Conference call. This is Elizabeth Sun, TSMC's Director of Corporate Communications and your host for today. Today's event is webcast via 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: First, TSMC's Senior Vice President and CFO, Ms. Laura Hou, will summarize our operations in the 3rd quarter, followed by our guidance for the current quarter. Afterwards, LoRa and TSMC's 2 co CEOs, Doctor. Mark Lu and Doctor. C.
C. Wei will jointly provide our key messages. Then we will open both the floor and the line for the Q and A. 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 at 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 the actual results to differ materially from those contained in the forward looking statements. Please refer to the Safe Harbor notice that appears on our press release. And now I would like to turn the podium to TSMC's CFO, Ms. Laura Ho for the summary of operations and current quarter guidance.
Thank you, Elizabeth. Good afternoon, everyone. Thank you for joining us today. I will start my presentation with financial highlights for the Q3 and followed by the guidance for the Q4. We had a good quarter.
The Q3, we have set a new record of revenue and profitability, thanks to strong demand and our successful ramp of 20 nanometer. Our revenue increased 14% sequentially and 29% on year over year basis to reach TWD 2,209,000,000. Our gross margin exceeded 50% to reach 50.5%, which is also a record since the second half two thousand and six. Compared with 2nd quarter, gross margin improved 0.7 percentage points. The higher margin was contributed by consistent cost improvement, variable inventory evaluation adjustment, partially offset by 20 nanometer dilution as we are still in early stage of the production.
Operating margin was 40.4%, up 1.8 percentage point from the 2nd quarter, reflecting an improving operating efficiency for the company. After a big jump in tax rate in the 2nd quarter due to accrual of 10% return earning tax, In the Q3, the effective tax rate fell back to normal level of about 11% of profit before tax versus the 20% in the 2nd quarter. Overall, the 3rd quarter EPS increased 47% sequentially to NT2.94 dollars The single quarter ROE was 33.3%. Let's take a look at revenue by applications. Compared to the Q2, communication showed strongest growth.
Revenue increased by 26%. Industrial related revenue also increased 9%, while computer and consumer declined 6% 3% during the Q3. Biotechnology, after 2 years of meticulous preparation, we began volume shipments of 20 nanometer wafers. The revenue contribution went up from 0% to 9% of the 3rd quarter wafer revenue. This is the fastest and the most successful ramp for new technology in TSMC history.
In addition, customer demand for 28 nanometer wafer continue to be strong. Our 28 nanometer wafer revenue continued to grow sequentially in the Q3, representing 34% of total wafer revenue. Accordingly, the 2 advanced technologies, 20 nanometer plus 28 nanometer represented 43% of our 3rd quarter total wafer revenue, increased from 37% a quarter ago. Now let's move on to the balance sheet. We ended the 3rd quarter with cash and marketable securities of NT290 billion dollars Current liability decreased by TWD74 billion, mainly due to we paid out the TWD 78 billion of cash dividend in August.
On the financial ratios, accounts receivable turnover days is 44 days, which is the normal level of our average days of receivable. Days of inventory increased 5 days to 56 days, mainly due to higher working process inventories associated with the fast ramp and the longer cycle time for 20 nanometer. Now let me make a few comments on cash flow and CapEx. During the Q3, we generated NT91 billion dollars cash from operations, invested RMB48 1,000,000,000 in capital expenditure and paid out RMB78 1,000,000,000 in cash dividend. At the end of the third quarter, our cash balance decreased RMB 29,000,000,000 to RMB 255,000,000,000.
Free cash flow for the 3rd quarter was an inflow of $43,000,000,000 a big improvement versus previous quarters. In U. S. Dollar, our 2nd quarter CapEx was US1.6 billion dollars This adds to the total of US7.8 billion dollars for the 1st 3 quarters. Regarding our capacity, we expect to increase our capacity by 12% from last year.
Total annual capacity will reach 8,200,000 12 inches equivalent wafers this year, slightly higher than our previous estimate of 8,100,000. I have finished my report on the financial part. Now let me turn into the 4th quarter outlook. Based on our current business outlook and forecast exchange rate of 30.30, we expect our 4th quarter revenue to be between 217,000,000,000 and 220,000,000,000. This will translate into around 4% to 5% quarter over quarter increase.
On the margin side, we expect the 4th quarter gross margins to be between 48% 50% and operating margins to be between 38% 40%. You may ask why we guide slightly lower margin rate despite 4% to 5% revenue growth. This is because we will continue to ramp our 20 nanometer to more than 20% of our wafer revenue in the Q4, we expect to see a mild margin dilution with our aggressive productivity improvement efforts. This concludes my remarks. Thank you very much.
All right. Now we will deliver our key messages. They will be offered by our CFO as well as by the 2 Presidents and Co CEOs. We will start with CFO, Laura Ho, first.
I will talk about the 3 items, the CapEx, free cash flow and supply chain inventory. Let me start with CapEx. In January of this year, we guided TSMC's 2014 ks PAS budget to be between US9.5 billion dollars to US10 1,000,000,000 Today, we are able to provide more specific number, which is about $9,600,000,000 Majority of this year's CapEx budget is spent for 20 nanometer expansion. In 2015, we will continue our investment in 16 nanometer capacity installation and 10 nanometer engineering capacity. Based on our current plan for 2015, our CapEx budget for the next year is likely to be slightly higher than US10 1,000,000,000 dollars On free cash flow outlook, you may recall in the past 4 years, TSMC has increased CapEx substantially to capture the growth opportunity brought by the mobile computing devices.
