Welcome to TSMC's First 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 dialing lines are in listen only mode. As this conference is being viewed by investors around the world, we will conduct the 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 Q1 2014, followed by our guidance for the current quarter. Afterwards, TSMC's 2 co CEOs, Doctor. Mark Liu and Doctor. C.
C. Wei will jointly provide a couple of 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 now 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.
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 Q1 and followed by the guidance of the Q2. You may have noticed from the information we provided to you today, starting from this year, we have changed the wafer unit to 12 inches equivalent, a 12 inches accounts for the majority of our production capacity. The Q1 came out better than expected. Our revenue, gross margin and operating margin were all exceeded the revised guidance. In the Q1, the demand for TSMC wafer was much stronger than we had initially predicted in mid January.
The strength then came from customers' better 4th quarter results, which led to a more positive outlook for the whole year, prompted to the active replenishment of inventory from a very low base in the Q4 last year. We were able to capture the bigger market share of customers' upside demand, thanks to the better performance and higher yield and reliability for our advanced technologies. 1st quarter revenue increased 1.7% on a sequential basis and 11.6% on year over year basis to reach RMB148 1,000,000,000. Gross margin was 47.5%, up 3 percentage points from the Q4 last year, mainly due to higher capacity utilization, a favorable foreign exchange rate, offset by unfavorable inventory valuation adjustments. Operating margin was 35.4%, up 2.6 percentage points from the 4th quarter.
Down off item was a small gain of TWD0.78 billion. Overall, the first quarter EPS was $1.85 and ROE was 21.9% in the 1st quarter. Let's take a look at revenue by application. If you recall, the 4th quarter inventory correction was mostly serious in the communication related applications. When customer demand came back in the 1st quarter, communication shows the strongest increase.
Compared to the Q4 last year, communications increased 8%, computer increased 2%, and industrial related revenue increased 2%, while consumer declined 14% during the Q1. Biotechnology, 28 nanometer revenue continues to grow and accounts for 34% of our total wafer revenue in the Q1. 40 nanometer has a nice rebound, now represents 21% of our total wafer revenue. The 2 advanced technologies, 28 nanometer plus 45 nanometer represented 55% of our Q1 total wafer revenue, increased from 51% a quarter ago. Now let's move on to the balance sheet.
Cash and marketable securities decreased TWD10 1,000,000,000 sequentially to RMB235 1,000,000,000 at the end of Q1. Current liabilities decreased by RMB15 1,000,000,000, mainly because of the decrease in accounts payable to equipment suppliers. Meanwhile, we borrowed RMB9 1,000,000,000 in short term loans for hedging purpose. Accounts receivable turnover days decreased 3 days to 45 days. Days of inventory increased to 52 days, reflecting the strong demand in the Q2 and the starting of 20 nanometer ramp.
Now let me make a few comments on cash flow and CapEx. During the Q1, we generated RMB95 1,000,000,000 cash from operations, invested $115,000,000,000 in capital expenditure and borrowed $9,000,000,000 short term loans. At the end of the Q1, our cash balance decreased RMB11 1,000,000,000 to RMB232 1,000,000,000. Free cash flow for the Q1 was an outflow of TWD20 1,000,000,000 due to higher capital expenditure in the Q1. Our CapEx and capacity, 1st quarter CapEx was US3.8 billion dollars We expect 2014 CapEx will be about US10 $1,000,000,000 with front end loaded pattern.
About 70% of the budget will be spent in the first half to support the quick ramping of 20 nanometer. On a full year basis, we're trying to increase our capacity by 10% from 2013. So the total annual capacity will reach 8,000,000 12 inches equivalent wafers. So I have finished my report on the financial part. Now let me turn into the Q2 outlook.
Based on our current business outlook and forecast exchange rate of 30.10, we expect our 2nd quarter revenue to be between $180,000,000,000 and $183,000,000,000 This would translate into around 22% quarter over quarter increase. On the margin side, we expect the 2nd quarter gross margin to be between 47.5% 49.5% and operating margin to be between 36.5% 38.5%. At the January Investor Conference, I talked about the tax rate for the year will be about 13% and the Q2 will carry more burden. Let me give you an update this time. According to the accounting principle, when shareholder approves the earnings distribution in June, we need to accrue the 10% retained earnings tax for the undistributed earnings.
Therefore, our 2nd quarter tax rate will go up to 21% and then go back to the normal level of around 11% in the 3rd and Q4. Full year tax rate, however, will still be 13%. This concludes my remarks. Let me turn the podium to our Co CEO, Mark and Cixin for their comments.
Good afternoon, ladies and gentlemen. Let me cover the first three items on the agenda. Let me begin by saying our 20 fourteen's market outlook has improved since our mid January investor conference. The Q1 is typically a slow season for our customers and for TSMC. However, since mid January, we started to see strong orders across all segments.
We now have an improved demand outlook from the following three perspectives. 1st, the demand in smartphone appears healthier than we expected last quarter. The acceleration of LTE infrastructure buildup, LTE smartphone proliferation and the increased silicon content of smartphone improve our demand outlook. The silicon content increases come with multicore 64 bit application processor, multi mode baseband, multi band RF transceiver, image sensors, MEMS, near field communications and fingerprint. These are all included in the smartphone.
