TSMC posted revenue of NT$1,270.381 billion and net profit attributable to shareholders of the parent company of NT$706.562 billion for the second quarter of 2026. Compared to the same period last year, revenue rose 36.0% and net profit surged 77.4%, with diluted earnings per share reaching NT$27.25. Gross margin hit 67.7%, exceeding the upper end of the company's guidance by 0.2 percentage points.
This profit figure includes NT$63.2 billion in gains from the sale and mark-to-market valuation of Vanguard International Semiconductor (VIS) shares. Even excluding this, operating profit still grew 65.4% year-over-year. While the record profit growth was boosted by one-time gains, high utilization of advanced nodes and cost improvements substantially lifted core business profitability.
At the same day's investor conference, TSMC announced it would raise its 2026 capital expenditure guidance to $60-64 billion and would invest an additional $100 billion in Arizona. The upper end of $64 billion in capex is 14.3% higher than the $52-56 billion ceiling indicated back in April. Fueled by current profits, the company has entered a phase of large-scale investment to build up next-generation production capacity.
Breaking Down the 77.4% Profit Growth: Core Business vs. VIS Share Gains
Cost of revenue for the second quarter was NT$410.070 billion, up 6.1% year-over-year—roughly 30 percentage points below the 36.0% revenue growth rate. As a result, gross profit rose 57.2% to NT$860.311 billion, with gross margin climbing 9.1 percentage points from 58.6% in the same period last year.
Operating expenses, including R&D, increased 17.1%, but their share of revenue fell to 7.8% from 9.1% a year earlier. Operating profit reached NT$766.603 billion, with an operating margin of 60.3%. In addition to the operating leverage effect from spreading fixed costs over higher production volumes, the cost improvements TSMC cited also boosted margins.
When interpreting net profit, it's necessary to separate out non-operating gains. Non-operating income totaled NT$95.827 billion, of which NT$63.2 billion came from the sale and revaluation of VIS shares. Against the year-over-year increase in pre-tax profit of NT$369.394 billion, the VIS-related gain accounts for 17.1%. Since tax effects were not disclosed, the NT$63.2 billion cannot simply be subtracted from net profit. Still, it's clear that most of the profit growth had already occurred at the operating level.
In May, TSMC announced it would sell up to 152 million VIS shares, reducing its stake from approximately 27.1% to about 19%. The company will maintain its silicon interposer manufacturing arrangement and gallium nitride (GaN) technology licensing relationship. This reflects a decision to scale back the equity relationship while preserving the collaboration needed for advanced AI packaging.
Revenue Mix Shifts: HPC at 66%, 2nm Reaches 3%
High-performance computing (HPC) drove growth. HPC revenue rose 20% quarter-over-quarter, accounting for 66% of total company revenue—up from 61% in Q1 2026 and 60% a year earlier. Meanwhile, smartphone revenue fell 4% quarter-over-quarter, with its share dropping from 26% to 22%.
However, it would be inaccurate to equate HPC's 66% share directly with AI revenue. TSMC's HPC category includes AI accelerators as well as high-performance processors for data centers and clients. The strength of AI demand should be read not from the breakdown within HPC, but from customer orders for advanced nodes and advanced packaging, as well as the increase in capital expenditure guidance.
By process technology, 2nm accounted for 3% of wafer revenue for the first time. 3nm rose from 25% in the previous quarter to 30%, while 5nm stood at 33% and 7nm at 11%. Advanced technologies of 7nm and below totaled 77%, up 3 percentage points from the previous quarter. Even now, with 2nm mass production underway, 3nm and 5nm remain the core of revenue.
The gap between shipment volume and revenue also reflects the shift in product mix. 12-inch equivalent wafer shipments rose 16.6% year-over-year to 4.336 million units, while NT dollar-denominated revenue grew 36.0%. Simply dividing revenue by shipment volume yields approximately NT$293,000 per 12-inch equivalent wafer, up 16.7% from approximately NT$251,000 a year earlier. This figure is not a contract price but an auxiliary indicator combining advanced nodes, advanced packaging, and overall product mix in revenue.
How Sustainable Is the 67.7% Gross Margin?
The 67.7% level reflects both strong demand and improvements on the manufacturing floor. TSMC cited cost improvements and higher equipment utilization as reasons for the 1.5 percentage point increase from the previous quarter. While overseas fab ramp-ups weighed on margins, improvements drawn primarily from existing Taiwan-based capacity more than offset this drag.
Foreign exchange also offers a clue to the scale of the upside surprise. The company's Q2 guidance had assumed an exchange rate of NT$31.7 to the dollar, but the actual rate came in at NT$31.60. Even with the New Taiwan dollar slightly stronger than assumed—a somewhat unfavorable condition for export profitability—gross margin still exceeded the guidance ceiling. This outperformance cannot be explained by currency alone; utilization rates and cost improvements likely contributed significantly.
Meanwhile, 2nm ramp-up costs are set to weigh more heavily going forward. Inventory turnover days extended from 80 days in the previous quarter to 87 days, which TSMC attributed primarily to preparations for increased 2nm production. At the April investor conference, the company indicated that initial 2nm mass production would drag down full-year 2026 gross margin by 2-3 percentage points. Dilution from overseas fabs is expected to widen from an initial 2-3 percentage points to 3-4 percentage points thereafter.
The Q3 company guidance incorporates this cost increase. Revenue is guided at $44.6-45.8 billion, with the midpoint representing a 12.4% increase over Q2 actual results. However, gross margin guidance stands at 65-67%, with the midpoint down 1.7 percentage points. Even assuming a weaker New Taiwan dollar of 32.0 to the dollar compared to Q2, margins are still expected to decline—making this a quarter where revenue growth and new-process ramp-up costs will be in tension.
$64 Billion Capex and Additional Arizona Investment
The increase in capital expenditure guidance signals that TSMC does not view current order levels as a temporary peak. Capex for the first half of 2026 totaled $26.8 billion. To reach the full-year guidance of $60-64 billion, the company would need to spend $33.2-37.2 billion in the second half—24-39% more than the first half, executed within six months.
This investment burden is already showing up in cash flow. Q2 operating cash flow rose to NT$783.36 billion, but capital expenditure also swelled to NT$496.0 billion, or $15.7 billion. Free cash flow came to NT$287.36 billion, down from NT$348.21 billion in Q1. Even as profits grow, the pace of funds flowing back into manufacturing equipment and facilities is outpacing that growth.
The additional $100 billion investment in Arizona is aimed at connecting front-end processes for 2nm and beyond with advanced packaging within the United States. Combined with previous plans, total U.S. investment now reaches $265 billion. While this allows TSMC to expand production capacity closer to customers, it also spreads the margin erosion from overseas fabs that the company itself has warned about. Increased production in the U.S. represents both a revenue opportunity and a cost factor that makes maintaining the 67.7% gross margin more difficult.
Building fabs, installing equipment, and achieving stable yields of quality products all take time. As of April, TSMC indicated its view that tight supply for advanced nodes could persist into 2027. How Q3's 65-67% gross margin guidance, the 2nm revenue share, and inventory days—now extended to 87 days—move from here remains to be seen. If 3nm capacity expansion toward 2027 proceeds as planned, the $64 billion in investment will finally translate into computing resources that customers can actually use.