As a result, our free cash flow dropped to about $1,000,000,000 to $2,000,000,000 per year, which were below the cash dividend we paid. The cash dividend, dollars 3 cash dividend is about US2.6 billion dollars a year. However, with a substantial increase in operating cash flow this year and a similar level of capital expenditure compared to last year, we expect to more than double our free cash flow in 2015 and we are confident that the free cash flow level will rise further in the foreseeable future. The sustainably higher free cash flow should enable TSMC to afford paying a higher level of dividend per share going forward. The Board of Director will consider increase in cash dividend in February of next year.
Now regarding the supply chain inventory, we have noted in our last quarterly conference that we estimate fabless DOI will increase MB2 days above seasonal at the end of third quarter. And then established DOI will decrease and be 2 days below seasonal level at the end of this year. Our daytime model for the forecast still warrants the same estimate today. You can see from this chart, we estimate 4Q 'fourteen published DOI will be 2 days below seasonal, but compared with 4Q, 2013 last year, which is 1 year ago, the fabless DOI was 60 below seasonal. Based on our model, we anticipate a much milder inventory correction in Q4 this year.
With that, I will turn the podium to Mark, who will share with you our view on the near term demand.
Good afternoon. I will continue to cover the near term demand. The strong demand of our 20 SoC customers enable our continued growth in the 4th quarter, overcoming our seasonal demand pattern of a sequentially weaker 4th quarter and the cautious inventory adjustment actions taken by some of our customers rendering the slower 4Q demand. This 4th quarter demand from our customer does not validate the recent forecast by microchip. Our recent demand in China still appears normal, little deviation from their seasonal pattern.
And we see China's 4 gs smartphone sales and infrastructure buildup remains to be very aggressive. So we are expecting another record breaking quarter with a 4% to 5% growth in the 4th quarter. On 10 nanometer development. Our 10 nanometer development is progressing according to plan. Currently, we are working on early customer collaboration for product takeout in 4Q of 2015.
The risk production date remain targeted at the end of 2015. Our goal is to enable our customers' production in 2016. To meet this goal, we are getting our 10 nanometer design ecosystem ready now. We have completed certification of over 35 EDA tools using ARM CPU core as vehicle. In addition, we have started the IP validation process 6 months earlier than previous notes with our IP partners.
We are working with over 10 customers on their 10 nanometer product design. The product plans show wide range of applications, including application processors, baseband, CPU, server, graphics, network processor, FPGA and game console. Our 10 nanometer will achieve industry leading speed, power and gate density. Then I'll cover the say a few words on our clarify next growth momentum of TSMC. We think the growth of smartphone and tablet in propelling our revenue growth will continue for at least several years.
In addition, the recent innovations in wearable devices, including smartwatch, in cloud computing, in fog computing, in Internet of Things, including smart car, smart homes, all are very exciting. And we are currently closely working with our customers on all these applications to set the stage of the next growth wave to move us forward. That's my comment. Now I turn the microphone to C. C.
Thanks, Mark. Good afternoon, ladies and gentlemen. This afternoon, I will update you the 20 nanometer ramp up status, followed by 16 nanometers of progress and 28 nanometer status. First, the 20 nanometer ramp status. We shipped 20 nanometer in high volume during Q3.
The yield is meeting our target. Revenue generated from 20 nanometer accounted for 9% of 3rd quarter wafer revenue. And because of the strong demand from the high end 4 gs smartphone, which are equipped with 64 bit cores, LTE, CAT6 or CAT47 and more advanced graphics and video performance. Our 20 nanometer will continue to grow and expected to contribute greater than 20% wafer revenue in 4th quarter. We expect the strength of our 20 nanometer business to continue in year 2013.
And we expect the revenue will come for roughly 20% of next year in wafer revenue. Next, I'll talk about 16 nanometer ramp and competitive status. In 16 nanometer, we have 2 versions, 16 PrintFET and 16 PrintFET plus Printfab Plus has better performance and has been adopted by most of our customers. Since the FinFET, we began the risk production in November last year and since then have passed all the reliability core early this year. For the FinFET Plus, we also passed the 1st stage of the qualification on October 7 and since then entered the risk production.
The full qualification, including the technology and product core, we expect to be completed next month. So right now, we have more than 1,000 engineers working on ramp up for the FinFET class. On the yield learning side, the progress is much better than our original plan. This is because the 16 nanometer uses similar process to 20 SoC, except for the transistor. And since 20 SoC has been in mass production with a good yield, our system feedback can leverage the yield earning from 20 SoC and enjoy a good and smooth progress.
So we are happy to say that heating nanometer has achieved the best technology maturity at the same corresponding stage as compared to all DSMCs of previous node. In addition to the processing technology, our 16 TwinFET design ecosystem is ready also. It supports 43 EDA tools and greater than 700 process design kits with more than 100 IPs. All these are silicon validated. We believe this is the biggest ecosystem in the industry today.
On performance side, compared with 20 SoC system feedback is greater than 40% speed, faster than the 20 SoC at the same total power or consume less than 50% power at the same speed. So our data shows that in high speed application, it can run up to 2.3 gigahertz. For unGaP hands, for low power application, it consumes as low as 75 milliwatts per core. This kind of performance will give us give our customer a lot of flexibility to optimize their design for different market applications. So far, we expect to have close to 60 tap outs by the end of next year.