The second, TSMC's 28 nanometer technology performance and quality suffice to fuel more of those customers' demand. Fabulous DOI was substantially below seasonal when we exit 4Q last year. So we still expect tablet COI will be below seasonal in 1Q 'fourteen. So for Q2 'fourteen, we expect our demand will continue to be strong and above seasonal in all major applications. Now I'll cover the market supply chain and demand of second half and full year for 2014.
Since Q1 fabless DOI is below seasonal, the 2nd quarter demand on us is unseasonably strong. But we expect fabless DOI will return to seasonal level at mid-twenty 14. Therefore, our second half demand would be more normal. TSMC will gain 28 nanometer market share with 28 nanometer high ksmetogate transition in the second half of twenty fourteen. TSMC also expect to gain overall foundry market share in second half twenty fourteen when we ramp up 20 SoC in the second half twenty fourteen.
However, since our Q1 and the second quarter will establish a higher base,
The quarter to quarter growth of
2nd 3rd quarter and 4th quarter will be both be positive, but will be more moderate than our Q2. For the full year of 2014, our outlook improved from last quarter as follows: semiconductor revenue growth from 5% to 7% fabless revenue growth from 8% to 9% foundry revenue growth from 10% to 14%. For our growth for full year of 2014, it will be higher than the forecasted foundry growth by several percentage points. Then I cover the updates on 16 FinFET, 16 FinFET Plus and our 10 FinFET. First, we have 2 general offers for customers, 16 FinFET and 16 FinFET Plus.
16 FinFET Plus offers 15% speed improvement, the same total power compared to 16 FinFET. More importantly, 16 FinFET Plus offers 30% total power reduction at the same speed compared to 16 FinFET. Our 16 FinFET class matches the highest performance among all available 16 nanometer and 14 nanometer technologies in the market today. Compared to our own 20 SoC, 16 FinFET plus offers 40% speed improvement. The design rules of 16 FinFET and 16 FinFET plus are the same.
IPs are compatible. We will receive our 1st customer product tape outs this month. About 15 products planned for 2014, another about 45 in 2015.
Volume production is planned in 2015.
This 95% tool of 1620 are common, we will ramp them in the same gigabytes in TSMC. 16 Things That Yield learning curve is very steep today and has already caught up with 20 SoC. This is a unique advantage in TSMC 16 nanometer. For 10 SimFET, 10 SimFET offer TSMC's 3rd generation FinFET transistor, designed to meet the power and the performance requirement of mobile computing devices. 10 FinFET will offer greater than 25% speed improvement, the same total power compared to 16 FinFap Plus.
More importantly, 10 FinFap offer greater than 45% total power reduction at the same speed compared to 16 Bing fab plus. And Xinfats will offer 2.2x of density improvement over its previous generation 16 FinFET Plus. So currently, hence, in fact, development progress is well on track, but risk production will be in 4Q 2015. Above are the key messages on the 3 items. Thank you.
Thank you, Mark. And following
Good afternoon, ladies and gentlemen. Volume marks our exciting forecast on our second quarter and the second half of year twenty fourteen. I would like to take this opportunity to share with you 2 topics with you. Maybe the 20 SoG ramp and KSMG's advanced assembly solution to our customer. First, I will brief you on the status of 20 SoC rep.
Let me recap what we have said in last meeting here. We started 20 SoC production in January this year. And by Q4 of this year, the 20 year SOC will account for 20% of the quarterly revenue wafer revenue. And for the whole year of 2014, we expect 20 SoC will be about 10% of our total wafer revenue of the year of 2014, of course. All these expectations remain the same today.
Now there are some major achievements I would like to share with you. 1st, on the revenue speed. 20 SoC by far is the fastest ramping in TSMC's history. Of course, this fast ramp is to meet customers' strong demand. And I believe it's production of 20 SoC in TSMC represents 1 of the largest mobilization in semiconductor history.
Let me share with some number, so you can have a snapshot on this ramp. In about 1 year of time, we have built a manufacturing team of 4,006 100 engineers and 2,000 operators in 2/5, Feb 14 in Thailand and Feb 12 in Hinto. More impressively, in the same time period, close to 1,000 engineers has been relocated among TSMC's suppliers in Hsinchu, Taishong and Tainan. All these are prepared for the 20 SoCs ramp up. This magnitude of mobilization, I believe, is not an easy job.
We move people around that show our strength in manufacturing. And this highly mobilization is not moving the tool or just a handful around. We are talking about we are moving the engineer and operator among the SMC's plan. In the meanwhile, we have installed more than 15 100 major tools for this 20 SoC ramp. Of course, the faster ramp has done with a very good device reliability and very good wafer defect density.
Without those, the fast ramp would have been to a get no sense. Now how important are these 20 SoCs ramp? Well, we view that 20 nanometer provided the engine of TSMC's profitable growth in the years of 20122013. And similarly, we expect 20 SoCs will provide the engine of KSMGs profitable growth in the year 20142013. Now let me switch gears to Advanced Assembly Technology.
