Welcome to TSMC's 4th Quarter 2014 Earnings Conference and Conference Call. This is Elizabeth Sun, TSMC's Director of Corporate Communications and your host for today. Before we begin, let me wish you a very happy and prosperous New Year. Today's event is webcast live via TSMC's website at www.tsmc.com. If you are joining us through the conference call, your dialing lines are in listen only mode.
As this conference is being viewed by investors around the world, we will conduct this event in English only. The format for today's event will be as follows: 1st, TSMC's Senior Vice President and CFO, Ms. Laura Ho, will summarize our operations in the Q4 and full year 2014, followed by our guidance for the current quarter. Afterwards, CFO, Laura and TSMC's 2 co CEOs, Doctor. Mark Liu and Doctor.
C. C. Wei, will jointly provide our key messages. After that, TSMC's Chairman, Doctor. Morris Chang, will host the Q and A session.
For those participants on the call, if you do not yet have a copy of the press release, you may download it from TSMC's website, www.tsmc.com. Please also download the summary slides in relation to today's earnings conference presentation. As usual, I would like to remind everybody that today's discussions may contain forward looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward looking statements. Please refer to the Safe Harbor notice as this appears on our press release. And now, I would like to turn the podium to TSMC's CFO, Ms.
Laura Ho, for a summary of operations and current quarter guidance.
Thank you, Elizabeth. Good afternoon and Happy New Year to everyone. Thank you for joining us today. My presentation will start with the financial highlights for the Q4 and a recap of our 2014 performance, followed by the guidance for the current quarter. 4th quarter was another record breaking quarter for TSMC with revenue, earnings per shares and the cash balance all reached historical high levels.
Despite the moderate impact from supply chain inventory corrections, our revenue increased 6.4% sequentially to reach 222 This was mainly due to the strong demand for our 20 nanometer technologies. On the profitability side, gross margin was 49.7%, down 0.8 percentage point from the 3rd quarter. This was attributed to 20 nanometer margin dilution and lower capacity utilization, while cost improvements and favorable foreign exchange rate offset some of the decline. Operating margin was 39.6%, also down 0.6 percentage point from the 3rd quarter. Overall, our 4th quarter EPS was $3.08 increased 4.8% sequentially and 78.5% year over year.
Let's take a look at revenue by application. During the Q4, the strong 20 nanometer ramp was mainly driven by communication related applications. As a result, communication grew 18% sequentially and the revenue contribution increased from 59% in the 3rd quarter to 65% in the 4th quarter. As for other applications, computer grew 7%, while consumer and industrial declined 21% and 11%, respectively. On a full year basis, communication increased 39% and represented 59% of our revenue.
The major contributing segments included baseband, application processors, image processors and the display drivers. Another fast growing application in 2014 was industrial and standard, which grew 30% year over year. The growth was mainly driven by increasing usage of power management ICs, near field communication and audio codec within the mobile devices. Biotechnology 20 nanometer revenue contribution started with a very small number in the 2nd quarter, jumped to 9% in the 3rd quarter and reached 21% in the 4th quarter. Such unprecedented ramp cannot be achieved without seamless teamwork with our customer, the R and D and operation people in TSMC.
On a full year basis, 20 nanometer accounted for about 9% of our full year wafer revenue. Looking forward, we are confident that 20 nanometer will continue its momentum to contribute 20% of the revenue for the whole year 2015. Meanwhile, customer demand for our 28 nanometer wafer remains strong. Accordingly, these two advanced technologies, 20 nanometer plus 28 nanometers represented 51% for our 4th quarter total wafer revenue, a big increase from the 43% in the 3rd quarter. Now, let me move on to the balance sheet.
On the asset side, cash and marketable securities increased NT147 1,000,000,000 to reach NT437 $1,000,000,000 at the end of the 4th quarter, mainly due to higher free cash flow generated from the Q4 and the receipt of NT30 1,000,000,000 guarantee deposit. Total liabilities increased by RMB56 1,000,000,000, mainly due to increase in guaranteed deposit, increase in the tax payable and employee profit sharing. On financial ratios, accounts receivable turnover days was 47 days. Days of inventory increased by 2 days to 58 days, reflecting longer production cycle time for leading nodes. Now let me make a few comments on cash flow and CapEx.
During the Q4, we generated about RMB153 1,000,000,000 cash from operations and invested $52,000,000,000 in capital expenditure. As a result, we generated free cash flow of NT101 1,000,000,000 in this quarter. Overall, our cash balance increased 132,000,000,000 to reach RMB 358 1,000,000,000 at the end of the quarter. In U. S.
Dollar terms, our 4th quarter capital expenditure was US1.7 billion dollars This adds to the total of $9,500,000,000 of capital expenditure for 2014. Now I would like to give you a recap of our total performance in 2014. TSMC set a record in terms of revenue and earnings in 2014. Our revenue grew 27.8% year over year to reach TWD763 billion or TWD25 billion in U. S.
Dollar terms. On profitability, although the rising depreciation and fast ramp of 20 nanometer has indeed put pressure on our margins. Our gross margin actually improved 2.4 percentage point to reach 49.5%. This is because the capacity we invested were fully utilized. And we continue the productivity and cost improvement and to a lesser degree a favorable foreign exchange rate environment.
Our operating margin increased 3.7 percentage points to reach 38.8%. This demonstrated our ability to drive higher operating efficiency. The operating expenses as a percentage of revenue decreased from 12% in 2013 to 10.6% in 2014. As a result, our full year earnings per share increased by 40% to reach the historical high level of NT1.10 dollars dollars per share. On cash flow, we spent TWD289 1,000,000,000 in capital expenditure, which is about the same level as 2013.
Meanwhile, our operating cash flow increased 21% to reach NT422 1,000,000,000. Accordingly, our free cash flow more than doubled in 2014. Overall, our ROE increased by 3.9 percentage point from last year to reach 27.9% in 2014, exceeded our long term financial goal of equal or bigger than 20%. I have finished my report on the financial part. Now let me turn to the Q1 outlook.