In summary, because of the excellent progress in EU lending and readiness in manufacturing maturity and also to meet customers' demand. We plan to pull in 16 nanometer volume production to the end of Q2 next year or early Q3 year 2015. The year performance and smooth progress of our existing TwinFAT plus further validate our strategy of starting 20 SoC first, quickly follow with 16 FinFET and FinFET path. We choose this sequence to maximize our market share in the 20, 16 nanometer generation. And I would like to repeat, our Chairman stated last time, In combined 20 16 nanometer, TSMC Y have an over quarter leading share every year from year 2014.
In total foundry market share, TSMCY did several percentage points in 2014. He also said that he's happy to add that this trend increasing the market share will continue in year 2015. Next, I'll talk about 28 nanometer stasis. We have a strong growth in 2nd quarter on 28 nanometer. And the business grew another quarter and accounted for 34% of THMC wafer revenue in 3rd quarter.
On technology side, we continue our effort to improve yield and tighten the process corners so that our customer can take advantage of these activity and shrink their die size and therefore reduce the cost. Let me give you an example. On 20 8 LP, the polysilicon gate version, we now offer a variety of enhanced process to achieve better performance. We also offer a very competitive cost so that our customer can address the mid to low end smartphone market. In addition to the 28 LP, we also provide the cost effective high ks narrow gate version, the 28 HPC for customer to further optimize the performance and the cost.
Recently, we add another 28 nanometers of offering, we call 28 ultra low power. For ultra low power application, obviously, we believe this 28 UOP will help TSMC customer to expand their business into the IoT area. In summary, we expect our technology spend in 28 nanometer node will enhance TSMC's competitiveness and ensure a good market share. We also expect the strength of the demand for our 28 nanometer will continue for multi years to come. In response, we are preparing sufficient capacity to meet our customers' future demand.
Thank you for your attention.
All right. 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 their questions. Questions will be taken both from the floor and from the call. Should you wish to raise your questions in Chinese, I will translate it to English before our management answers your questions.
Now let's begin the Q and A session. Our first question comes from the floor of Deutsche Bank, Michael Cho.
Hi, thank you. Two questions. First question is, you mentioned you're pulling much production by end of Q2 next year, early Q3. Does that imply you will have earlier schedule than you planned before?
Yes.
Okay. Second question is, do you have any comment for your market share for next year in 16, 14 millimeter?
Very hard for me to comment on the whole market share. And but if there's any indication, I would have say that we narrow the gap with our competitor. Okay. So it means your view now is more positive
than 3 months ago. Can you say that? Yes. Okay. Thank you.
All right. Next question
still come from the floor. It will be from Momoa sorry, Saiwa,
musical chair. Saiwa's Rick Xu.
Xu. Thank you so much. It's been a while. So, The first question is about your 20,000,000 ramp up. I think been progressing quite well and it's going to be around 20% by the end of Q4.
So I wonder if by that level, 20% in the end of Q4 in terms of revenue, would that reach your corporate average margin?
No, you will not. We have talked about this several times. Any new leading edge technology, it would take 7 to 8 quarters to reach corporate average. So if you count the 20 nanometer ramp starting from Q3 shipment starts, is by mid-twenty 16, you will get to corporate level profitability.
All right. Thank you so much. So that will be the same for 2016, I mean, I assume interim approval?
Yes, we count the 2016 is 1 note
in terms
of ramping and schedule capacity, so and so forth.
This doesn't count as the second question.
All right. You can have a second question.
Okay. The second question
is more about the feature
of China competition. I think recently we had observed quite a lot of moves inside China including in advertising with our DAA or Spectrum and Open Vision could be another target to shoot for. Also your competitor UMC last week announced that you're going to set up a 12 inches joint venture for local government. So I think my feeling is these guys seem to be aiming for the next growth potential market, which is IoT. And by taking the leverage of the huge demand market in China, number 1, and also the very favorable Chinese government policy in favor of local production.
So my feeling is, were you worried about this kind of potential competition in the longer term because you only operate an AG fab in China or do you have any strategy to cope with this potential threat from China in the next
couple of years? Thank you.
Okay. This is a complicated question. Let me put this question into 2 parts. One is the China government subsidy effects. Secondly is the IoT opportunities.
On China government's subsidy, the recent announcement about RMB1200 1,000,000,000 subsidy does cost a lot of activities across the industry. For us, we think currently we have a very strong penetration on our China design houses, many of them over 80%. And they are most of them are clinging towards leading edge. And with these subsidies, they will be more aggressive. And we think that is we will be ready to capture the business, even the existing good penetration.
And this subsidy may also bring into a merger position because China government wants to small company bring to big to be more competitive. And I do think that is a healthy development for the industry with a bigger, stronger design houses to compete with. Of course, there will be downsides because on the back of this subsidy may be some of the company who are under the influence of using local foundry and capacities. And that is a threat, may I put this way. So but putting these positive and negative factors together, so long as we have technology leadership, so long as we have a strong manufacturing, so long as we have a good service, customer service, we think our business opportunity in China
will grow, will be bigger with this development.
On the IoT, IoT indeed. IoT has been anticipated by many companies, including us. For us, we have we are currently actively developing IoT related technologies, okay, and including sensors, including processors, including wireless connectivity, advanced packaging and all the power management IC included. All we are striving for ultra low power, a technology provider, lower power design. On the capacity, yes, we are increasing our mature technology capacities today.
And we will continue to expand the mature technology capacity, deviating from our past strategy, increasing those capacity to capture the potential growth of demand. In terms of further new fab, we are we don't exclude any possibility including the fab in China. Okay.
Thank you so much.
