Welcome to TSMC's 4th Quarter 2013 Earnings Conference and Conference Call. I'm Seo Seo Lee Le Sup san, TSMC's Director of Corporate Communications and your host for today. Before we begin, please let me extend our warmest wishes to all of you for a very happy year of the course. Today, VBAM is webcast live via TSMC's website at www.tsmc.com. If you are joining us through the conference call, your dialing lines are in listen only mode.
As this conference is being viewed by investors around the world, we will conduct this event in English only. The format for today's event will be as follows: 1st, TSMC's Senior Vice President and CFO, Ms. Laura Ho, will summarize our operations in the Q4 full year of 2013, followed by our guidance for the current quarter. Afterwards, TSMC's Chairman, Doctor. Morris Chang and 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 lines for the Q and A.
For those participants on the call, if you do not yet have a copy of the press release, you may download it from TSMC's website at www.tsmc.com. Please also download the summary slides in relation to today's earnings conference presentation. As usual, I would 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 and Happy New Year to everyone. Thank you for joining us today. I will start my presentation with financial highlights for the Q4 and a recap of 2013 financial performance followed by the guidance for the Q1 of 2014.
In the Q4, TSMC's business was negatively impacted by semiconductor supply chain inventory management. On a sequential basis, 4th quarter revenue declined 10.3% to TWD146 1,000,000,000 Gross margin was 44.5%, down 4 percentage points from the Q3, mainly due to lower capacity utilization. Total operating expenses decreased 11% as we took several expense cutting measurements during the quarter. This leads to an operating margin of 32.8 percent, down 3.9 percentage points from the 3rd quarter. Non operating items was again of RMB2.6 billion.
We have reversed the RMB1.2 billion impairment loss due to strong business recovery from 1 of our invested companies. In addition, we received the last payment of litigation settlement from SMIC. Overall, EPS was $1.73 in the 4th quarter, ROE was 21.7%. Let's take a look at revenue by application. During the Q4, inventory correction continued across all major segments of the semiconductor supply chain.
Our communication, computer and consumer related revenue declined 13%, 7% and 20%, respectively, while industrial and standard products remained flat during the quarter. On a full year basis, communication increased 29% and represented 54% of our revenue of 2013. This reflected the strong demand for application processor, baseband, display driver and other peripheral ICs used in mobile computing devices. Computer decreased 10% with PC graphics declined the most. Consumer increased 43% year over year, reflecting the strong demand in the next generation game consoles.
Industrial and standard increased 14% as mobile devices use various ICs enabled by our specialty technologies such as touch controllers and the power management IC, etcetera. Our technology 28 nanometer contributed 34% of our total wafer revenue in the 4th quarter, up from 32% in the 3rd quarter. On a full year basis, 28 nanometer tripled and contributed about 30% of our total wafer revenue, a big increase from the 12% in 2012. Now let's move on to the balance sheet. Cash and marketable securities was TWD245 billion at the end of the 4th quarter.
Current liability increased by $42,000,000,000 due to higher accounts payable to equipment suppliers. Accounts receivable turnover days increased to 48 days. Base of inventory remained at 45 days. Let me make few comments on the cash flow. During the Q4, we generated RMB103 1,000,000,000 from operations, invested RMB74 1,000,000,000 in capital expenditure and repaid RMB2 1,000,000,000 short term loans.
At the end of the Q4, our cash balance increased TWD26 1,000,000,000 to TWD 243 1,000,000,000. In the Q4, free cash flow was an in store of $29,000,000,000 Now, I would like to give you a recap of our performance in year 2013. 2013 was another record year for TSMC. Thanks to the technology leadership and excellent manufacturing execution in 28 nanometer, we were able to capture the strong growth in mobile computing market. From a financial point of view, revenue increased 18% year over year to reach NT597 billion dollars or in a U.
S. Dollar term above US20 billion dollars dollars
On the
profitability side, gross margin declined 1.1 percentage points to 47.1 percent due to lower capacity utilization in 2013, while our structure profitability continued to improve. On cash flow, we spent TWD288 billion or US9.7 billion dollars in CapEx, up 17% from 2012. However, we were able to grow operating cash flow at a faster rate of 22% to reach RMB347 1,000,000,000. Therefore, free cash flow increased by 54% year over year to reach CLP 60,000,000,000 On earnings, income before tax increased by 19% versus 2012. Meanwhile, we took a hit by the higher effective tax rate.
The effective tax rate went up from 9% in 2012 to 13% in 2013. As a result, EPS increased at a slower pace of 13% to reach NT7.26 set a new record. Overall, our ROE was 24% for the whole year, meet our long term financial objective of bigger than 20% ROE. I have finished my report on financial part. Now let me provide you a Q1 outlook.
Based on the current business expectation and a forecast exchange rate of 13, we expect our revenue to be between and TWD138 1,000,000,000 This would translate into 6% Q over Q decline. On the margin side, we expect the Q1 gross margin to be between 44.5 percent 46.5 percent and operating margin to be between 32% 34%. As you can see, 1st quarter gross margin is expected to be better than the 4th quarter despite a lower revenue. Let me explain why. You all know our business has certain seasonality.
Q1 is normally a slow quarter. If we can start a wafer earlier in a slower quarter, then we will be able to complete more wafers in the following quarters when the business pace picks up. This way we were able to compete and ship more wafers to support a surge demand in the peak quarter without having to build to a peak capacity for that quarter. Meanwhile, we can also benefit from better utilization rate in the slower quarter to improve our profitability. We began to implement this practice few months ago and expect it to be benefit our gross margin by 2 to 3 percentage points in the Q1.
