, which we've 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?

Charlie. We don't have a number to share with you, but look at it this way: In the past 3 years, our total CapEx was 101 billion.

This year, we're already saying CapEx is towards the high end, which is 56 billion, which is already over 50% of the past 3 years in total. We have a strong conviction in the AI megatrend.

We expect the CapEx in the next few years, in the next 3 years, will be significantly higher than the past 3 years. Then

the final part of Charlie's question, with such a long lead time, are we concerned about tools, securing tools, or bottlenecks and such?

Charlie, TSMC's culture, we always working with our supplier, because we view them as a partners. We continue to work with them, especially for those ASML, Applied Materials, Lam Research, etc.

Far, we are very happy their support. That all I can tell you.

Got

it. Thanks, C.C., Wendell.

Thank you.

All right. Thank you, Charlie.

Operator, can we move on to the next participant, please?

Good afternoon. Thank you very much for taking my questions, and congrats on the steady results.

My first question is again to follow up on CapEx. If we look at from 2024 to 2026, in this current cycle, TSMC has been able to keep capital intensity at healthy level of 30% plus, given very strong technology leadership and operating leverage.

Understand 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 CapEx growth? Should we think topline remains steady, and therefore CapEx could grow in line or even below?

What's the best way for us to think about it?

Sunny. Thank you for your question.

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% plus, 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?

Thank you very much, Jeff.

Sunny. In the past few years, as you correctly pointed out, the revenue growth outpaced 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 TSMC side in recent years, would TSMC actually consider maybe spending CapEx ahead more so that clients wouldn't need to diversify given the tight supply?

All right, 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?

Yes, thank you, Jeff.

Sunny, we repeatedly saying that we prepare the capacity to meet customers' demand, not because of our competitor or not because of 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. Very clear.

Thank you. Maybe my 0.5 question: If we look at this year, earlier you just guided higher than 30% growth for topline, but indeed, there's ongoing supply tightness.

For 2026, how much upside could you realize for topline? At this point, have you start to see some impact of consumer and demand, and therefore on your demand coming from smartphone and PC?

Sunny's second question is regarding 2026 full-year outlook. She notes now that we have increased the guidance to above 30%.

How much more upside can there be? Or maybe the first part also, how do we see the impact from the memory price hike to the end market, and how do we see with above 30%, is there more upside?

Sunny, memory price hike definitely has some impact to price-sensitive end market, especially in PC and smartphone market. We did see a little bit softer market, but to share with you, all the high-end smartphone continue to do better.

This is to TSMC's advantage. As you're asking about how much higher than above 30% year-over-year's growth, we will share with you in July.

How about that? Now we'll have a more accurate or some more precise number to share with everybody.

No problem. Thank you very much, C.C.

Okay. Thank you, Sunny.

Operator, can we move on to the next participant on the line?

Thank you. Thanks for taking the question.

My first question is to do with demand. You commented earlier in the call that demand continues to outstrip supply for leading-edge capacity, and obviously you've just delivered a very strong print and guide for gross margins.

Against this backdrop, has management's thinking changed about the sustainable margin structure and what appropriate longer-term returns might be for the business?

Jim's first question is asking on the margin structure. He notes as we said that demand continues to be extremely robust and very strong.

How does this change our view on the long-term margin profile and the return profile? Is that correct?

That's correct.

Jim. As we said in the last earnings calls, 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. That thinking is not changing against a backdrop where other parts of the AI supply chain are clearly starting to print supernormal returns?

That doesn't impact how you think about margin structure for the next 2 or 3 years?

Jim, the long-term planning is a ongoing and continuous process, we do that all the time. 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 US fab economics will match Taiwanese-produced wafers?

Jim's 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. What is the plan or the purpose behind this, and then what is the profitability or margin outlook as

well? Jim, let me answer the question.

We acquired the second land because we need it. We want to build more fabs in Arizona.

This is actually to meet the multi-year demand from our leading-edge US customers. Again, let me emphasize again that we are working very hard to speed it up.

We already gained 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. We expect that we can improve the cost structure, of course.

Jim?

Thank you.

All right. Thank you.

Operator, can we move on to the next participant, please?

Hello, thank you for taking my question. I think I want to follow up on Jim's question for the profitability.

I think early last year when I asked why TSMC did not raise the profitability target when TSMC continued to sell the value, I think C.C. told me that to focus on the above version of 53% and above.

I think last quarter, we raised it to 56% and above. The question is that, do you believe the current profitability fully reflect TSMC's value?

I'm guessing C.C. might ask me to focus on the higher portion of the profitability target again.

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. Can you tell us how we should think the profitability benchmark for TSMC, or what is the best way to see TSMC's value to be fully reflected into the gross margin and operating margins?

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.

Bruce, 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 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, and we also earn our value, so that we can continuously 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.

Again, there's a key word, please pay attention to: Customer is our partners.

Your customer continue to be successful, maybe in a couple quarters we can see the higher profitability target again.

Bruce, what's your second question?

My second question is that management has been guiding the AI accelerator revenue to grow by mid to high-50s CAGR in 2024 to '29. How does TSMC plan and forecast AI-related demand?