All right. Next question will also be coming from the floor. It will be from Bank of America Merrill Lynch, Stan
Thanks, Elizabeth. Thanks. Good afternoon. So a couple of questions. So as you're expanding your capacity and mature technologies for the IoT and MEMS and NFC and the whole range of things and you're expanding your advanced technology.
TSMC has held a dominant position in 28 nanometer for almost 4 years and 20 nanometer accounts for 34% of revenue now. As your key customers are moving to 28 and 16 and competition is obviously heating up as well, I'm wondering what steps you guys are taking to keep your 28 nanometer fabs fully utilized. You talked about HPC as a cost down version. Will this be a potential headwind to keep those fabs full in 2015? And if so, how are you able to address the competition as well?
Thanks. We believe the demand on 28 nanometer will continue as I stated in my statement.
From where? From where?
Okay. All the mobile devices and IoT and a lot of applications. Actually, the 28 nanometer today, RuBao is a very cost effective technology. This is the last node that you enter into the 2P2E, the double edge, double pattern. And so its application is very
being widely
adopted. So we expect that the demand for the next few years or actually for a long time, they will continue to increase. And a lot of our companies will take the advantage of the cost effective and the performance also. So as we said, we are using phone coil from the application side, application side is also all the mobile devices and all the consumer even on the industrial part, we can find some applications.
Okay, great. And I presume you intend to hold market share. Do you need to hold the 100% do you need to hold the current market share in order to prevent a falling utilization? You bet. Okay, great.
And then the second question is with regard to 20 nanometer margins, I guess, for Laura. So it looks as 'twenty will be over 20% of revenue in the Q4. And your guidance is for 'twenty to be about 20% contribution for all of next year. That implies pretty much flat. How do you achieve margin expansion on flat revenue?
Dan, 4th quarter 20% is not equal to whole year 20%. So it's increased price significantly, it's number 1. So the whole year, 2015, 2020 is a big number. How do we hold the profitability? I would say today's 2016 profitability is acceptable.
I won't say it's great, but it is acceptable. And we continue to work on it as we have done for other nodes in the past. And the margin will gradually improve as we have more volume coming on the line. So I'm still same what I said and we believe we can achieve corporate level margin in 8 quarter timeframe 2016?
Yes, my question was just specific on 2018 margins. So yes, so will kind of additional customers coming into 28 because you previously said you felt this was going to be a major node. So, is part of this margin expansion or margin improvement of function of different more products coming in that will help margin or is it more internal efficiencies and getting smarter, better about how you're doing things? Both.
The our 28 nanometer currently 80% of them are high key middle gate and 20% of them roughly about 20 ALP. And next year, we'll compete on both fronts. We will compete on 20 AOP and we are planning to increase the capacity of 20 AOP also. That's good render. The next year's 28 nanometer will be bigger than this year.
Competition will always be there. Of course, our this is already from 2011, this is the 5th year of 28 nanometer production. The learning curve bring us to a very, very mature state that all the cost reduction and many of the yield improvement has been will be our competitive advantage and also increase our margins.
All right. I think we'll now take our next question from the call. Operator, please proceed with the first caller on the line.
Thank you. Your next question comes from the line of Donald Lu from Goldman Sachs. Please ask your question.
Good afternoon. My first question is Can you let us know how what percent of revenues today in Q4, for example, is from smartphone? And also what would be the TSMC addressable market per smartphone, I. E. Like on average how many how much revenue PSMC can generate on average per smartphone this year and next year?
Okay. Donald, let me repeat your question. Your question is how much percent of revenue TSMC derived from smartphone related applications? Your second question is in terms of revenue per smartphone box, what is TSMC's revenue per smartphone on average?
Yes. Donald, we actually don't count on quarterly basis percentage of smartphone. But I can tell you, I can see for the whole year 2014, there will be a little bit more than 50% of our revenue coming from a smartphone in revenue per box. Revenue per box, in average $8 this year, which is improvement from last year's $7
Okay. And how about the trend for next year? Do we have any estimate?
It's probably too premature to talk about next year, but I would think the percentage will be very similar to this year.
Okay, great. Just my second question is more on structural profitability. Given all the moving parts, depreciation trends, etcetera. For next year, what would be the can TSMC still maintain a similar structural profitability with the 20, 16 nanometer ramp going slightly?
We continue work on productivity and cost reduction. So from what we can see now, we believe we can maintain the same level of structured profitability in next year versus this year.
Great. Thank you.
All right. So now we are coming back to the floor. Our next question comes from the floor from Credit Suisse, Randy Abrams.
Okay. Yes, thank you. I want to ask one follow-up on the 16. If you could talk about what you expect the revenue contribution now, given you're pulling it in earlier? And do you still see any material swing factors that could swing that ramp up at this stage?
Excuse me, Randy, you have seen the 16th infat? For 16th infat for next year, when you ramp it up in second half percent of revenue And also if there's any material swing factors up or down that could swing the magnitude of that ramp up?
Probably too early to comment on the revenue side, but I will assume that give you a hint. The ramp up will be a little bit faster than 20 SoC. And we have customer committed high volume product takeout already.
Okay. My follow-up question, actually just more looking at your outlook, given the comments you made on inventory, I think you put the chart as not quite as lean coming out of 4th quarter, it's still coming down in Q4. But given you have a strong ramp up in 2020, should we expect as we go into Q1, one, if you think you'll use Q1 to build product again, like if we have a lower utilization, you may build product early through Q1. And then also if you expect a little bit of a gap or slowdown coming out of 4th quarter?
I would prefer not going to the Q1 next year, but as I just show you, the inventory cycle is 2 days below seasonality and it's going to be a mild correction, not as severe as last year. So that should give you some idea about the Q1.