Another thing I want to highlight is the tax rate for 2014. We expect our full year effective tax rate to be about 13.3%, which is about the same as 2013 13%. However, from a quarterly perspective, 2nd quarter would carry about 40% of the total tax burden for the whole year due to the need to accrue the 10% on distributed return earnings. This concludes my remarks. Let me turn the call in to our Chairman, Doctor.
Morris Chang.
Today, our comments are scheduled as on the slide on your left. First, I am very glad to have the opportunity to introduce our new top management team. I first start with Laura, although I think everyone knows Laura well. Laura has a bachelor's degree from Kunst University, a master's degree from National Taiwan University, both degrees in Finance. She worked for Cyanamid, Wise, Thomas and Betts and TI ASA before she joined TSMC in 1999.
And she has been TSMC's CFO since 2003. Next, Doctor. C. C. Wei, C.
C. Has a bachelor's degree from Georgetown University and a PhD from Yale University, both in Electrical Engineering. CEC worked for PI SGS Chartered before joining TSMC in 1998. C. C.
Has been Senior VP of Operations, Senior VP of Business Development, Co COO and in the co COO job, Zixi was successfully responsible for R and D and operations. Now C. C. Is President and Co CEO. C.
C. Is 60 years old. And I should add that Laura is 57 years old. Mark Liu. Mark has a B.
S. From National Taiwan University and a PhD from Berkeley, both in Electrical Engineering and Computer Science. Mark worked for Intel, Telefonica Labs before joining TSMC in 1993. And at TSMC, he has been VP Senior VP of Operations and he was also a co COO. And all the time he was co COO, he was responsible for our sales, marketing and planning.
And now Mark and T. Are President and Co CEOs of the company. Mark is 59 years old. I'm not going to introduce myself. So let me talk about 4Q and I will just give you a few comments, a few words on the year 2013 and I will say more words on this year.
4Q, I think Laura already discussed it. It's pretty much as we guided it 3 months ago. Our revenue was affected by the supply applications. The supply chain BOI declined from one day above seasonal in the Q3 to one day below seasonal in the 4th quarter. However, our structural profitability remains intact.
The lower utilization caused by lower revenue resulted in a lower gross margin and operating profit percent than 3Q. On 2013, overall, we are pleased by the results. It was another consecutive year of record performance. And as Laura pointed out, revenue grew by 18% and profit before tax grew by 19%. Now looking at 2014, we expect still another consecutive year of double digit growth in revenue and I'll talk a little more about profit later.
1Q is a seasonally weak quarter for IC Companies, including us. And supply chain continued to manage inventory conservatively even when the BOI has already reached below seasonal level. We expect the supply chain VOI to be 2 days below seasonal in 1Q at the end of Our structural profitability in 1Q still remains intact. In fact, it will probably improve slightly, as you can tell from the guided profit margins. For full year 2014, we forecast the following industry numbers.
For worldwide semiconductor industry, we forecast 5% growth. For fabless industry, we forecast 8% growth. And for Foundry Industry, we forecast 10% growth. For TSMC, as I already did, we are forecasting revenue growth surpassing the growth of the foundry industry. 2014 capital budget is estimated to be between $9,500,000,000 $10,000,000,000 similar to that of last year.
About 95% of the capital expenditure is for advanced technologies and we mean 20 nanometers, 16 nanometers, more 28 nanometers, R and D and our mass car portion. Depreciation expense is expected to increase by about 35% year to year. The ratio of depreciation expense to revenue is expected to rise by a few percentage points in 2014. We will have a higher blended ASP by several percentage points, resulting from our new technologies, principally the high k metal gate 28 nanometer and the 20 SoC. We also plan to have better operating efficiencies.
The higher operating efficiency would include lower variable cost to wafer, higher manufacturing productivity, etcetera. Now between those 2, principally the higher blended average price, which results from the richer product mix principally from that and also partly from the better operating efficiencies, we intend to offset the increase of depreciation as it is in the revenue. We believe we can maintain and perhaps even improve our structural profitability in 'fourteen versus last year. From Q2 on, we see strong growth. We are our growth engines in terms of market segments, mobile products, smartphones and tablets will be the growth engine.
In terms of technology, high scale metal gate 28 nanometer and 20 SoC are our growth engines. I will say a few words about mobile products now and Citi will, a little later, talk about the new technologies. Smartphones are expected to grow by 25% to 1,246,000,000 units and tablets are expected to grow by 21% to 307,000,000 units. Now to be a little finer brand, the high end smartphones are expected to grow 8% year over year to 3.25000000jumens. The middle end, 22% year over year to 449,000,000 units the low end, 45% year over year to 472,000,000.
Dollars And due to the continued performance improvements, which means multimode and 64 bit, etcetera. And also due to feature enhancement such as fingerprint, MEMS, NFC and new scanners in Wi Fi and Bluetooth. We expect silicon content for the mobile devices to continue to rise, silicon content in the mobile devices to continue to rise. And TSN's share in the non memory silicon content of these devices is expected to increase from 45% last year to 47% last year. As a result, TSMC revenue from mobile products are expected to grow more than 35%.
And just looking a little further ahead further than this year, We expect to continue benefiting from the growth of mobile products in 2,050 and expect to see emerging devices such as wearables and others to join the line for the mobile products. Now let me ask T. C. To speak to the technology aspects of our growth engine.
Zixin? Okay. Thank you, Chairman. Good afternoon, everybody. I'm Qiqi Wei, and I'll give you the update of our 28 nanometer high gain network version.
