Good afternoon, everyone, and welcome to TSMC's third-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're joining us through the conference call, your dial-in lines are in listen-only mode.

The format for today's event will be as follows: First, TSMC's Senior Vice President and CFO, Mr. Wendell Huang, will deliver the prepared remarks for the third quarter 2026, followed by our guidance for the fourth quarter 2026.

Then, 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 the 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 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 third quarter of 2026.

After that, I will provide the guidance for the fourth quarter of 2026. Third-quarter revenue increased 17.6% sequentially in NT, supported by strong demand for our leading-edge process technologies.

In US dollar term, revenue increased 16.2% sequentially to $46.7 billion, above the high end of our third-quarter guidance. Gross margin decreased by 1.3 percentage points sequentially to 66.4%, primarily due to margin dilution from 2nm ramp.

Total operating expenses accounted for 7.8% of net revenue. Operating margin was 58.7%.

Overall, our third-quarter EPS reached 29.43 NT, and ROE was 45.5%. Now, let's move on to revenue by technology.

2nm process technology contributed 8% of wafer revenue in the third quarter, while 3nm, 5nm, and 7nm accounted for 33%, 28%, and 10%, respectively. Advanced technologies, defined as 7nm and below, accounted for 79% of wafer revenue.

Moving on to revenue contribution by platform. HPC increased 22% quarter-over-quarter to account for 68% of our third-quarter revenue.

Smartphone increased 10% to account for 21%. IoT increased 5% to account for 4%.

Automotive increased 23% to account for 4%, while DCE declined 12% to account for 1%. Moving on to the balance sheet.

We ended the third quarter with cash and marketable securities of 4 trillion NT or $126 billion. On the liability side, current liabilities increased by 110 billion NT quarter-over-quarter, mainly due to the increase of 46 billion in current portions of bond payable and bank loans and 26 billions in dividend payable.

In terms of financial ratios, accounts receivable turnover days decreased by 1 day to 28 days. Inventory days decreased by 5 days to 82 days, primarily due to the increase in wafer shipment.

Regarding cash flow and CapEx. During the third quarter, we generated about 920 billion NT dollar in cash from operations, spent 443 billion in CapEx, and distributed 156 billion for fourth-quarter 2025 cash dividend.

Overall, our cash balance increased 488 billion NT to 3.6 trillion at the end of the quarter. In US dollar terms, our third-quarter capital expenditures totaled $13.8 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 fourth-quarter revenue to be between $52.3 and $54.3 billion, which represents a 14% sequential increase or a 58% year-over-year increase at the midpoint. Based on the exchange rate assumption of US$1 to 31.8 NT, gross margin is expected to be between 65% and 67%, operating margin between 56.5% and 58.5%.

This concludes my financial presentation. Now, let me turn to our key messages.

I will start by talking about our third-quarter '26 and fourth-quarter of 2026 profitability. Compared to second quarter, our third-quarter gross margin decreased by 130 basis points sequentially to 66.4%, primarily due to the margin dilution from the initial ramp-up of our 2nm technology.

We have just guided our fourth-quarter gross margin to decrease by 40 basis points to 66% at the midpoint, primarily due to the continued margin dilution from the steep ramp-up of our 2nm technology, as well as dilution from overseas fabs. These impacts are expected to be partially offset by cost-improvement efforts, including productivity gains and across-node capacity optimization.

While the cost of overseas fabs remain higher, thanks to the company's overall larger scale and cost-improvement efforts, we now expect the gross margin dilution from the ramp-up of our overseas fabs to be closer to 2% percentage points per year in the next few years. In the latter part of the five-year period, as we make more effort to support the strong structural demand from our customers, more fabs will be ramping up in the US.

Thus, we expect the dilution from our overseas fabs to widen to 3% to 4% in the next few years. We will leverage our increasing size in Arizona and work on our operations to improve the cost structure.

We will also continue to work closely with our customers and suppliers to manage the impact. Overall, with our fundamental competitive advantages of manufacturing technology leadership and large scale production base, we are confident that TSMC continues to be the most cost-efficient manufacturer in every region that we operate.

Next, let me make some comments on our 2026 capital budget. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following years.

