Welcome to TSMC's Second Quarter 2014 Earnings Conference and Conference Call. This is Elizabeth Sun, TSMC's Director of Corporate Communications and your host for today. Today's event is webcast live via TSMC's website at www.tsmc.com. If you are joining us through the conference call, your Zhao Li's lines are in a 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 Q2 followed by our guidance for the Q3. Afterwards, TSMC's Chairman, Doctor. Morris Chang will provide a couple of key messages. Then we will begin the Q and A session where TSMC's 2 Co CEOs, Doctor.
Mark Lu and Doctor. C. C. Wei will join Chairman Chang and Ms. Ho in responding to your questions.
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 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. Thank you, Elizabeth. Good afternoon, everyone. Thank you for joining us today. I will start my presentation with financial highlights for the Q2 followed by the guidance for the Q3.
Q2 2014 is a record quarter for TSMC, both in revenue and in net income. In this quarter, we saw strong demand for our wafers across all major segments. Our revenue increased 23.5% sequentially and 17% year over year to reach TWD183 1,000,000,000 On the profitability side, gross margin was 49.8%, 2.3 percentage points higher than that in the 1st quarter. The higher margin was mainly driven by higher capacity utilization, partially offset by inventory valuation adjustment and a small margin dilutive effect from 20 nanometer ramp. Operating margin was 38.6%, up 3.2 percentage points from the Q1, reflecting an improved operating efficiency for the company.
During the Q2, we recorded a TWD2 billion disposal gain from the sale of Vanguard International Semiconductor Company's share. We also saw a big jump in the corporate tax rate from 10.4 percentage in the 1st quarter to 19.8 percentage in the 2nd quarter, The 9.4 percentage point increase was attributed to the accrual of retained earnings tax, which is incurred in the Q2 every year. We estimate our full year tax rate for 2014 will be about 13%. Overall, the 2nd quarter EPS was $2.30 and ROE was 26.9%. Let's take a look at the revenue breakdown by application.
Our revenue from all major segments increased sequentially in the 2nd quarter. Compared to the Q1, communication increased 19%, computer increased 14%, consumer increased 31% and industrial related revenue increased 25% during the Q2. Biotechnology, our 28 nanometer grew more than 30% from the previous quarter. Its contribution to our total wafer revenue increased from 34% in the first quarter to 37% in the second quarter. Combining the 2 advanced technology nodes, 28 nanometer and 45 nanometer, we derived 56% of total revenue in the 2nd quarter.
Now let's move to the balance sheet. Cash and marketable securities reached RMB350 1,000,000,000 at the end of the second quarter. Our cash increased RMB23 1,000,000,000 during the quarter, while our marketable securities increased RMB58 1,000,000,000 as we reclassify certain long term investments to short term marketable securities. Current liabilities increased by $72,000,000,000 as we accrued $78,000,000,000 for the cash dividend in the 2nd quarter. Accounts receivable turnover days increased 5 days to 40 days.
As our revenue increased at a much faster pace than average accounts receivable in the Q2, days of inventory increased one day to 51 days. Now let me make a few comments on cash flow and CapEx. During the Q2, we generated $82,000,000,000 cash from operations, invested $73,000,000,000 in capital expenditure and borrowed RMB10 1,000,000,000 short term loans for hedging purpose. At the end of the second quarter, our cash balance increased RMB23 1,000,000,000 to reach RMB265 1,000,000,000. Free cash flow for the Q2 was an inflow of RMB8 1,000,000,000.
In U. S. Dollars, our Q2 CapEx was RMB2.4 billion. That means our CapEx totaled US6.2 billion dollars for the first half of the year. Our full year CapEx budget remains in the range between US9.5 dollars 10,000,000,000 Regarding our capacity, we now expect to increase our capacity by 11% from last year.
This is a small increase from the 10% growth as we forecasted earlier and it is mainly derived from our productivity improvement. Total annual capacity is expected to reach 8,100,000 12 inches equivalent wafers this year. I have finished my report on the financial part. Now let me turn to the 3rd quarter outlook. Based on our market outlook and the business exchange rate and forecast exchange rate of 29.81, we expect our 3rd quarter revenue to be between TWD206 1,000,000,000 and TWD209 1,000,000,000 representing between 12.6% and 14.2% sequential growth.
Gross margin is expected to be between 48.5% and 50.5 percent and operating margin is expected to be between 38.5% and 14.5%. This concludes my remarks. Let me turn the podium to our Chairman, Doctor. Morris Chang.
Good afternoon, ladies and gentlemen. I want to make a few comments on the supply chain inventory situation and the second half demand. And then a few words on 20 nanometer and 16 nanometer progress and then if you were on 10 nanometer progress. First, on supply chain inventory and second half demand. Our second quarter was record breaking in revenue, operating income and net income.
We have noted in past investor conferences that supply chain inventory dipped to a low point at the end of last year. The past 6 months have seen a rebuilding of inventory, which partially explains the strength of demand in that period. We estimate that the supply chain inventory has returned to a seasonal level at midyear from a very low point at the end of last year to seasonal level at mid year. We further estimate that it will actually continue to build through the Q3 and DOI will be 2 days above seasonal at the end of third quarter. But then we estimate that BOI will decrease and will be at 2 days below seasonal at the end of the year.