Okay. Let me recap the history. We start the 48 nanometers volume production in year 2011, mainly on the 28 LP, the oxynitrate gate version. And since then, the business continue to grow. So last year, we have tripled the 28 nanometer business versus year 2012.
And in this year, year 2014, the business, 28 nanometer, was continuing to grow at least by another 20%. And all the increase are coming from the 28 nanometer, the high gain metal gate voltage, which is we name it 28 HPM. Let me add more color to it. We expect we are going to have about more than 100 takeouts from about 60 customers in this year in 28 HPM. Now you may ask why, why there are so many products will be designed on this technology.
One of the main reason I can give it to you is the performance, the superior performance. For example, 28 HPM compared with 28 EOP that was again another 30% of the speed at the same kind of power consumption. Or you can say that at the same power consumption at the same speed, you are consumed 15% less power. And everybody knows that the power consumption in the mobile device is very important. Okay.
That's what we think we have a very high good business under 28 HPM. Now furthermore, after the 28 HPM, we also offer 28 HPC, which is a low cost version of the 28 HPM. The 28 HPC is developed to meet the customer's demand to compete in the mid to go in smartphone market. And we expect that this 28 HPC will have a very strong demand in the next 2 years. That's what we have, okay?
Let me give you some information on the competition to explain why we are so confident on this 28 nanometers high generated vehicle. If you still remember that long time ago, we mentioned about gay first and gay last. Still remember that terminology? So simply to say that, GameLoft version will give you better performance and better process control. And as a result, all our customers will enjoy using the gatemaster version, the technology to have a higher or better performance if the other product which are designed on the different approach.
In addition to that, we will say that because of the better process control and TSMC's manufacturing excellence, we have a much better yield than our competitors. And so that our customer enjoy the store back cost. That's what we have. And that's probably explained that our confidence that on the 28 nanometers business continue a very good business for us. Now let me switch the deal to 20 SoC.
After another exciting news that we have, I want to share with you. 20 SoC is the technology that we developed to enable TSMC's customer to lead in the mobile device market. And this technology, we believe in this year, next year, we'll have a very good business to capture. So what is the status now of the 20 SoC? We have 2 fabs, Feb 12 and Feb 14 that complete the core of 20 SoC.
And as a matter of fact, we started production. We are in the volume production as we speak right now. So it's in the high volume production as we are speaking right now. Let me add more information to that. First, there are more than US10 1,000,000,000 dollars have been committed to build the capacity.
2nd, we have more than 2,500 engineers and 1500 operators right now in manufacturing during the 20 SoC supporting production. The ramping rate will be the fastest one in KPMG history. Using the ramping rate, you can get the hint of the digits, how big the business is. Another fact to share with you, we have probably at the end of this year, we have more than 1,000 take out from about 1,000 customers that we are producing the 20 SoC product, okay? You might ask, good business.
How about the competition? If you have a very strong competition, you might cannot have too much of confidence on the future. Let me talk about the competition. I'm very confident that our 20 SoC is high the gate density in volume production at the 20 nanometers node. Okay, please remember that high gain density and high volume production.
I don't think any competitor today can claim on this kind of production and with this kind of gate density at this time, nobody. And most of our competitor, to be frank with you, they are not even into this game yet. So we are confident we will have a full business that will contribute to TSMC's revenue wafer revenue by probably around 10% this year. And that will conclude my presentation. Thank you for your attendance.
Thank you, C. C. Now looking into next year now, 2015 and perhaps even 2016, I think next year this time, I will be telling you that our growth engine in technology next year, a year from now is going to be 16% impact. Now recently, Intel published some data, which showed our 16 FinTechs and targets to be behind. And we think that the data is highly misleading.
So I now will ask Mark Liu to speak to PSMC's competitiveness versus Intel and Samsung.
Good afternoon, ladies and gentlemen. I will start this topic by update you our recent development status of our 16 FinFET technology. 16 FinFET technology has been a very fast paced development work in TSMC. And we have achieved the rich production milestone of 16 FinFET in November 13, November last year. And this month, we should have the 1,000 hours so called the technology qualification.
So the technology is ready for customer product takeout. Our 16 Things That Yield Improvement has been ahead of our plan. This is because we have been leveraging the yield running of 20 SoC. Currently, 16 Fin Fair S RAN yield is already close to 20 SoC. And with the status, we are developing an enhanced transistor version of 16 FinFET plus with 15% performance improvement.
It will be the highest performance technology among all available 16 and 14 nanometer technology in 2014. The above progress status is well ahead of Samsung. Let me comment on the Intel's recent graph shown in their investor meetings showing on the screen. We usually do not comment on other companies' technology, But this is because this has been talking about TSMC technology and as Chairman said has been misleading. To me, it's erroneous based on outdated data.
So I'd like to make the following rebuttal. On this view graph, the vertical axis is the chip area on the large scale. Basically, this is compared to chip area reduction. On the horizontal axis, it shows the 4 different technologies, 32, 28, 22, 20, 1416 FinFET and 10 nanometer. 32 is Intel Technology and 28 is TSMC Technology.
So it's the following 3 nodes, a smaller number 20, around 14 VINFETs at Intel, 16 VINFETs at TSMC. On the view graph shown at Intel Investor Meeting, it is with the gray plot showing here. The gray plot shows the 32 20 nanometer TSMC is ahead of the area scaling. And but however, with 16, the data gray data shows a little bit uptick and following the same slope go down to the 10 nanometer. What's the correct data we show on the red line?
That's our current TSMC data. The 16th, we have been volume production on 20 nanometer. As C. C. Just mentioned, this is the highest density technology in production today.