Given the continued robust multi-year demand from our customers, including the emerging agentic AI market, we reiterate our full-year 2026 capital budget to be between $60 and $64 billion. We continue to expect our CapEx dollars investment from 2026 to 2028 to be even more significantly higher than the past 3 years as we continue to invest heavily to support our customers' growth.

Additionally, while the tool supply is tight, we always collaborate closely with our tool suppliers well in advance to prepare the capacity, just like our customers collaborate with us well in advance to plan our capacity. Even as we invest for the future growth with this level of CapEx spending in the next few years, 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 an 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 third quarter with a revenue of US$46.7 billion, higher than our guidance in US dollar terms, driven by strong demand for our leading-edge process technologies.

Moving into fourth quarter 2026, we expect our business to be supported by continued strong demand for our leading-edge process technologies, including a steep ramp-up of our 2nm technology. Looking ahead, we continue to observe consumer and price-sensitive end-market segment are being challenged due to the impact of rising component prices and macroeconomic uncertainties.

As such, we are being prudent in our business planning going into 2027 while focusing on the fundamentals of our business to further strengthen our competitive position. Having said that, demand for our leading-edge technologies continued to be extremely robust, supported by our strong technology differentiation and broad customer base.

Therefore, we now expect our full-year 2026 revenue growth to be around 44% year-over-year in US dollar term. Next, let me talk about the AI-related demand outlook.

The AI market continues to be very strong. Recent developments are very positive to AI's long-term demand outlook.

We observe increasing AI demand fueled by the rising adoption of agentic AI as we transition from chatbots to AI assistants. In addition, we are observing great adoption of open-source AI models.

This will drive greater efficiency and help lower the barrier to future AI usage and result in more and more demand for leading-edge silicon. Thus, AI-related demand is being supported by strong underlying demand for AI accelerators.

In addition, the emergence of agentic AI CPUs and continued demand for networking chips are driving further silicon demand. Therefore, semiconductor will remain essential in the AI megatrend.

The value of semiconductors in the global supply chain is set to continue to increase in our view. This will create more value opportunities for our customers to capture and more value opportunities for TSMC as well.

No matter which approach is taken, it will require use of the most advanced semiconductor process technology. With our technology leadership, manufacturing excellence, global capacity expansion, and customer trust, we are well-positioned to capture the full multi-year structural AI-related demand.

Therefore, all the AI players are working with TSMC. Next, let me talk about TSMC's capacity expansion strategy.

As a foundry, our first responsibility is to provide our customer with the best technologies and effective capacity support to unleash their innovations. To address the structural increase in the long-term semiconductor market demand profile, TSMC collaborate closely with our customers and our customers' customer to plan for our capacity.

In addition, we are now going one step further and sending our own teams of people to check on the data center build-out progress and power supply situation in the US. The feedback so far, good, and the CSPs has been well-prepared.

Internally, TSMC employed a disciplined capacity planning system to assess the market demand from both a top-down and bottom-up approach. This is a continuous and ongoing process.

Given the fundamental complexity of leading-edge technologies and the design-in and lead time involved, we already have a very good idea of customers' multi-year product roadmap and production plans. Thus, we continue to hold a strong conviction in the AI megatrend.

We are moving full speed ahead to increase our capacity to meet our assess's demand and stepping up our CapEx investment to support our customers' future growth. TSMC is expanding at a unprecedented pace with near 20 fab worldwide in progress.

We are building 13 leading-edge and advanced packaging fab in Taiwan over the next several years and another 5 to 6 fabs overseas. Our new node, N2, has already entered the high-volume manufacturing in the fourth quarter of 2025 with good yield.

N2 is ramping successfully in multiple phases at both Hsinchu and Kaohsiung site. We expect our N2 family technologies' annual capacity to more than double in 2027, supported by strong demand from both smartphone and HPC AI applications.

We will also leverage our manufacturing excellence to generate more N2 wafer output, further increasing our capacity support to customers. In addition, we have already begun preparing the capacity for our A14 technology.

Risk production is well on track for 2027 and volume production will start in 2028. Thus, TSMC's semiconductor technologies and manufacturing will continue to play a pivotal role in supporting the global semiconductor industry while unleashing our customers' innovation.

Now, let me talk about the TSMC's global N3 capacity expansion update. As we said before, historically, we do not add additional capacity to a node once it reaches its targeted capacity.