We expect a slightly weaker demand in the Q1 due to seasonality. However, we also anticipate that a more favorable foreign exchange rate will moderate a seasonal weakness. Based on current business expectation and the forecast exchange rate of 31.80, we expect our first quarter revenue to be between NT221,000,000,000 and 2.24,000,000,000, representing a flattish quarter. In terms of margins, we expect the 1st quarter gross margin to be between 48.5% and 50.5%. And we expect operating margin to be between 38.5% and 40.5%.
This concludes my remarks. Thank you very much.
Now our executives will deliver the key messages. The messages will be offered by our CFO as well as by the 2 Presidents and Co CEOs. We will start with Laura.
We will make a few comments. I'll start with the capital expenditure for this year. As we continue to expand our business in Advanced Technologies, we estimate our 2015 capital expenditure to be between US11.5 billion dollars to US12 $1,000,000,000 which is about 20% to 25% year over year increase. In addition to the investments for 16 nanometer capacity, we also spent for 10 nanometer tools and facilities to be ready for customer product tape out by end of this year. More than 80% of the planned CapEx is budgeted for advanced technologies, while 8 inches capacity tools for specialty technologies and the back end capacity investment constitute the rest of the 20% of 2015 budget.
I'd also like to make some comment on the solid state lighting selling. As you know, last Friday, January 9, upon TSMC's Board of Directors approval, we have signed a contract with Epistar to sell TSMC's entire holding shares, which is 94% of TSMC Solar State Lighting to Epistar and we will exit the LED industry. Despite several years of dedication and hard work as a late entrant to the LED industry, TSMC Solar State Lighting faced difficulties overcoming patent obstacles and the sales channels. Not seeing how the company will be able to reach profitability due to the oversupply exhibited by massive expansions of LED companies worldwide, we have decided to transfer the ownership to Epistar, which is the world's largest manufacturer of LED epitaxel wafer and dyes. The share transfer is valued at NT1.46 dollars per share with a total proceed of NT825 1,000,000 to TSMC.
We have took NT740 $1,000,000 impairment loss in Q4 last year with minimal impact of EPS by about $0.03 A most important part of this deal is that no solid state lighting employees loses its job. Everybody has a job. My last comment is about the ASML stock sale. As you know, in August 2012, we acquired about 21,000,000 shares of ASML Under its customer co investment program, the purchase price was €39.91 per share for a total of €838,000,000 There was a lockup period of 2.5 years. In the last 2 years, TSMC has entered several hedging contracts that fully covered our position with an average hedge price of €62.5 9 per share, resulting in a locking profit of €483,500,000 As the lockup period is to be expired in April this year, we will be able to book a total profit of about NT 21,000,000,000 in 2015.
This one time non op gain is expected to increase our EPS by $0.61 in 2nd quarter and the $0.13 in 3rd quarter and for the full year will be about NT0.75 dollars That concludes my remark. Let me turn the podium to Mark. Okay.
I will follow to give you key messages on the near term demand. We just we have just concluded a strong 2014 with a 27.8% revenue growth. In particular, the strong demand of our 20 SoC overcome the normal inventory adjustment pattern and enable a 6.4% quarter to quarter growth in the Q4 2014. The fabless company exited 2014 based on our estimates with the days of inventory 2 days below seasonal. It was from a 4 days above in the 3rd quarter.
Now, we see such inventory adjustment should come to a close. We estimate the days of inventory at the end of the Q1 'fifteen should be one day below seasonal level. So we see our near term demand is quite healthy. Since our Q4 last year set a high base, we guide a good quarter for the Q1 2015, with essentially flat from 4th quarter 'fourteen and clearly better than our seasonal again. Looking forward to 2015, it should be another upbeat year.
We forecast the semiconductor industry revenue growth to be 5%. The foundry revenue growth is 12%. For TSMC, 2015. Now, I give you a few words on 10 nanometer development update. Our 10 nanometer technology development is progressing and our qualification schedule at the end of 2015, end of this year remains the same.
We are now working with customers for their product tape outs. We expect its volume production in 2017. On the new technology development in TSMC, I'll begin with beyond 10 nanometer, I just talked about, we are now working on our future generation platform technology development. We separate dedicated R and D development teams. These technologies will be offered in the 2017 to 2019 period.
We are committed to push forward our technology envelope along the silicon scaling path. In addition to the silicon device scaling, we are also working on the system scaling through advanced packaging to increase system bandwidth, to decrease power consumption and device form factors. Our 1st generation info technology has been qualified. Currently, we are qualifying customer info products with 16 nanometer technology and it will be ready for volume ramp next year 2016. We are now working on our 2nd generation InFO technology to supplement the silicon scaling of 10 nanometer generation.
On the other side, in addition to the recently announced 55 ULP Ultra Low Power Technology, 40 ULP, 28 ULP technologies for ultra low power application, such as wearable and IoT. We are also working on 16 ULP technology development. This 16 ULP design kits will be available in June this year. It will be just suitable for both high performance and ultra low power or ultra low voltage less than 0.6 volt applications.
2016 nanometer status and the import business. First, 28 nanometer, since year 2011, we started to ramp up 28 nanometer production. Up to now, we have enjoyed a big success in terms of good manufacturing result and the most importantly, the strong demand from our customer. This year, we expect the success will continue. Let me give a little bit more detail.
First, on the demand side, the demand continue to grow, which are driven by the strong growth of mid and low end 4 gs smartphone as well as the technology migration from some second wave segments such as radio frequency, hard disk driver, flash controller, connectivity and digital consumers. 2nd, on the technology improvement, we continue our effort to enhance 28 nanometer technology by improving the speed performance while reducing the power consumption. 28 HPC, 28 ultra low power technology are some examples. So to conclude the 28 nanometer status, we believe we can defend our segment share well because of excellent performance and performance cost ratio and our superior defect density result. Next, I'll talk about the 20 SoC business status.
