Welcome to TSMC's Second Quarter 2013 Earnings Conference and Conference Call. This is Luiz Besson, TSMC's Director of Corporate Communications and your host for today. The event is webcast live via TSMC's website at www.tsmc.com. If you are joining us through the conference call, your dial in lines are in listen only mode. As this conference is being viewed by investors around the world, we will conduct this event in English only.
The format for today's event will be as follows: First, TSMC's Senior Vice President and Chief Financial Officer, Ms. Laura Ho, will summarize our operations in the 2nd quarter followed by our guidance for the current quarter. Afterwards, TSMC's Chairman and Chief Executive Officer, Doctor. Morris Chang, will provide his key messages. Then we will open the floor to questions.
For those participants on the call, if you do not yet have a copy of the press release, you may download it from TSMC's website at www.tsmc.com. Please also download the summary slides in relation to today's earnings conference presentation. Before we begin, I would like to remind everybody that today's discussion may contain forward looking statements and that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward looking statements. Please refer to the Safe Harbor notice that appears on our press release. And now, I would like to turn the podium to TSMC's CFO, Ms.
Laura Ho. Thank you, Elizabeth. Good afternoon, everyone. Thank you for joining us today. I will start my presentation with financial highlights for the Q2 and I will follow that by providing a guidance for the Q3.
I'm very pleased to announce another record quarter for TSMC in both revenue and net income in the Q2 this year. The record results once again demonstrate that our investment in R and D and advanced capacities has started to pay off. Looking at the numbers, our revenue increased 17.4 percent to TWD156 1,000,000,000, mainly due to strong demand for 28 nanometer technology, while customers need in building inventory for the launch of mobile product in the second half also helped. On the margin side, 2nd quarter gross margin was 49%, up 3.2 percentage points from the 1st quarter, thanks to higher utilization rate, cost improvement and more favorable exchange rate. Total operating expenses increased 14.8 percent to NT18.8 billion dollars mainly due to higher R and D and opening expense.
Despite that, 2nd quarter operating margin expanded 3.5 percentage points to 37% on larger revenue base and higher gross margin. Non operating item was a gain of NT2.4 billion dollars in the second quarter, up from NT1.3 billion dollars in the previous quarter. The increase is mainly due to the legal settlement income, dividend from invested companies and one time gain from a deconsolidation revaluation of assets. None of these are recurring, but together contributed about $0.04 of EPS to the Q2. Overall, we made $2 EPS in the 2nd quarter and a single quarter ROE was 27.4%.
Let's have a look at the revenue by application. Mobile computing devices continue to drive our business growth in the Q2. The revenue contribution from the communication segment further increased from 55% in the first quarter to 57% of total wafer revenue in the 2nd quarter. On a quarter over quarter basis, revenue increased across the board of all major segments. Communication again showed the strongest growth of 22%, followed by computers 18%, industrials 11% and consumer 9%.
In terms of revenue by technology, as 28 nanometer continue to ramp successfully, the revenue contribution has significantly increased to 29% in the Q2 from 24% in the Q1. Driving on the success of 28 nanometer, revenue from Advanced Technologies defined as 40 nanometer and below now already represents 50% of our total wafer revenue. Moving to balance sheet. Our cash and marketable securities increased RMB38 1,000,000,000 to RMB228 1,000,000,000 at the end of the second quarter, mainly due to proceeds from issuance of U. S.
Dollar corporate bonds. Correspondingly, our long term interest bearing debt increased CLP 43,000,000,000 to CLP171,000,000,000. Current liability increased by $85,000,000,000 mainly because we accrued the cash dividend of $78,000,000,000 which will be paid by the end of July. Looking at the financial ratios. Our accounts receivable turnover days remain flat at 43 days.
Days of inventory decreased by 4 days to 47 days, mainly due to shipment out of finished goods and the lower working process inventory days. On the cash flow side, in the Q2, we generated $75,000,000,000 from operations, invested $78,000,000,000 dollars in capital expenditure and raised $45,000,000,000 through corporate bonds. In U. S. Dollar terms, we spent RMB2.6 billion in capital expenditure in the second quarter, Together with the RMB2.7 billion spend in the Q1, we have already spent about 55% of our guided full year CapEx, which is US9.5 billion dollars to US10 billion dollars Overall, our cash balance increased $40,000,000,000 to $226,000,000,000 Free cash flow ended slightly negative at TWD3 1,000,000,000.