We took the approach of significantly using the FinFET transistor to improve the transistor performance on top of the similar back end technology of our 20 millimeter. Therefore, we leveraged the volume experience in the volume production this year to be able to immediately go down to 16 volume production next year within 1 year. And this transistor performance and innovative layout methodology can improve the chip size by about 15%. This is because the driving of the transistor is much stronger, so that you don't need such a big area to deliver the same driving circuitries. And for the 10 nanometer, we haven't announced it, but we did communicate with many of our customers that that will be the aggressive scaling of technology we're doing.
And so in the summary, our TENFIM technology will be qualified by the end of 2015. TEN FinFET transistor will be our 3rd generation FinFET transistor. This technology will come with industry's leading performance and density. So I want to leave this slot by 16 FinFET scaling is much better than Intel said, but still a little bit behind Intel. However, the real competition is between our customers' product and Intel's product or Samsung's product.
TSMC's grand alliance that is the alliance of us, our customers, EDA, IT, communities and the supplier is the largest and the only open technology platform for the widest range of product innovations in the industry today. As for the takeout of our 16 Think FAD, more than 20 customer product takeouts on 15 things that technology scheduled this year already. They include wide range of applications, baseband, application processors, application processor SoCs, graphics, networking, hard disk drive, few programmable array, CPUs
and service.
Our 16 SIM fab technology captured the vast portion of products in the semiconductor industry. We've been actively working with our customer designer on this. It's been since last year. TSMC speed and productization of the customer's product and our ability to execute for a short time to market for our customers
are far superior than
Intel and Samsung.
So lastly, I would comment on the mobile products. With this 16 FinFET technology and the innovations of processor architecture and various IP from our customers. We are confident that this planned 16 ThinkPad mobile product, which going to take out to us, will be better than Samsung's 14 nanometer and better than Intel's 14 SoC. Thank you very much.
Thank you, Mark. Summary. In summary, I want to say the following. First, in 2014, we expect double digit revenue growth and we expect to maintain or slightly improve our structural profitability. As a result, we expect our profit growth to be close to our revenue growth.
In 2014, the market segment that most strongly fuels our growth is the smartphone and tablet mobile segment. The technologies that fuel our growth are the 20 SoC and the 28 IK Metal Gate, in both of which we have strong market share. In 2013, our strong technology growth will be 16%. We believe our brand alliance will outcompete both Intel and Samsung, outcompete. Thank you very much.
All right. This concludes our prepared statements. Before we begin the Q and A session, I would like to remind everybody to limit your questions to 2 at a time to allow all participants an opportunity to ask 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 questions.
First question comes from the floor. It will be from Roland Xu of Citi Securities.
Very happy to see Chairman to host the energy team. I think my first question is on the minimum impact So and I know we have 15 plus. So my question is Daniel, whether the 15 plus is improving from the 16, FinFET plus is a transistor enhancement. For the design, back end design rule are similar to 16 FinFAT. Therefore, designer can design on 16 FinFET and be recharacterized, upgrade their product performance.
This transducer, as I mentioned, also can reduce the cell size, standard cell size and with other and with the enhanced performance transistor. That's the way to reduce the chip size. So we do not intend to change the naming. I mean, this is the engineering. This is the word that this is the name that we choose earlier based on the physical consistent number and we do not intend to change to change mainly.
Okay. Thank you. So, this is fast, this is actually the same driver as the 20 and with the very happy to hear you are so confident about your 16 past half of March. My second question actually is for Nora, actually for the cash business. So I think with a very good bottom line last year and this year and also with improving free cash flow.
If you look at the free cash flow, when the free cash flow sufficiently cover our current $3 per share dividend level, that is the time we will seriously consider to increase cash dividend.
So in the model actually our estimate this year, 20 14 free cash flow probably reached about 3.5%, 3.6% this year. So, there this is the only one consideration
That's the major element. I will not comment on your model. Other than the free cash flow consideration, another thing is we look at the capital intensity. Our capital intensity in the past 4, 5 years has been very close to 50%. That number will come down this year, 2014, will even come down further in 2015.
So that added another element for us to seriously consider cash dividend increase.
Okay. Thank you. I guess, he's asking when we raise the cash dividend. I don't think that matters to say that certainly 2014 is perhaps the first half 2014 dividend payable in 2015. I think we start out the question.
Okay. Our next question comes from the floor and that will be from Bank of America Merrill Lynch, Stan Hyver.
Thanks. I came with a lot of questions, but you answered a lot of them earlier on. I've got 2. But I first want to comment to congratulate Doctor. Chang and your team as well for your achieving your 3 to 5 year target of turning around technology and turning around growth in the company.
It's been remarkable to see. Also congratulations on handing off the transition here to the management I've got 2 questions. First, I guess, as we look at maybe perhaps for CCY on the you agree that most likely implementation of EUV appears to be profoundry, number 1, over kind of 1 to 2 layers at 10 nanometer, and that, you can kind of achieve this X number of wafers per hour to hit a rollout of that technology? What exactly wafers power do you need? And what time will you achieve those?
Mark, will you answer that, please? I think he was asking whether we are considering using DoD in Canada with maybe 1 or 2 layers. That's the question, right? Yes. We
the current process of record, our current execution plan is on 10 nanometer, do not have EUV. It's all in emerging layers. However, we have been working with S&L very closely and we set a target for their EUV throughput. And together, we will we have the ambition to improve the 10 nanometer cost if the EUV development in SML can reach our target, the target we gave them. And this 2 party has been working very closely.
So EUV is a cost reduction opportunity for us on 10 nanometer.