So last 6 months have seen a rebuilding of inventory and at midyear, it's about seasonal level. It will continue to build some modestly to 2 days above seasonal at the end of 3rd quarter and then it will dip to 2 days below seasonal at the end of Q4. So one might characterize the next 6 months as a period of cautious inventory management by the supply chain. However, the widespread adoption of 4 gs LTE tends to increase the demand of our 2820 technologies. Overall, we're guiding 3rd quarter to be another record breaking quarter as Laura just did.
It will be another record breaking quarter in revenue, operating income and net income. Also at this point, because of our strength in 20 SoC and our strength in 20 28, 4Q appears to be a sequential growth quarter also. WowQ appears to be a sequential growth quarter also. Now a few words on 20 nanometer and 60 nanometer progress. In the last 2.5 to 3 years, 28 nanometer technology has driven our growth.
In the next 3 years, 20 16 nanometer technologies are going to drive our growth, 28 in the last 2.5 to 3, 20 and 16 in the next 3. After 2 years of meticulous preparation, we began volume shipments of our 20 nanometer wafers in June. The steepness of our 20 nanometer ramp sets a record. We expect 20 nanometer to generate about 10% of our wafer revenue in the 3rd quarter and more than 20% of our wafer revenue in 4th quarter. And we expect the demand for 20 nanometer will remain strong and will continue to contribute more than 20% of our wafer revenue in 2015.
We will reach 20% of our total wafer revenue in the Q4 of this year and it will be above 20% of our total wafer revenue next year. The 16 nanometer development leverages up 20 SoC learning and is moving forward smoothly. Our 60 nanometer is more than competitive, combining performance, density and yield cancellations. 60 nanometer applications cover a wide range, including baseband application processors, consumer SoCs, GPU, network processors, hard disk drive, FPGA servers and CPUs. Volume production of 60 nanometer is expected to begin in late 2015 and will be fast ramped up in 2016.
The ecosystem for 16 nanometer designs is current and ready. A few years ago, in order to take advantage of special market opportunities, we chose to develop 20 SoC first and then quickly follow with 16 nanometer. We chose this sequence to maximize our market share in the 20 16 nanometer generation. As the competition unfolds, we believe our decision to have been correct. Number 1, in Planting SoC, we believe we'll enjoy overwhelmingly large share in 2014, 2015 and onwards.
Number 2, in 16 nanometer, TSMC will have a smaller market share than a major competitor in 2015, but will regain leading share in 2016, 2017 and onwards. Number 3, if you look at the combined 2016
technologies, GSMC
will have an overwhelming leading share every year from 2014 on. Number 4, in total foundry market share, after having jumped 4 percentage points in 2013, TSMC will again gain several percentage points in 2014. This is the total foundry market share covering all technologies After having increased 4 percentage points last year, TSMC will gain another several percentage points this year. Now a few words about 10 nanometer. The 10 nanometer development is progressing well.
The 10 nanometer speed is 25% faster than the 16 nanometer. The power consumption is 45% less than 16 nanometer and the gate density is 2.2x that of the 16 nanometer. Power is 25% pressure. Did I say speed power? I meant speed.
Speed is 25% faster. Power is 45% less, gate density 2.2x more, all compared with 16 nanometer. We work closely with our key customers to co optimize our 10 nanometer process and design. We expect to have customer tape outs in the second half of twenty fifteen. Those are all my prepared comments.
I believe we are ready for Q and A.
Yes. 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. Should you wish to raise your questions in Chinese, I will translate that to English before our management answers your question.
The hash key.
Yes, one already.
All right. So I think Chairman wants Randy, right? Okay. Okay. Credit Suisse, Randy Abrams.
Okay. Thank you, Randy. Yes.
I appreciate you calling me first. I'm sorry to harp on on one negative with all the results quite good. I wonder if you could elaborate on your comments on 16 nanometer, where you talked about your market share next year being lower than a competitor. If you could talk about why you think that plays out, the potential impact of that and then confidence to regain share, like what's driving confidence to regain share the following year?
Will you review that, Parshal? Sure.
Randy's question is with respect to Chairman's comment on 20 fifteen's market share at 16 nanometers, where we said that we will be lower than a major competitor in 2015. So Wendy is asking why we will be lower and what is the impact to TSMC if we have a lower market share and what gives us the confidence that we will regain the market share in following year? Okay.
Well, we need to go back to history a little bit. 32 28 nanometer follow 32. And that particular major competitor that I referred to closed 32 and skipped 28. And then, of course, we came to 2016, 16 for us, 14 for Heming. And we chose to do both.
Actually, we chose to do 21st and 2016 about a year or so later, but it was a pretty quick succession. And this major competitor skipped 1 and went on to 16. So you asked why is our market share on 2016 lower than this major competitor in 20 15. Well, the answer is we got started a little late because we chose to do product also. And product turned out to be a very, very important note as I already spoke to just a few minutes ago.
So we have both 2016. Now how can we be sure that we'll regain 16 share in 2016. Well, the answer is that the technologies these days, we just have to engage with the customers way in advance like about 2 years in advance before you get orders. You get you talk with you discuss with the customers. The customers follow your technical progress and then the customers give you payouts and you have to qualify the payback etcetera, etcetera.
And the whole process is about 2 years in advance of actual delivery, volume delivery delivery. So how can I be shared that we'll regain share in 2016? Well, this is middle of 2014, about 2 years ahead of 2016. I think I have a pretty good idea of how much order I'm going to get in 2016.