Thank you.
All right. Next question also comes from the floor. It will be
from Morgan Stanley, B. O. Lu.
Hi, thank you. Can I just start with a housekeeping question? That inventory chart that you showed, can I just ask you if it includes you've got a big system house customer that we cannot track, but perhaps you can, does it include the system house?
That's our fabless customer. The chart shows fabless. Fabulous. Yes.
Okay, great. The second question is a comment that I think Mark and Laura have both talked about, which is smartphones going to drive growth for multiple more years. I think that's a little bit different from what is the consensus view, which is that you're going to get unit growth, but a lot of it going forward is going to be more lower end. And Laura also said just now that percentage wise, smartphone is going to be about the same next year. So can you talk about why you think it's going to drive growth for a few more years?
What do you see that gives you confidence? Well, yes, smartphone revenue next year appears flatten out total, but we see next year is still going to be increased. And but our growth are propelling what TSMCs can grow mainly from the market share in that smartphone segment that we think given the 20 nanometer going forward and 16 and 10, we think our market share in the smartphone will continue to grow. So I thought Laura's comment was that percentage of total revenues, smartphones are not going up next year, right, versus last couple of years has been increasing. So next year, smartphone is not going to outgrow the overall company.
I saw that our sales hit me up actually is a little bit increase.
All right. Thanks.
Yes. You forget that we're going to grow next year, the company. Sure. No, I understand that.
So it's a growth above the average. Yes. All right. Next question comes from the floor and it will be from Citi's Roland Xu.
Hi, good afternoon. I think my first question is still on 20 millimeter gross margin. Laura, if I have read you right, you said increasing volume after you ramp up new technology actually will be a key factor for bringing up gross margin overall. And also I look at in the past, you said it takes about 7 to 8 quarters to bring up the new technology gross margin to corporate level. That actually 7 to 8 quarter also was around the time you ramp up the total revenue to above 20%, probably 20%, 23%, 25%.
So my question is for your 20 nanometer in 4Q, I think the revenue now is above 20%. So is this 20% actually a big threshold level for you to bring up the gross margin? Because I think with this 20% total revenue contribution, I think the volume that is big enough. Our main is another to have a low margin for 20 nanometer.
Actually, this is a unique way of associating with percentage revenue to the gross margin. And you talk about a 20 nanometer as a separate node. But when we look at 2016, we feel it's the same node because 2016 is a continuation of 20 nanometer and they share a lot of the same equipment and the same process almost. So if you combine these 2 nodes together and well, I cannot say it's 20% of the strategy or not. What we look in the company is we look into the how efficient can we run this node and what will be the scale and what's our engagement with the customers and how exactly we bring down the capital efficiency, bring up the capital efficiency and so on and so forth.
So we don't usually link that to a percentage of contribution to company revenue.
But for the volume wise, actually, I think it is big enough now. So is it possible to 20 millimeter actually to bring up the 20 millimeter gross margin to corporate leverage less than 7 to 8 quarters, maybe 3 quarters, 4 quarters?
It's not possible because the 20 nanometer will be very soon migrate to 2016. And 2016 will take the momentum from 2020. It's going to run very, very fast, not only on the volume, also on the profitability side as well.
Okay, a little bit complicated to me. Okay, I'll switch to the second question. Second question is, Adele, Tier X actually have been delivered a very good job. Adele, from 2010 to 2014, you have 2 strategic financial goals. 1 is for your PBT to grow more than 10% in CAGR.
The other one is ROE to be above 20%. I think from 2010 to 2014, I think still 20.7% is above a year ago. So how about the expectation for next 5 years, 2015 to 2018 or 2019? Are you still comfortable with this double digit PPT growth going forward? Thank you.
We believe we will still grow faster than semiconductor. And actually in the past few years, we've been growing 2 apps of semiconductor. We continue to gain foundry market share in the next 5 years. That's what we believe. So our financial objectives will remain unchanged.
BBT, CAGR, bigger equal to 10% and ROE bigger than 20% from 2015 to 2019. Thank
you. All right. Let's go back to the call. We'll take our next question from the call. Operator, please proceed with the next caller.
Thank you. Your next question comes from the line of Brett Simpson from Arete Research. Please ask your questions.
Yes. Thanks very much. So this is a question for Mark or C. C. I'm just looking at the end market focus for TSMC.
PC has not never been a big part of your business. But when I look at AP for next year, the transition to 64 bits and the introduction of FinFET, are we moving is the AP moving into a world where it can realistically address mainstream PCs now that we've got Windows 10 coming and we have Chromebook ramping up and Android is moving to 64 bit. How do you see this AP evolving into mainstream computing? And maybe just a follow-up to that, can you maybe just compare and contrast, if you're an ARM fabless chipmaker building these APs for computing, how would you compare the cost and the performance using 64 bit ARM and your FinFET plus versus Intel's Broadwell? Do you think it would be cost competitive versus Intel's Broadwell?
And do you think it will be performance competitive versus Intel Broadwell? Thank you.
All right. Brett, let me repeat your question. You basically are asking us whether or not the migration of technologies and then with the arrival of ARM based 64 bit core, the fabless today can design application processors that can go into the mainstream PC market. And if they could, how would they compare with the existing incumbent players such as Intel in terms of cost and performance? That's your question, right?
That's right, Elizabeth. And it's really comparing next year's AP to Intel Broadwell, whether you think the new Broadwell platform from Intel, which is 14 nanometer, how does that how might we see fabless players running SMC FinFET Plus and 64 bit ARM versus those platforms from Intel from cost and performance perspective?
