Wendell Huang: Automotive decreased 7% and accounted for 4%, and DCE increased 28% to account for 1%. Moving on to the balance sheet, we ended the first quarter with cash and marketable securities of 3.4 trillion NT, or 106 billion U.S. dollars. On the liability side, current liabilities increased by 256 billion NT quarter over quarter, mainly due to the increase of 129 billion in accrued liabilities and others, and the increase of 82 billion in accounts payable. On financial ratios, accounts receivable turnover days was flat at 26 days. Days of inventory increased six days to 80 days, reflecting the ramp up of our two nanometer technology and strong demand for our three nanometer technology. Regarding cash flow and CAPEX, during the first quarter, we generated about 699 billion NT in cash from operations. spent $351 billion in CAPEX, and distributed $130 billion for second quarter 2025 cash dividend. Overall, our cash balance increased $268 billion to $3 trillion at the end of the quarter. In U.S. dollar terms, our first quarter capital expenditures totaled $11.1 billion. I have finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our second quarter revenue to be between $39.0 billion and $40.2 billion, which represents a 10% sequential increase or a 32% year-over-year increase at the midpoint. Based on the exchange rate assumption of one US dollar to 31.7 NT, gross margin is expected to be between 65.5% and 67.5%. Operating margin between 56.5% and 58.5%. Also, in the second quarter, we will need to accrue the tax on the undistributed retained earnings. As a result, our second quarter tax rate will be around 20%. We continue to expect the full year tax rate to be between 17 and 18%. This concludes my financial presentation. Now let me turn to our key messages. I will start by talking about our first quarter 2026 and second quarter 2026 profitability. Compared to fourth quarter, our first quarter gross margin increased by 390 basis points sequentially to 66.2%, 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 point to 66.5% at the midpoint, primarily driven by a higher overall utilization rate and continual cost improvement efforts, including productivity gains, partially offset by dilution from our overseas FAB. Looking ahead to the second half of the year, given the six factors that determine our profitability, there are a few puts and takes I would like to share. As we have said before, the initial ramp up of our two nanometer technology will start to dilute our gross margin in the second half of this year. And we expect between 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 percent in the early stages and widen to 3 to 4 percent in the latter stages. In addition, given the recent situation in the Middle East, prices for certain chemicals and gases are likely to increase. Based on our current assessment, there may be impact to our profitability, but it is too early to quantify the impact. On the other hand, we will continue to leverage our manufacturing excellence to generate more wafer output and drive greater across-node capacity optimization in our fab operations to support our profitability. Also, M3 gross margin is expected to cross over to the corporate average in second half 2026. Finally, we have no control over the foreign exchange rate, but that may be another factor. Next, let me talk about the materials and energy supply update, given the recent situation in the Middle East. ESMC 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 for material supply. In terms of energy, TSMC worked closely with Tai Power and the Taiwan government to ensure a stable and sufficient energy supply. With the recent situation in the Middle East, the Taiwan Government has announced it has secured sufficient LNG supply through at least May. The Government has also said it is actively working on securing further LNG supply, diversifying sourcing to other regions, and other power backup plants. 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 structure demand from the industry megatrends of 5G, AI, and HPC. We now expect our 2026 capital budget to be towards the high end of our range of between $52 and $56 billion, 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 CC.