Does TSMC incorporate the metrics such as token consumption growth in your assumption? Because the recent token consumption in the first quarter is definitely accelerated and faster than earlier expectation, right?

Do we see the changes for the AI accelerator revenue growth in the coming years?

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'm saying now that it's a very strong demand, and we continue to receive the very positive signal from our customer and customers' customers. What do you say is whether we change our CAGR on AI accelerator, it's actually we continue to see strong demand, but again, let me say that is toward higher 50s of a CAGR that we observe.

Okay. Thank you, C.C.

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

Hello. Hi.

Good afternoon, C.C., Wendell, and Jeff. May I dig more details on TSMC's strategy in advanced packaging, and what will be the business model working with your OSAT partners?

As we see that there are various different solutions provided by your peers, and also the OSAT makers. Yet TSMC is also expanding more in the advanced packaging.

How would TSMC work with your customers planning on their advanced node wafer demand, but also align with their advanced packaging demand at TSMC?

Okay. 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 OSAT partners on the advanced packaging businesses.

Laura, our priority actually again is to support our customers, right? Whenever we can and wherever we can, we want to make sure that the demand of their product can be met by TSMC's front-end and high-end packaging.

We certainly, let me say that, our advanced packaging capacity is very tight also. We have to work with our OSAT partners.

We hope that we can increase the capacity to support our customer. Again, let me emphasize again, we support our customers.

We try very hard to increase our own capacity also, but certainly it just have been very tight. That's what our situation today.

Sure. Sure, understood.

My second question is also about advanced packaging. As C.C.

highlighted before many times that AI chips are growing into super chips with very large die size, and TSMC now working at the biggest reticle in the world. At the same time, there's a potential technical challenges such as warpage.

Do you think that the following roadmap like SoIC or like CoPoS can solve this kind of technical issue? Based on TSMC's technology roadmap, do we see any technology like SoIC or CoPoS will be a bigger ramp in couple of years can solve this problem?

Laura second question is also related to advanced packaging. AI and larger reticle sizes pose potential technical challenges such as warpage.

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 the outlook in the next several years?

Laura, you are good. Actually, that's all the challenges that we have in advanced packaging technology.

Mechanical stress, which is a very top 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 and in packaging area.

We continue to increase the die size, and continue to meet all those challenges from the mechanical stress, like you said, actually is a warpage or the thermal limitation. A good challenge, and we like it.

The harder, the better, because it's TSMC's strength in technical engineering. We have a confidence that we can work with our customer to solve all the issues, and continue to move on.

Should we expect that SoIC, TSMC may introduce that earlier then to solve this kind of challenge, because we already have the learning curve and already have the products in production? That should be go faster than other technologies, I suggest?

Again, the

Sorry. Laura's question is very specific, on SoIC, how do we see that developing, I guess?

We work with our customer, and we meet their demand. That's all I can tell you.

Speed it up or slow down, no, we work with our customer to meet their demand.

Laura?

Thank you, very clear. Yes.

Okay. Thank you.

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

Hi, thanks for taking my question. TSMC's definition of AI revenue includes data center GPU, AI accelerator, HBM base die, maybe I left out a few others, but it specifically excludes data center CPU.

I think you made that definition very clear for a couple years now. With the CPU, there's more and more conversation about CPU now becoming part of the AI infrastructure, especially for agentic workflows.

Any chance for TSMC to maybe provide us a revised numbers for AI revenue and maybe the AI revenue growth CAGR projection going into 2029, 2030, and maybe hopefully give us some sense how the historical AI revenue numbers would have been if some of the data center CPU numbers, especially for agentic AI workflows, are included there? That's my first question.

Okay. Thank you, Charles.

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 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?

Charles, certainly CPUs becomes more and more important in today's AI data center. Actually, let me share with you, this is a good question, by the way.

Let me share with you that we are not able to identify which CPU goes to where, right? Is a PC or a desktop or is a AI data center.

Today, we still not include the CPUs in our AI HPC's calculation. Someday later, we might consider.

Charles, do you have a second question?

Thanks, C.C. Yes.

Maybe it's kind of also tied to the recent development in overall AI infrastructure, how things have been evolving. NVIDIA, of course, they recently added more CPU content to the overall Vera Rubin SuperPOD, but I think that the most that people are focusing on that brand new LPU that they recently added.

We understand, appreciate that TSMC very strong in CPU and will definitely participate in that upside in CPU, but the LPU business, it's a higher business. For historical reasons, it's still at your competitor, Samsung Foundry.

I think investors are looking at that, and the thing that maybe looks like Samsung Foundry finally made the first true inroads into AI. Any thoughts from TSMC side, how should we think about whether and how TSMC will win back that LPU business or any future inference chip business coming from your customers?

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?

Do we have plans to win this LPU business back in the future?

Charles, I think Jeff already give me enough warning, say it's very specific, and a very specific customer, very specific area. Let me answer your question: We are working with our customer for their next generations LPU anyway.

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, C.C.

That's very good color. Thank you.

Appreciate that.

Okay. Thank you, Charles.

Thank you, C.C. Thank you, Wendell.

This concludes our Q&A session. Before we 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. 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.