So the impact of TFMC, if you could talk about how material the revenue impact of that market share, because you'll be doing 20 in high volume, So how much impact potentially potential to outgrow the industry or how much revenue impact from this market share loss on 2016 initially?
Could you repeat that question a little bit?
So Randy, your question is in 2015, since we will lose our market share at the 16 nanometers, so what's the impact to us in revenue if we do not have that part of the business?
Your ability to help grow industry like you have for the past few years. Yes, either revenue impact or how you see your growth relative to industry.
So will we be growing faster or slower than the industry next year?
Well, I don't know. I think there's too much unknown because we think I think I have a pretty good idea of how much revenue our competitor, foundry revenue on polymer. How many foundry revenue our competitor is going to have in 2015 on the 16 nanometer. But I don't think I want to publicly say what the number is. And actually, there's still a bit of uncertainty in the number.
We could get some of it. We are going to be late. But we'll be there actually in the second half.
Wendy, maybe we should remind you that Chairman said in his key message that 2015, our 20 nanometer will be accounting for more than 20% of our total wafer revenue. I think that would give us
I think everybody I think Randy understood that and I think everybody also does so.
Okay. That's good.
That's your you have 3 questions.
Yes, you got 2 chances already, Randy. I think you wait your turn now and play it.
Okay. Next question, I think, would be JP Morgan's Gokul, Terahana.
Thanks for taking my questions. I had a couple of questions on 10 nanometer. So since you've mentioned that 10 nanometer will start risk protection in Q4 of next year, is it fair to assume that 16 nanometer I'm sorry,
I need to interrupt. Did you say that you reset before when 10 nanometer
I mean, Chairman, you just mentioned that 10 nanometer would start with production in second half of next year? No, no, no. Test to No, no, no.
16 will start module production in second half of next year. Okay. So I didn't say anything about 10, don't misunderstand, A very important distinction. 10. On the 16.
Yes.
So just wanted to understand what is the cadence for 16 nanometer since we are starting a bit later? Since 2020 is still going to be more than 20% of revenue next year? Does 16 nanometer also ramp up to be 20 plus percent of revenues in 2016? Or is it going to be a shorter node and being overtaken by 10 nanometer maybe sometime in 2016 or 2017?
We also repeat that.
Okay. Gokul's question is with respect to the cadence. First part is with respect to the cadence between 16 nanometer and 10 nanometer, whether or not we will have a shorter cadence or a regular cadence. And whether or not 16 nanometer will account for more than 20% of the revenue for us in 2016 or 16 nanometer will become a short node.
What's the second question?
Whether 16 nanometer will account for more than 20% of our wafer revenue in 2016 or whether or
not 16 nanometer will be very strong. So whether 16 nanometer say it again, please.
Whether 16 nanometer will be 20 percent of revenue by 2016. 2016. 2016.
I don't think I've looked at it, have you? Well, 2016, I don't know what the total well, I think the total revenue will be higher than 2015, But exactly what it will be, I don't quite know. Just guessing I really I have more problem with your question. I have more problem with the total revenue of 2016 than I do with the if I replace the 16 nanometer
revenue in yes. If I could rephrase it, will 15 peak out lower than 20 nanometer?
No, I have a feeling that 16 will be a strong or stronger node for us than 20 nanometer. Okay.
And the second question I have
is on I don't think we have answered your first question. Your first question was 10, was that The
cadence between 60 nanometer and 10 nanometer, whether or not it will be a shorter cadence.
I just noticed that Intel said that they are about to talk about their 10 nanometer agenda until sometime next year, right? So I'm going to follow that practice, okay?
The second question I had is
in terms of capital intensity. I think this year and next year, I think capital intensity is already coming down. Should we expect a change when it comes to the
next leg of investment?
Or is it still going to be the same pattern in terms of capital intensity coming down?
Capital intensity is measured by CapEx divided by revenue, whether or not this number will be coming down or stays the same?
It will be coming down.
Okay. Thank you.
Okay. Dan Heilert, the next one from BOA Merrill Lynch.
Thank you, the Chairman and team. I wanted to follow-up a little bit on, again, back to the 2016 question. It feels a little bit like I remember the CPU days where you've had somebody who followed behind on OneNote and then try to leapfrog. And I want to revisit this question of the probability of success in skipping and TSMC has been over the years relatively careful at making sure that you're bringing up your technology and learning one thing at a time. So we have double patterning obviously at 20 nanometer.
And now we have FinFET at 16 and 14 in addition to 2 shrinks. So have you ever seen a company successfully have basically 3 major changes at once leapfrogging and
being able to
do that. So I'm just wondering that you have consciously chosen 2020 for multiple reasons. I'm sorry.
What three changes are you speaking of?
So we have thin set, double patterning and also you have a couple node shrinks. So your competitors So
you can have double patterning and Scaling. Scaling. Scaling. And scaling.
What is your confidence that in fact that can be done successfully by your competitor and
By our competitor, I'm not going to comment on how successful they will be. You just done that. I don't think it's going to be easy, but as far as we are concerned, you mentioned 3 hurdles. To us, I think the double patterning will not be a hurdle because we have done that in product already. So 16 will not be but your question was not about us, it was about our competitors, right?
And I don't think I really want to comment on that except to say that it's not going to be easy.
Yes. Well, I mean, yes,
I think you are commenting already by saying you're going to lose share. So I just wanted to get a feel and maybe flush this out. I think it's important from an investor standpoint to understand the complexity in doing this. I think now you're pretty much down the road in 20 nanometer. I think you're C.