However, based on our assessment, we are executing well on our global capacity plan to add three new fabs to support the robust multi-year pipeline of demand for 3nm technologies. In Taiwan, volume production for our new 3nm fab in Tainan's Science Park is well on track to begin in the first half of 2027.

In addition, driven by the strong demand from our customer, we have decided to add one additional 3nm fab in Tainan. Volume production is scheduled for the first half of 2028.

In Arizona, we have completed the construction of our second fab and are in the process of tool move-in and installation. Volume production will begin in third quarter '27, slightly ahead of our previous schedule.

In Japan, we are processing well to our plan to utilize 3-nano 3nm 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 3nm capacity in Taiwan.

We are also leveraging our manufacturing excellence to 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 N7, N5, and N3 node.

Thus, we are using multiple levers to do everything we can, whenever we can, as fast as we can to maximize the support to our customers. We have no intention to leave food on the table for others, and we want to capture every pieces of business possible.

This concluding our key message, 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 as many participants as possible the opportunity to ask their questions. Should you wish to raise your question in Chinese, I will translate it to English before 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 caller on the line, please?

Thank you very much. Good afternoon.

Appreciate C.C. for sharing with us TSMC capacity expansion strategy.

May I follow up more on that. Given that increasing aggressive AI semiconductor demand, how does TSMC now see the AI revenue CAGR growth?

How does TSMC reconcile customer capacity requirement with some of the potential concern on the data center power availability, and also maybe funding recently, and other critical components such as HBM, ABF advanced packaging, and also in the networking side we see the tightness of laser as well. If this constraint create a mismatch between semiconductor supply and also actual AI development, how would TSMC minimize the potential overbuilding in the supply chain?

Thank you. That's my first question.

Okay. Laura has a very involved first question.

I think she's asking how do we see the AI demand outlook. The AI demand, as C.C.

said, seems to be very strong. She's worried or concerned, how do we reconcile the strong demand for of chips, AI chips, versus risks related to whether it be power supply, I think also different bottlenecks within the supply chain, et cetera, how do we make our assessment of what is the appropriate CapEx and capacity we need to prepare?

Is that correct, Laura?

Yes, thank you.

That's a long, long question. Laura, let me share with you.

We have a very sophisticated capacity planning process, and we also have a very disciplined on our consideration. Let me share with you, we put every possibility if we can.

We talking about the CSPs' CapEx, data centers' build-out, financial, power supply, and also other component supply, et cetera, into our consideration. We make our own judgment, and then based on our assessed the demand, we still think the demand is higher than the supply, and we are working very hard to narrow the gap.

Did I answer your question, Laura?

Sure. Thank you.

Thank you very much. Far from our comprehensive study in the supply chain, we are still quite positive on the demand in the longer-term run.

In that case, can you also give us more color about any update on your AI CAGR growth? I recall previously we talking about high 50%?

We

Sorry. Yeah.

Part of Laura's question is then based on our assessment we had previously guided our AI CAGR, AI accelerator CAGR, which is a narrow definition, to

be

mid-to-high 50s percentage from 2024 to 2029. Laura wants to know do we have any update to that number today.

Laura, all I can say right now is the demand is extremely robust, okay? We did not see any sign of slowdown.

Whether it's a high-50 CAGR, it doesn't matter. It probably will be higher.

Sure. [laughter] Okay.

Yes. Thank you very much.

My second question is also about given the very strong demand, the CapEx cycle. We see that definitely this round will be much higher than before, and TSMC also announced that earlier you will adopt a high-NA EUV around 2030.

Should we think about that that will be further improved the productivity, that will be more meaningful for further accelerating revenue growth in the longer term? Also given that the CapEx intensity are also getting much higher, how should we think about that the pricing power and also the long-term gross margin and the capital efficiency return?

That's actually two two questions, but okay, we'll just very quickly. Laura's part of it is on with the strong demand on our CapEx cycle, how do we view the adoption of high-NA, which we said we will in 2030.

Then her question is on profitability, long-term outlook.

Thank you. Oh, okay.

Let me answer that question. Yes, for the long-term productivity, we continue to improve it, and high-NA definitely is a very good tool, and so far I think our plan is to use it in 2030.

Again, our CapEx will be much higher than today, and so you talking about gross margin or the profitability can be increased or not, let me say that. There's no ceiling for TSMC's profitability, but a dramatic increase will not happen overnight either.