Okay. Great. And a quick follow-up on that. If we were to draw that curve that you put up earlier, would that look fairly linear based on your current model on your cost curve previously that you showed?
That curve is without EUV. Exactly. Without with EUV and
we imagine a dotted line, do we go through a bit of a penalty there and then we're back on trend? Or do you think
it's It's the same. With EUV, our design will be the same. We're not going to wait for that. Is that
We're looking at EUV just as
a cost reduction opportunity. Thank you very much. And then I was going to ask you previously on managing the squeeze in utilization that we've seen over the last couple of years. You're addressing that through production during these cycles. Are there other things that you can do going forward to smooth out these big swings in utilization?
And I guess part of the answer, I'd like to know what you think the industry dynamics will be on these swings? And how should we think of it? Is it pretty much business as usual from an order standpoint the last 3 years? Or could we see the orders? Thank you.
I think that Laura just explained what we have started to do, which is really what the IBMs do all the time. That is they build some inventory when the situation is small, they build some inventory. And that's what we are doing too. Of course, in our case, we have to bet wide. But I do believe that we have organized ourselves.
We actually I wanted to start doing it as early as August of last year, because even at that time, we saw that the Q4 and the Q1 was a little slow. And well, we have to organize automation. I mean, people have to do that. If not a job, but their bonuses are on the line. But this inventory we are building will not be written off.
And also we can decide how much reserve to take
the transaction.
So now we didn't get completed all in all. We didn't get we really didn't get going until sometime in the around the middle of Q4. So the effect of inventory building on the 4th quarter was minimal. Now in the Q1 as well as $20,000 it does have an effect. I think you said 2 or 3 percentage points of gross margin.
And is that 2 to 3 percentage points something that you're modeling kind of through the course of the year? Is that the single quarter?
I don't think. Through the course of the cycle or is that just 1 quarter?
Yes, I don't think you can model it for the whole year because we have to look at lower season and off season. That meant to be due in the lower season. So only the low quarters will start to produce some inventory.
I misspoke there. I kind of met through the cycle. Is that kind of your expectation for as you go through the cycle? At the trough, each of the troughs, could we kind of see this as something you can repeat on the next correction, a couple percentage points?
The answer is no. But it's when we see that we need to use it, we'll do it. Thank you very much. We don't bother it, blaming the banks, okay?
And is there anything else you can do to affect this volatility and improvement in margins?
Are there other things in the toolbox there? Yes.
We very carefully control the capacity
we
question from the call. Operator, please proceed with the first caller on the line. Your first question from the phone comes from Randy Abrams from Credit Suisse. Please ask the question.
Hey, thank you. My first question on the management structure now with the co COOs promoted to co CEO. If you could talk about how the responsibilities will change with their promotion to co CEO? And for yourself, Doctor. Sherman, how will your activities change versus before this move?
So if you could talk about the roles for each of the different co CEOs and yourself now?
Yes. We started the President and Co CEO in November, and it has been now 2 months. And if you ask me now, has my life changed in the last 2 months? My answer is no, it has not changed. But I think that my effort, my time has been spent more on the coaching aspect.
I think that I do believe that I do more coaching if I spend 100 hours and I now perhaps spend 20 hours, probably 100 hours on coaching, whereas in the past, I've probably spent only 5 or 10 hours or the 100 hours on coaching. Now actually, this is an overseas call. Is this correct? Yes. So let me just explain very briefly what's in the Taiwan Law and Customs in relation to a Chairman's Authority and Response Service.
Basically, by both law and customs, the Chairman of our company has the ultimate authority and responsibility. However, he may delegate his authority and responsibility to the President. He may also take it back anytime. He can be delegated at any he may delegate any and all, any or all of the responses to the present. And now these 2 gentlemen, their title is President and Co CEO.
President comes first. They are in a very legal sense presence. Now the co CEO is basically a Western firm. And then in the United States, a CEO usually has the final ultimate response within authority. As a Chairman in Taiwan does, in the U.
S. As the CEO. Now, so my role in the
future
is really to convert these 2 DC gentlemen from the Taiwan Sands President to the U. S. Sands CEO. And it will be a gradual process. I don't know whether you think I've explained this service?
Randy, do you think Chairman has explained your questions clearly?
Yes. No, that was clear. And I could ask a second question. It goes back to the last conference. There was a talk about the battle raging on 16 nanometer in 2015.
And I'd want, I guess, an update on how, given the technology progress you've made, how you're looking at 2015, those battles playing out? And your thoughts on your market share position? And also if you see any challenge, whether it's market share or pricing with Samsung and Intel both more aggressively at least pursuing foundry?
I think it's about nanometer.
Right now, we may intend to maintain our position in the foundry business on 16 FinFET as we did on the 28. As I mentioned, our 16 FinFET, we have over 20 cable already working with our customer. And it of course, these products will be competing with Intel's product in 2015. And that is that we are so closely working with our customers. Together, the technology is ready to take out.
We need to work with our customer closely so that their design and the time to market can be can be patched as early as possible for their 2015 ramp.
Well, we live on tech products just as Intel thinks or said, we do that too. So it's extremely important for us that on 16 gigabytes, we need to provide good enough technology so that the grand alliance of customers, our key equipment vendors, the EDA and 3rd party IP developers, all those are in the Grand Alliance. We need to our role is to provide good technology so that the grand alliance together can outcompete Intel and Samsung. And we feel pretty confident that we do that. So if you talk about the market share, we feel that we'll win a pretty big share of the market share.
I don't know how much yet, but I think that's very pretty big.
All right. Now we are coming back to the floor. Next question will be coming from Michael Zhou of Deutsche Bank.
