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Taiwan Semiconductor Manufacturing NYSE: TSM reported third-quarter 2026 revenue above the high end of its guidance, citing strong demand for leading-edge process technologies and a steep ramp in 2-nanometer production.

Revenue rose 17.6% sequentially in New Taiwan dollar terms. In U.S. dollar terms, revenue increased 16.2% from the prior quarter to $46.7 billion. Chief Financial Officer Wendell Huang said gross margin declined 1.3 percentage points sequentially to 66.4%, primarily because of margin dilution from the initial ramp of the company’s 2-nanometer technology.

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Third-quarter earnings per share were TWD 29.43, while return on equity was 45.5%. Operating margin was 58.7%, and operating expenses represented 7.8% of net revenue.

Advanced-node demand drives quarterly mix

Advanced technologies, defined by TSMC as 7-nanometer and below, accounted for 79% of wafer revenue during the quarter. The 2-nanometer process contributed 8% of wafer revenue, while 3-nanometer, 5-nanometer and 7-nanometer technologies represented 33%, 28% and 10%, respectively.

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High-performance computing was the company’s largest platform, rising 22% quarter over quarter and accounting for 68% of third-quarter revenue. Smartphone revenue increased 10% and represented 21% of revenue. Automotive revenue climbed 23% to 4% of revenue, while internet-of-things revenue rose 5% to 4%. Digital consumer electronics revenue declined 12% and accounted for 1%.

TSMC generated approximately TWD 920 billion in cash from operations during the quarter and spent TWD 443 billion on capital expenditures. U.S.-dollar capital expenditures totaled $13.8 billion in the quarter. The company ended the period with cash and marketable securities of TWD 4 trillion, or $126 billion.

Fourth-quarter outlook calls for further growth

For the fourth quarter, TSMC forecast revenue of $52.3 billion to $54.3 billion. At the midpoint, the outlook implies sequential growth of 14% and year-over-year growth of 58%, based on the company’s stated exchange-rate assumption of NT$31.8 per U.S. dollar.

The company projected fourth-quarter gross margin of 65% to 67% and operating margin of 56.5% to 58.5%. Huang said gross margin at the midpoint would decline about 40 basis points sequentially, reflecting continued dilution from the rapid 2-nanometer ramp and overseas fabs. Those pressures are expected to be partly offset by productivity gains and capacity optimization across process nodes.

Huang said overseas fabs are expected to create gross-margin dilution of about 2% currently, widening to 3% to 4% over the next several years as more facilities ramp. He said TSMC plans to work on its U.S. cost structure while coordinating with customers and suppliers to manage the effects.

Chairman and Chief Executive Officer C.C. Wei said the company now expects full-year 2026 revenue growth of about 44% in U.S. dollar terms. While consumer and price-sensitive end markets remain challenged by rising component prices and macroeconomic uncertainty, Wei said demand for leading-edge technologies remains “extremely robust.”

AI demand supports investment and capacity additions

Wei said TSMC sees growing demand tied to agentic AI, expanding adoption of open-source AI models, AI accelerators, CPUs used in agentic AI applications and networking chips. He said semiconductor content in the global supply chain should continue to increase as the AI market develops.

In response, TSMC reiterated its 2026 capital budget of $60 billion to $64 billion. Huang said capital expenditures from 2026 through 2028 are expected to be significantly higher than in the prior three years. While equipment, materials and labor costs have risen, he said the majority of capital spending remains tied to long-term demand and that revenue growth should outpace capital-expenditure growth if the company executes well.

Wei said TSMC uses a capacity-planning process that considers customer spending, data-center construction, financing, power availability and supply-chain constraints. The company has sent teams to assess U.S. data-center build-outs and power conditions, and Wei said the feedback so far indicates cloud service providers are well prepared.

“The demand is very, very high,” Wei said, adding that TSMC still sees a substantial gap between demand and its current ability to supply customers.

New fabs and technology roadmap

TSMC said it has nearly 20 fabs under development globally, including 13 leading-edge and advanced-packaging facilities in Taiwan and five to six overseas fabs. Its N2 technology entered high-volume manufacturing in the fourth quarter of 2025 and is ramping in Hsinchu and Kaohsiung. The company expects annual capacity for its N2 technology family to more than double in 2027, supported by smartphone and HPC AI demand.

The company is also preparing A14 technology for risk production in 2027 and volume production in 2028. Wei said TSMC expects A14 to be a larger node than N2 based on customer activity so far.

For 3-nanometer capacity, TSMC said a new fab in Taiwan’s Tainan Science Park remains on track for volume production in the first half of 2027. The company also decided to add another 3-nanometer fab in Tainan, with volume production scheduled for the first half of 2028. In Arizona, its second fab has completed construction and is undergoing tool installation, with volume production expected in the third quarter of 2027, ahead of its previous schedule.

Wei said TSMC is evaluating expansion opportunities beyond Arizona, including Texas, and is discussing potential capacity arrangements with a customer. He said any fab involved would need to be run by TSMC.

On advanced packaging, Wei said the company is in production with 5x reticle-size products and is working toward 9x and 14x reticle sizes. He said CoWoS remains the leading choice for customers, while TSMC is also developing additional packaging approaches and working with GlobalFoundries to help address backend capacity needs.

About Taiwan Semiconductor Manufacturing (NYSE:TSM)

Taiwan Semiconductor Manufacturing Company Limited NYSE: TSM, commonly known as TSMC, is a Taiwan-based semiconductor manufacturer and the world's largest dedicated semiconductor foundry. Founded in 1987 by Morris Chang, the company pioneered the pure-play foundry model, producing chips designed by other companies rather than selling products under its own semiconductor brand.

TSMC manufactures a broad range of integrated circuits, including advanced logic chips used in high-performance computing, smartphones, automotive systems, communications equipment, and consumer electronics.

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