After successfully ramp up in high volume last year, we expect to grow 20 nanometer business more than double this year due to high end mobile device demand, which was generated by our customers very competitive product. Our forecast of the 20 nanometer business, as Noah just pointed out, will contribute 20% of the total wafer revenue that remain unchanged. Now on 16 nanometer ramp up, we expect to have more than 50 product takeouts this year at 16 nanometer. High volume production was starting in 3rd quarter with meaningful revenue contribution starting in Q4 this year. And I would like to stress again that our Chairman already mentioned that combining 20 nanometer and 16 nanometer, we expect to enjoy over 1 market segment share.
Last, our update on the InFO business. The traction on InFO is strong. We have engaged with many customers and a few lead customers are expect to ramp up in Q2 next year. Right now, we are building a small pad line in a new site to prepare for high volume production next year. Also, we expect this InFO technology will contribute sizable revenue in 2016.
And thank you for your attention.
Okay. This concludes our prepared statements. Before we begin the Q and A session, I would like to remind everybody to limit your questions to 2 at a time to allow all participants an opportunity to ask questions. Questions will be taken both from the floor and from the call. Now let's begin the Q and A session.
First, we will invite Bank of America Merrill Lynch Stanhiler.
Thank you. Good afternoon and congratulations on a fantastic 2014 and guidance. I had two questions. First, I wanted to talk a bit about the ASP situation. You did talk about blended ASP.
You did talk about growth in semis being 5% this year, foundry being 12% and TSMC growing several percentage points beyond that. Should we expect that your blended ASPs should rise again this year and continue to rise in future years? Thank you.
And the answer is yes. We do expect the blended ASP will continue to
grow in 2015. In order of magnitude relative to last couple of years?
We expect our trend will continue to the year after next year as well. Okay.
Order of magnitude, you said.
Low single digit range year over year.
In that range.
And the specific drivers of that, I know you're going to say mix, but could we talk a little bit more detail on the drivers of the ASP improvement as my follow-up?
I think it's just 'twenty will be bigger this year percentage wise than last year. And 'sixteen will start and 'sixteen will be much bigger next year than this year, etcetera and 'ten. So I mean in the past several years, our ASP has been increasing because the mix, the advanced technologies keep coming up. So that's the driving force.
Thank you. And the second part, I guess, as we look at your pie chart on your slide with communications and computer being amazingly only 9% of your revenue. On say 10 years ago that chart looked much, much different with compute being the biggest. As we look at computer opportunities going forward, I think to some extent there's maybe a sense of a little bit of disappointment in that we don't see ARM necessarily in PCs yet. We haven't really necessarily seen that ecosystem come through in the server business and big data being such an important trend going forward with compute growing about 15% per year.
I'm wondering what TSMC is doing or what your view of that opportunity will be in the future as a potential growth driver?
Service is one of them, Mark. Well, that's IoT actually also. And just don't forget that mobile actually, we think, has few more years to run yet.
Really,
the PSMC silicon content in the average phone is actually increasing, which is something that is not recognized by a lot of people because everybody says that the weight, the gravity is shifting to the middle level, lower level priced phones.
But
according to our data and we have kept track of it for quite a long time, The average our TSMC silicon content in the average phone is actually increasing. So and look, we still look for I think the number we have is that by 2019 there will be 2,000,000,000 dollars 2,000,000,000 phones manufactured. And this I think last year, it was what $1,300,000,000 I think, yes, dollars 1,300,000,000 to $2,000,000,000 And well, the average TSMC silicon content per phone is increasing and the number of phones is going up. So that's by no means a I mean, it's still there. It's still a growth engine.
And then IoT, I think we talked about IoT before. And now we are certainly not oblivious to the server possibility. So why don't I ask Mark to talk more about the server and maybe C. C. Will talk a little about the IoT.
Yes. Okay. Dan, I'll just respond to you on the server part. Chairman talked about the area we mostly focus on, phone today and that would drive give us growth momentum in the next several years. On server, we work with the product innovators around the world and such a few definitely will not lose in our radar screen and theirs.
And the TSMC has been over the years developed our technology to suit for high power computing and from 65, 40, 28 to 16 nanometer, we continue to improve our transistor performance. And today, we believe our 16 FinFET plus transistor performance probably is the
top of if one of the top
of the world that well suitable, well capable doing the computing tasks. And actually, before server and there are several supercomputer around the world in U. S. And in Japan already powered by our technology doing the weather forecasting, whether the geo exploration applications today. And on the server, we on ARM, in particular, we have very close partnership with ARM in recent years.
And ARM is a very innovative company. They produce CPU core and the new architecture every year and we reach our leading edge technology very early with ARM and to design their leading edge CPU cores And that is will continue and several our customer are taking advantage of that. Yes, in the past, it's been getting into slower as expected. That's because the software ecosystem is slower to come and but actually a lot of service company, assistant company is continuing investing in this ecosystem. Linux based ecosystem is coming very strong too.
So I think the trend will continue and we will with our customer get into these segments in the next in the near future, yes. Okay.
So say if it was about IoT?
Okay. For the IoT, that will be a big topic right now in the whole industry. All I want to say is that we are happy to share with you that long time ago, we already focused on our specialty technology, which are CMOS image sensor, MEMS, embedded for us, all those kind of things. Today, we add another new technology, absolute power into it. And that will be the basis for the IoT technology necessary in the future.
And we believe that when the time comes and IoT business become big, TSMCY in a very good position to capture most of that business that I share with you. Thank you. Thank you very much.
Next, we will invite Credit Suisse Randy Abrams.
Thank you. The first question actually wanted to ask about the CapEx increase where it's moving up for this year. Could you talk about the allocation how much you plan for the 10 nanometer? How much for the 16? And then also if you still see growth out of 28 in the 8 inches if there's plan 6 inches and 8 inches So if you could give more flavor on the CapEx?
Yes, Randy, in my remark, I was talking about 80% of the CapEx goes to leading edge technology that actually cover a very big part of 16 FinFET capacity and also the 10 nanometer for the engineering line and R and D expenditure, the altogether leading edge technology will be 80%. We are also increasing our investment in the back end also in 8 inches These two things together will be about 10% and the rest are the smaller items.