Our philosophy or our strategy always are working with our customer, and we want to make them be successful, and then we can gain our value.

Thank you. Very, very, yeah, very helpful.

Appreciate. Congrats for the great result.

Thank you.

Thank you.

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

Hi, good afternoon, C.C., Wendell, and Jeff. My first question again on capacity addition Just wanted to hear C.C.

your view on this. I think it's been quite some time since we have seen TSMC add capacity at more than 10% every year.

I think if you look at your annual report, I think it's been like about 10 years that you've added capacity at more than 10%. Given this accelerated build-out, can we start getting wafer capacity growth closer to 10% or even higher than 10% in the next couple of years?

Any comment on what is your planned wafer capacity growth in the next couple of years? That's my first question.

Okay. Gokul's first question is regarding the capacity addition and the demand.

His question first is, the tightness in the wafer supply, do we think that will be even more or greater in 2027 than 2026? Then along with that, how do we see our overall capacity addition?

Although you say 10%, I think every year we disclose in the annual report, it's been about mid-to-high single digit and sometimes even lower, but anyways, regardless, those are the two questions. First on just the demand outlook and then the supply, will next year be even more tight than this year?

I just mentioned, the demand is extremely robust and getting higher and higher. Of course, we have our own judgment, and we look at it every angle.

As I said, we talk to customer, customer's customer, and then we do our own one more steps to check the data center's build-out. All the results we put into our judgment, and our assessment, the result is say the demand is very, very high.

The gap between demand and supply are still quite big, and that's why we put all our strength to increase the capacity. As I just mentioned, whether the gap becomes bigger or the gap becomes narrower, we're working very hard.

I cannot answer this question right now because of my customer continue to increase their demand.

Okay. Gokul, I think it's a bit too early to talk about capacity increase percentage going forward.

Let me just remind you that the increase every year, even though the number may be small, but the increase in advanced nodes are really the main driver for the capacity increase. Okay?

Fair enough. Okay.

Thank you. Secondly, I think you alluded to more aggressive overseas expansion plans in the US especially, and I think recently there's been a lot of discussion with potentially a new fab cluster in Texas, as well as I think one of your customers also talked about discussions with TSMC as well.

C.C., could you talk a little bit about your overseas plans, like the more accelerated kind of capacity build-out, and also any engagement with SpaceX or Tesla given your customer did call you out last week in terms of some engagements here? What are the broad contours of this kind of engagement likely to be?

Is it similar to what you've done with some of the customers in Japan and ESMC as well?

Thank you, Gokul. Gokul's second question, he notes that C.C.

said we're expanding at an unprecedented pace, doing everything we can as fast as we can to increase the capacity. His question is particularly to the US.

What is the status or update? There's been reports that we are looking to expand in Texas.

There's been reports that one of our customers, we are engaging in discussions. He wants to know what kind of framework or parameters of any cooperation may be, or any comment on either of those two things.

Okay. Gokul, we work very hard to expand our capacity in US.

This is necessary because of most of large customer in US, and then they request the TSMC to increase the capacity. Also, US government are very helpful, so that's the place we want to expand.

Recently, we did expand our capacity's consideration to see outside Arizona whether we can get another chance to expand our capacity. Texas is a one.

We sent the teams to Texas to do all the evaluation, and we also talk to one of our customer who try to build a fab, Terafab, let me be more specific, and we are discussing with them, see whether that we can be utilizing that actual capacity also. We're still in discussion.

If we have any solid conclusion, we will share with you. Today and that's it.

Yes, from Arizona to Texas, yes.

All these are still going to be TSMC-run fabs, right? You're not becoming part of the Terafab project or anything like that.

Could you just help us understand what are the principles that you're using here? Is it a similar principle that you use for JASM or ESMC?

Okay. Gokul's question is not in particular to the potential cooperation with this customer.

Would it be TSMC-owned, what's the principles that we have if anything?

We are still in discussion. Let me say that.

Either way, it will be possible. The fab got to be run by TSMC.

All right,

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

Hi. Thanks for taking my question.

I have two of them. First one, C.C., some customers talk about a secondary wafer market where one customer passes their wafer allocation to another.