The purpose of for us to develop advanced assembly technology is to provide our customer as a better performance at the lower power consumption, while at a lower cost as compared to the previous assembly solution. For example, we have developed CoWoS and CoWoS has been developed to connect 2 guys or more guys together. We have a very high performance and very low power consumption. And today, cobalt is in a small volume production already. However, the cost structure of CoWoS has made CoWoS only suitable for some very high performance application and the product.
To address the cost structure issue and for those of mobile very large volume mobile devices, we have developed a derivative technology called InFO, that stands for integrated brand out. InFO will have decreasing lower cost as compared to COVID. And at the same time, InFO also can have the same capability to connect multiple dice together just as the core was did. Currently, we are working with major customers on the info to incorporate this structure into their future product. We have delivered many functional ties to our customers already and the process optimization are ongoing.
In fact, we are very excited about THMG's advanced assembly technology development as we are building innovative solution for our customers' product, which requires high performance, low power consumption and at a very reasonable cost structure. Now let me sum up of today's key message, which is presented by Mark and myself. First, we have revised up 2014 forecast for the semiconductor industry and the proprietary segment. After outlook has become very positive. More importantly, TSMC will be able to strongly outperform our voluntary peers and we will continue to increase our market segment share as we have done in the past 4 years.
The demand from 28 nanometer 20 nanometer will provide a foundation for our profitable growth and the stronger outperform of this year. The 20 SoC's ramp is a new record. There is one of the largest mobilization in the semiconductor industry. Our 16 Green Fab, especially 16 Green Fab Plus are highly competitive and we have a very similar good EBITDA density performance already, which of course, just like Mark said, is 95% similar to 30 gs SoC, which we already have a very good EBITDA for 4 points. Our telemetry technology development are on track, And we are working on a cost effective advanced assembly solution input for our large volume mobile devices.
And we believe all these activities will pave the way for our continued profitable growth for the next few years. This ends our prepared remarks. Thank you very much.
Thank you, C. C. This concludes our prepared statements. Before we begin the Q and A session, I would like to remind everybody to limit your questions to no more than 2 at a time, so that we can allow all participants an opportunity to ask questions. Questions will be taken both from the floor and from the line.
Should you wish to raise your question in Chinese, I will translate it to English before our management answers your question. Now let's begin the Q and A session. First question, we will invite Goldman Sachs, Donald All right. Well, since Donald prefers to use Chinese, then it will be my job to translate to English first. First question Donald has is with respect to smart phone semiconductor content.
He likes to know what is the semiconductor content for the smartphone on average in 2013 2014 and was the semiconductor content to TSMC per smartphone in 20132014. And if we could do that, you also want us to break it down into low end and high end smartphones? That's the first question. The second question is with respect to 16 nanometer SIMVAD progress. According to Donald, ASML said they saw mobile SIMSAT delay and he was wondering whether the delay is caused by TSMC or another company.
English, please.
Okay. I probably cannot give you as detailed numbers as you wish, but let me give you some numbers from my perspective, from my granularities. For the smartphone total in 2013, TSMC's average wafer value per unit is $7 last year, it will increase to about $8 So this increase, of course, include the second content increase as well as the market share increase. But I cannot at this point, I cannot distinguish those 2. But this increase significantly stands out is in the high end smartphone.
High end smartphone, last year, we are about $10.8 per unit in average. This year, we expect to be $13.9 So that's a major increase. So the mid end and the low end, we see similar. Last year was about $6 and this year will also be $6 and low end is 3.6 and this year will be 3.6 also. However, we do see the low end on the spec continually increasing.
Mid end and low end smartphone spec continue increasing. And we see a lot of features regardless of the mid and low end, then it's still increasing almost like the high end of last year. So these are the perspective we can see now. Secondly, about the SNL's message, I really don't know what it means. But let me give you some comment on that.
If you talk about the FinFET technology difficulties, I must tell you that our 16 FinFET technology development is well on track and our new improvement is well on track. And we are working with customer closely and we expect to ramp up in 2015. But I think one unique feature for our 16 FinFAT is our 16 things that have the same design rule, back end design rule at 20. So we can leverage all the new learning, all the massive work C. C.
Had talked about in this year into next year 2016 FinFET. Secondly, if you observe the industry, mobile device industry, we do see in the past 6 months, we do see the 32 bit conversion to 64 bit in the processing after the Apple's announcement. And that change, that transition include indeed bring a lot of attention of the product development back to 28 20 nanometer product design. And indeed, we see increased demand on the 28 2020 this year as well as next year. So that's our second message.
And the last message I'd like to comment with that is, if you combine in 2016, our Chairman has mentioned to you that combined 2016 total revenue in the first 8 quarters or 1st 2 years will be even bigger than the 28 nanometer revenue in total. So that's how I give you this above. Thank you.
All right. Next question
I can ask a follow-up on the 16. Could you talk about the timing for the 2016 regular version versus the Plus version, if there's a difference on timing and also the customer adoption? Could you also talk about your expectation at this early stage in market share for the 16 node?
So Wendy, your question is with respect to the timing, the availability of the 16 ThinkFAT versus the 16 thin fab plus and then the way the customer adopts, whether they are more adopting 16 FinFAT or the Prokier FinFAT platform?
Yes. 16 FinFAT Plus will be qualified in September. But remember, we and our customer work on 16 Thingset design 1.5 years before, but all the customer already design. The design is on 16 FinFET. Okay?