Lastly, I would like to talk about our capacity plan. Our total capacity increased 3% to around 4,000,000 8 inches equivalent wafers in the 2nd quarter and the well increased by another 6.5% to 4,300,000 wafers in the 3rd quarter. For the full year, our 12 inches capacity is expected to increase 17% year over year and our total annual capacity will increase 11% to 16,400,000 8 inches equivalent wafers. I have finished my financial summary. Before we talk about Q3 outlook, I would like to brief you one changes that impact our consolidated revenue.
We used to consolidate Zintech, one of our invested company, because TSMC support representation in Zintech was greater than half. Recently, Zintech expanded its board structure by adding 2 independent directors in June. As a result, TSMC's Board representation is now less than half. Therefore, we will no longer consolidate Zincat starting June 30 this year. The deconsolidation impact would be close to 1% reduction of our total revenue in the 3rd quarter.
Taking this into consideration, our Q3 guidance will be as follows: Based on current business expectation and the forecast exchange rate of 29.83, we expect our revenue to be between NT161 $1,000,000,000 and NT164 billion. In terms of margins, we expect the 3rd quarter gross margin to be between 47% 49% and operating margin to be between 35% 37%. This concludes my remarks. Let me turn the podium to our Chairman and CEO, Doctor. Morris Chang.
Good afternoon, ladies and gentlemen. On the screen you see an outline of Coramborou say in my message today. 1st, 2nd quarter and third quarter. 2nd quarter was a record quarter for TSMC, both in revenue and in earnings per share. The strength was mainly driven by the strong growth in module related mobile related applications and TSMC's strong position in the 28 nanometer technology.
We are rather pleased about the results of the Q2. 3rd quarter guidance has already been given to has already been given by our CFO. And there will be growth in the Q3. And we are rather pleased about the expected performance of our Q3 as well. Next, let me talk about industry outlook, the forecast and supply chain inventory.
For full year 2013, we are forecasting a global GDP of 2.6%, which is unchanged from our forecast 3 months ago. For semiconductors, however, we are lowering our earlier forecast of 4% growth to 3%, 3% in 20 13 for semiconductor growth. For fabless, we continue to forecast 9% growth. This is unchanged from our last forecast. For foundry, we are forecasting now 11% growth.
This is the foundry industry. We are forecasting 11% growth, which is up from 10%. For TSMC, we again forecast a revenue growth, which is much higher than the foundry industry growth and that's unchanged. Now let's look at the supply chain inventory. 2 things have happened in the last 3 months or two things have actually become more obvious in the last 3 months.
First, the IC vendors inventory preparation for product launch by several major handset makers. The IC vendors preparing for product launch by major by several major handset makers has caused the supply base inventory base to increase. 2nd, the lower than expected sales of PCs and several smartphone models have again caused the supply chain inventory to become higher. Now in April, we had forecast the fabless supply chain inventory fabless supply chain inventory to be 73 days. I'm sorry, to be 70 days, 70 days.
In April, we had forecast fabless supply chain inventory to be 70 days at the end of the second quarter. Now we are forecasting saying we are saying that it will be or it was 73 days at the end of the second quarter. Now 3 months ago, we were forecasting the supply chain the fabless supply chain inventory to be 68 days at the end of the third quarter. And now we are forecasting it to be 71 days at the end of the 3rd quarter. About the Q4, 3 months ago we were forecasting the inventory again for the fabless to reach 66.
And now we're still forecasting 66. So our inventory base forecast for the fabless supply chain has increased for the second and third quarter, but remains unchanged in the 4th quarter. This is an early indication that Q4 may be a down quarter, because we expect the supply chain to take serious action to manage the inventory in the second half And the overall inventory, however, we'll approach the seasonal level by 4th quarter. I'm talking about the 66 days that we are forecasting. That's very close to the seasonal level.
A few words on our structural profitability. Since 2009, I picked 2009 because that was a year when I resumed my CEO responsibilities. Since 2009, our structural profitability at constant exchange rate has improved by 7.7 points, 770 basis points. On the other hand, the O and I exchange rate was 32.87 percent and the year to date 2013 exchange rate is 29.66, a change of 9.8%, almost 10%. And we have said several times that each point of change in exchange rate causes 0.4% change in our margin.