Is this a very small portion of the business? Is this customer-specific, or do you see that as an emerging trend where customers whose demand is weak pass some of their allocation to stronger customers?

Then I had a quick follow-up.

All right, Krish, thank you. Krish's first question is asking, some of our customers are talking about a resale or a secondary wafer market where they can pass their allocation on.

Is this a very small portion of our business or is this more of a trend for us to do, and is this something that we allow our customers to do?

Let me answer that. To say whether this is a new strategy, new methodology, the answer is no.

The principle of TSMC is we do not allow our customer to sublet or auction off the capacity. In certain cases, customer can collaborate through a master licensing agreement, but this is not our common practice, and the amount is a very, very small.

Krish, did I answer your question?

Yes, you did. Thank you very much for that.

Then a quick follow-up. You did touch upon at the high-NA agreement with ASML from 2030 onwards.

I'm just curious, historically TSMC was more ahead of the curve with the EUV adoption. It looks like by the time you adopt high-NA EUV, it'd be 2030, 2031, but some of your competitors would have already been using it by then.

Do you see that as a disadvantage, or you're not worried about competition getting ahead with high-NA EUV? Thank you.

Okay. Krish's second question is looking at high-NA.

He notes some of our competitors already adopted or will adopt high-NA earlier than TSMC. His question, does this put us at a competitive disadvantage or risk compared to our competitors in terms of technology leadership?

Krish, let me answer that. We always evaluate a new tool, and if we want to put it into the mass production, it got to be the best technology with a very reasonable cost, and, most important, is the best maturity.

Okay? We say in 2030, we'll start to use it because we also think at that time high-NA will be mature, and we also working very closely with ASML to establish a 12-inch photomask by 2031, and at that time, we think that the high-NA's cost will be reasonable, and for TSMC to make it into the mass production, and this is a very good tool.

Let me emphasize that. In a smaller geometry, it definitely has some advantages.

Whether that our technology because we are using it later than our competitor so disadvantage to TSMC? No.

Because we have confidence that we are still the best company to offer the most advanced technology to our customers.

Krish, does that answer your question?

Thank you very much, C.C.

Yeah.

Thank you very much, C.C. Thanks, Jeff.

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

Hi, gentlemen. Thanks for taking my question and also glad to hear very strong AI semi demand amid some recent stock market correction.

My first question is really about your leading-edge capacity expansion strategy. As far as I know, one of your IDM customer is spending CapEx very aggressively.

There are some concern about these customer may insource more and outsource to you, right? I'm not sure how are you going to deal with this sort of business opportunity.

Secondly, I remember last time, C.C., you mentioned about A14 could be a bigger note than N2. May I know whether that assume the big IDM company will outsource more CPU like server CPU at A14?

Thank you.

Okay. Charlie's first question is around IDM competitor.

He wants to know very specifically if we see this competitor moving to insource more. His question is then our prior comment of A14 being a larger, bigger node than N2 has even been, does this include the server CPU from this IDM competitor?

Which Charlie, we treat every customer fairly. Whether it's IDM or is purely fabless, we treat them the same.

Of course, we take into consideration of their internal capacity, we calculate our support, we calculate our capacity build-up according to our own judgment. Actually, in our A14, we have seen more and more customer, actually higher than the 2nm's activities so far.

We expect that A14 will be a bigger node than our current N2 technologies.

I see. It doesn't need to consider this IDM will also outsource more.

We can still have the A14 to be a bigger node than N2. Is that the right understanding?

Again, Charlie wants to know very specifically this customer's outsourcing plan, which you probably may need to ask them, but, yeah.

Charlie, as I said, to be frank with you, I don't comment on a specific customer, but let me guarantee you that we take everything into consideration. Okay.

Okay.

Okay. Do you have a second question, Charlie?

Thank you. Yes, I do.

Thanks, Jeff. The second question is that kind of follow-up about your advanced packaging.

From what I've seen that the reticle size is getting much bigger. C.C., you said last time or even two quarters ago about your response, SOW, 2.5D so lots of initiative is going on.

My question is that do you think those kind of a CoWoS, SOW, 2.5D can really catch customer's very rapid developments of their larger reticle-sized chip, like 14 reticle? Secondly, if some customer they initially choose to use Intel's EMIB-T and for some reason cannot get to sufficient demand, are you okay to bail out or support customers for the CoWoS version or capacity?