So the customer for those customers when the product PayPal, for example, we have a first product PayPal this month, it will write on 16 FinFET processes. And for those customers tape out in the second half, mostly, I would say mostly will be right on the 16 ThinkPad Plus. So that's so I would think majority of our product customer will run on 16 FinFET plus And looking into the volume and coming up for the next year, I would say most of the product will be run on 16 FinFET plus Okay. Thank you.
And the second question, if we look ahead to second half, you talked about normal kind of normal profile for growth. And if
you could give a
characterization what that normal would be for Q3, Q4, how you think about normal seasonal? And then in that context for gross margin, given 20 nanometers ramping and depreciation is going up, if potential with normal growth margins can move up.
Okay. Talking about our second half growth will be normal. As I just give you the guidance, our second quarter will grow 22%. We believe second half will be normal means less than 22%. I cannot give you a specific number, sorry.
You also talked about the margin. I think last quarter a lot of analysts asking how can we maintain even better structured profitability given 35% year over year depreciation increase. Let me elaborate and I will talk about the 20 nanometer impact. The reason we can improve structural growth profitability are the following. Number 1, we see the 35% increase in depreciation that's on dollar to dollar, but we also increased 10% capacity.
So if you divide that by unit basis, actual depreciation or whole basis go up by 22%, number 1. Number 2, depreciation accounts for about half of our manufacturing costs. We have another half that's basically the variable costs, indirect material and other fixed cost. We work extremely hard to drive those costs down. So with very good progress.
With that, along with the better blended ASP, thanks to the technology migration and our higher yield and better performance, we are able to raise the overall corporate SGM level. With the ramping of 20 nanometer, which just started in the Q2, we will have very, very small volume shipment. We'll have much more volume in 3rd and 4th quarter. As any new nodes starting with low margin, so we expect there will be some dilution to corporate level margin starting from Q2. The magnitude of that will impact by 1% in Q2.
It will be slightly bigger than 1%, will be a very low single digit impact on our second half. But for the whole year, we still expect to see a slightly higher SG and A compared to last year. Next one goes to Bank of America Merrill Lynch, Dan Hyland.
Thanks. Good afternoon. Thanks for all the clarifications on 2016. It's very helpful. I wanted to follow-up on Donald's questions on the mobile numbers that you put out, which were helpful.
That's a very significant increase in the high end content per phone for TSMC in terms of market share. Congratulations there. I wanted to talk more about your mid end number. I'm a little bit surprised to see that you talked about the mid end phones being basically flat, but you also commented that the specs are increasing for mid to low end phones. So would that suggest that there's significant pricing pressure that and you're not benefiting from that content increase?
Thanks.
This is the number for the full year. So there is the current we can see is from 5.9 to 6. So I really cannot distinguish the silicon content versus the market share. I think we will hold our market share seriously as we had before. The price, as you know, is always there.
Okay. Yes, I think that mid end market is where there's significant units in terms of globally, it represents the biggest part of the units. And I am amazed at how much that content is increasing the mid end zone. So I was a little surprised as to why you're not seeing dollar value in the mid end market go up more or is that maybe happening in the second half of the year in 2014 or 2015? So how should we think about that?
I think it has to do with 2018 also, which is mostly second half.
Dan, do you want to read with your microphone?
Sure. While they were chatting, I thought C. C. Was going to comment there. No, I will not give up my microphone.
I have one more question. I wanted to ask a bit about if you could elaborate on what's your feeling of the progress on EUV is, if you think it's coming on slowly or we're still kind of treading water? And your latest best estimate on when there would be an insertion into progress, again timing? Thanks.
Well, I think we work very closely with the SME. So with their comment about EUV yesterday, I think we hold the same perspective. Okay. Today, of course, the EUV is not up to the production spec. Actually, the most recent breakthrough was 30 watt and now they have higher 80 watt machine, but that we're still working towards that goal.
So and also the same as Peter mentioned yesterday that the EUV will not be inserted in 10 nanometer at the start, because it's already past the window. So we however, our EUV team is still continuously working on EUV, hopefully to insert a few layers after the 10 nanometer
process
start to qualify as a follow-up process simplification,
Okay.
And that will end that will meant to be second half next year.
Thank you. Okay. Next one goes to Deutsche Bank, Michael Zhou.
Could you give us some more color on the advanced packaging you just mentioned? What is the difference between this one and the cohorts? Thank you. The difference between the Inflow and the cohort is actually the geometry to connect the multi dies together. In the cohorts, actually we are using very small geometry like the 65 nanometer geometry to connect the market ties together.
In InFO, we're using the larger geometry, which is still technical confidential information. But the cost is much, much lower. Do we expect that would be adopted by mobile customers? I would like to say that we are working with major customers. Thank you.
The second question is regarding QQ outlook by segments outlook by segments.
2nd quarter, all segments will grow more than seasonal, especially strong in communication, consumer and industrial related applications. Computer will grow less than the other three segments. Thank
you.
Next question goes to JPMorgan, Google.
Thanks for taking my question. My question is about the 2nd wave of demand, both for 20 nanometer. I think some of it is already coming through. And how do you think about 2nd wave of demand for the future process like 2020 or 2016? Is it going to be much smaller?