C. C. Wei: 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 dollar 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 bring further macroeconomic uncertainties. As such, we are being prudent in our business planning while focusing on the fundamentals of our business to further strengthen our competitive position. Having said that, AI-related demand continues to be extremely robust. The shift from generative AI and query mode to 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 as silicon. Our customers and customers of 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 remains 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 U.S. dollar terms. Next, let me talk about our N2 capacity expansion plan. Our practice is to prioritize the land in Taiwan to support the first ramp of our newest node due to the need for tight integration with R&D operations. Today, our new node, N2, has already entered high-volume manufacturing in the first quarter of 2025 with good yield. N2 is ramping successfully in multi-phases at both Hsinchu and Kaohsiung sites, supported by strong demand from both smartphone and HPC AI applications. With our strategy of continuous enhancement, such as N2P and A16, we expect our N2 family to be another large and long lasting node for TSMC. Now let me talk about TSMC's Global N3 Capacity Expansion Plan. Historically, we do not add additional capacity to a node once it reaches its target capacity. However, as a 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 entry capacity. Thus, we are now executing a global capacity plan to support the robust multi-year pipeline of demand for three nanometer technologies, which are used by smartphone, HPC AI, including HPN-based eyes, 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 include inflexible capacity support among the N7, N5, and N3 nodes. We are using multiple levers to do everything we can, wherever we can, however we can, to maximize the support to all our customers across all platforms. Also, let me emphasize that while the capacity is tight, we do not pick and choose or play favorites among our customers. Next, let me talk about our mature node strategies. TSMC is a strategy that mature node has not changed. Our focus is to build high yield capacity for specialized technologies rather than just normal capacity. For example, we are increasing our material capacity, such as in JASM-51 in Japan for CMOS sensor application, and ESSMC 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, focus on guideline choice, and use 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 a necessary capacity to support our customers' growth. Finally, let me talk about our A14 status. Figuring our second-generation nano-sheet transistor structure, A14W delivers another four-node stride from N2 with performance and power benefit to address the essential need for high-performance and energy-efficient computing. Compared with N2, A14 will provide 10 to 15 speed improvement at the same power, or 25 to 30 power improvement at the same speed, and close to 20% chip density gain. Our A14 technology development is on track and progressing well. We are observing a high level of customer interest and engagement from both smartphone and HPC applications. Volume production is scheduled for 2028. Our A14 technology and its derivative will further extend our technology leadership position and enable TSMC to capture the growth opportunities well into the future. This concludes our key message, and thank you for your attention.
Jeff Pu: MR. Thank you, CC. This concludes our prepared statements. Before we begin the question and answer session, I would like to remind everybody to please limit your questions to two at a time to allow all the participants an opportunity to ask their questions. Should you wish to raise your question in Chinese, I will translate it to English before our management answers your question. For those of you on the call, if you would like to ask a question, please press the star, then one on your telephone keypad now. If at any time you'd like to remove yourself from the questioning 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.
spk12: The first one to ask a question, Hasley from Bank of America.
Haas Liu: Yes, good afternoon, Cici, Wendell, and Jeff. Congrats on the solid results and guidance, and thanks for taking my questions. I would like to start with your three-millimeter gross margins outlook. You just mentioned the node is going to across the average gross margin in second half this year, which is now at mid-60 percentage levels. And we understand that technology is in severe undersupply backed by strong AI demand, and we already forecasted the capacity expansion through conversion in Greenfield through 2028. Would you be able to discuss more in detail on what kind of applications are driving such strong business for you and convince you to extend more? And the other thing, on three nanometers 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.
Jeff Pu: Okay, so the first question from Haas Liu of Bank of America is two parts on three nanometer. First, as CC described, we are executing a plan for expanding three nanometer capacity. So he wants to understand what are the applications to drive such a strong multi-year looking ahead pipeline of demand for three nanometers since it's already been around in volume production since late 22. That's the first part of his question.
C. C. Wei: well let me answer that i think the application is simple it's still the hpc ai applications does that answer your question okay yes that is the first part and the second part
Jeff Pu: And the second part of this question is on the gross margin for three nanometer. His question is really, you know, what is the gross margin outlook for three nanometer? Will it cross over in the second half of this year? To what level? And then once it becomes fully depreciated, what happens to the margin?
Wendell Huang: Okay, this is Randall. We expect the N3 gross margin to reach and cross the corporate gross margin level in the second half of this year. And we don't have a number to share with you, but after the 40 depreciation as our previous note, the gross margin are generally very high.
Jeff Pu: Okay, Haas, I'll take that as 1.5 questions. So if you have a quick follow-up for your second question.
Haas Liu: Yes, thanks so much, Jeff. And the other, I think just a 0.5 follow-up is probably just the CAPEX you revised up to the high end of your guidance for 52 to 56 billion US dollars for this year. Compared to three months ago, what gives you the incremental confidence when you discuss with your customers and also customers' customers regarding the demand outlook to support your stronger or the upper half of your guidance for the CAPEX this year.
Jeff Pu: Okay, thank you, Ha. So his second question is he notes that indeed we have this time guided to the high end of our CAPEX range versus January. So 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.