How big is the 10 nanometer?
We do not disclose specific numbers.
Okay. And the follow-up question on profitability, if you could give a flavor on structural profitability for 2015 and some of the flavor for 2020, how quick that may get to corporate margins and for 2016 because it's an extension whether that could be near corporate margins as that comes up. And if you could give a comment on the inventory at current levels if there any if that will stay at these higher levels from the WIP you've been building or that may come back down to a different level?
Okay. Randy, you have multiple questions. I recall you asked about the structure profitability. That's your first question, right? From what we can see now, we are quite confident.
We can maintain equal or slightly better structural profitability standard gross margin versus 2014. For the 20 nanometer and 16 nanometer ramping, how would that affect the corporate margin? I have said in last July, it usually takes 7 or 8 quarters for any new leading edge technology get to close to the corporate average. So for 20 nanometer, it will take 8 quarters. So we believe 20 nanometer start to sell in Q2 'fourteen and we expect by Q1 'sixteen, that's 8 quarters, you will be at corporate average level.
For 'sixteen, we are going to mass produce this product. It will follow the similar trend. 60 nanometer will be based on the feature of 20 nanometer, so the margin will start to be higher, but it will also follow the similar trend, it takes 7 quarter to reach to corporate average. So say we plan to mass produce 16 Fin Fang in Q3 'fifteen, so by Q1 'seventeen, it will get close to corporate average. So there will before that, there will be still small dilutions.
For this year, the dilution will be 2 to 3 percentage point and last year, the second half will be 3 to 4 percentage point and very low in 2016.
Okay. And then is there just the one pop on inventory. Is there any impact from the inventory at these current higher levels? Do you expect because of the longer cycle time inventory would stay at these inventory day levels or that would come back down to the historical levels or closer to history?
I think Mark has talked about the inventory level. We have went through the inventory depletion period. Now we see inventory was 4 days above seasonal in Q3 last year.
For TSMC's inventory?
TSMC's inventory level. TSMC, you're talking about 50 days I was talking about. Okay. Normally, in the past, you have seen around 45 to 50, maybe 45 day average. This increase of inventory is mainly because of 20 nanometer ramp.
It has much longer cycle time, both in the wafer fab, also in the back end. So that's the main reason inventory is going up. So it will not continue to go up further. It will probably stay at a similar level, but it will not go down either.
Okay. Thank you.
All right. Next we invite Citibank's Roland Xu.
Hi, good afternoon Chairman, Mark, C. C. And Laura. I think first question I would like to learn from Chairman your view about the effective capacity of 14 nanometer. Since I think back to 14 nanometer days, you precisely have seen the effective 14 nanometer definitely will be much smaller than the capacity 14 nanometer capacity will be much smaller than the built in 14 nanometer capacity.
So what's your view for 14 nanometer this time?
Yes. So Roland, your effective when you have a useful technology. So your question is wanting to hear from Chairman about the situation of 14 16 nanometer, what kind of effective capacity scenario we are facing today?
And I define effective capacity as what?
A capacity with a useful technology.
Yes, I think that is an effect to 14 nanometer phase. Chairman guiding us on the effective 14 nanometer capacity. That means it's going to be much smaller than the overall build capacity. So just want to learn from you, what's your view for 14 nanometer effective capacity these days?
Yes. That is capacity that is going to be used, right? Used and That is going to make a profit for us, right? We are just in the middle of building up our 16 nanometer effective capacity strongly. I mean that's
I think Roland's question you probably are asking us
about
industry whether or not other players are building effective capacity as well.
Well, I think I have pointed out many times in the past that some companies, some boundaries build capacity on speculation just like builders build houses or handles on speculation. They haven't sold them yet. The speculation is that after they build the apartments or houses, they will be sold, all right. But that doesn't always happen, of course. Now we, however, are different.
We build capacity when we know that it's already sold.
Amit, maybe I add in other way. So compared to 14 nanometer days and now we are looking for the 14 capacity, do you think the effective capacity for 14 nanometer industry will be bigger or smaller than the effective capacity when you see at the 14 nanometer base? Base?
Sort of.
40, he's talking about 40. Well, tell me, tell me, yes, tell me.
He's asking Chairman to compare 14 nanometer today versus 14 nanometer a few years ago in terms of the capacity.
What today?
14 16. We should use 16. Yes. 16 nanometer versus 40 nanometer a few years ago.
In what respect?
Whether the industry has oversupplied in capacity, whether the oversupply capacity is effective?
I don't know yet because from the data we have now, I don't think you're talking about 14, right? Yes. 14, right? From the data we have now, I don't think that there's enough they are building too much 14 capacity. Am I correct?
Everybody, together. I don't think that everybody together is building from the data we have now, I don't think they are building too much capacity yet. But you want me to compare with 40? 40, yes. I think at about the same point in time in the 40 nanometer cycle, we well, my memory is a little hazy now.
That was 5, 6 years ago.
Too long ago, yes.
Okay. Thank you very much. I think my second question is, most investors are very happy to hear Chairman, you have ranked return of shareholder as top priority when you are running TSMC. But I think some of the customer probably are very upset to hear about the TSMC put customer on the much lower priority when you are running your business. No.
Customers have a very high priority in our company, in fact, very, very high. As I think we have said many times that we really have 3 major strengths. 1 is technology, 2nd is manufacturing, and 3rd is customers' trust. And this has been our model ever since we started the company almost 30 years ago. So, no, if you are talking about we do, of course, place shareholders also in a very high priority, very high position.
And but I think that's quite common. And I think that's the way it should be. But obviously, you need very good customers. You need customers that trust us. We need customers that trust us, that work with us in order to satisfy our shareholders.
It's a part of the same equation.
Yes. I think maybe I should rephrase my question again. I think in the past TSMC because of your technology Why do
you rephrase your question all the time? Okay. Go ahead, go ahead.
Okay. My question is just on your for the profitability and also customer relationship. I think most of the time, I think this is complex. I think in the past due to very good profitability for TSMC, probably some of the customer actually was not happy. So going forward, how TSMC to balance its profitability and the customer relationship?