So you're specific to 2015? That's right. Okay.
Thank you.
Well, we certainly hope the ARM based core can get into PC faster. However, the recent trend seems to be slowing down and we do not count on that. But our customers are continuing to making this ARM based core into a mainstream PC application. And I think it's more than power and performance of those chips. There are lots to do with the ecosystem around the X86 core.
So this is up to our competitors our customers and their customers how we together get into this. But definitely this industry needs alternative in the PC world.
Great. Maybe just a follow-up for Laura. If I look on the balance sheet at TSMC, there's a large amount of construction in progress. So capital has been spent, but it's not effective capacity. Can you maybe just give us a sense for how this trends over the next 3 or 4 quarters?
And how that how depreciation might trend as well on the back of that? Thank you.
So your question is looking at our balance sheet with a very large item called construction in progress, which of course eventually will become capacity and you want to know what is the trend leading from this large account in construction in progress into the impact of our depreciation.
That's right. Thanks.
Okay. We are building our new facilities to ramp the 20 and 16 nanometer, which will be located in our Tainan site. So the number you're seeing in the balance sheet is associated with those building constructions and some of them are equipment purchase. From what I can tell you, the depreciation change and this year with the RMB 9,600,000,000 CapEx, the depreciation year over year change will be roughly 30%, which has actually been lower. I was telling somebody 35%, right, earlier.
Now it's come out to about 30%. With slightly more CapEx for next year, as I was talking about, the depreciation increase will be much smaller than this year versus last year. You'll build in the mid teens range, certainly below 20% increase year over year.
Thank you very much.
Okay. Now let's come back to the floor and Andrew is eagerly anticipating me. So we'll have Andrew from Barclays. Okay. I have to translate your questions into English.
Andrew's question is, given there will be a faster ramp of 16 nanometer, is this does this mean that next year's Q3, Q4 revenue from 16 nanometer will be bigger than this year's Q3, 4th quarter revenue from 20 nanometer?
Actually, if you look at what we announced this year, early this year, we say that the 20 SoCs in production. That means we start with our wafer production. As a shipment, the significant shipment actually is in the Q3. So you know that for this kind of a cycle time, run through the line, yes, they're getting the packaging and then get the revenue. 16 print bed actually is longer because they have more masking there.
So when we start at the end of the second quarter, you can estimate that when you are being the volume shipment translated into revenue. That's what I can
Two quarter difference.
The lead time was the shipment.
So it is 1.5 quarter, let me to be exact.
All right? So to be exact, Jocelyn, Ming and revenue contribution as mentioned. Okay. Thank you. That's all I want.
The other question, just using English, Shao. For 10 nanometer ramp up, you mentioned we'll be starting from year 2016. Is that similar timeframe to ramp up like 2016, nanometer ramp up next year or further delay another 1 or 2 quarters to generate revenue. Yes. Okay.
I said we will try to enable our customers to ramp up in 2016. I think it's toward the end of 2016. And really, it's still up to the customers' ramp. But I think in terms of revenue, it will be much lower than 16 nanometer in 2015. So the new volume will happen beginning of 2017 and all.
Thank you.
Next question also comes from Steven Pelayo,
When I look back at 28 nanometer, you had 7 quarters of solid absolute dollar growth sequentially. Now when I look at 20 nanometer, you're already at 20 percent of revenues in 2 quarters, such a steep ramp. Do you expect that 20 nanometer in absolute dollars on a quarterly basis can continue to grow every quarter like the first 7 quarters that you saw in 28 nanometer? Yes. We still see the 20 nanometers continue to grow next year.
So even quarterly in the Q1, Q2 with seasonality, you still will see sequential dollar on dollar growth in 2020.
You might have some kind of synergy, but on the average, yes, still Corey.
I understand the average. Okay. And then Laura, a question for you. I know the Board is going to talk about a dividend next year in February. You have about $300,000,000,000 in cash.
You're generating about $40,000,000,000 a quarter. How much cash are you do you need to run this business? We're trying to figure out what kind of magnitude, could you afford $4 Could you afford more even? It seems like you could. So maybe you could talk a little bit about what are the inputs that go into that decision on where you would like to take the dividend?
I think the key input is the sustainability of free cash flow generation. Consider the potential CapEx for the future years and operating cash flow we can generate with that kind of business growth. That's the key decision factor. I probably cannot tell you how much magnitude because we need to discuss with the Board. And but as I said earlier in my comments, we feel that we are affordable to raise the dividend level and the Board will decide the numbers.
I'm sorry, if I
could just sneak in a follow-up to that first question to you. If you do have some seasonality in 20 nanometer in the first half next year, Do you worry at all about the margin implications there if you're not fully utilized on that very expensive capacity?
Very hard to answer your question. Although I say seasonality, but I don't expect too much of the drop, if there's a drop. You can see the smartphone selling very well, right? I did not say which one, but I'll let Laura to answer this question because you know.
It's too early to give a guidance on margins.
Yes. But we think the seasonality since last year, we have this mechanism of a prebuilt work with our customers, right, to smooth out the utilization. And for the 20 nanometer, we intend to do that. And I think that in terms of product complexity is much simpler, which we should be able to minimize the impact.
All right. Next question comes from the floor. It will be from UBS, Eric Chan.
Hi. My first question regarding to the 20 16 FinFET, technology. You mentioned the equipment in between the both FinFET are pretty similar. So I assume the year and the 15 I'm sorry, 16, even 16, clean fare costs is pretty high. So I just wondering why the our equipment moving is so conservative compared to our competitor.