Thank you.

All right. Charlie's second question is focused on the advanced packaging.

I guess, Charlie, if I understand your question, summarize it, it's of course customers are moving to larger and larger reticle size, 14x, he wants to know TSMC's roadmap and solutions and how competitive we can be against, I think he mentions specifically, our competitor's EMIB-T. How do we view our solution, is it as competitive as our competitor?

That's the first part of his question.

All right, Charlie. Actually, I still think that TSMC's advanced assembly, or let's say packaging technology, are very, very competitive.

The most important thing is we're using that one to help us, help our customers' product can be introduced in the market smoothly. That's our number one priority.

We have to offer them the best technology with enough capacities. Far, let me share with you our today's situation.

We are in the real-world production of 5x reticle size. I don't believe that anybody can do that today except TSMC, and the yield is excellent.

Our customer are very satisfied with the result, and then we are working on the 9x reticle size and moving into the 14x reticle size. Of course, we are also working on the CoPoS, and to make sure that in the future, we can offer a reasonable cost reduction.

Far, the CoWoS is still the number one choice for our customer. As time goes by, yes, our competitor offer a very competitive solution.

Still, I want to say that today's situation, we are the only one that, make sure that the advanced packaging is a 5x reticle size, and still, we are very competitive. I want to emphasize that.

Then Charlie's question, if the competitor cannot deliver on their solution, Charlie, I think you're saying will we be willing to be a something like a backup plan?

I [laughter] try to avoid to answer it directly, but let me say that. Yes, we will be Number one priority I already indicate that TSMC's customers' product can be introduced into the market smoothly.

That's our number one priority, okay? That give you enough hint.

Yes, yes, indeed. Thanks for all the answers.

I hope you don't leave any food to [laughter] others including the advanced packaging. Thank you.

Thanks, C.C. Thanks, everyone.

Thank you. All right.

Operator, let's move on to the next participant, please.

Good afternoon. Thank you very much for taking my question.

My first question is to have a bit more color on how we should think about CapEx beyond 2026. Recall a few quarters ago, you mentioned if you are doing your job well, then you may be able to drive CapEx to grow a bit less than top line, but now obviously, the overall client demand has further strengthened, and you're also willing to support your clients with more substantial expansion, and therefore, wonder at this point, when you look at maybe the coming two years, could we still expect the CapEx growth maybe in line with sales or even a bit faster just like for 2026?

Then meanwhile, obviously, the tool price is also increasing given a very tight supply, and therefore, going to 2027, would the higher tool price also be a driver for higher CapEx as well? Thank you.

Higher Sorry, what was the last part of your question, Sunny, higher tool price higher what?

It popped Oh, yeah, wonder when we think about 2027 CapEx, should we also consider tool price inflation to be a meaningful variable for a lot higher CapEx compared with this year?

Understood. Okay.

Sorry. Thank you.

Sunny's first question is about our CapEx beyond '26. Really, she's asking '27, '28, the next 2 years.

With the, strong, extremely robust demand that C.C. indicated, question is around our capital intensity the next 2 years.

How do we see the capital intensity trending, revenue growth versus a CapEx growth part one, and then also the impact of tool inflation on the CapEx outlook as well?

Sunny. This is Wendell.

It's a bit too early to share the CapEx number beyond this year's. As we said in the prepared remarks, we have very strong conviction in the AI megatrend.

Therefore, our CapEx from 2026 to 2028 is expected to be significantly higher than the past three years. This is a step-up of our investment to support the customers' growth.

We have no intention to leave any food on the table for others. The tool price inflation is real.

The tool price, material, labor cost, et cetera. However, the majority of the CapEx is always related to the long-term demand.

That will be the composition going forward. Capital intensity-wise, as we always said, if I'll do our job right, the increase in revenue will outpace the increase in CapEx, and that is still the case from what we are looking at.

Okay.

Got it. Thank you very much.

If I may have a very quick follow-up on the CapEx side. Earlier, Wendell, you raised the margin dilution from overseas to I think 3% to 4% starting from 2027 given faster overseas expansion.

For the US, you are still so far focused on Arizona. Does that imply for Arizona, the expansion for the second phase will happen very quickly, or you are actually accelerating the expansion for the third phase or even the other phases well as well, and therefore, the result for higher margin dilution for next year?