So Roland, your point is that because we have very high profitability, therefore, our customers are unhappy. That is not the right logic.
Well, we think we earn our profit. We think everyone has to earn his profit. We think our customer has to earn his profit too. And I think they do think our customers do think they earn their profit just as we think we earn our profit. But there are always people who think that you are making too much profit.
Some of our customers' customers think that our customers are making too much profit too. So but we think we earn our profit. And if any customer is unhappy with us, he sees me, he comes to see me. He comes to see us, okay? And we try to correct the situation.
We try to improve the situation.
Okay, good. Next, we invite Goldman Sachs, Donald Lu.
Congratulations on very good 2014 results and also very strong 2015 CapEx guidance. I think this year maybe TSMC will top the world in logic.
Not really?
Maybe. Okay. So now two questions. One is, Chairman, about 6 months ago, you gave us a comment on your estimate on TSMC's market share in FinFET in 2015, 2016, 2017. So has that changed?
Second question is, Laura, you commented that someone paid you RMB30 1,000,000,000 capacity guarantee. Is this something new? I don't remember that TSMC take. What did you say?
I didn't hear the last one.
The second question is about capacity guarantee of NT30 1,000,000,000.
Customer deposit. Deposit, customer deposit.
It's a guarantee deposit. You're asking this is something new?
Yes.
Actually, in I think more than 10 years ago, maybe 15 years ago, TSMC have done this with several customers. So it's not something really new 15
years ago.
Late 90s.
Late 90s.
Forgive me. I wasn't very
But I think that this is but after that I guess we didn't have. I thought it was pretty good in the late '90s. So we started again. Customer likes it too.
So maybe you can explain a little bit like what it guarantees, TSMC's obligation on that and how long it will be?
Are we still answering the second question? Are we I want to answer the first question. Donald's question was I said actually I looked up my statement at that time, July 16 of last year. I said on the subject of 1620, 16 nanometer and 20 nanometer technology. I said that I actually made three statements.
The first statement was that because we started the 16 a little late, our market share in 2015, our 16 nanometer market share in 2015 will be smaller than our major largest competitors. The second statement I made was that we started 16 late because we wanted to do 20. And so if you combine 2016, our major competitor who will be slightly ahead of us this year on 16. He has very little 20%, almost no 20 at all. And we if we combine 'twenty and 'sixteen, our combined share in this year will be much higher than that competitor's.
The 3rd statement I made is that in 2016, we will have much larger share in just 16 nanometer than that competitor. All right. First, I want to say that I, at this time, stand on those statements. In fact, I now will add a couple of statements. The statements I will add, that's 4th statement now, okay.
When we have a larger share on just 16 alone in 2016, the 'sixteen market will also be much larger than this year, 2015. So yes, we are slightly behind. We have a smaller market share in 2015. In a smaller market, next year, we'll have a larger share, in fact, much larger share in a much larger market. 16.
So and another statement I want to make is that I'm at this point very, very comfortable with all those statements that I have made on July 16 last year and the statements that I have added today. Welcome. I don't know whether that answered your question or not. Donald?
Yes. How about 20 17?
The what?
2017. What?
Well, 2017. 2017, the trend is going to continue. I mean, we're not going to lose the leadership on 'sixteen market share once we recapture that in 2016. It's going to continue 2017, 2018 And also, both 'twenty and 'sixteen are going to live longer than you might think now. 28 for that matter also, we'll live longer than you think.
Okay. Next, we will invite Deutsche Bank's Michael Zhou.
Thank you. Chairman, do you see the 16 nanometer FinFET plus PPA is better than Tier 2 foundries' 14 nanometer at this moment. Given that you mentioned you expect TSMC's 16 nanometer market share should be higher than your major competitor in 2016. I'm sorry. What?
Based on current R and D progress or any product design progress, do you think your PPA of the 16 nanometer FinFET plus is better than your competitors' PPA, 14 nanometer. PPA.
PPA. PPA.
PPA. PPA. PPA. PPA.
PPA. PPA.
Okay. So Michael's question is, if we look at the definition of the technology in terms of performance, power and area, is our 16 nanometer better than our competitors?
As a follow-up, do you think that your most customer will stay in your 60 nanometer rather than shift to Tier 2 foundries? I mean, for over the next 18 months? Well, staying your 16 nanometer FinFET plus rather than move to your competitor, 14 nanometer?
You mean after we have ramped 16 Fin fab plus
Yes.
Will our customers shift to our competition's offer?
I thought the question has been answered already. Once we capture that larger share, we stay there for many
years. Okay. Let me put another one. Can we say your 16 nanometer market share in 2016 will be quite similar to your dominance in 28 nanometer, given that your 20 nanometer is the only provider. So the apple to apple comparison should be 28 to 16 nanometer.
So market share in 16 nanometer in 2016, will that be the same as our market share at 28 nanometer, I would say, back in 2013, 'fourteen?
Well, no. I don't think so because 'twenty eight, of course, we were virtually so sourced. And 'sixteen, we already know. We are not I mean, there's at least one major competitor. And then there's another one that's just kind of eager to get in.
I don't mean that first competitor's accessory, I mean another one.
Okay. Second question is regarding the info. Do you expect the gross margin info will have a negative impact to your overall gross margin in 2016 or beyond, Given that you mentioned it could be sizable revenue in 2016.
So your question is whether or not info business in 2016 will impact our margins? Yes. Whether info will impact our margins?
No, probably not. The back end business actually is low margin, but the turnover is faster. So put 2 together is comparable.
Inflow will have lower margin than our wafers business, but it will actually have higher return on invested capital than our wafer business.
Okay. I think we really should go to the line and invite questions there. Operator, could you please invite the first caller on the line?
All right.
Let me repeat Brett's question, so that people here can hear it better. Brad's question is TSMC's 28 nanometer capacity is very large. As our technology migrate to more advanced nodes such as 2016 in the next few years, what will be our plan on capacity of the 28 nanometer? Will we still have large demand to utilize those capacity or we need to do some changes?