I just wanted to follow-up question because you mentioned Regarding the condition, what's
your In the transistor design, the speed and power are is convertible. So from our intelligence, our 16 FinFET plus technology with 15% improvement on top of 16 FinFET is about the same as Intel's
transistors. So that is
what we are targeting at and customer can convert that speed to power consumption.
I thought I already said around 10% for every year.
For the year. For the full year. Yes. It will and so by the Q4, it will be much higher than that. How about the 4th quarter?
End. Q4 this year, Q4 2014 will be very high. That's what I said earlier. Q4 last year was negative.
With 10% for the total year of wafer revenue, we expect for the quarter alone, 20 nanometer will contribute more than 20% of our wafer revenue. Okay. Next question will come from the floor again. It will be Barclays and Zhu
I have two questions here. First one is regarding the capacity design for 20 or 15,000,000 impact. Revenue indicates travel to repair 60 case a month for 20 and 16 16 case a month for 16 nanometer impact.
Well, I don't want to say that. We may capture even more market share than we now think we will. And if that happens, we'll spend money. No, but you're right about the 20 to 16 capacity being quickly convertible to 16 at a loss that's a lot less than the 10% as we've tried, a lot less. Well, you said that 90%, I think.
Yes. So I'm saying it's more than 90%. Switchable. Switchable.
So we might see kind of different case. It depends on the subject change our customer demand. We might see the next year
No, we are not by the way, we are not building 60,000 per month capacity of 20 and then $60,000 per month capacity of 60,000 they are not additive. Okay.
Can you change based on the customer
Well, the best laid plan by man is sometimes undone by God, okay. So let me tell you the story. It's not God, it's customers, okay? We actually
first
got committed to the party. We got committed to them. And then suddenly, we realized that there was a need for FinFET for a faster FinFET. This is be. Now if we haven't committed already to 2020, we might have skipped 20.
I think we would have skipped 20. But we were committed already. So that was a good thing, getting committed to the customer, that was committed to. That was a good thing. That's why we gained a great deal, I think, on the 2020.
But we have to hasten up to do the 16 months. And I think the team, the team in TSMC, the R and D team, they've been tremendous job. And now getting the 16 to where it is now. That's the small debris history. Did that answer your question?
Both. Okay. Not exactly. So what was your question exactly?
Okay. Let me ask another way.
Do you consider switchable as
an important part? Yes. Always. We now, for instance, when we consider 10 nanometer, we consider the 16 to 10 switchability. And you keep saying switchability, actually it's just convertibility, one way convertibility.
I don't see it being converted back. Yes, That is an important factor when we consider it. So if
we
If we invest in 14, we are not investing in 14. I'm sorry, did I misunderstand you? If we invest in The earlier decision was not 2040. Earlier decision was 2016. As a reason, it was well, actually, I mean, 16% and 14% is the same.
What the heck?
Okay. Since there are so many hands being raised so many times, I have to the maximum has to go to HSBC given per rail.
Great. If we could talk about 20 nanometer, you talked about it being I think as much as 30% faster ramp than what you had at 28 nanometer, 20% of revenue by the 4th quarter. That's all the top line. I'm curious about the margin impact to it. Obviously, you get a good ASP premium, but I think it took about, I
don't know, maybe 5 quarters to get 28 nanometer corporate average margin. Could you just talk a little
bit about the pace given the accelerated ramp to get 29 nanometer corporate average margin?
Well, actually 5% is pretty normal. I mean, yes, 28, I guess, 5, right? Was it 5? Yes.
708 quarter for 28 nanometer. I can tell you 20 SOC will be the same as 28 nanometer will reach corporate average at 7 to 8 quarters like 28 nanometer.
And then if I could just
get a clarification on the smoothing effect to the Q1 of the credit, taking some of the potential ramp in the second part.
Can you measure how much is that? And then does that then impact
the potential growth in the
second quarter? So are we taking 2 or 3 percentage points of growth away from the 2nd quarter by pulling that into the Q1? Do you think it doesn't really impact effectively enough demand in Q2?
No, the so called smoothing helps the margin. It does not affect the revenue.
If I can add one more point, The real purpose not to lose capacity. When you have a surge demand and your capacity is not enough and you lose the Bina, you lose the business by switching and most of our non quarters, we don't lose the product and lose the market share. That's the main purpose. So we don't have to build so much capacity, especially such peak capacity probably only exists for a few quarters, which is bad for the company. You understand that?
Okay. The next question will come from JPMorgan Skou Kuo.
Hi. Thanks for taking my question. Doctor. Chang, Doctor. Wei and Gail and Ngo.
I had a quick question just switching gears a little bit on the back end side. We hear a lot about TSMC working on the back end side, especially on 2.5d, 3d as well as recent level process. And you also had given a kind of a target of $500,000,000 revenue sometime in 2015 or 2016. Can you update us on what your plans are on the second side? And secondly, also how does that work?
When it works with the second part, are you going to be some projects going into just data level stuff or is it going to die level stuff as well? Thank you.
Do I need to repeat the question? Okay. Anyway, to answer your question that's on the revenue of reaching the $1,000,000,000 for the CoWoS and 3DIC. Since we announced the CoWoS technology and we will come to the 3DIC, we're using a lot of key technologies and develop a lot of derivative applications. So today, we estimate probably that go up to $1,000,000,000 but it's around $800,000,000 in year 2016.
That's what we are our estimate today. All right. What's your second question, by the way?