Okay. Sunny's question is kind of about the puts and takes to next year's margin.

She does note as Wendell said in our prepared remarks that the overseas fabs will widen a bit to 3% to 4% in the next few years. She wonders what's driving that wider dilution.

C.C. did say we are pulling in the schedule for the second fab for 3nm.

Her question is, are we also pulling in third fab? What's leading to this wider dilution?

Maybe, yeah.

Okay. Sunny, as we mentioned, we are doing everything we can, wherever we can to increase our capacity to meet the strong demand from the customers.

We are also accelerating everywhere including in the US. We did mention before that the latter part of the five-year period, the margin dilution from overseas fab will be 3 to 4 percentage point, and that still remain the case.

It's 3 to 4 percentage point in the second part of the five-year period.

I see. Thank you very much for the clarification.

My second question

I

want to follow up on the Sunny,

that was two questions, Sunny, so that's already two questions. Sorry, but we probably just to accommodate as many as we can, we were going to move on.

Sure.

Thank you for your understanding. Operator, can we move to the next participant, please?

Yes. Hi, C.C., Wendell, and Jeff.

Thanks for taking my questions, and congrats on the great results. My first question would be on your view regarding the potential shift in AI demand mix.

You mentioned in the prepared remarks that the AI accelerator chip set demand is proliferating into agentic AI demand, including CPUs and networking switches. We understand the overall AI investment is still pretty strong and even getting stronger across the board, but can we get more clarity that are you seeing your customer's demand shifting towards more efficient compute solutions, especially when high-density gets more important?

How should we think about the incremental opportunity for your manufacturing and packaging business? Thank you.

Haas's first question is on the AI-related demand. His question is are we seeing a shift in the AI-related demand, more and more to CPU or networking switches and away from AI accelerators?

Or any type of comment, yeah.

All I can say is AI's demand is extremely robust, okay? Whether it's come from accelerator or is more from the CPU side, it's not for me to make a comment.

Although we did see the demand from agentic AI CPUs continue to increase. Yes, that is a trend today.

Other than that, everything is a very robust. I want to emphasize again, in our judgment, we consider all the parameter, and the demand actually still far above our capability today to supply, and we are working very hard to narrow the gap.

That's all I can say.

Okay. Thank you.

That's very clear. My second question is just regarding the yield learning curve going forward for your dual technology tracks strategy going forward.

Historically, I think you have been ramping up the yield of a new node through producing the chipsets with smaller die size and simpler design to improve the learning curve of a new node. For the future node families, supporting both conventional power delivery for the applications like mobile and consumer chip applications, and Super Power Rail technology for HPC and AI chipsets, would operating two process architectures at the same time make the learning curve more challenging or increase the manufacturing complexity?

How should we think about the implications to your gross margins from the yield and also cost control perspective? Thank you.

Okay. Haas's second question is really about ramping a new node the learning curve of yield and cost and therefore the implication to gross margin, really I think is what he's driving at.

His question is that in the past, new node is mostly ramped with smaller die size and simpler design, but, so, today, we have both the smartphone and also with the AI and HPC applications coming in, does that increase the complexity of the node process architecture, make the learning curve more challenging or difficult, and therefore, the implication to the margin?

Today's situation actually is a little bit different from previous years. Yes, we now have a very strong demand from smartphone and also AI HPC's applications.

The smaller die size per se or the big die size in the accelerator, they happen at the same time. This is to TSMC's advantage, let me say that, because we are good.

We have been prepared for this kind of thing, and happy to working with us. The learning curve, yes, but we have doing a reasonable job, and so all the customer are very happy today.

Okay. Thank you so much.

Thank you. Operator, let's move on to the next participant, please.

Hi. I really appreciate management taking my question.

I have a question on the power as a gating factor. I want to understand have a power grid constraint led to reduce your customer forecast in the history?

Also, could this tighter and tighter power grid surprise make your customer actually accelerating adoption of your Super Power Rail products for the better performance power? Thank you.

Okay. Arthur's first question is about the power supply or electricity supply.

Is it a gating factor and have we seen that lead to a reduction in customers' forecast? With the tighter on the other side or on the other hand, with the tighter power electricity supply, have we seen more customers' adoption of Super Power Rail technologies?