In every generation, we worry a lot about the conversion loss we will suffer when we convert the equipment of that the capacity of that generation to the capacity of the next generation. Now, so we do 2 things. 1st, we try to minimize that conversion loss. And since we've been living with the problem for so long now, I think we're getting to be pretty good at it. So the conversion loss from one generation to another is normally in the low single digit, low middle single digit.
Now the second thing we try to do is and I think that we actually have been doing it perhaps even more successfully than the first thing. The first thing was to try to minimize the conversion loss. The second thing we try to do is we try to prolong the life of each generation. And I was just saying just 5 minutes ago that I think with the life of 28 nanometer maybe longer than a lot of people think. And I mean it actually, we're still making half micron stuff.
And we try to prolong the life of every generation as we continue to migrate to advanced technologies. And 28 is certainly a generation that we want to prolong the life of.
All right. Brett, do you have a second question?
The question is
Whether or not we will build a 28 nanometer capacity in China in the next 12 to 24 months and how large will that be?
We are seriously considering the possibility. And in fact, we are gathering data and making contacts, etcetera. They are obviously both pluses and minuses. And we're seriously considering the proposition of making about 28 nanometer in China. And there are also barriers.
But as I said, at this stage, we're exploring, we're serious considering, we're exploring, we're gathering data and making contacts.
All right. Let's go back to the floor. And now it will be from Barclays Andrew Lu.
Test Doctor. Chen, Doctor. Liu and Doctor. C. C.
Wei and CFO. First one is regarding the revenue outlook for the next few quarters. Are you expecting any single quarter for the next few quarters, Q2, Q3, Q4 revenue below Q1?
Andrew is asking us to give him a guidance whether or not our Q2, Q3, Q4 revenue will be lower than Q1 level.
Will Q2, Q3, Q4 be lower than Q1?
Any single quarter in your internal forecast saying will be lower than the Q1.
What is Q1 times for?
That will be I'll work out the
answer here right here. Because that's the following one I'm going to calculate. Because based on the estimate, Q1 is quite similar to Q4 from the revenue from EPS point of view, from OP margin guidance, gross margin guidance. If we times 4, revenue is up 16% year over year and EPS up 20% year
over year. That will be consistent with what Mark said. He said that we'll outperform the foundry growth, which is what 12%. He said we'll outperform it by several points.
Yes, but this is based on flattish environment. We got no growth for the next few quarters. That's why we're not adding any downside risk.
Let me just tell you what I think. I think we have upside, okay, in next year.
Okay. That's enough. In this year, yes.
And Andrew, I also have to remind you the foundry numbers are based in U. S. Dollars, but the Q4 or the Q1 revenues are based in NT dollars. Yes. Yes.
2nd question is, are we still planning to raise our cash dividend?
Well, look, yes, we are seriously considering it. But I can obviously, I can't answer the question because the Board has to approve it. And then of course the shareholders meeting has to approve it. And but
What's in Doctor. Chen's mind? What number in your mind?
I'm not going to go there. I'm not going to go there.
Thank you.
Okay. Now we will invite HSBC's Stephen Pollo.
Thank you. It seems like especially last week there have been 2 or 3 key concerns people are talking about relative to TSMC. The first one is smartphone growth slowing down. I think your guidance for foundry market growing 12% and you growing several points faster kind of answers that growth. Next two concerns are really about competition customer concentration.
So I wonder if I just ask, you look at your top three customers in 2015, do you expect them each to grow year on year and do they grow that several points above 12% foundry market?
Okay. Stephen's question is regarding our top three customers. Whether or not their business with TSMC year over year growth rate will be at least in line with the foundry's 12% rate of growth?
If you just limit it to 3, it's getting too specific because you almost know who the 3 are. And if I tell you anything you will. So let's say 20, okay, our top 20 customers. I expect the vast, vast majority of them to grow every year.
Okay. Well then maybe as a follow-up, I think we're all kind of dancing around the same general questions. I asked this of you I think last quarter. At the 28 nanometer node you had 7 quarters of sequential growth absolute dollars. 20 nanometer has ramped up so significantly because you've had some significant customer wins there.
When you look at it on a quarterly basis, do you expect every quarter of 20 nanometer to be higher than the prior quarter in dollars as you go through 2015?
You're asking 20 or 28? 20 now. 20 nanometer every quarter in the following quarters, whether they will be higher than the prior quarter. 20 nanometer every quarter, whether it will be higher than the prior quarter?
This year.
This year.
I think the answer is yes. The answer is yes. And by the way, going back to your last question, were you just asking about this year or every year from now on?
I think the customer concentration concerns are primarily to this year trying to offset such huge gains last year and it appears as though you are absorbing this.
Well, my answer is still the same. Of the top 20, I expect the vast, vast majority of them will grow each will grow this year.
Thank you very much.
All right. Next questions will be coming from Morgan Stanley's Bill Lu.
Hi there. Thanks very much. And also let me add my congratulations on a spectacular 2014.
Thank you.
My first question is on 28 nanometers. If I look at your capacity this year versus 2014, how much is increase in capacity? 28? 28, yes.
C. C, you want to answer the question?
High double digit.
High double digit.
You mean high teens or high double
digit? Teens. High teens, actually.
High teens, I'm sorry.
Okay, great. Do you think revenues can grow? In other words, do you think ASP decline could be less than that unit growth?
We are not supposed to comment on a single note price. I'm sorry. Our legal advice is not to comment on single note price.
Okay, great. My second question is on your China strategy. I think you talked about potentially looking at 28 nanometers. Correct me if I'm wrong, but my understanding was that Taiwanese companies cannot do 28 in China. Can you talk a little bit more about that?
What?
28 nanometer manufacturing in China. So your question is most of the players cannot do 28 nanometer properly in China
right now.
I thought by law Taiwanese companies cannot do 28.
Oh, Taiwan. Whether Taiwan
no, actually Taiwan, I think, has a rule now that says you still have to apply in every instance, but the general rule is that n-one technology is allowed. That's Taiwan. But you still have to apply in each case.
