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# Taiwan Semiconductor Manufacturing Company (TSM) — Narrative, FY26Q2 TSMC reports in New Taiwan dollars (NT$). Amounts in this document are converted from New Taiwan dollars into U.S. dollars, at the exchange rate TSMC states for the period where it gives one (NT$31.11 per US dollar for 2025 flows and NT$31.37 for December 31, 2025 balances; NT$31.60 for second-quarter 2026 flows and NT$31.918 for June 30, 2026 balances) and otherwise at the Federal Reserve's rate for the date or period. Growth rates are in U.S. dollar terms unless marked as NT$ terms. The annual figures in the Business and fiscal 2025 management's discussion sections come from the Form 20-F, which is prepared under IFRS as issued by the IASB. The quarterly figures come from the 6-K reports, which follow Taiwan-endorsed IFRS. The two bases can give slightly different figures: FY2025 net income attributable to shareholders of the parent is $54.57 billion in the 20-F, slightly different from the Taiwan-IFRS figure for the same year. TSMC sells almost entirely in U.S. dollars. One ADS represents five common shares, and per-share amounts are stated per ADS. ## Business *From the annual report on Form 20-F for the fiscal year ended December 31, 2025 (accession 0001628280-26-025362).* TSMC is the world's largest dedicated semiconductor foundry. It manufactures chips designed by its customers rather than its own products. Its customers are fabless chip companies, system companies that design their own silicon, and integrated device manufacturers. In 2025 it earned $122.44 billion of revenue. About 86% came from wafer fabrication. The rest came mainly from advanced packaging and testing, mask making, design services and royalties. TSMC reports a single operating segment, the foundry. It counts itself the technology leader among dedicated foundries by revenue at 7-nanometer and below. **Revenue by end platform (2025, share of net revenue):** - **High Performance Computing: 58%** ($70.49 billion, up 53.3% year over year). This covers AI accelerators (GPUs and custom ASICs), server and PC CPUs, FPGAs and networking chips. Management calls it the key growth driver, and it also anchors demand for TSMC's 3DFabric advanced packaging (CoWoS, SoIC). - **Smartphone: 29%** ($35.71 billion, up 14.1%). Premium application processors on N2P/N3/N4/N5, plus companion RF, power-management and sensor chips and InFO packaging. - **Internet of Things: 5%**, **Automotive: 5%** (N3A, its most advanced automotive-grade node, was released at the end of 2025), **Digital Consumer Electronics: 1%**, **Others: 2%**. Revenue has shifted steadily toward HPC, which was 43% of revenue in 2023 and 51% in 2024. Customer concentration has risen with it. TSMC groups revenue by where the customer is headquartered. On that basis North America was 75% of 2025 revenue (70% in 2024), China 9%, other Asia Pacific 9%, Japan 4% and EMEA 3%. **Technology mix.** Advanced nodes (7nm and below) made up 74% of 2025 wafer revenue, up from 69% in 2024 and 58% in 2023. By node, 3nm was 24%, 5nm 36% and 7nm 14%. The 2nm node (N2, a nanosheet-transistor technology) entered volume production in 2025. The A16 (16-angstrom) node is on track for risk production in 2026. Mature nodes (16nm and above) still serve specialty uses such as RF, embedded memory, power management, image sensors and MEMS. **Manufacturing footprint.** As of February 28, 2026, TSMC operated one 150mm fab, six 200mm fabs, nine 300mm fabs and seven advanced backend (packaging) fabs. Capacity exceeded 17 million 12-inch-equivalent wafers in 2025, and shipments were about 15.0 million wafers, up from 12.9 million in 2024. Most capacity is in Taiwan's Hsinchu, Central and Southern Taiwan Science Parks and Kaohsiung. Overseas sites: - **Arizona (TSMC Arizona, Fab 21, 100% owned).** The first fab reached high-volume production at the end of 2024. The second is under construction and the third began construction in 2025, and more land was bought in 2026. A U.S. CHIPS Act agreement provides up to $6.6 billion of direct funding and up to $5 billion of government loans, guaranteed by the parent. - **Kumamoto, Japan (JASM, Fab 23, about 72.6% owned).** Partners are Sony, DENSO and Toyota. Volume production began in December 2024, and construction of a second fab began in October 2025. - **Dresden, Germany (ESMC, Fab 24, 70% owned).** Bosch, Infineon and NXP each own 10%. Construction began in 2024, supported by up to EUR 5 billion (about $5.24 billion at December 2024 exchange rates) of German state aid. - **China.** Fab 10 in Shanghai (200mm) and Fab 16 in Nanjing (300mm, up to 16nm). - **Washington State.** Fab 11 (TSMC Washington, formerly WaferTech). TSMC also holds stakes in Global Unichip (about 35%, design services), Xintec (about 41%, wafer-level packaging), VisEra (about 67%, image-sensor back end) and SSMC in Singapore (about 39%, alongside NXP). In 2025 it held about 28% of Vanguard International Semiconductor (VIS); it sold part of that stake in the second quarter of 2026 (see below). **How it competes and invests.