C. C. Wei: Well, again, this is CC Wei. Let me answer this question. A simple, a very simple answer is The demand are very robust, especially from the HPC and AI applications. And so we try very hard to speed it up and pulling all the equipment as we can. Still, our supply is very tight. Demand needs continue to increase. And so we continue to work with our suppliers to speed it up. And that's why we are toward our high end of APEX forecast.
Investor Relations Support: Okay, Has, does that answer your question?
Haas Liu: Yes, thank you so much. I'll be back in a minute.
Jeff Pu: Sure, thank you. Operator, can we move on to the next participant, please?
spk12: Next one to our question, , JP Morgan.
Gokul: Hi, good afternoon, . My first question on your comments on demand. Clearly, demand is even better than what you predicted back in January, and you also raised the capex. Now, all your customers seem to be telling everybody they can tell that They first will remain the biggest constraint. So given your expanded three nanometer capacity plan and faster capex, Cece, what is your expectation that how long the supply constraint is likely to last? Do you have any visibility of when you can kind of bring some kind of balance here? Based on what you hear from customer and as a strategy, do you also plan to build out more clean room space? Because that seems to be a little bit of a constraint right now to bring on the capacity quickly. That's my first question.
Jeff Pu: Okay, Gokul, please allow me to summarize your first question. So his question is directed for CC. He notes that the demand seems to be even stronger than our forecast in January. We have also raised the CAPEX, and customers continue to say they need more chip supply. So with our capacity plan, do we – have a forecast or expectation of how long the constraint can last and will we have a strategy to build up clean room space first? Is that correct, Gokul? That's right, yes.
C. C. Wei: Okay, Goku, let me answer the question. Again, it's very simple because of demand continue to be robust and the number continue to be increased. And we double check with our customers, customers are customers or CSPs, they gave us a very positive outlook, right? And so we have to speed it up with our build up of clean room and buying the tools. And so we are working with construction, and we are working with our equipment supplier. And so we want to pulling forward of our forecasted schedule. That's a simple answer because our AI is so strong.
Gokul: Any read, CC, on when we can kind of meet these demands? Or do you think in the next couple of years it's still going to be very challenging to meet that supply is still going to be running below demand, let's say, into 2017 also?
Jeff Pu: So, Gokul would like to know when supply can meet the demand. Do we have a forecast or a timeframe?
C. C. Wei: Goku, you know, it takes us two to three years to build a new FAB. And with the current schedule, we believe that at 27, we are announced anyway when we enter 27. But let me say that it takes time to build a new FAB. It takes time to ramp it up. We expect this to continue to be very tight. So that's why we just announced that we try to build three new and three fab to meet the demand.
Gokul: Okay, that's very clear. My second question on competition. So everything you have, the traditional competitor of Samsung Intel, But one of your customers, Elon Musk, also announced his TerraFab initiative recently. What is the agency's perspective on this initiative? They have also been a customer of yours, and they recently signed a deal with Samsung a few months back. So what is the agency's response here now that they are also trying to kind of build chips on their own? How are you trying to win back this customer? Like, what is your perspective here?
Jeff Pu: Okay, so Gokul's second question is on competition. He notes that we have competition and then recently a competitor or he knows that this TeraFab, so he wants to know what is our perspective on this initiative? This customer has also been a customer of TSMC, but has also signed a deal with one of our other competitors, Samsung. So Goku would also like to know what is our perspective on the TerraFab and what is our view on winning back this customer's business?
C. C. Wei: Well, Goku, Actually, both Intel and Tesla, TSMC is a customer. But again, they are our competitors. And we view Intel as formidable competitors and do not underestimate them. But having said that, there are no shortcuts. The fundamental rule of the foundry game never change. They need the technology leadership, manufacturing excellence, and customer trust. And most of all, the service, which has been mentioned by Jensen. Well, thank you for his wording. Again, let me say that it takes two to three years to build a new fire. No shortcuts. And it takes another one to two years to ramp it up. Again, that's a fundamental of the foundry industry. And whether we try to win them back, actually they are still our customer. And we are very confident in our technology position. And we work very hard to capture every piece of business possible. Goku, did I answer your question?
Gokul: So do you think your faster ramp up of capacity can kind of win some of these customers back? Because the reason seems to be mostly about capacity tightness rather than any other kind of big reasons, right? So is that your evaluation that this is probably the most important thing to win some of these customers back?
