Taiwan Semiconductor Manufacturing (TSM.US) held its Q1 2026 earnings conference call on the 16th. Strong AI demand is driving a second-quarter revenue forecast to a record high. CEO C.C. Wei stated on the call that "AI demand is extremely strong," noting the global economy is in the midst of a "major AI trend." He also indicated the company's capital expenditure for the year would be at the high end of its previously guided range—a statement seen as potentially easing investor concerns about Middle East tensions impacting AI chip demand.
Regarding overseas expansion, TSMC is investing $165 billion to construct a chip plant in Arizona, USA. Additionally, the company has revised its manufacturing plans in Japan, now intending to produce 3-nanometer chips there instead of the previously planned mature nodes.
TSMC's Q1 2026 results showed net profit surged 58% year-over-year to NT$5.725 trillion (approximately $182 billion), surpassing market expectations and marking the eighth consecutive quarter of double-digit growth. The company forecasts Q2 revenue between $39 billion and $40.2 billion, significantly higher than $30.1 billion in the same period last year and $35.9 billion in Q1.
The conflict in the Middle East poses a potential threat to the supply of materials for semiconductor production, with risks of disruption to key inputs like helium and hydrogen. TSMC stated it currently maintains sufficient safety stock to handle potential supply fluctuations.
Ahead of the earnings release, TSMC's Taipei-listed shares closed at a record high of NT$2,085, up 0.2%, bringing the year-to-date gain to 35%, outperforming the Taiwan Weighted Index's 28% rise. The company's current market capitalization is approximately $1.7 trillion, about double that of South Korea's Samsung Electronics.
The company provided the following guidance: Q2 sales are expected between $39 billion and $40.2 billion, compared to a market estimate of $38.11 billion. Q2 gross margin is forecast between 65.5% and 67.5%, versus a market estimate of 64.1%. Q2 operating margin is projected between 56.5% and 58.5%.
TSMC noted that the Middle East crisis could impact profitability. Helium and hydrogen are sourced from multiple regions. Near-term raw material supply is not expected to be affected. 2026 capital expenditure is anticipated to be near the high end of the $52-56 billion range. 2026 sales (in USD) are projected to grow more than 30%. Business planning is being conducted cautiously given the Middle East situation.
AI demand remains "extremely strong," with customers signaling very strong demand. Company capacity remains tight. TSMC is monitoring the impact of component price increases. The N2 process has entered high-volume production. To meet strong AI demand, capital expenditure is being increased to boost N3 capacity. Mature node capacity is being expanded in Japan and Germany. Plans are in place to gradually shutter 6-inch wafer fabs. Capacity strategy will continue to be optimized.
Customer interest in the A14 process is high, with mass production expected to begin in 2028. Both Intel and Tesla are customers and competitors, with Intel being a very strong competitor. TSMC understands competing technologies are attractive but remains confident in its own technology position. A CoWoS pilot production line is under construction. There is strong confidence in the AI super-cycle, with capital expenditure over the next three years expected to be significantly higher than the past three years. The company is preparing capacity to meet customer demand. Memory price increases are having some impact on the PC and smartphone markets. Efforts are underway to accelerate construction progress at the Arizona fab, with hopes to build more fabs in Arizona.
During the Q&A session, management addressed various topics. On 3nm demand and margins, it was clarified that HPC and AI applications are the primary drivers. N3 gross margin is expected to reach and surpass the corporate average in the second half of 2026, and historically, margins for fully depreciated nodes become very high. The increase in the capital expenditure guide to the high end of the range was attributed to very strong demand, particularly from HPC and AI applications, and efforts to accelerate the construction timeline.
Regarding the duration of supply tightness, management indicated that building a new fab takes two to three years, and with current plans, supply is expected to remain very tight into 2027. On competition, including from initiatives like "Tera Fab," TSMC views Intel as a strong competitor but emphasized that fab construction and ramp-up have no shortcuts, requiring technology leadership, manufacturing excellence, and customer trust. The strategy is to work hard to win every piece of business.
Concerning larger reticle sizes and advanced packaging competition, TSMC currently offers the world's largest reticle size packaging and is developing larger-sized advanced packaging technologies. Collaboration with all customers is ongoing. On long-term capital expenditure visibility, while no specific multi-year figure was provided, capex over the next few years is expected to be significantly higher than the past few years. Supplier support, including from ASML, is currently satisfactory.
The capital intensity outlook suggests revenue growth should continue to outpace capex growth. Regarding 2026 revenue upside beyond the "more than 30%" guide, memory price increases are impacting price-sensitive markets like PCs and smartphones, though high-end smartphones remain strong. A more precise update will be provided in July.
Long-term profitability targets were recently raised, with the cycle-through (2024-2029) gross margin goal now at 56% or above and ROE in the high-20% range. The acquisition of a second land plot in Arizona is for building more fabs to meet multi-year demand from US-based leading-edge customers. Confidence in improving the cost structure at the Arizona site has grown.
On pricing strategy and value capture, TSMC views customers as partners and aims for mutual success and growth rather than drastic price adjustments. The long-term CAGR forecast for AI accelerators was noted to be trending towards the high-30% range, reflecting observed strong demand.
For advanced packaging strategy, the primary principle is to support customer needs. TSMC's advanced packaging capacity is also tight, requiring collaboration with OSAT partners to expand overall capacity. Technical challenges like warpage for larger chips are being addressed through accumulated experience and engineering prowess. Development of technologies like SoIC is guided by customer needs.
Finally, regarding the definition of AI-related revenue (currently including data center GPUs, AI accelerators, and HBM controllers, but excluding CPUs), management acknowledged CPUs are becoming more critical in AI data centers but noted the difficulty in distinguishing CPUs used for AI/HPC versus other applications like PCs. Therefore, CPUs are not currently included in the AI/HPC revenue calculation. On specific competitive dynamics concerning a certain client's LPU product, TSMC expressed confidence in its technology and commitment to competing for all potential business, including collaboration on the client's next-generation products.
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