C. And Mark have had a good look at 2020. You've looked at the challenges in bringing up double patterning. How critical is 2020 as a learning node?
Critical is 2020 as a learning aid. It's not working yet.
You have a team optimization. I think indeed I haven't seen industry skip notes to be a successful. It's not still catching up. But we never underestimate our competitors. So I wouldn't want to comment.
But it is every change of ATEC of each generation is very difficult. Therefore, you see the skilled technology definition, they change one thing at a time, as you know. So that sets most of it. For the people trying to catch up. That's how they do.
But there are a lot of historical data we can see.
Thank you. Second question, Cadence R and D has been impressed by your operating efficiencies, Laura. With this 2016 acceleration, 10 looks pretty aggressive. Should we be modeling R and D pickup growing at a faster rate than sales or will that maintain as a percentage of sales over the next 2 to 3 years?
Let me answer. If you're asking whether our R and D will build up even faster than revenue, is that right? I think that it's possible. In fact, that's really our first priority. I think we want to strengthen our technical side even more.
But it's not going to be very big. I mean, right now, actually we modeled R and D at 8% of revenue 8% of revenue at the beginning of the year. Now the revenue has turned out to be bigger than we thought it was going to be. So right now RMB is only 7.3% of revenue. And in my mind, however, the models still age.
Thank you.
Next question will come from the floor will be from Citi's Roland Chu.
Hi, good afternoon, Chairman. I think I think the 3rd follow-up productivity and trust of customer, actually we have no doubt about that. So can Chairman quantify that how big the lead is for your 50 nanometer FinTech to competitive 40 nanometer FinTech? Thank you.
Actually,
I intended to repeat what I said in the annual general meeting just now. Really, if you combine the 3, speed, density and power, we feel that we are more than competitive. Now you asked me how big a deal we have, etcetera, etcetera. Well, I think that will be a very difficult question to answer because our competitors on the 16 are the 2 companies that I in the past referred to as the 2 big guerillas of the industry and each has its strengths. So the 2 are not the same at all.
And each has its strength, each has its weaknesses. And a competitor may be technologically strong, but if he turns out to be a competitor of his potential customers, then that's a weakness.
And
if a competitor is already used to being both a competitor and a supplier, but he has got technology weaknesses. So that's a problem too for him. Well, I don't think I can really answer your question in a very simple way. I can only answer it by just repeating what I said earlier, combining performance, density and speed, speed, density and power, we believe we are more than competitive. And in terms of the ability to get business, we believe we are more than competitive.
Okay?
Thank you, Chairman. I think my second question is just for the 3Q. The revenue guidance now is up 12% to 14%, but as you know, the 20 nanometer is probably be contracted more than 10%. So that means that some 20 nanometer revenue growth in 3Q probably will be below seasonality.
So is this any reason behind this
or is this just because of the capacity constraint for the now 20 nanometer ramp? Thank you.
So Roland's question is with respect to the 3rd quarter. Since our guidance of the 3rd quarter sequential growth rate is 12.6% to 14.2%, but then our 20 nanometer growth rate is going to be a lot faster, which means the non-twenty nanometer geometry's growth rate will be slower. And so what was the reason behind the slower growth rate in other nodes? Is it because of capacity constraint or some other reason? I'm sorry.
Roland. Roland was coming on the second half. Not the capacity constraint issue, it's the overall inventory level going into the 3rd Q4.
Okay. Then do you see any specific segment actually have the limited issue electric issue into the second half? Thank you.
I don't want to comment. Actually, I don't have information on DY on specific segments. But based on my guidance, I just gave you earlier, we are seeing very strong growth in communication in the 3rd quarter. However, on the computer and consumer will be a decline segment. Industrial and related product will be will have a modest growth.
Thank you.
Okay. We will now take our next question from the call. Operator, please proceed with the 3rd caller on the line.
Thank you. Your first question comes from Stephen Pilayo from HSBC. Please ask your question.
Yes. I apologize if this was asked. The line dropped there. Your 20 nanometer ramp is very impressive, very steep. But I guess if I think about your revenues excluding 20 nanometer going to 10% of revenues and more than 20% of revenues in the Q4, it kind of suggests rather anemic growth for the industry in the 3rd quarter and pretty sizable down in the Q4.
So is that what you think the industry is doing? Or do you think that maybe 28 nanometer competition and pricing pressure is starting to have an impact there? It just seems odd when I think about your revenues excluding 20 nanometer because that really is driving so much of your growth in the second half of the
year? So Stephen's question is very similar to Roland's question earlier in the sense that if we take out the 20 nanometer, then our 3rd and 4th quarter growth doesn't look so impressive. Is that because of competition heating up at 28 nanometer or is it because of some other reasons?
Well, I really I guess, if we take out I think the rest of it, if you take out 20 nanometer, I'm just calculating in my head right now, if you take out 20 nanometer, where we have growth in the 3rd and 4th quarter,
I think we still do. We'll have growth in 3rd quarter.
We'll have growth in 4th quarter, we'll have growth in the 4th quarter. Well, I haven't said anything
about Q4 total Q4
yet, but I'm just mentally calculating what it looks like if we take our 20 in the 4th quarter. And the answer of my mental calculation is that we still have little growth. Yes. I don't know how little is little. It may not be too little.