Yes. The second is, is it going to be the back end activity? Is it going to be limited only to the very high end 2.5e3d related products? Or is it also going to be whatever is going to be the F11 package like F11 CSP that's
going to be here? Okay. The correct answer is that we are not shooting for some kind of technology by ourselves. We're always working with that customer to meet their demand. All right.
So to answer your question is whatever or whatever that our customer ask us to integrate and to give them better service if we do it. All right. So it's not limited to provide DE, 3D or whatever it is.
All right.
Next question will come from the floor again. It will be from Goldman Sachs, Donald Lu.
First question is I want to ask the Chairman, how would you are you satisfied with the transition you need to follow? And also how the 2 year President will share their work, are they still taking or not. And then are they still the 3 cohorts are rotating, but probably not now? And maybe give us some details about how the company is run. And I will have a follow-up question on competition.
All right. I am quite satisfied with the transition. And these two gentlemen, Mark is now responsible
for sales marketing,
strategic planning, business development, information technology and materials management orders. And CT is responsible for operations, all the operations. And he is also responsible for specialty technology R and D. Specialty technology is vendorially accounts for 25% of our total business. So now, and Donald, your other question is whether I can rotate.
My plan currently is I don't plan that way. I don't plan it that way right now. However, I deem it a pretty flexible thing. Tomorrow, I may take one part of Mark's, get it to C3 or vice versa.
But
I'm not considering location per se. Does that answer your first question? Yes.
Thank you. My second question is, this is, as far as I can remember, the first time, Jeff and his comments on competitors, mainly Intel and Samsung. That's because we kicked them off. I understand that is a very good reason. Okay.
So since we are already doing it, why don't you give us more color? 16 nanometer, for example, are we saying that in terms of size, size, performance, our product will be very similar to Intel 14 nanometer FinFET. And also Mark commented that for the FinFET take off specifically the CPU and server chip. Chip. Can we say that TSMC's CPU and service chip will have the similar physical performance as Intel products today?
Well, I think, Donald, we have already given everybody enough information on our subsidiaries. I think that if we keep doing more, we would be helping our competitors who have picked up us. And so now I do we do stand on what we said. We are going to have great alliance will outcompete Intel and Samsung. Our brand alliance on the 16th intel.
We're all confused. By that, I don't mean that we'll complete it, excluding. No, no, no. We can't do it. We won't be able to do that.
But we will our brand alliance with us as foundry suppliers will capture a large share of these 16
Yes. I think if you have a product in mind today, want to get to 16 FinFET, I think that your job will be more secure coming to TSMC and make sure your product will be able to deliver in the market.
Okay. The next question will come from Morgan Stanley, Bill Lu.
Smartphone what? Yes, right. Yes, I said that just now. No, I am no expert on that. But there are a lot of other non semiconductor stuff in the the handset makers getting free, maybe the the carrier, the subsidizes is getting squeezed.
So you ask the general question which I not expert enough to answer. Or just to make sure
I understand. So you kind of categorized into high end, mid end and low end. Do you see that the semi content is going up for each one
of these segments
or what's the Do
we appraise our own that Laura?
The high end content definitely will go up. But the growth rate for high end will be slower than the medium low end. The medium low end stay constant, but because the medium low end has higher volume, which to TSMC advantage.
I actually looked at more look more at I guess I have it back already. I look more at our value in the smartphone. And it's gone up, this is TSMC, right? It's gone up from average, average meaning average in high end, medium end, low end. Average of $6 in 20.12 to $8 this one from $8 last year to $11 next year this year, this year.
6, 8, 11
That's very helpful. Thank you. Yes. Second question is for Doctor. Wei.
You talked about 28 nanometers. And I think the expectation is that you are going to try to switch customers from poly to high gs metal gate. If you look at the market this year from 28, what do you think is the split between high key metal gate and poly? Is it seventythirty? Is it eighty-twenty?
And then can you also talk about your expected market share for TSMC for high gain middle gate and also for poly? Thanks. In terms of TSMC, I would say greater than 80% of the 28 megawitches are loading will be in high key narrow gate. How about for the industry? I cannot comment on that.
Thank you. Okay.
The next question, I think we should go back to the line. Operator, could you please proceed with the next caller on the line? Thank you. Your next question from the line comes from Mehdi Hosseini from SIG. Please ask the question.
Thank you for taking my question. I have 2 and the first one is for Doctor. Lu and Doctor. Li. You offered some metrics comparing HBM with HP, talking about speed improving by 30% and power by 15%.
Would you be able to offer similar targets or similar metrics comparing 28 to 2020 to 2016? And I have a follow-up.
All right. If I repeat the question correctly, that is asked about the from 28 HPM compete with not compete compared with the 28 LP, there will be 30% speed improvement. Now how about the 16 Flip WAD? 16 Flip WAD actually improved much more compared with the 28 HBM.
Is that okay?
And what about 28? Yes. And how about 20
I cannot hear you clearly.
Mehdi, are you still on the line?
Yes. Can you hear me?
Mehdi, are you still on the line? Okay. Mehdi, I think your question was asking Doctor. Wei to explain what's the power and speed engagement from 28 to 20 and from 20 to 16.
The 16 feet flat will have a higher than 30% improvement in the speed. Does that answer the question, Javier?
Yes. Yes, it does.
Okay. Thank you. Yes.
And let me move on to the second question that I have for Doctor. Chang. Over the past 2 years, we have seen a significant improvement in revenues from Q1 to Q2, and this was followed by seasonal or below seasonal trends in the second half. How do you see this year evolving? Do you see this year be any different than the trend over the past 2 years?
So Mehdi, your question is about seasonality of this year, whether we will have a strong rebound in second quarter from Q1 and then whether we will have a stronger second half than the first half.