Okay. Next, we will be having questions from UBS
Eric Chan.
Hi.
Very quick, my first question regarding to your China investment. So I would like to know why you picked the 28 nanometer process? And we know your China client already and do very good business with your TSMC and in Taiwan. So what's the point for you to build out a 28 nanometer process in China? And what is the trigger and what's the benefit?
My first question.
Yes. So Eric's question is, since most of our Chinese customers already do 28 nanometer with us in Taiwan, why do we need to go to China to capture the 28 nanometers there? What's the plus and the minus?
Well, because they're telling us that, yes, they will continue to do 28 with us, but it would be better if they do 28 with us if we're in China.
Okay. So in this
And you have to realize that there are companies, there are foundries in China that are also going to do 28 nanometer. And so they may prefer to buy from our customers may prefer to buy from the Chinese foundries when their 28 becomes available.
Okay. Can we assume from the profitability point of view, it's no big change, no big difference between the manufacturing in Taiwan and the manufacturing in China. What's that? Brian?
Whether or not the profitability, in fact you are actually talking about
Well, there are pluses and minuses. Basically, I think the cost that we have had the experience of well for more than 10 years now of operating in an 8 inches factory in China, okay? And cost seems to be the cost is higher, all right, let's say minus. But if you lose business, then it's even worse. All right?
Okay. My second question regarding to the CapEx. We raised our CapEx also the all the CapEx higher than the market expectation. So can we expect, can we assume all the equipment, all capacity for the 16 Narrow FinFET probably will move ahead of all the earlier schedule in terms of the 16 nanos in fab equipment schedule. Will I move ahead?
So Eric, your question is, since our CapEx guidance is higher than market expectation, whether or not we are moving the equipments earlier or ahead of our original schedule?
Yes, for the 16.
For 16 nanometer?
Yes. Thank you.
I don't know what the market expectations are. We don't benchmark ourselves against market expectations. We benchmark ourselves against needs.
Yes, you are right. Thank you. But other channel, I remember the probably the 6 months ago, you talked about probably 3 months ago, 6 months ago. And in conference, probably Laurent mentioned the CapEx for this year probably slightly higher than year 2014. And so I assume we get more aggressive at the CapEx.
Am I right?
Well, I think we have always been reasonably aggressive in CapEx without speculating at all. So I mean that's our standard, all right? So I don't know what your question is anyway. Are you asking whether we are moving in how soon we are buying the we are just setting up the capacity. Is that what is that?
Well, I think, Eric, you are really trying to see if we are becoming more confident, convinced of the demand. So we are pulling in the equipment sooner, right?
Yes. I said earlier that we don't build capacity on speculation.
So that's what we need.
Yes. Okay. Thank you. All right. So then next, I think we will because JP Morgan's Google was already raising his hands, we'll give the microphone to him.
Thank you.
Congrats on a good 2014 and thanks for taking my questions. First, I had a question on there's been a lot of controversy about cost per transistor, whether most law economics of Moore's Law is slowing down. Your competitor Intel has kind of put out a very emphatic statement saying that until 7 nanometer, they are seeing that continuing at the same pace as before. While there has been a lot of noise from the fabless community in the last couple of years that at 20 nanometer or at 16 nanometer, there is a potential slowdown. Could we have TSMC's version now that you're pretty much ready to start 10 nanometer and thinking already about 7?
That's my first question.
So, all right. Let me repeat. Gokul, your question is mainly on the comments of cost per transistor. Some of the other player, I think you are referring to Intel, who has made comments that they do see the cost per transistor to continue into 7 nanometer and so they can handle the economics of the Moore's Law. Whereas on the other hand, fabless companies begin to complain about not seeing enough economics economics issue?
Okay. Let me answer this question. The cost of transistor continues to go down and by scaling mostly is everybody knows, nobody I think is diffuse refused that statement. We see the cost of chances continue going down in the constant rate. And going forward, the cost of chances are going down probably at slightly slower rate.
That's the argument. But it really depends on companies. And for some companies simply do not have the technology capabilities. And today, further going down the Moore's Law technology development, just a few. And we as far as though whether those costs can get enough returns.
And of course, that has to do with how much that technology bring the values to the product where the product can command the price. And today, we see certain segments will continue to needed that type of system performance to get enough return. So this is the reason we committed to push
the system scaling. So can we say that for customers who can afford it, it is still going to go down basically? Even at 10 nanometer, for customers who can afford it, afford the development cost and the volume, the cost is still going to be going down substantially?
Of course, of course. It will go down very significantly. Yes.
I have a second question just a clarification on the 16 nanometer ramp up. I think last conference, C. C. Mentioned that 16 nanometer ramp up is likely to be at or even faster than the 20 nanometer ramp up that we saw last year with the 5 quarter delay. So basically meaning that Q1 2016, 60 nanometer revenues could be even higher than what 20 nanometer revenues were last quarter.
Is that still the expectation for the 16 nanometer ramp up in the next few quarters?
What was the question?
The question is whether or not the speed of the ramp up of 60 nanometer will be faster than the speed of the 20 nanometer ramp up in the first three quarters?
In the first three quarter, ramping up speed is very similar, but maybe a little bit faster, but very similar. I'm sorry. Okay. Okay. Thank you.
All right.
Don't we have any more questions from the
Yes. There are people raising hands here. Yes. Okay. There is Daiwa's ratio?
No, no, no. I mean, overseas mail.
Yes, hi. Sure, I'll do this quick. Yes, this is Rick from Daiwa. So just got one question here. I remember in the last 4 years post the financial crisis, I think TSMC tended to build about 2 fab shells per year for expansion a year ahead.
But if I look at this year, correct me if I'm wrong, if I look at this year, it seems to me that you don't have any new fab shell under construction. So does that mean your guys are turning a bit more conservative in 2016 or 2017?
So Rick is asking us whether or not we will be building new fab shells this year at the same speed as we did in the past, which is 2 shells per year?