Yes, we still have growth. But I think just as Laura has said now, we are and I also said in my opening remarks that the inventory will be cautiously managed. I mean, it almost always is toward the end of the year. Last year, in fact, it went overboard. The caution went overboard.
And as a result, we had a pretty bad 4th quarter and a lot of people had a pretty bad 4th quarter only to recover it in the first half of this year. And we are predicting, as I said earlier, that inventory will be very cautiously managed. And of course, we'll tell you again 3 months from now what it looks like at that point. But just based on the numbers that we have already given out, I would say that, yes, even if you take out 20, we will still have growth. We'll certainly have growth in the quarter and we'll still have growth in the 4th.
And that's already that is already taking into account the cautious inventory management that will happen in the second half of this year.
Okay, great. Maybe just one quick question for Laura. I noticed in the management report you no longer were breaking out depreciation within cost of goods sold. And I think you've guided for total depreciation to grow, I think it was 30% or 35% this year. Could you just remind us what it was within cost of goods sold in the Q2 and your outlook for the Q3?
Okay. We have a chart in the later page, the last page of management report that shows the depreciation including the CODS. But what I can tell you, the overall depreciation for the Q1 this year is NT 41.6 billion and the second quarter will be NT 45.9 1,000,000,000 and will go up very steeply in 3rd Q4. For the whole year, we do expect the year over year depreciation will be 33% growth, which is lower than what I have told you in the past.
Okay. Slightly lower. And just so we can try to quantify how much it where does it step up to in the 3rd quarter?
You mean from second quarter to third quarter, how much is the depreciation increase?
Yes. What's the depreciation impact?
Our Q3 will be a JPY 59,500,000,000 depreciation.
59,500,000,000. Okay.
Great. Thank you very much.
So the next question will come back to the floor and it will be coming from Barclays, Andrew
David Chen, I have a question for you. Regarding the market share on the 16 nanometer you mentioned earlier, next year we might have a lower share compared to competitor. Can we use something to describe is next year, do you see the total addressable market for this thing that is a large like this year like 20 or much smaller as either this one or the second one we might be sure because our 20 nanometer customers switched the comparison using 40 nanometer and that's why we're losing share, but not using our 16. These two answers will have a dramatic difference for the company's earnings process. Company's earnings?
The first one is, for example, this year we have a 50 ks 20 nanometer capacity by the end of this year. And I have a lot of runway on here. I'm trying to follow your questions, but let's first let Elinib. Did you get the questions?
Yes. The
first question I think I got. The first question is 2 choice.
Andrew, your question is, you want to know the overall size of the 1614 nanometer business, overall size of the business in 2015, whether or not that is bigger or smaller than the 20 nanometer size of 2014?
That's correct.
That's your first question.
Is that our shares moving because of shares, I mean, they are much smaller. Okay. I think
2016, yes.
Put this way, our 20 and our 2016 is much bigger than the share is much bigger than the 2016.
I think this question is the total 16 foundry market next year, is it as big as in total 20 this year? Is that your question?
Yes. Yes. I think it's more smaller. The total
including 16, 14 FinTech fund holder, a lot of revenues.
Yes. Okay. How about comparable?
Comparable. So we are losing share. For either party, right, the union. Next year, we will have a lower 16 share than a major competitor. That's what I said.
Yes. So my question is whether this business share because our 20 customers move to a competitor for 14. So this is a brand new demand, which choose competitors 14 nanometer first. Yes, I don't think the rule we are not going to comment on specific customers or I think. I did not mention any customers.
Why you said because one important customers. What?
Why is important?
Are you asking because they switch from 20 to 16? Yes. Yes. 20 to 16. Because somebody switches from 26 to 16, and therefore, we lose share now.
Thank you. At least not primarily.
All right. Next question will be coming from Goldman Sachs' Donald Lu.
Good afternoon, Chairman. I think it's getting quite complicated on this market share.
I don't really don't have to be so complicated. I think I just look at the total. I just look at the hours.
Yes. I think maybe let's just look at the total Tian Tan is total foundry market share. I think last year you said you gained 4% This year based on your guidance Several more. Yes. More than 4%, probably next year.
Yes. And I think we'll at least stay there. Aetna gaining almost 10 points, 4% or not quite 10 points, 4 points last year, several this year. That's more than halfway to a 10 point gain in 2 years. And I think we'll stay there at least.
So just as you said, Donald, it doesn't have to be very complicated once you think about the basics.
Okay. So next year, yes, I mean, we'll at least maintain market share in the whole foundry market?
Yes.
Next year what? Sorry. I'm just rephrasing your words. You said next year, TSMC will at least maintain your foundry total foundry market share next year?
Next year? Yes. At least we are going through at least we'll do everything we can to actually inch forward a little. Okay, great. Yes.
Because remember, actually the looming battle is really not 16. In my mind, the 16 battle has already been fought. And the looming battle was And I don't know what the outcome come of that battle will be in. It's a trend. And I'm not going to say anything about it today.
But before I came here today and after I leave here to go back to the office today, my thoughts are primarily on the 10 and not so much on the 16. The 16 is I guess this is somebody said Wellington I think that that water rule was one of the plans of Ethan. And I have already graduated from Ethan, and I can only foresee the results of Waterloo. The 10, I'm still in EBITDA, okay?