** TSMC competes on process technology, manufacturing excellence and yield ramp, cycle time, and customer trust. Its Open Innovation Platform ecosystem of EDA tools, IP and design kits, and its CyberShuttle multi-project wafer program, are built around winning customers' designs early. Spending is very large: - **R&D:** $7.92 billion in 2025 (6.5% of revenue), aimed at 16-, 14- and 10-angstrom nodes. - **Capital expenditure:** $40.90 billion in 2025, up from $29.75 billion in 2024. The 2026 plan given in the annual report was $52–56 billion. It is weighted to 2nm and 3nm capacity (Fabs 20, 21 and 22), with the rest going to specialty and advanced-packaging capacity (including Fab 24) and R&D. **Capacity prepayments.** Some customers pay "temporary receipts" in advance to reserve capacity. These stood at $6.05 billion at the end of 2025, and they give TSMC some visibility on future demand. ## Risk factors *From the FY2025 Form 20-F (accession 0001628280-26-025362), condensed.* - **Geopolitics and Taiwan concentration.** Most senior management, production and revenue are in Taiwan. Cross-Strait tensions, military conflict, or a deterioration in Taiwan's political or economic conditions could disrupt operations and depress the price of TSMC's shares and ADSs. TSMC's model depends on a dense cluster of fabs, engineers and suppliers. It can move thousands of engineers between sites, and immigration or employment limits on doing so would weaken that advantage. - **Tariffs and trade policy.** In 2025 the U.S. imposed tariffs under IEEPA, which excluded semiconductors but still raised TSMC's U.S. operating costs. The Supreme Court struck those tariffs down in February 2026, and a Section 122 replacement tariff followed. Section 301 investigations opened in March 2026 name Taiwan among their targets. A Section 232 action finished in December 2025 put a 25% tariff on certain advanced computing chips that are not imported for designated U.S. use, and signalled broader chip tariffs to come. A January 2026 U.S.–Taiwan agreement caps reciprocal tariffs at 15% and promises preferential Section 232 treatment to Taiwanese chipmakers that invest in the U.S., but the details are unsettled. Tariffs on chips or on chip-making equipment could reduce demand or raise costs at the U.S. fabs. - **Export controls.** January 2025 U.S. rules may require licenses before TSMC ships 16nm-or-below products to specified destinations. The Nanjing fab's Validated End-User status expired in December 2025. It now runs on an annual U.S. export license, which may not be renewed. In October 2024 TSMC told U.S. and Taiwan authorities that a customer's chip it made may have been diverted to a restricted entity, and it has been cooperating with their information requests since. As a foundry, TSMC has limited visibility into where its customers' chips end up. China's 2021 blocking statute could expose TSMC to liability for complying with foreign rules. - **Customer concentration.** The ten largest customers were 78% of 2025 revenue, up from 70% in 2023 and 76% in 2024. The largest was 19% and the second largest 17%, up from 11% in 2023. More system companies now design their own AI chips, which ties TSMC's revenue to whether AI spending holds up. - **Cyclicality and fixed costs.** TSMC owns its capacity, so most costs are fixed and margins swing with utilization. Semiconductor downturns and pricing pressure from falling end-product prices can sharply cut earnings. - **Technology leadership and competition.** TSMC must stay ahead on each new node and on packaging while customers launch products ever faster, especially in AI. Competitors may receive government subsidies that TSMC cannot get, may price aggressively, or may court customers who want a second source. TSMC's own grants (CHIPS Act, EU Chips Act, Japan) come with conditions, can be delayed or clawed back, and limit expansion in "foreign countries of concern." - **Global expansion execution.** New fabs in the U.S., Japan and Germany bring higher construction and operating costs, labor shortages and construction delays. They also require new supply chains, local compliance and cultural integration, and they draw more IP assertions. - **Capacity planning.** Expansion raises costs before revenue arrives. If demand does not come through, returns suffer, and capacity idled in a downturn may not come back quickly when demand recovers. - **Natural disasters and utilities.** Taiwan's earthquakes, typhoons and droughts are a recurring risk. Earthquakes cost about $93 million net of insurance in 2Q24 and $161 million in 1Q25. Taiwan's power and water supply are tight, and utility prices are rising. - **Supply chain.