And how does that have an impact in terms of your thinking on investment as well as future returns?
Thanks.
I think, Gokul, your question is with respect to the backfill of the 2016 nanometer once the first wave customer migrate to the next node. Whether or not we will have sufficient demand as big as what we had in the past and whether or not if not, whether this will change our investment profile and change our return on invested capital?
Thank you. Let me answer this question. The 20 nanometer SoC is not a transition node, okay? We have worked with our customer already come out with very powerful products and in the ramping. So and these customer, some of them indeed will quickly transition to 16 things up plus.
However, still some other product will stay on 20 SoCs for quite a long time, for quite a long time. Not every product require the highest speed, for example. The key is we manage this transition by the 2 commonality between 20 16 are 95%. So when the customer moved from 20 SoC to 16 FinFET, we only need to increase much smaller, very marginal amount of the capital to suffice that demand. Of course, ASP and the product will be more competitive for our customer.
So that's how we so we consider 20 SoC CapEx wise
are almost very similar.
So we always put it together as one note, but it does provide our customer their product grade or product set to continually improve year after year.
Okay. Just one more follow-up on that. I think you have indicated that 2015 CapEx will start to come off a little bit. Should we expect that to continue going into 2016 and 10 nanometer? Or is it intermediate stop and then we need to ramp up as we ramp up maybe EUV or triple patterning those kind of stuff?
We have not decided CapEx for 2015, but from what we are seeing right now, we expect the CapEx for next year will be similar to this year level. However, because while revenue will continue to grow for this year and also for next year, So the capital intensity will go down this year and next year as well. Next book of CapEx will be 10 nanometer. So I think I will be coming on maybe the timeframe of 2016 and 2017. Next question comes from HSBC, Stephen Peleo.
Hi. We focus so much on 28, 20 and 16 nanometer, but I guess one thing I noticed here in the Q1 is your 45 nanometer actually grew about 25% quarter on quarter. That was a bit of a surprise. So what's the driver kind of that mid node? And then the second question would be the more than more strategy.
Are you out of capacity on 200 millimeter? Are you able to transition some of those products to 300 millimeter? What are we thinking for the higher nodes that are still half the business?
I'll answer the 45 nanometer demand. I think our 4045 nanometer market share holds up this year much better. And our the product mostly is associated with the connectivity and the connectivity integration become very big. So in our we hold a very large capacity for our customers. So the demand is very strong this year.
Your second question is Morgan Moore.
On the even higher level nodes, I mean, obviously things like CMOS image sensors, fingerprint sensors, they suck up a lot of capacity. And historically, these are being built on 200 millimeters. So I'm curious, are you out of more mature node capacity? And what are you doing about that?
That's a good question. Actually, we did not increase huge amount of capacity for those specialties, but we did modify and buying some public tours to increase a little bit and also to convert the logic capacity into the more and more specialties capacities. We did all the time. We continue to see the strong demand on those specialties, such as packaging, chemo division, fingerprint especially and embedded flash for automotive for those kind of products. I can just sneak one last question.
We're so focused on intensifying competitive landscape potentially at 16, 14 nanometer. But it seems to me that at 28 and maybe now 45 as well, you guys are just extending or lengthening your period of dominance. So this fear of this talk of potential second sourcing, it almost seems like
competitive landscape almost got less intense.
Would you agree with that?
I think it will be more difficult today and even more difficult in the future. Take 28 nanometer, for example. We this is already the 3rd year the 4th year we ramp 28 and the 3rd year we ramp 28 High K Metal Gate. And first of all, the complexity is hard. But secondly, when we ramp 2020, our performance did not stand still.
We continue to improve the product grade in the 28 nanometer. There are several ways of product grade improvement. That's how we try to defend our market share.
Next question goes to Citi's Roland Xu.
Good afternoon. I think my first question is to Citi. Citi are talking about the engineer mobilization is the key for the best ramp on the 20 nanometer. I think that is the reason you highlighted in our TSN we had enough talent pool for that. I think it's for sure.
But I think going forward, I think the last couple of weeks TSN we would like to I would say we'd like to hire about 5,000 talent. And also at the same time, Hong Hai and the other Tier 1 companies in Taiwan also would like to hire thousands of the talent. So are you worried about the shortage of the talent pool in Taiwan?
I think TSMC today is a preferred employer in Taiwan. So I don't use the word worry.
Okay. I think very nice to hear you are so confident about that. But I think another side question is, how are you going to motivate current employee of the going forward are the new employees and to motivate them to work more hard, more smart, more innovative too and do more contribution to TSMC.
How to motivate the executive employees? Actually TSMC continue to expand and our young engineer or the employees all has a very bright future because of there are so a lot of new openings in the higher position. And company's performance is getting very good. That's enough to mobilize to motivate our existing employees. We never have that problem.
Okay. Sounds like a very good career path to all of your employees. Okay. My second question is to Laura. I think, as you look at your margin improvement actually from a continuous cost reduction is one of the reasons.
And also look at your other manufacturing costs in the Q1 have been kind of about 7% even though you have the same amount of wafer shipment. So my question is, how much room for you to continue cut cost for and to decrease your gross margin.