Let me update that. Definitely, power supply situation is one of the consideration factor that we look into.

That's why also we do one more step to double check whether the power supply situation in the US and we have done all the study, and so far so good, let me say that. Whether this kind of situation change our customers' behavior and move more into the backside power rail?

[laughter] The answer is no. Whether you use the backside power those kind of metallization scheme is based on your need for your product, okay?

Some of the accelerator might be using it, some of the product like mobile phones they don't use it. It depends on customers' product.

Did I answer your question? Okay.

Yes. Thank you, C.C.

Do you have a second question? Oh,

yeah. Thanks, Jeff.

Just to recall the previous discussion on the agentic AI demand on the CPU. I wonder, according to our previous framework, demand forecast framework, the mid-to-high 50 growth, including the CPU or not?

If we heard our clients increase the CPU forecast significantly, when is the next time we refresh our AI demand growth numbers?

Okay. Arthur's second question is on We already stated, but anyway, our AI accelerator definition.

He wants to know with the emergence of agentic AI and CPU, does that AI accelerator definition include CPUs or not, and when we will provide a inclusion for him?

Let me answer the question. It's not.

It's not including in our AI demand's calculation. The reason is very simple, because we cannot identify which CPU use in the conventional server CPU or AI server CPU, and also that it depend on our customers' application and their own allocation also.

No. Far today, we stick to our initial very narrow definition on the AI's demand.

Understand. If we have seen a very strong CPU-driven demand, when we will revise up the

the AI forecast? [laughter] I think Arthur, we already said very clearly, it's not part of the AI accelerator definition.

It's a narrow definition, but it is certainly part of our business, okay?

Okay. Sure.

[laughter]

Okay. Operator, in the interest of time, can we take question from the last participant on the line, please?

Hello. Thank you for the question.

Into 2027, you have N3 turning accretive, and now that's crossed over. N2 still in its dilutive ramp, and the overseas dilution is widening.

On the offset side, there have been reports of significant price increases across your mature and advanced nodes. Could you provide some color into perhaps some of that conversation and where pricing does move, does it typically apply across the existing contracted book, or is it mainly being applied to incremental capacity above what customers have already committed to?

Yeah. Okay.

I guess you're asking about the potential puts and takes for next year, or you're asking specifically on pricing, sorry.

Specifically on pricing. A pricing.

Okay. It's a very specific question that there's reports that we are increasing the price.

He wants to know, does it apply across the existing contracted commitments from customers or is it mainly for the incremental capacity?

We have discussed this kind of thing before that our pricing strategy is very strategic. It also depends on the market segment, depend on the location, and depends on the technology and something.

Once we offer the flexibility of the physical location, like in the US, it will be a little bit different from the one we produce in Taiwan. No matter what, well, we try to get our value to be recognized, and we will give our shareholder the maximum value of our technologies.

Understood. Thank you.

For the second question, something you said in your prepared remarks which stuck out to me was, we will not be leaving food on the table. Earlier, I think it was maybe 1 or 2 weeks ago, there was the announcement via GlobalFoundries that they would be providing silicon interposers to TSMC.

Would love some color into, how are you thinking through these strategic decisions in terms of procuring it from some of the specialty foundries versus providing in-house? Thank you.

Okay. His second question is again, he notes that recently, we had an announcement with GlobalFoundries on interposers.

How do we view these partnerships, and what is our approach strategically?

Let me answer the question. We did sign a deal with GlobalFoundries, and this is part of our overall strategy in the back-end supply.

Actually, our number one priority is to help our customer to be successful in their market. We want them to be fully supported by all the supply including the front-end and back-end.

Definitely, we have a little bit shortage on the back-end, and we'd like to work with our so-called partner with GlobalFoundries so that both TSMC and GlobalFoundries can support TSMC's customer for their product to be introduced with a enough support on the capacity.

Understood. Thank you very much for my questions.

Thank you for your questions. Thank you for all the participants.

This does conclude our question-and-answer session. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within 30 minutes from now.

The transcript will become available 24 hours from now, and you can find both will be available through TSMC's website at www.tsmc.com. Again, thank you for joining us today.

We hope everyone continues to stay well. Have a good autumn, and we hope you will join us again next quarter.

Thank you and have a good day.