** Some critical equipment comes from a limited number of suppliers, and some materials from a single supplier. Trade tensions can delay export licenses or raise prices. - **Currency.** Sales are in U.S. dollars, while more than half of capex is in USD, euros and yen, and results are reported in NT dollars. Each 1% fall in the USD against the NT dollar cuts operating margin by about 0.3 percentage points (based on 2025). - **IP and antitrust.** Patent suits by well-funded non-practicing entities are rising, and recent U.S. Patent Office changes limit inter partes review. TSMC's dominant position also draws antitrust scrutiny in several jurisdictions. - **Regulation, climate and tax.** Taiwan began charging a carbon fee from 2026 (for 2025 emissions), which adds to manufacturing costs. Environmental permitting can delay new fabs. Changes to tax law, including OECD BEPS / global minimum tax rules, could raise the effective tax rate. - **ADS holder risks.** ADS holders cannot vote individually and may be shut out of rights offerings. The share price can be moved by sales from large holders (Taiwan's National Development Fund owned 6.38%) and by Taiwan government market-stabilization activity. ## Management's discussion — fiscal 2025 *From Item 5 of the FY2025 Form 20-F (accession 0001628280-26-025362).* 2025 was a step-change year. Net revenue rose 35.9% to $122.44 billion. The increase came from higher average selling prices as the mix moved to 7nm and below, and from a 16% rise in wafer shipments. In NT$ terms growth was 31.6%, because a stronger NT dollar partly offset it: the average rate moved from NT$32.13 to NT$31.11 per USD. HPC grew 53.3% and smartphone 14.1%. Margins widened on every line: | | 2024 | 2025 | |---|---|---| | Gross margin | 56.1% | 59.9% | | Operating margin | 45.7% | 50.8% | | Net margin (attributable to shareholders of the parent) | 40.0% | 44.6% | Management attributed the gross margin gain to higher utilization and cost improvements, partly offset by currency. Operating expenses rose 14.8% in NT$ terms, more slowly than revenue. R&D grew 20.7% in NT$ terms, driven by research on 16-, 14- and 10-angstrom process technologies. Non-operating income rose 30.1% to $3.39 billion, mainly on higher interest income ($3.40 billion for the year). Income tax expense rose 39.6% in NT$ terms on higher taxable income. Net income attributable to shareholders of the parent was $54.57 billion, up 51.4%. **Cash and balance sheet:** - Operating cash flow was $73.13 billion. Capex was $40.90 billion, and financing outflows of $14.15 billion were mainly dividends, partly offset by $2.79 billion of new NT-dollar bonds. - Cash, cash equivalents and current marketable securities reached $97.82 billion. - Long-term debt was $32.93 billion, mostly fixed-rate bonds in New Taiwan and US dollars at 0.41%–4.63%. There were no short-term loans. - Contractual commitments for construction, equipment and materials totalled $48.92 billion, of which $38.90 billion is due within a year. Quarterly cash dividends were $0.80 per ADS for each of the first two quarters of 2025 and $0.96 per ADS for each of the last two. TSMC qualifies for Taiwan's 25% R&D and 5% advanced-equipment investment tax credits. The statutory corporate rate is 20%. **Legal proceedings.** In the Marlin patent case (Longitude Licensing and Marlin Semiconductor), filed in February 2025 at the U.S. ITC and in the Eastern District of Texas over five U.S. patents, the annual report said no reliable estimate of liability could be made. The ITC proceeding has since ended; see Subsequent events. ## Current quarter — second quarter 2026 (ended June 30, 2026) *From the second-quarter results release and earnings presentation furnished on Form 6-K (accession 0001046179-26-000451, July 16, 2026), and the reviewed consolidated financial statements for the six months ended June 30, 2026 furnished on Form 6-K (accession 0001046179-26-000541, August 14, 2026).* **Results above guidance.** Q2 revenue was $40.20 billion, up 33.7% year over year and 12.0% from the prior quarter, at the top of the $39.0–40.2 billion guidance range (in NT$ terms, up 36.0% year over year). Margins beat the guided ranges: | | Q2 2025 | Q1 2026 | Q2 2026 | Q2 2026 guidance | |---|---|---|---|---| | Gross margin | 58.6% | 66.2% | 67.7% | 65.5–67.5% | | Operating margin | 49.6% | 58.1% | 60.3% | 56.5–58.5% | Income from operations rose 62.5% year over year to $24.26 billion. Net income attributable to shareholders of the parent was $22.36 billion, up 74.3%, for diluted EPS of $4.31 per ADS. The annualized ROE was 45.9%. Wafer shipments were 4.34 million 12-inch equivalents, up 16.6% year over year. The CFO credited "strong demand for our leading-edge process technologies." **Profit was boosted by a one-time gain on the VIS stake.