Jeff Pu: Okay, so Google's final question is then in winning customers back, his concern is because our capacity is tight. Is that the reason we're losing customers and so can we win customers back?
C. C. Wei: Well, again, let me emphasize, take two to three years to build a new FAB. So in this time, we're also building a new FAB to meet our customers' stronger demand, no shortcuts. So anyway, capacity is very tight, as I said, but we are working hard to make sure that we can meet customers' demand.
Gokul: Robert Hopkinson- Got it. Thank you. No shortcuts. Got it.
Jeff Pu: Robert Hopkinson- All right. Thank you. Operator, can we move on to the next participant, please?
spk12: Next one, we have Charlie Chang from Morgan Stanley.
Charlie Chang: Hi, good afternoon, CC, Wendell, and Jeff. Thanks for taking my question, and also congratulations for a very, very strong result again. So I think I would also address the competition topic from a little bit different angle. As you can see that those AI customers, they are developing a much larger radical size, and some customers are considering to use the e-meep. uh because it's a kind of substrate base uh more suitable for circular larger uh center chip design So I'm not sure what the TSMC's strategy to address this competition. And more strategically, is TSMC comfortable to open up your compute die to your competitors, for example, Intel, to do the package? What's the kind of thought process behind? Thank you.
Jeff Pu: All right, Charlie, thank you. So Charlie's first question is also related to competition. He notes that AI customers are seeking for larger and larger vertical sizes. So he wants to know what is our assessment of the competitive threat from solutions such as like eMIB, and what's our strategy to address this competition? Would we be willing to open up our front end wafer and let someone else do the packaging, basically?
C. C. Wei: Well, Charlie, today TSMC is supplying the largest radical size packaging. And yes, we understand that our competitors also offer very attractive technology. But we welcome that so our customer can have more choices and then we can do more business with our customers. that's our attitude and that but seeing that we don't leave any business on the table we are working very hard to meet all our customers at demand we also are developing a very large vertical size packaging technologies and we are working with all the customers it's so far so good
Charlie Chang: Thanks, Lizzy. So a follow-up on this. When you mentioned about larger size technology, are you referring to COPUS or COSL 3.5D? Do you think 3D stacking can resolve this kind of planner extension problem?
Jeff Pu: So Charlie is asking a follow-up. So he wants us to comment on for larger vertical size. Is it coaxial? Is it panel level? What exact detailed solutions are we doing?
C. C. Wei: Charlie, so far today, we have a very large, regular size cohorts. Of course, we are also working on a co-pass. And together, we try to make sure that we give you enough capacity to support our customer with reasonable cost. So that's why we build a co-op pilot line right now and expect production a couple of years later. But today, the main approach or the main supplier is still a large size co-op. And together with a system on waiver technology, we think TSMC give our customer the best options for their product in the market.
Charlie Chang: All right, so yeah, I would take, we don't need to worry too much about the competition. So my second question is actually about your long-term K-PACE plan. Since, as you said, it takes two to three years to build a new FAB, so you definitely have better visibility, right? So, I remember back in 2021, management also provided three-year K-PACE guidance as 100 billion U.S. hours given restaurant demand. I'm not sure if the TSNC can provide a little bit longer-term K-PACE guidance because, as you said, there's the Equivalent supply is also pretty tight. Yesterday, ASM reported very, very strong results. So you said the EUV supply is an issue. And secondly, would the management provide a kind of long-term capex guidance to investors? Thank you.
Jeff Pu: all right Charlie that's a lot of questions but uh the second one then on Capex uh and building capacity again Charlie knows CC's comment capacity is not born overnight it takes time so he would like to know besides this year's Capex which we have already said at the high end uh can we provide a guidance for the next three years Capex like we did back in 2021 in terms of the dollar amount
Wendell Huang: Okay, Charlie, we don't have a number to share with you, but look at it this way. In the past three years, our total CAPEX was 101 billion. This year, we're already saying CAPEX is towards the high end, which is 56 billion, which is already over 50% of the past three years in total. So we have a strong conviction in the AI megatrend. So we expect the CAPEX in the next few years, in the next three years, will be significantly higher than the past three years.
Jeff Pu: And then the final part of Charlie's question, with such a long lead time, are we concerned about securing tools or bottlenecks and such?