We will. We continue this trend.
Two shares a year.
Two shares almost for 1 generation.
Thank you. Okay. Randy has a follow-up question.
Thank you. My first question on the guidance you gave for Q1 is holding up pretty well flat. And looking at the last 4 4 to 5 years, it's also been much better than it used to be at the beginning of the year in first quarter. If you could talk about if you're seeing seasonal patterns shifting more customers getting more first half. And if you see the same type of scenario, we have second half slowdown again.
So if you see a different pattern in seasonality.
Okay. Seasonality, Randy's observation was that in the past, he saw our customers to be optimistic in the first half and then going through an inventory correction in the second half.
Rate change is equivalent to 0.4% point of our margin. I think you're asking whether that still holds true. Is that right?
Or whether if the currency stays at that level if over time like if that's a permanent benefit if we were to stay at 32 or over time you share some with your customers?
So you're saying that since if NT dollar remains this low, whether or not we will share the exchange rate benefit at least part of that with our customer. Whether we will be sharing the exchange rate benefit with our customers, I. E. Whether or not we are willing to take a lower U. S.
Dollar price?
Well, they didn't share the exchange rate loss with us.
Okay. All right. Follow-up question from Roland, Citi's Roland Xu.
Thanks. Just a 10 nanometer question to C. C. Since Sisi, you said we are expecting to volume production 10 nanometer in 2017. But I remember in the past two quarters actually in your outgo was to pulling in 10 nanometer mass production by end of 2016.
So are we pushing out the 10 nanometer mass production schedule a little bit or not?
Let me explain that Because 10 nanometer, the masking layer is about 70 to 80. So you got to start in 2016 to have output in 2017. So what I'm talking about is 2017, you still start to have revenue.
Okay. Thanks. So wafer starts schedule definitely does not change.
No, I cannot say more than that. Okay. Thank you.
Okay. All right. Andrew Lu also has follow-up question.
I remember last investor conference, Cixiwei mentioned 16th impact revenue have a high single digit by Q4 this year and maybe few percentage by Q3. Is that number unchanged?
Unchanged.
It sounds less confident.
The more I say the more that the information from the customer will released. Okay. Okay. Understood.
All right. Andrew, you're done, right? Yes. Okay. Now we're going to Dan Heiler.
Yeah. Thanks. I had a question on the more the mature nodes situation. Still a nice chunkier revenue there on the mature 12 inches nodes. As we move into IoT, there's a lot of interesting products that are coming out ultra low power for 1.
I'm wondering is as you look at the 40, 65 nodes, what's happening on device complexity? Is device complexity there increasing? Because we hear about device complexity may be on the mature node may be increasing. I wonder if you have a view on that. Sorry, it's more design related.
What I'm getting at there is kind of the ASP trends. I think there's a traditional view of mature technologies as being low margin business.
C. C. You answered the question. Generally, yes, the device complexity on mature nodes is increasing. I mean, that's how we are prolonging the life of the mature nodes.
Yes. Usually, we develop the pure logic technology into the derivative technologies, which is more complex complicated. One good example is from the logic to embedded flash then you add quite a few steps and become CMOS image sensor or those kind of things or that's more complex. Yes.
So implications there for I would presume pricing and market share then would be, I guess, quite favorable. Does do you when device complexity goes up, does it hold blended ASPs flat? Or does it increase ASP in general terms?
What's the question again?
Because of the complexity of the mature technology is increasing whether we will benefit from ASP
because Whether we will what?
Our ASP will benefit?
No, does market ASP?
Well, actually, I would say that our profitability has remained pretty constant over well, in the early stage, the profitability of a node is often low. As Laura pointed out, it takes about 8 quarters for the margin to get to the corporate level. But after that, it stays pretty constant. Well, it increases a little bit, in fact. It increases particularly in the last few years.
I think we have kind of boosted up the structural profitability. And yes, I think that the added complexity or the actually a lot of new things are happening on the mature nodes. So the mature nodes today are nothing like, well, not nothing like, but only about 50%, 60% like what they were when they were first introduced. That's about right. Okay.
And then thank you. Great. And the second question is on the 20 do you think 20 year revenue will grow this year? Of course. It will.
Okay. And then if that's the case, does the mature technology overall everything else say 40 to 90. Is that able to stay flat or does that go down? Because there's still some migrate a lot of migration taking place to 2020. 2020 is a very attractive node.
I'm just wondering what's happening on the kind of the 40, 65 and 90. Can that hold flat or does that decline?
I think it depends on nodes. Yes. So Dan's question is, if we are growing our 20 nanometer revenue, we are growing our 28 nanometer revenue whether or not our 40, 65, etcetera, those older nodes revenue will be growing as well.
If I
can make some comment on your questions. Actually, we have very strong demand on those specialty technology. As you know, that's 0.1518 is very high demand. And we are also increasing the technology offering for 40 nanometer, 65. From what I can see now, I believe the 2015, those mature technologies revenue will be bigger than 2014.
Excellent. Thank you.
All right. So I think really, we will just allow 2 hands, okay? It will first go to Michael and then it will be Steven and then that.
So sorry, just capacity increase this year. So what would be your forecast?
Okay. With the RMB11.5 billion to RMB12 1,000,000,000 CapEx, we expect to increase our capacity by about 11% to 12%. Thank you. Thank
you. Steven?
The guidance for the Q1 is very, very impressive. And of course, we're all going to try to reconcile that with the full year, Andrew's question, with the full year guidance. I guess, could we talk just a little bit about the Q2, but talk about it relative to I think you mentioned last quarter and I think you did it last year. You had some you do some pre building in the Q1 ahead of the Q2. How much of that is impacting your Q1 guidance?
Laura?
Very minimal. As we are going through the inventory depletions and this preview gets less and less, I think you know the purpose trying to utilize the capacity without any waste. So it does help a little bit for the utilization, but it's getting lower and lower now.
Okay. Thanks.
All right. So I think in the interest of time, we will end our conference here. Thank you for coming and I hope we will see you next quarter. And goodbye. Have a good day.