** In May 2026 TSMC sold 152 million VIS shares, about 8.1% of VIS, for cash proceeds of about $767 million. That cut its stake to 19%, so TSMC lost significant influence and moved the remaining interest to fair-value accounting. It booked a $2.00 billion pre-tax gain, which includes a non-cash remeasurement of the retained stake to its $1.78 billion fair value. As a result, non-operating items jumped to $3.03 billion from $912 million in Q1, and the net-income growth rate overstates operating growth. Operating income growth (+62.5%) is the cleaner measure. Also in the quarter, insurance claims for the April 2024 earthquake were finalized, leaving a cumulative net gain of about $136 million. **Mix moved further toward AI and leading-edge nodes:** - **2nm** reached 3% of wafer revenue ($1.01 billion) in its first reported quarter. - **3nm** rose to 30% of wafer revenue, from 24% for full-year 2025. 5nm was 33% and 7nm 11%. - **Advanced nodes** (7nm and below) were 77% of wafer revenue. By platform, HPC revenue was $26.28 billion, up 45.4% year over year, and reached 65.4% of total revenue (60.1% a year earlier). In NT$ terms, smartphone grew 13.3% to 22.3% of revenue, IoT grew 44.6%, automotive 24.7% and others 29.5%, while Digital Consumer Electronics fell 15.6%. By customer headquarters, the United States was 76.4% of revenue, up 39.9% in NT$ terms. China revenue fell 12.1% year over year in NT$ terms to 6.0% of revenue. **Cash flow and balance sheet:** - Operating cash flow was $24.79 billion. Capex rose to $15.70 billion from $11.10 billion in Q1, leaving free cash flow of $9.09 billion. Cash dividends paid in the quarter were $4.92 billion. - Cash and marketable securities were $110.22 billion against long-term interest-bearing debt of $27.08 billion. - Inventory days rose to 87 from 80 in Q1, and receivable days to 29 from 26. - Customer capacity prepayments (temporary receipts) rose 21.2% in six months to $7.34 billion, and the non-current portion more than doubled to $2.89 billion. Customers are committing cash to reserve future capacity. - Government grants received in the first half fell to $19 million from $2.11 billion a year earlier. Separately, the investment credit TSMC Arizona can claim on qualified investments rose to 35% from 25% from January 1, 2026. In the first half TSMC issued $1.13 billion of domestic bonds, including $584 million of green bonds in May. Net bond flows were still an outflow, because $1.74 billion of bonds were repaid over the same period. **Guidance.** For Q3 2026 management guided: - Revenue of $44.6–45.8 billion, about 11–14% above Q2. - Gross margin of 65–67% and operating margin of 56–58%, assuming $1 = NT$32. The CFO cited "the steep ramp-up of our 2-nanometer technology" as a Q3 driver. Full-year 2026 revenue is expected to grow "slightly above 40%" in U.S. dollar terms. Earlier in the quarter, TSMC unveiled its A13 process at its 2026 North America Technology Symposium (April 23). ## Subsequent events *Events after June 30, 2026, from the notes to the six-month consolidated financial statements (accession 0001046179-26-000541) and later Form 6-K filings, as cited.* - **Marlin patent case resolved at the ITC.** The parties filed a joint motion on July 13, 2026, and the ITC investigation was terminated on August 6, 2026 (note 33, accession 0001046179-26-000541). Marlin had already dropped three of its five patents before the February 2026 hearing. No settlement amount or terms were disclosed, and the filing does not say what happens to the stayed Eastern District of Texas suit. - **Sony image-sensor joint venture, about $1.77 billion from TSMC.** On August 11, 2026 TSMC and Sony Semiconductor Solutions signed a binding agreement to form Advanced Vision Semiconductor Manufacturing Corporation in Kumamoto, Japan, to make advanced smartphone image sensors from 2029 (accessions 0001046179-26-000536 and 0001046179-26-000539). TSMC will put in about ¥282 billion (about $1.77 billion at the August 11, 2026 rate) of cash in phases. Sony will contribute about ¥465 billion (about $2.92 billion), including its newly built Koshi fab, and will control and consolidate the JV. TSMC therefore takes a minority stake rather than an acquisition. The deal is subject to regulatory approval. - **Financing and shareholder returns.** In July 2026 TSMC issued $574 million of 5- and 10-year NT-dollar green bonds at 2.03%–2.10% (note 17, accession 0001046179-26-000541). On August 11 the board declared a second-quarter cash dividend of $1.08 per ADS (at the August 11, 2026 rate), payable January 7, 2027. It also approved about $29.4 billion of capital appropriations, mostly for advanced-node and packaging capacity (accession 0001046179-26-000536). - **Revenue momentum continued after the quarter.** Unaudited monthly revenue rose 44.7% year over year in July and 53.3% in August 2026, in NT$ terms. That brought January–August revenue to $106.68 billion, up 37.4% (accessions 0001046179-26-000471 and 0001046179-26-000658).