So maybe you can share with us like what are you thinking about TEN, like what's the key issues maybe? My question is on 10 nanometer. You said you were thinking before and after the conference, maybe you can share with us what are the key points that we should be focusing on the 10 nanometer progress as well?
So Donald's question is what is in Chairman's mind regarding 10 nanometer?
What is in my mind regarding 10 nanometer? He knows what is in my mind.
I think right now,
we reported our target, the 10 nanometer and the development is in full steam in TSMC. And at this time, our 10 nanometer is very competitive. As Chairman just mentioned, particularly in density, that will be back on the historical trend even better.
And most importantly,
we have a few customers embrace this technology and also the timing. Our leading customer even plan to collaborate with us to do their product take off before we qualified the technology. Therefore, we see there is a strong market demand for the TAM at this point. So we are very excited about this new technology definition. We're very excited about our customer partnership of this 10 nanometer and we are really
Can I have another question here? My other question is more on the margin side. Maybe you can Raul can explain to us like you commented that in Q2 there is inventory adjustments and also a 20 nanometer ramp up cost. What's the total margin impact there?
Yes. 2nd quarter gross margin.
I do want to go back a bit on the I think someone from here asked a question about capital intensity will go down. And at that time, I said unhesitatingly that it will go down. But I was just checking with Laurel, but I remember something. And I think there is a chance that next year actually may perk up a little bit, but not significantly. This year, but the general trend is very definitely downwards.
We have already we are already over the hill this year. This year, we'll be spending about less than $10,000,000,000 $10,000,000,000 or a little less. And last year, we spent 9.6 percent. 9.6 percent. Our revenue last year was I mean, let's say that our revenue this year is 27% greater than last year and the same capital expenditure.
Who asked the question by the way? Both. Yes, right. So our capital expenditure this year is about the same as last year and yet our revenue this year is 27% higher than last year. So I expect the total trend to be coming down.
However, next year, we may see a little aberration, a little But since we're going to be we will again in 2016 on the 16 nanometer, probably need to spend a little more capital.
Chairman, may I make some comments on that? Sure. Chairman said next year maybe our capital intensity will be slightly higher than this year, but it's very safe to say it will be much lower than 20 13. Yes.
2013, I think
Was 48%. Yes.
Yes.
Laura, Donald still has a question for you on the margin of the second quarter. How much is the impact on inventory?
Sorry, did I interrupt something actually? Yes.
Okay, please, please. It was the inventory readjustment and the ramp up of 20 nanometer impact to the Q2 margin. We'll talk about the 20 nanometer impact first. In Q2, we have very, very small shipments, but we have incurred some costs already. So the impact to margin is about 1% digit point for 20 nanometer.
For inventory adjustment, it's more than 1%, but below 2%. All right. Next question will be from UBS, William
Dong. Good afternoon, Mr. Chairman. We keep talking about technology. I guess the question I want to ask is that with all this rush to continue to push down technology roadmap to go down to 16 to 14 and to 10 nanometer, What are our thoughts about what's driving this demand?
I mean, as we move toward, for example, Internet of Things, is there such a requirement keep pushing on the technology front to actually have enough sufficient demand to keep driving it down? Well, if the cost is low enough, cost is very much part of the equation. If the cost is low enough, the demand will increase because we can see a lot of applications that are just waiting there. Of course, I'm talking about the mobile products, but I'm also talking about Internet of Things, wearables and so on, so on, Internet of Things. The applications are just waiting there for better, for faster speed and lower power and higher density IPs.
Cost is density in the equation. So yes, so when you asked will the demand be there, if we can get the cost down to an acceptable level, demand will be there. And of course, that's why that's how things like EUV come into a question. Nobody has asked about that yet. We actually were prepared to answer that.
With the same answer that we gave you last time, by the way. We are still planning to it's still a possibility to use EUV on 1 or 2 or this 1 layer in the 10 only. Yes. 1 layer in 10 nanometer. And 7, I think, is of course even better candidates.
Okay. Thank you for that. So it's good to hear that U. V. Will be potentially used.
U. V. And we're trying we're working very hard with a lot of other people, ASML and other equipment vendors to reduce the patterning costs of optical immersion lithography. And we are also trying very hard to reduce the cost all around, not just for lithography, but or other costs. Okay.
Thank you. I have one more question is, as we look at the earnings continue to improve and obviously, expectation will continue to rise, what are your thoughts about potentially having more cash dividends as we move forward in time.
As of
right now, we've been staying about $3 for the last few years. But as we generate more and more profit and cash flow improves, how likely is that to happen? Will cash dividend to rise?
As our earnings continue to improve, will we also increase our dividend? Dividends? It will
be seriously considered. Any increase will be seriously considered. Okay. Thank you. Yes.
We do have about $7,000,000,000 of worth of bonds that we have to repay, right? But certainly an increase in dividend will be seriously considered.
Okay. I think we need to go back to the line for the next caller on the line. Operator, please proceed.
Thank you. Your next question comes from the line of Mehdi Hosseini from SIG. Please ask your question.
Yes. Thanks for taking my question. Doctor. Chang, going back to your commentary about 10 nanometer and how the tape outs is going to be available in the second half of twenty fifteen, and that's when you're going to start ramping 16 nanometer. So if I'm one of your major customers, why should I want to switch from 20 to 16?
And why not just skip 16 and just go directly to 10? And I have a follow-up.