C. C. Wei: Well, Charlie, we always, TSMC's culture, we always work in with our supplier because we view them as our partners. So we continue to work with them, especially for those ASML, prime material, them research, et cetera. So, so far, we are very happy that they are support. That all I can tell you.
Charlie Chang: Okay. Thank you. All right.
Jeff Pu: Thank you, Charlie. Operator, can we move on to the next participant, please?
spk12: Next one we have from UBS.
Sunny: Thank you very much for taking my questions and congrats on the steady results. So my first question is, again, to follow up on KPACS. So if you look at from 2024 to 2026, so in this cloud AI cycle, TSMC has been able to keep capital intensity at a healthy level of 30% plus, given very strong technology leadership and operating leverage. I would say 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 revenue growth compared with KPAC growth? Should we think top line will remain steady and therefore KPAC could grow in line or even below? What's the best way for us to think about it?
Jeff Pu: okay sunny uh thank you for your question so please allow me to summarize sunny's first question is on uh 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 you know 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?
Sunny: Yeah, thank you very much, Jeff.
Wendell Huang: Okay, Sunny. Okay. So in the past few years, as you correctly pointed out, the revenue growth outpays 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 outpays the CAPEX growth. Okay. Now, therefore, we do not expect in the next several years a sudden surge in capital intensity. Okay. Okay.
Sunny: I see. Maybe a very quick follow-up. A lot of questions on competitions already, but also from a competition point of view, even a very tight supply, at TSNC site in recent years, would TSNC actually consider maybe spending key packs a bit more so that clients will need to diversify given a tight supply?
Jeff Pu: 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?
Sunny: Yeah, thank you, Jeff.
C. C. Wei: Well, Sunny, we repeatedly saying that we prepare the capacity to meet customers' demand, not because of our competitor or not because of our other consideration. The most important one is our customers' demand, and they work with TSMC, and so that we plan our capacity, and so our capital expense. Sunny, did I answer your question?
Sunny: Yeah. Yeah, very clear. Thank you. So maybe my 0.5 question. And so if we look at this share, earlier you just guided the higher than 30% growth for top line. But indeed, there's ongoing supply tightness. And so for 20.6, how much upside could you realize for top line? And at this point, have you started to see some impact of consumer and demand, and therefore, on your demand coming from smartphone and PC?
Jeff Pu: Okay, so Sonny's second question is regarding 2026 full year outlook. She knows 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?
C. C. Wei: Well, Sunny, memory price hike definitely has some impact to price-sensitive yen market, especially in PC and smartphone market. But we did see a little bit softer market. But To share with you, all the high-end smartphone continue to do better. And this is to TSMC's advantage. And as you're asking about how much higher than above 30% year-over-year growth, we will share with you in July. How about that? Then we will have a more accurate or some more precise number to share with everybody.
Sunny: No problem. Thank you very much, Siti.
Jeff Pu: Okay, thank you, Sonny. Operator, can we move on to the next participant on the line?
spk12: Yes, next one, Jim Fontanelli, Advertise.
Jim Fontanelli: Yeah, thank you. Thanks for taking the question. So, my first question is to do with With demand, so 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. So against this backdrop, has management's thinking changed about the sustainable margin structure and what appropriate long-term returns might be for the business?
Jeff Pu: Okay, so 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. So how does this change? I think your question is our margin, our view on the long-term margin profile and the return profile. Is that correct? That's correct.
Wendell Huang: Okay, Jim, as we said in the last earning 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.
Jim Fontanelli: Thank you. And 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 two or three years.
Wendell Huang: Yeah, Jim, this is a long-term planning. It is ongoing and continuous process. So we do that all the time and we will update you when there is a change.
Jim Fontanelli: Okay. Thank you. My second question is it looks like the Arizona site is becoming more strategic. In terms of leading-edge commitment for TSMC, particularly with the recently added second parcel of land, could you talk about how you see mid- to long-term capacity opportunity and also how confident you are that the U.S. fab economics will match Taiwanese-produced wafers?
Jeff Pu: Okay, so 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. So what is the plan or the purpose behind this? And then what is the profitability or margin outlook as well?
C. C. Wei: Well, Jim, let me answer the question. We acquired the second land because we need it. We want to build more farms in Arizona. And this is actually to meet the multi-year demand from our leading edge US customers. And 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. And we expect we can improve the cost structure, of course.