Our current outlook
is Yes, correct.
Our current outlook is Is correct. Our current outlook is very, very anti normal seasonal. Our current outlook is that we have the Q1 is the lowest and the Q2 is stronger, Q3 is stronger yet and even 4th quarter is a bit stronger than in 3rd quarter. Now that's I certainly would not call that anything seasonal at all. I think that's pretty unique for this year, mainly because of the ramp up of 20 SOC.
Thank you. That's very helpful.
Okay. Thank you. Now we come back to the floor. The next question comes from Daiwa's Eric Chan.
Hi, Doctor. Chen, Doctor. Liu, Doctor. Wei and Laura. And happy New Year.
And okay, and then you know, if I get it wrong, it's just mentioned you are the smartphone IC, the ASP, get higher like the right now, so that is the US dollars. And I believe that's probably because of the what do we call about smartphone from a single cost to dual cost to core cost. And my point is that probably we will not have the 16 costs and the 50 fold feet probably will be the next rock. And I try to say is that we probably will see that, but we really call the low and small ball, the wet will really catch up. And then that probably will give you a start, the ASP impact.
So actually my question is the your strategy and in terms of the lower smartphone ICs. What I look at the China's mobile IC meter, your market share probably does not understand it. Again, let me know if I am wrong. And your market share at the China smartphone IC maker, probably know that your market share at the global smartphone mega, probably know that your market share at the global smartphone IC mega. So what do you have to deal with the wafer bond contingent?
We intend to be a significant factor China market. We intend to do significant factor in the medium to low end, middle to low end kind of smartphones. Okay. Let me
say more exactly. The data where you provided 28, the HPC, that's mainly for the Zohr and Marvel IP business. And for the car YI2, the 20F HPC, finalize to the 20F polysilicon and what kind of advantage may we talk about and the ending thing and forming the technology.
28 HPC is still the high MLK version. So the performance will be much better than 28 OP, but that is the low cost version. So you can trade off that performance and the buy side sometimes. And so you can get your optimal position that depend on your product. From our point of view, and we work with the customer that we offer this solution for them to meet the challenge of the market of mid low end smartphone.
It's a low end, so you expect the prices to be lower. But then for us, we offer the technology to compensate that.
How many percent of performance improve and how many percent the time lower than the gap from the Polycom and about the check?
From LP to HP, from LP to HPC, I'm not going to tell you that how many percentage of the price or something like that. You realize that it depends on the guided designs too.
So but as far as now in terms of stuff is concerned.
You mentioned about the performance. Speed. The speed. The speed is actually 28 HPC, they are at 60% as the 28 HPM.
So then how many percent?
30%. And so TSMC, the customer can trade off that 30% speed gain performance and then trading with the Dice size so that you can gain the Dice size. And if you don't enjoy the 30% performance, you can enjoy the Daisai shrinking. Okay, I see. That's the idea.
I assume that we will price probably like 10% higher than
You're not our customer. We're not going to tell you about that. Thank you.
And thanks for the same question as the other question for the LoRa. And I remember that Doctor. Chen just mentioned all the ASP this year were down by several points. And my question, when I look at it here?
No, no, no, no, no, no. That's not what I said. I said our branded ASP will rise.
Okay, the right side of the point. Once I look at the TSNP, the revenue growth at 18% year on year, monetization revenue declined. And the competitor is probably strong at 14% currently going wrong. So my point is the yes, same store success last year because one of main reason because of Fannie ASP. And I believe Fannie ASP last year probably ramped by probably 5% more.
So how the either the double change or the lower, how you think about this year? And you mentioned the 20 nanometer process in Q4 probably will reach 10% of total revenue 2020 and we're ranked by over 5% year on year.
Actually, Chairman just gave you the answer. He said the blended ASP with the product mix switcher, it will go up several points. So he has already answered your question. So what's your 2 questions? Eric, what would know?
So we have Well, Eric assumed that this 2013, our ASP went up by 5%, which we will not comment. And he wants to know whether 2014 we can go up above 5% or below 5%, which we will not comment. Okay. Next question will come from the floor and will be UBS, Zhongna Chen.
No, we have not considered that. We understand in fact that only Chinese will benefit from not companies located in China, but truly Chinese registered company that only they can benefit from this subsidy from the old families.
I think, Jonna, your question is, can TSMC benefit from the benefit of the Chinese companies?
Well, I don't know about that. We do have a lot of business in China from companies from tablets, Chinese tablets companies. Our business has been rapidly growing. I don't know. I somehow doubt that in giving us their business, they are benefiting from the subsidy somehow about that, but I don't know for sure.
Can you add a comment? Yes.
I think we will benefit. Oh, we will? The fabless company in China are very aggressive approaching leading edge technologies. To tell you on 16 FinFET this year, already some of the fabless companies will be using it in tape outs. So I think all those fabless companies, subsidy will propel them into the leading edge technology more.
I don't see the part of the way to this. The subsidy is not for them to use leading edge, is it?
Because our technology leading edge technology is not yet available in China.
Yes, that's not bad at all. So how does that how is that related to the subsidies again?
Their business will be aggressive moving into leading edge, which will benefit our competitive advantage. They will
be generally better off after receiving the subsidy. And that allows them to move faster into leading edge management. That's
All right. Well, I think yes, I think with this strong prospect in China, we will be very happy to end our quarterly conference call here. And before we conclude the conference, please be advised that the replay of the conference will be accessible within 3 hours from now. Transcript will become available in 24 hours from now. And thank you for joining us today.
We hope you will join us again next quarter. Goodbye. Thank you very much. Have a good day.