I also asked myself the same questions, how much room? So I was every time I was surprised how much the engineer in the factory can do. So I'm confident we will continue to drive that. It's old technology, current technology and leading edge technology.
Okay. Thank you. And I think, Paula, I think TSMC now is loading at very high utilization now. And what's your expectation if TSMC is loading at 100% utilization? What is the margin expectation for TSMC
at the current SG and A? Thank you.
I think you're trying to understand whether we can achieve 50% again if the capacity utilization is 200, right? I can say, I think we have the capability to achieve 50% if the utilization exceed each 100%. Okay. I think this is about time that we should open the Q and A to those people who are on the line. Operator, could you proceed with the first caller on the line?
Yes, ma'am. First question from the line of Nivi Hosseini from SIG. Please ask your question.
Yes. Thanks for taking my question. Going back to the commentary on 16 and 16 plus it seems to me that 16 nanometer plus will have a larger mix of revenue and 16 nanometer revenue contribution will be limited. Could you please clarify on that? And then when should we think about the actual contribution?
Is this going to be more of a Q4 2015? Or would it be more meaningful in early 2016?
All right. Mehdi, I think his question is with respect to 16 ThinkFAT versus 16 ThinkFAT plus whether or not we will have a bigger business volume from 16 Think Fab Plus and if so, whether or not the margin volume will be coming from Q4 of 2015 or we have to wait until 2016?
From 2015, first of all, the volume 2016 things that will happen in 2015. Let me drive that. Even for some of the customer initially their product sits on 16 FinFET, they also would like to migrate their second if market opens the opportunity to upgrade their product. So that would be the majority, I really mean massive majority would be 16% plus.
Okay. And then one follow-up question for Laura. You talked about the SG and A trend into the second half. What is what should we think about R and D? Should we also assume that the R and D as a percentage of revenue will go higher in the second half and into 2015?
I think our current R and D to revenue is ranging from 7% to 8%. If I look at the second half, I think that's still in that range from 7% to 8% range.
Okay. Thank you.
I think we can take another call from the line. Operator, could you please proceed?
Yes. We have the next question from the line of Brett Simpson from RT Research. Please ask your question.
Thanks. Thanks very much. Just had a quick question. Can you give us a sense within the 28 nanometer nodes, how this splits between polysilon and high ks? And how do you think this might trend through this year?
So Brett's question is what is really the mix between polycyon that is our 28 LP versus our high key metal gate and what is going to be the trend with respect to that kind of mix throughout this year?
Allow me to answer that. Our 28 nanometer HiK Mirror Gate has 3 options, 28 HP, 28 HPM and 28 HPC. And this year, these 28 high ks middle gate technology will be about 85% of the overall 20 nanometer in terms of the wafer.
Great. That's very helpful. And then a follow-up question on info. Can you maybe talk a little bit about attach rates for info over the next couple of years in smartphones. Is this something you expect all major smartphone chipmakers to adopt?
Or is it something that you think is more targeted at the high end? And maybe as a quick follow-up on that, what is the real benefit that Ingrid is bringing to chipmakers? I don't know if there's a performance or power saving you can share with us. And also, how should we think about the margin structure for this within TSMC's business? Thank you.
Okay. We you asked whether we are working with the customer and when you have a product out. We are working with the major customers That all I can say and the outlook is very good. Performance is very good. The cost is low.
I believe that we will see the product out, but that was our customers' schedule. Technology is close to being in production ready probably early next year.
Okay. And if we look out maybe a couple of years from now, just to get a sense, is this something you think will be a very high attach rate? When you sell SoCs at the leading edge, do you think the percentage of chips you sell at that leading edge will be attached with info? I'm just trying to get a sense for the penetration that you think info will have within your the biggest smartphone chip makers?
We certainly believe that attach rate, you are using that working attach rate. We certainly think you will be very popular among the mobile product. And because of it provided a very low cost solution and continue to keep the high performance and lower power consumption. Whether it's going to be what is the percentage of test rate, I cannot answer that question right now.
Okay. Thank you very much.
All right. Let me go back to the floor now. The next one will be Morgan Stanley's Bill Lu.
Hi, good afternoon. I'll start with a housekeeping question for Laura. A quarter ago, management said that the company was pre building, I don't know what it was exactly, but building some of the demand in 2Q and in 1Q and that impacted margins. If you look at your 2Q guide, if that didn't happen, can you tell me what the margins would have been? I think that would have been 1Q margin a little bit lower, 2Q margin a little bit higher, right?
2Q will be a very strong quarter and our capacity are essentially full. So there's no need to
build inventory and no room to build inventory.
Yes. So I wasn't clear.
I don't mean that you would do that again in 2Q, but the what you did in 1Q impacted 1Q margin and 2Q margins, correct?
Yes. Phil's point is that since we did it in the Q1, which probably represents some sort of a pull in from the Q2. So had we not done that, our 2nd quarter utilization probably will be even higher and in 2nd quarter's margins would be higher. I have to talk on Q1, okay. As I said, Q1, we did do some inventory and the impact to Q1 about 1 percentage point margin.
For Q2, had we continued doing that? Well, you have to look at which node you're building. For example, for certain capacity, it's already full. So we can only run that much, right?