Jeff Pu: Okay, Jim? Thank you. All right, thank you. Operator, can we move on to the next participant, please?
spk12: Next one, Bruce Liu from Goldman Sachs.
Bruce Liu: Thank you for taking my question. I think I want to follow up on Jim's question for the profitability. I think earlier last year when I asked why GSMC did not raise the profitability target when GSMC continued to sell the value, I think CC told me that to focus on the, you know, above version of 53% and above. I think last quarter, you know, we raised it to 56% and above. So the question is that do you believe the current profitability fully reflect QCC's value? So I'm guessing CC might, you know, ask me to focus on the higher portion of the profitability target again. So the real question is that given the uniqueness of the dominant position for TSMC, it's not easy to find a perfect benchmark for TSMC's profitability. So can you tell us how we should think the profitability benchmark for TSMC or what is the best way to see TSMC's value to be fully reflected into the gross margin and operating margins?
Jeff Pu: Okay, Bruce, his first question is, he wants to know what profitability benchmark he should be looking at, and whether we believe our current profitability level fully reflects TSMC's true value.
C. C. Wei: Well, Bruce, you actually, you ask about our pricing strategy. Let me say that we always view our customer as our partners. Of course we know that our value, of course we know our position, but we also view that our partner as a very important business partner so that we don't change our pricing dramatically or something like that. We just try to make sure that our customer can be successful in their market and at the same time we grow together then we also earn our value so that we can continue to expand our capacity to support them that fundamentally is number one our customer has to be successful that's our consideration number one and we grow together And again, there's a key word, please pay attention to, customer is our partners.
Bruce Liu: Okay, so if your customer come here to be successful, maybe in a couple of quarter we can see the higher profit to be a target again.
Jeff Pu: Bruce, what's your second question?
Bruce Liu: My second question is that management has been guiding the AI-accelerated revenue to grow by mid- to high-safeties in 2024 and 2029. How does TSMC plan and forecast AI-related demand? Does TSMC incorporate metrics such as token consumption growth in your assumption, because the recent potent consumption in the first quarter is definitely accelerated and faster than earlier expectation. Do we see the changes for the accelerated revenue growth in the coming years?
Jeff Pu: Okay, so Bruce's second question is on our AI accelerator long-term CAGR guidance, which yes, we have guided mid to high 50s. He notes with the strong token growth and demand for tokens, do we have any changes to this long-term guidance?
C. C. Wei: Bruce, actually, I think I say now that it's a very strong demand. And we continue to receive the very positive signal from our customer, and customers are customers. And so what do you say is whether we change our trigger on AI accelerator? It's actually, we continue to see strong demand, but again, let me say that is toward a higher fifties of our CAGR that we observe.
Jeff Pu: Okay. Thank you, CC. Thank you, Bruce. Operator, can we move on to the next caller, please?
spk12: Next one to ask question, Laura Chen from City.
Laura Chen: Hello, hi. May I take more details on TSMC's strategy in advanced packaging and what will be the business model working with your OSEC partners? We see that there are various different solutions provided by your peers and also the OSEC makers. Yet TSMC is also expanding more in the advanced packaging. So how would TSMC work with your customers planning their advanced no wafer demand, but also align with their advanced packaging demand at TSMC?
Jeff Pu: Okay, so thank you, Laura. Laura's first question. is on advanced packaging. She would like to know, we work with customers, collaborate with customers to plan our front-end wafer capacity. How do we work with the customers to plan the advanced packaging capacity is what she would like to understand, and also in the context of working with our OSAP partners on the advanced packaging businesses.
C. C. Wei: Thank you. Our priority actually, again, is to support our customers, right? And whenever we can or wherever we can, we want to make sure that their product can be, their demand of their product can be met by TSMCs or and high-end packaging. We certainly, let me say that our packaging capacity is very tight also. So we have to work with our offset 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. And so that's what our situation today.
Laura Chen: Sure, understood. My second question is also about advanced packaging. As Citi highlighted before many times that AI chips are growing into a super chip with a very large die size and TSMC now working at the biggest radical in the world. But at the same time, there is a potential technical challenges such as warpage. So do you think that the following roadmap like SOIC or like COPPOS can solve this kind of technical issue? And based on TSMC's technology roadmap, do we see any technology like SOIC or COPPOS will be a bigger ramp in a couple years can solve this problem?