I mean compared to our competitor and the 14, the FinTech technology. In terms of equipment molding?
So Eric's question is, he assumes that we will have a very good yield rate on the 16 nanometer thin fab, I think that's correct. And so given that, why are we so conservative in equipment moving?
All straightforward like Samsung GlobalFoundry, they mentioned they have like a 50,000 wafer at the end of this year.
Let me answer your question. First, you are increasing of we slowly moving 16 kilogram equipment. I think, Loa just mentioned that we are going to spend also a big CapEx next year. And from this year, next year, we invest on the 16 print bed and 20 SoC also. And some of the tools actually high work high portion of the tool are coming for these 2 node.
So no, it's not a slowly moving as you said. Yes, we did ramp up the 16 Twin bed behind our competitor. Yes. And that's why Chairman say that we are going to have a smaller market share. But our situation improved as time goes by because of our manufacturing maturity and good yield performance and also the customer pulling their demand.
So we decide to pull in the ramp up schedule. And we are in a very high downhole to bring up the existing footprint. I said we have more than 1,000 engineer preparing for the ramp up. So that's give you a hint that we are full speed actually preparing for that.
Okay. We believe you are going to be very aggressive at 2016, the competitive, the Fintech competitive for next year. And your competitor right now is very aggressive, probably will keep aggressive. So internally, the Tier 10 do have a scenario, the analysis that said the 14, the 16 plus FinFET technology in terms of the capacity wise, probably well overcapacity and in year 2016, I'm sorry, year 2016, the overcapacity and for overcapacity,
we build the capacity to meet the customer demand and we have a confidence. As I said, we already have customer committed high volume tap outs to us. And we build the capacity according to the demand and we have a confidence to gain large market share 2016. The year end will be the key, right? Yes.
Okay. And also for LoRa, regarding to 2016 narrow payment, I may loss. The equipment is not a big difference. So we assume that the depreciation pretty much locate for the 20 nanometer process. So in our work, can we expect the gross margin for 2016, the plus, in fact, the pickup time above LNG, probably well much faster than we thought.
That's the right assumption, yes.
Okay. That's fair. If we talk about the Q2 for 2020, can we assume that probably 4th quarter for 2016?
I don't know. We only look at the 2 nodes together.
Okay. And then my same question.
You already have 2 Okay. Yes. Now we have to go to someone else. Sorry, we can come back to you. Okay.
Sure. All right. Next will be from Dan Hyler.
Thank you. Just a few quick housekeeping. So, Mark, could you comment a little bit on the linearity of the CapEx next year in terms of first half versus second half? Do you normally share that with us?
Next year is not the priority yet. Let's see.
Imagine front end loaded.
All right. Eche, I don't have number with me. I intuitively think it will be front end loaded because we need to get a capacity ready for the 15 nanometer ramp.
Kind of similar to this year then probably, right, in terms of the weighting?
This year it's not that front end loaded. Maybe slightly front end loaded. I don't have a number with me.
Great. Thanks. So we'll come
back to us.
So on the capacity growth, then this year you grew by 12%. Could you share with us what kind of capacity growth we should expect next year? Because you did allude to some 8 inches expansion and then you've also got, which I'm sure is quite small, but in addition to that, your 20 nanometer capacity growth? Thanks.
I said this year we will grow about 12% in total capacity, next year about the same.
Great. And is it fair to assume that very little 8 inches addition that's more kind
of peanuts or
could we see bigger 8 inches?
Couple of 100,000,000 is not peanuts. More 8 inches than last year, I would say. 2,000,000?
The magnitude of the revenue trends in the Q4, you're growing low single digit. The non-twenty nanometer capacity, how much
is that? Is that growing or
is that down in the Q4 in terms of the non-twenty?
Yes. Taken on 20 is down. It's down. Yes. More for our case, a little bit more than seasonal, because we are forecasting the DOI where we below.
It looks like down low single digit what it looks like? We don't know, probably close to double digit.
Double digit decline for non 2020?
For non 2020, yes. Okay.
Great. And then finally, just a short one no, she's cutting me off. Okay, I'll
come back.
Right. Next one goes to well, the question will be coming from Credit Suisse, Randy.
This one might be more for C. C. I just want to see if you could give an update on the info and the fan out wafer level packaging, just your initiatives on doing some of the integration, whether next year there's many applications or it'll take time to develop, would come more the following year and what type of applications you're seeing the first interest?
It takes time for the customers really to adopt the new packaging because that affected their design, architecture and also everything. So application wise, it will be still in the mobile devices.
And your question is? So it's probably more the following year, like next year, probably not much revenue, but I guess to get the 100 to 1,000,000 in revenue. The significant volume will be in 2016.
We already work with the customer on that.
Okay. And then one quick follow-up on the China. There was some discussion earlier about China and now you have competitor foundries putting a fab there. Does it make sense given a lot of attention on local manufacturing and even the Qualcomm going SMIC to have local China manufacturing, Does it make sense at some point to consider a fab in China? And are there restrictions or are those removed if you wanted to have a 12 inches fab in China?
We have the fab in China today with 8 inches and we are expanding that capacity also. This actually is today and following months. And we have space next to that fab also. So when the demand is needed, when the option is most cost effective, that's one of the consideration. As to 12 inches no, I think so long as n minus 2 and below, I think the at least for the in the local government restriction is not there.
Thank you.
So now we are going back to Eric for his follow-up questions.