All right. Nadim, your question is with respect to what we said earlier about having 10 nanometer customer product PayPal available in 2016. Well, I think we said second half of 2015, not 2016. And then your question is whether or not we see customers skipping 16 nanometer and going from 20 nanometer to 10 nanometer. Is that your question?
Yes, that's correct. Thank you.
No, no. Those customers are not skipping 16. I think there are segments of application driven by the integration and possibly solar power also together to drive this technology. But that's only
a particular segment.
That doesn't mean that driving the technology faster, the previous model will be a short lived. It's not because the market is application
is spreading up.
Some of the segment continue to drive the leading edge, but there are a lot of segment applications that stay on the older node. So it's not a one move to make no, the position will be idle, it's not the case. So we see this migration fuel the semiconductor growth in those applications.
Thank you. And the follow-up is a clarification. The cash flow intensity may increase next year, but does the dollar value of CapEx remaining the same? Or would it go up in 2015 compared to 2014?
Maggie, your question is, if our capital intensity ratio will go up a little bit in 2015, does that mean that our revenue will go up in 2015? Is that your question?
One more. So let me rephrase the question. Should we assume during the last conference call, there was a comment that CapEx in 2015 would be similar to 2014. Is that assumption still staying? Or should we assume that CapEx may actually go higher in 2015?
Okay. So will the comment of higher capital intensity in 2015 means higher CapEx in 2015?
Yes. Thank you.
Okay. Now coming back to the floor and next question will be coming from Deutsche Bank's Michael Zhou.
Hi, Chairman. One question for info. Do you expect any info revenue next year?
For giving that info. Info. Info. Okay. If you will answer that question.
No, not yet. Thank you. The second question is regarding the 10 millimeter. Do you think the 10 millimeter total addressable market will be still bigger than 16, 14 or similar? Thank you.
Will 10 nanometer market be similar to 16, 14, how would we just guessing? I would just be speculating. But if you talk about dollars, I think it will be more. If we talk about wafers, I think it will be either similar or maybe a little less. Again, I'm speculating with you, all right?
Because a lot depends on what cost we can come down.
All right. Follow-up question from Dan Heiler, Bank of America and Merrill Lynch.
Hopefully, this question simplifies and doesn't complicate things. Just to make sure I understand this share loss thing. So basically, what you're saying is the share loss at 16, these are customers that are choosing to skip 20. Is that how should I think of this that these are not any are any of these customers that are currently 20 that are going to 16 next year? Or is this all people that are choosing to skip 20?
Well, first of all, I want to question the word share loss, okay? I don't consider it a share loss because just like 30 two-twenty 8, we had a zero share in 32, but then we were very successful in 28. The 2 really belong to the same generation. And 20 16 also belong to the same generation. So yes, and share loss means that you start with something and then you lose it, it becomes less.
Well, this year, nobody has everybody has zero share, okay? And I'm just saying that we'll start on 2016, we'll start with a lower share than we did with 20 or 28. We start with a lower share than we did with 20 or 28. And we'll get back to a high share in 2016. And just to argue with him, but he didn't have a question.
So this one is not a good, it's a simple question.
Yes, I remember Dan's question is the lower share that we will have at 'sixteen in 2015, is it due to a customer's
Well, just simply, are your are these customers moving to 16? Are these ones that have currently gone 20? Are these the guys that are scared because the debate in the industry is, should we go straight to 16 and skip 20? So are these customers that are basically been at 28 and are skipping 20% and going straight to 14% and your competitor?
Why do we start with lower share? Well, because mainly because are you listening to me, Dan? I'm trying to answer your question.
Yes. Some listening. I'm listening.
Yes. Mainly because our customers want it sooner. We got a little late, as I said. Our customers want it sooner. So that's why we're starting and we'll catch up only a little later.
Very clear. Thank you.
I think we have a follow-up question on the call. Operator, could you please proceed to the next caller?
Thank you. Your next question comes from the line of Stephen Pelayo from HSBC. Please ask your question.
Great. Thanks again for letting me come back with another question. I'm curious about customer concentration. In your annual filings, you had 1 customer I think 22% or 23% of revenues. It seems like you're ramping I think another significant customer.
I'm curious if you think about maybe just your top 5 customers in 2015, let's say next year. It seems to me that those 5 alone could maybe even approach as much as 45%, 50% of revenue. Do you think that's possible? And do you have any concerns about increasing customer concentration? So,
customer concentration in 2015 and whether or not the top five customers that we will have in 2015 will account for about 45% or 50% of the total?
Just in the future,
it doesn't necessarily have to be 2015, but I mean even the second
half of
this year, it seems like you're going to be ramping up pretty significantly another customer. And so it would seem that your top 4 or 5 customers are going to be a very large amount.
So the customer concentration starting second half of this year that our top customers will have a very large share of our revenue.
Is the customer concentration even in the chance? Is that the question?
It seems like the concentration customer concentration is increasing going forward. Last year, you divulged in your annual filing one customer at 22% of revenues I think. I think you have another customer that's ramping up very significantly now. And then maybe a couple of other ones that would suggest to me that maybe your top 4 or 5 customers are 40% to 50% of revenue. Does that sound right?
Is concentration increasing? And do you are you nervous at all of the risks of higher concentration concentrated customer base?
Well, as we talk about the top five customers, I think that
the top our top five customers
have always had 40%, 50% of the revenue. Okay.