So I don't know how to assume
we will be exceeding 110% utilization. That's essentially not possible. So am I
answering your question? Not exactly. I guess I can take it offline. That's okay.
Okay. Maybe I should say that the inventory build for the Q1 has no impact on 2nd quarter. It will impact Q1. This will utilize Q1's capacity ahead of time.
Doesn't mean that Q2 margins would have been a little bit higher?
Q2 order already coming in. It's a regular order.
Second question is on this inventory cycle that we've seen. So if we look back into last year, 1Q, 2Q were also very good and then things dropped off in 3Q and 4Q. Can you talk about what you're seeing now that is different from a year ago in terms of potentially a broader base recovery, maybe more end markets, more customers? Or what are you seeing that gives you confidence that, that will happen again this year? And then I guess if you look at this more broadly, TSMC used to have a very diversified customer base.
But in the not too distant future, I could see your top two customers being 25%, 30% of total revenues, both in the mobile segment, right? How do you manage that concentration going forward?
Phil, you actually have 2 questions packaged into 1.
Okay. I think as you know, typically in the past few years, we see the end of the year people can try to control inventories. And toward the end of the year, it's about back to the seasonal level. However, last year, we look at our fabulous DOI. And in the industry, they try to control the inventory, reduce inventory.
Even at the end of Q3, we see them get to seasonal. And going to Q4, everybody find that their inventory is below seasonal. What our data shows below seasonal by 6 days, which didn't happen before. Therefore, you see the reason they did this because of their perspective for the outlook when they were in the Q3 last year. Okay.
Now for this quarter, we see the inventory not even back to seasonal. It's still from our data is minus 5 days below seasonal. So they don't have time to replenish inventory given the better outlook. So what happened, we feel the inventory will happen in the 2nd quarter. Now whether this year will be as bad as last year, I think I'm particularly more optimistic because even down to the Q2 is only to the seasonal level.
Okay. So it might even we assume doesn't overshoot, it shouldn't be very much below seasonal. So this is the difference we see this year.
Customer concentration risk.
Customer concentration,
We just work very closely with our customers, okay? Remember, if you are IDN, you have to face and if you have big market share, you have to face the same consumer product demand key control. So this problem is more industry problem than our problem. But we deal with this problem by working very closely with our 2 biggest customer. And today, we are already together planning our 2015 supply and demand very closely.
So we recognize these challenges. Our customer also recognize the same challenges. So the only solution is work very closely together. Okay.
All right. Next question goes to Barclays, Andrew
The first one is the CapEx number for next year about RMB10 1,000,000,000. For this year, we are going to spend a lot of money on 20 nanometer capacity. It is very likely 1 or 2 customer is going to migrate direct a large customer to 16 FinTech Plus or something. And earlier you say this capacity is 95 percent convertible. I believe the spending is very low.
Assuming we have a 40,000, 50,000 capacity by the end this year and next year 30 ks convert to 16 ks instead of adding a new capacity. Supposing next year CapEx should be sharply declined compared to this year. So I don't know what's
the mix on this one. Thank you. You said next year the capacity will suddenly decline? Yes, because
your 620 versus 2016 is 95% convertible.
What we see is this year we ran 20 nanometer very steeply. Yes. But towards the end of year, we see next year the combined 2016 capacity will continue to increase next year. So some of the 16 FinFabs, we will convert 20 to 16, but we will also add a new 16 FinFabs capacity next year. That's what the most CapEx this year is deal with for.
So the total 2015 2016 capacity will continue to increase next year.
So total combined 20 plus 16, the amount of capacity you are going to add quite similar for both each year. Can we say that? For example, just using example is 40 ks capacity by the end of this year, next year and next year about 80 ks?
Allow me to say the increase of total capacity increase next year, I think will be more than the conversion of 2016.
16? Andrew, I think you can go home and work out your numbers. Yes.
The reason I asked this question because I assume one customer take out 50% of your capacity on 20. This customer is not going to use 20 next year. It's going to migrate 16 to another. And you have a totally the capacity next year, you don't need to add that much on 2016 unless you add additional 20 nanometer capacity.
I think the key is this customer will still continue to use 20 SoC next year.
That's right. And Andrew, That's cleaner.
That's cleaner. The second question I have is, when you calculate the U. S. Dollars per smartphone, do you calculate based on the shares you have or you use the total value divided by the global smartphone shipment?
Yes. We use the total TSMC with revenue divided by global smartphone shipment.
That's why the high end side,
if you gain shares, then your ASP change a lot. Yes, yes. That includes the second content increase and also the share increase. I cannot distinguish which portion and how much at this point.
But based on our calculation, it should be much higher than $8
Maybe your number is correct and you may be very happy. Yes.
Average total average? Yes. Okay. I'll check with my staff.
Thank you.
Okay. Next question will come from UBS, William Dong.
Okay. Thank you. My quick question is, I think in terms of competitive landscape, there's always been a lot of talk about design portability. Obviously, I think your competitor will try to come after your clients next year very aggressively. So I wanted to check what is your view on design portability?
And is it a realistic threat as sort of with the move from 2020 to 2016, we're using the same design rule. Does that really mean that the competitors can actually try to get some of these customers?