Thank you very much. Okay. Regarding to the 10 nanometer, the same fact, ASML have a conference call last night and indirectly, they mentioned that Telesens is quite a big player. So I just would like to know the what's your strategy? I mean, your equipment moving in the 'sixteen, probably not so aggressive, but your strategy at the 10,000,000 is so aggressive.
So while you look at the future outlook? On EUV, you mean the question? Yes. In terms of the 10 nanometer. Our current 10 nanometer, it does not using EUV.
All the technology developing for TEN is still using multiple patterning technology. Okay. I saw you used 2, right, EUV and the one you mentioned. We are working with S&L to develop EUV tools. And the opportunity is to have a follow on process simplification using EUV, the masking layer simplification.
But that's some way to go, could not catch our initial ramp of 10 nanometer. The current challenge is to be the power of the source and availability. And but it's still very encouraging that power source power is continually increasing. And other factors as mask defects, mask technology and the photoresist have a lot of improvements. So we are looking at the follow on insertion point after the 10 nanometer ramp for the cost reduction or for the process simplification.
Okay. So the way you go for the 10 nanometer effect is the same as the Intel way or different way on the Intel. In terms of not using EUV? Yes, Intel. Intel appeared announced they don't use EUV on their antenna.
So it's a different way, right? I'm sorry. I don't know if Intel technology that won't answer. The reason is that there is a one argument talking about the 14 now in fact is the way Intel to go and the Samsung go. So once they go to the 10 now, if they go to a different way, probably we will see the 2 different way in the 10 now in fact and for the client to choose.
That probably will bring the risk on the either side. So I don't know this argument makes sense from your point of view. Does that make sense? That's our plan. I don't know what details detail plan is and they have announced their 10 nanometer detail either.
So we just make the best of putting to our most beneficial way to implement the EUV. Okay. Very clear. Thank you, Zantal Liu.
Follow on questions from Andrew Lu.
Very quick two questions. First one, the 28 nanometer high key megawatt versus the polysilon percentage 28 in Q3 and Q4. Any rough numbers?
Probably 70 to 30
for both quarter.
That's good. The in Q3 is probably more than 20% more than 80% are high key middle gate, less than 20% are polysilon. But getting into Q4, polysilon has a big increase from our demand. So it's getting to temporarily get to 70, 30 in the Q4 as C. C.
Just mentioned. Because of customer, right? Because of customers. Okay. The next one is I remember last time Laurent mentioned the CapEx of sales for next year is going to be higher than this year.
So this time change to tone saying the CapEx next year will be slightly higher than this year. So I just want to ask whether the CapEx itself is also higher than this year for next year?
I don't think I said last time that next year will be higher than this year. I didn't say that. I probably said we'll be lower than last year. That's probably what I have said. Given the total fee tax, as I just indicated, will be slightly higher than RMB10 1,000,000,000, but we have not decided how much it's going to be.
We don't decide the revenue over 2015, So it's probably too mature to comment the capital intensity for next year.
Thank you.
All right. Follow on questions from Daiwa, Rick Chu.
Hi, thank you so much. It's Ray Xu from Daiwa. Just a quick follow-up question. Sometimes Doctor. Mo Chan gave some color for beyond 1 quarter.
So could you give a little bit color for your Q1 outlook because we'll talk about inventory correction this year is very mild and demand is still pretty strong especially for deep management screen shape pretty I mean it has been in good shape. So some cover for next year Q1.
Well, Q1 normally is a low season. You will see sequential decline for the experience we had before. I cannot comment more on that. I don't think Q1 will be very different from that pattern.
Let me add some color for that if you want. Yes, sure, of course. We don't expect strong inventory adjustment more than what we see in Q4. Okay. This is I think this is what we see from our demand forecasting.
Follow-up question from HSBC, Steven Palleo.
Just a little bit thinking about
the next 3 years or so, the last 3 years, you guys have clearly benefited 28 nanometer dominance, smartphone industry growing at kind of 40% comp and annual growth rate. You guys have grown 20%, 25% per year, I think, in the last 3 years or so. And I got to do the calculation again for this year, maybe you're actually above that. When you think about the next 3 years, I think people are forecasting smartphone CAGRs maybe more in the under 15% type range.
Deep thinking you guys gained a
lot of market share I think in the last couple of years as well. Are laws
of large numbers touching up to you
guys is without smartphone growth and that significant increase in silicon content per phone? Do you think these growth rates that you've been enjoying, this 20% plus for multiple years are headed lower over the next few years? And then to what magnitude?
You cannot expect 20% growth for every year, but we are confident we can grow double digit next 2 years.
Short follow-up questions from Dan Hiler.
That last one, that you won't let me sneak in there. Forget it. So on the 20 nanometer, coming back to that, the 4th quarter contribution for this year on this percentage of sales, will this will 2020 grow 1 year later, so Q4 next year, will that what contribution to sales do you expect 20 per se to be 20 nanometer next year? Because I mean, you've obviously pulled in 16 nanometer, so there's new dynamics. I'm wondering if you're going to see any growth year on year from 4Q this year to 4Q next year, will the dollar value grow year on year?
Good question. I think next year when we ramp up 16% to 5. 20 SOCs, the demand will be flat and the percentage will be lower. Okay. Does that answer your question?
Yes, it does. Thank you.
Okay. I think pretty much we have answered the most critical questions in your mind and we would like to conclude our conference and conference call right now. And thank you for attending our session today. Before we conclude, please be advised the replay will be available within 3 hours from now. Transcripts will be available within 24 hours from now, both of which will be available through our website at www.tsnc.com.
Thank you for joining us today. We hope you will join us again next quarter. Goodbye and have a good day.