Yes. Now but something has changed
in the last couple of years. So but to detect the change, you have to ask about the top 3 customers. Okay. Their concentration change. The top 3 customer churn has changed, but I don't see it changing very much from this point, which is the second half of 2014, in the next 18 months to the end of next year, I think the top 3 customer penetration is going to stay about the same.
Okay. Thank you. One final question for me. I'm curious just about you're pretty far your view from actual in demand, but the data points on in demand in the first half of the year, maybe PCs were a little bit better than expected on end of life WinXP. But in general, some of the data that came out in TVs and smartphones wasn't that good.
And there's a lot of expectations with this 4 gs ramp in the second half of the year. I'm curious what signals do you have confidence in that in demand will be robust enough support so much my opinion undifferentiated 4 to 6 inches blank slate smartphones out there.
Stephen's comment was that it doesn't appear to him, I guess, that the smartphone demand in the second half will be that strong.
Yes, yes. Believe the smartphone demand. The second
half will be that strong.
I'm merely saying the data points we've seen thus far have been disappointing. So we need a pretty big ramp in the second half of the year.
We have got some numbers also. I mean that's she believes the smartphone demand will not be social and therefore
So what drives the business growth in the second half?
What drives the business growth? Well, I guess we have the orders already, don't we? I mean, as far as third quarter is concerned. And the Q4, we have some orders also. I think maybe yes, Lars, I
think Chairman did mention second half will go through some mild inventory correction. However, because of the power share on 28 and 20 nanometer, it
allows us
to have a stable trend.
Okay, fair enough. Thank you.
Yes. Coming back to the floor, there is follow-up questions from Barclays and Andrew
Yu. Doctor. Chen, I'm Laura. I remember January conference when the Q1 utilization low, we built the inventory for customer and believe in some of the inventory was being taken out. The Q2 seems doing very well, this new strategy.
Assuming in Q1 next year, we have a kind of larger decline because customer have an adjustment in the long term, while we do the same thing in Q1 next year and to smooth out the I'm glad you praised it as a very good strategy. I thought so too. I was the author of that strategy, all right. I thought so too. But it doesn't it wasn't necessary for too long because very quickly our inventory building program was overtaken by customer demand.
So while we feel more this time compared to this year, we see a kind of concern Well, utilization is 100% just to respond to customers' demand, you have no capacity to build inventory. That's what happened when I said that that program wasn't necessary for too long. We didn't have the capacity anymore after, I guess, since what March maybe? Since March. Yes.
So that program was in place, inventory building program. Inventory building meant anticipating orders, not having orders and building inventory. That's what it means. And that was the case I guess in the Q4 last year and in January February. And then from March on, we began to be flooded by orders.
So there was no capacity to build inventory with. With. All the capacity has to be devoted to building orders, converting to orders. Yes. My second question very clear.
Earlier, Doctor. Chen mentioned the ramp up on the 2016 was starting from end of next year and change to second half next year. So can you just have a clear picture what kind of revenue contribution will be by Q4 next year from 16 nanometer? Thank you.
So how much will 16 nanometer account for our 4th quarter revenue in 2015? How much will 16 nanometer account for? Our revenue in 4Q next year.
How much?
16 nanometer in 4th quarter 2015.
That's your question? Do you want to ask? Yes. Okay. Go
ahead. We will start mass production of 15 nanometer from Q3 next year. It's a bit too early to tell you the percentage of revenue contribution, but we believe it will be a single digit range. Okay. Follow-up question from Deutsche Bank, Michael
Zhou. Chairman, regarding the 16, 20 millimeter, could we, let's say, your total market share in 16 and 20 nanometer will be similar to 20 832 for the corresponding period. Can we say that?
Say it again.
Combined 20 nanometer and 60 nanometer market share, will that be similar to the combined 32, 28 nanometer market share?
The combined 20, I just ran now just a couple of weeks ago. So I know exactly the answer to your question. The combined 2016 market share in the first two years of its existence, which is this year and next year, well, I guess, I have to add in 2016. We combined our combined 20.16 share in 2014, 2015, 2016 is still a bit greater than our combined share of $32,000,000 in 20 11 or 12?
12, 13 and 14.
Yes, 2012, 2013 and 2014. Thank you.
Great. All right. In the interest of time, I'm just going to allow the very last one and that's credit suite Randy.
Thank you. This one might be more for Laura. Just wanted to ask on 20 nanometer, the forward look, how much impact on margin, how long it might take to reach corporate average?
And if
you could do an initial look on structural profitability and depreciation for next year?
Okay. I just talked about the Q2, the 20 nanometer has about 1 percentage point impact to corporate gross margin. As we're ramping very fast in 3rd and 4th quarter, so Yintai will be larger. Based on my current number, it will be ranging from 3 to 4 percentage points in second half of this year. For next year, it will be 1% or 2% roughly, okay?
When to reach the corporate average? I think it usually takes 7 to 8 quarters. So it will be in 2016. I don't know which quarter yet. And you asked about depreciation as well?
We have now finalized our CapEx for 2015. I think the 19Q of year over increase will be much, much smaller than the 33% this year. So I don't have a phone number yet. Okay. So as you know that we are very confident in our profitability, we will end our conference call for this quarter right here.
So before we conclude today's conference, please be advised that the replay of the conference will be accessible within 3 hours from now. Transcript will become available 24 hours from now, both of which can be available through our website at www.tsmc.com. Thank you for joining us today. We hope you will join us again next quarter. Goodbye and have a good day.