All right. So William's question is with respect to design portability in the sense that if 20 nanometer and 16 nanometer share the same design rule, will we open the window for our competition to learn something about our 20 nanometer rule and then compete with us on 16 nanometer.
Let me answer the question. 1st, 20 SoC and 16 gigabytes are totally different device structure. Even the back end design rules are similar, we cannot port from 1 to the other easily. No, it won't be easy. And what's your second question?
Okay. So I guess from 20 to 16, it's difficult. But in terms of perhaps you having 16, your competitors having 16 nanometer as well. Obviously, I think there's been some talk in the market about them having some ability to port designs. Do you think that's a realistic threat?
Or is that really just a lot of wishful thinking?
Well, Mark already answered this kind of question saying that from 14 from one country to the other countries, we are getting harder and harder. The real reason is all the device are catalytic right now is related to the strength, strain or those kind of things which you cannot get copied. You cannot delay or you cannot do the reverse engineering to look at what is the device structure and get the same kind of IV characteristic. So it's quite very hard. It's actually very hard.
Okay.
Let me answer that. Well, the porting, it happens. And we I just want to bring out 2 points. We just have to deal with it. Let me point out 2 points.
1 is booking its cost more and more nowadays for this generation. I think it takes a lot of R and D resources to do that. Secondly is, we just have to do a better 16 technology. There are reasons to do that because first of all, we ramp 20 SoC massively this year and a lot of learnings, a lot of process window control, a lot of design, collaboration with our customer, we built ahead of our competitor. So we believe R16 things that right on top of our 20 SoC, given their same user will be more mature at the time compared with our competitor.
All right. There will be follow-up questions from the floor and that will be Bank of America Merrill Lynch and Stan Heiler.
Yes. I just wanted to come back a little bit to the 2016 discussion and 2016 discussion. We've again and again, this industry encountered some big node changes and 28 was fraught with problems that TSMC didn't anticipate and your customers did not anticipate when 28 was first rolled out. How should we think about 2016? This is really unchartered territory.
It is in a totally new device structure. Should we be a little more conservative on the possible unknowns coming in and that this could easily be pushed out say a few How much are you really setting expectations here very high that ZUKA now 16 in the market? Should we be thinking of this as a pretty uncertain note given how early it is? Thank you.
I think this is your comment. We'll accept that and think
and I think we at
this point, we develop our technology. We can only make sure our technology do not stand in the way when customer has need for product needs, we'll be there and mature and support their business with enough capacity. Okay. As I mentioned earlier, industry market does change, for example, from 32 bit to 64 bit and that does sway some of the schedule of 16 Thingside. But today I really talk about our readiness, okay, as to as the how much real business and we'll let you know when we do that next year's financial forecast.
Just to be clear a follow-up, just to be clear that so it's kind of we should start to see volumes in first half twenty fifteen where we'd start to see a few percentage of revenue based on your current expectations, a few percentage contribution by Q2 next year,
is that fair? Or else checking. The 16? Yes. Okay.
We will see some revenue in 2015.
Good. Okay. Setting expectations low. That's good. I want to follow-up on the VINFAR.
This is quite interesting. Could you maybe elaborate a bit more on what exactly are you going to be attaching? So which devices we're talking about in terms of with co ops, it was pretty much the PLD companies were there and others on baseband. But what devices are you attaching on the initial generation between the different chips? Yes.
On the initial generation between the different chips? And second part of that question would be, what kind of how many customers do you expect to manage to have in this area? Because you start handling lots of devices and lots of customers, it gets a little complicated. You start to look more like an OSAT. I wonder if this is going to be a pretty small group of high volume products.
And finally, on as you attach, are you actually doing the chip attach or will you be doing only the wafer level activity and will you be having working with the OSATs to do the actual chip attach? Thank you.
Well, thanks to answer your question. The info actually we are right now working on application process together with memory guys, if that's good enough for you. I cannot say anything more than that. We're working with mobile product customers and we did not we expect a very high volume, but we did not work with many, many customers
as current status.
We are working on the wafer level plus stacking die on top of it, we are able to do the complete line out here.
Thank you.
All right. We have a hand raised on the back of the room. I think this is from the media. Please say your name and the company you work for.
Hi, Mark from UJEN TV. Just congratulating on the DSMC on the very great another great quarter. But I still have a just out of curiosity, I'm just wondering what the management team right now, how is it the management team right now, because we're not obviously more is not here. And I'm just wondering if that's a sign that you're very confident that for both CEO right now here. And how do you divide work right now between Mark and Cixi, just out of curiosity?
And are we is TMC shifting into a new generation management team? Well, I'm delighted to work with C. C. Of course, as Chairman, we 3 contact constantly to devise new initiative for the companies all the time. And the rest I think is for you to judge.
But how open is Morris to both of your ideas to the company? I mean, does he just let you guys do your expectation or do you still make the final decision? Of course, we everybody contribute ideas. Of course, decision usually is made together and but more than often we find wisdom talking, discussing with Maurice, our Chairman And that's we learn and that we want to grow and to up to his expectation, I guess. Thank you.
All right. I think in the interest of time, we will conclude our conference here today. 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 will be available through TSMC's website at www.tsmc.com.