Jeff Pu: Okay, so Laura's second question is also related to advanced packaging, AI in larger reticle sizes pose potential technical challenges such as warpage. So she would like to know how do we see SOIC or panel-level packaging? What's the key to solving these issues, and what is its outlook in the next several years?
C. C. Wei: Yes, thank you. Well, Laura, You are good. Actually, that's all the challenges that we have in advanced packaging technology. Mechanical stress, which is a very tough challenge to the electrical engineering like I am. However, we accumulated a lot of experience already today because we have supply most of the leading edge or end up in packaging area. And we continue to increase the die size and continue to meet all the challenges from the mechanical stress, like you said, actually is a war PG or the thermal limitation. A good challenge, and we like it. The harder, the better, because of TSMC's strength in technical engineering. And we have a confidence that we can work with our customer to solve all the issues and continue to move on.
Laura Chen: So should we expect that SOICs, TSMC may introduce that earlier to solve this kind of a challenge? Because we already have the learning curve and already have the products in production. So that should go faster than other technologies, I suggest.
Jeff Pu: Again, sorry. So Laura's question is very specific. I don't even, yeah, on SOIC, what is, how do we see that developing, I guess?
C. C. Wei: Well, we work with our customer and we meet their demand. And that's all I can tell you. Speed it up or slow down. No, no, no, no, no. We work with our customer to meet their demand.
Laura Chen: Thank you. Very clear.
Jeff Pu: Yes. Okay. Thank you. Operator, in the interest of time, can we take the questions from the last participant, please?
spk12: Next one to ask question, Chaoshu from Needham.
Chaoshu: Thanks for taking my question. TSMC's definition of AI revenue includes data center GPU, AI accelerator, HP, and base. 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 of years now. With the CPU, there's more and more conversation about CPU now becoming part of the AI infrastructure, especially for agentic workloads. Any chance for TSMC to maybe provide us revised numbers for AI revenue and make the AI revenue growth take a 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 kind of CPU numbers, especially for agentic AI workloads, are included there. That's my first question. Okay.
Jeff Pu: Thank you, Charles. So Charles, first question, please let me summarize, is regarding our definition of AI accelerator, which is, of course, we have said GPU, ASIC, and HPM controllers for training inference in the data center. He notes now with agentic AI, he wants to know, will we start to include 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?
C. C. Wei: Charles, certainly CPUs becomes more and more important in today's AI data center. But 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? It's a PC or a desktop or it's an AI data center. So today, we still not include the CPUs in our AI HPC's calculation. Someday later, we might consider.
Jeff Pu: Okay, Charles, do you have a second question?
Chaoshu: Thanks, CC. Yes. Maybe it's kind of also tied to the recent development in overall AI infrastructure, how things have been evolving. So NVIDIA, of course, they recently added more CPU content to the overall Vera Rubin super pod, but I think that most people are focusing on that brand-new LPU. As they recently added, we understand and appreciate that the TSMC is very strong in CPU and will definitely participate in that upside in CPU. But the LPU business, the acquired business, well, for historical reasons, it's still at your competitor, Samsung Foundry. Investors are looking at that and the thing that maybe looks like Samsung Foundry finally made the first for two inroads into AI. So any thoughts from TSMC side? How should we think about whether and how TSMC will win back that LTE business or any future difference to business coming from our customers. And yeah, give us some thoughts there, we appreciate that, thank you.
Jeff Pu: 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?
C. C. Wei: Charles, I think Jeff already gave me enough warnings, very specific, very specific customer, very specific area. Let me answer your question. We are working with our customer for their next generation inside your PEU anyway. And we are very confident in our technology position, and we will work hard to capture every piece of business possible. How about that?
Chaoshu: Very good. Thank you, CC. That's a very good comment. Thank you. I appreciate that.
Jeff Pu: Okay. Thank you, Charles. Thank you, Cece. Thank you, Wendell. This concludes our prepared statements. Oh, sorry. I should say 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. So, again, thank you, everyone, for taking the time to join us today. We hope you continue to stay well, and we'll hope you join us again next quarter. Goodbye and have a good day.