So the almost 10% change in exchange rate has caused a 4% change unfavorable in margin. And therefore, at prevailing exchange rates, our structural profitability has improved by only 3.8%. Still, I think it's very encouraging. And they are signs that exchange rate may stabilize or perhaps A and T may even depreciate a little bit. And if that happens, it will of course help our progress in structural profit really even more.
Next, I want to talk about at any rate, the message in the last section is that in the last 4 years, our structural profitability has improved by 3.8 points at prevailing exchange rates. Next, I want to talk about high end, mid end and low end mobile product growth and TSMC's position. Mobile products have been important in driving the demand in recent years. And we'll continue to enjoy robust growth in this year as well as in coming years. High end year on year growth this year was 18% or is 18% as we estimate from $361,000,000 last year to $428,000,000 this year.
Mid end grows from 167,000,000 units to 227,000,000 units, a 36% growth. Low end rose from 202,000,000 to 341,000,000, 69% growth. So this year we will see high end units to grow 18%, mid end, 36%, low end, 69% for a total smartphone year to year growth of 36%. We are uniquely as a foundry, we're uniquely positioned because of our comprehensive technology portfolio We have solutions to address each tier high, low, middle each tier of the smartphone market. And of course, we benefit from the overall strength of smartphone demand.
We in particular, I want to point out, I think everyone knows that our 28 nanometer technology has allowed catalysts to be very well positioned in the high end and probably mid end. But I want to particularly point out that we are very well positioned in the low end,
Because
of the comprehensive technology portfolio, we can do silicon area shrink and layer reductions help our customers to streamline features and to integrate functionalities for their overall low cost designs. China, of course, is a fast growing area
for mid
to low end smartphones. We're seeing our Chinese customers taking a more important role in providing chip solutions to the market. Many of them have accelerated their cadence in adopting advanced technology. As a result, our business from Chinese customers has doubled in the first half this year from a year ago. And for the whole year, our Chinese China region is expected to account for 6% of our total business this year.
Next, few words on 28 nanometers. Our 28 nanometers is on track to triple in wafer sales this year. And our 28 nanometer high k metal gate is ramping fast and will exceed the oxynitride solution starting this quarter. For the oxygen nitride solution in which we do have competitors, we believe that we have a substantial lead in yield. For the Hi k Metal Gate solution, we do not have any serious competitors yet.
We believe we have a substantial lead in performance. If you recall, ours is a gate last version and our competitors are mainly in the gate first version. So in HighclemedalGate, we have a lead in power. Our power is lower. In performance, our performance is better.
And should the competitors who are in gate 1st now switch to gate last, they will be conservatively behind us in yield learning in yields. Our continued lead in yielding performance will keep our 28 nanometer market segment share strong for both this year and in future years. Now a few comments on 20 16 and I want to say a few words on our brand alliance And also I want to show you a few photographs of our new Giga fab, which is dedicated to 20 nanometer and 16 nanometer. 20 nanometer SoC and 16 nanometer FinFET are both progressing well. On 20 nanometers, we see little competition.
The risk production has started in the Q1 and volume production will start in early 2014 next year. And I'll see you I'll show you the photograph of our brand new fab and equipment already being installed. Equipment are streaming and are being installed are going to be tried out and the volume production will start in early 2014. On 16 FinFET, it will start volume production about 1 year after 20 SoC, in other words, early in 2015. Our R and D progress on 2016 FinFET is very good.
New improvement is better than planned and is better than 20 nanometer a year ago. And we have been working with several major customers and many payouts, many product payouts are planned for next year. But the joint work is essential for before tape outs of course and that joint work has been progressing for some time. Grand Alliance, by that we mean our alliance with customers, with the design electronic design EDA companies and companies such as ARM and Imagination Technology and companies like Cadence, Mentographics as well as our own platform, the open innovation platform. So it's an alliance with customers with the EVA companies with the IP providers and of course with our key vendors, critical vendors.
Now the reason I want to point that out is that for TSMC, we have entered a new era of competition. We pointed out almost every time we get together in this meeting and we've been pointed out for the last 1 or 2 years now. Now in this New Year competition, the competition is not boundary to foundry. It is not boundary to IDM. It is grand alliance to IDM.
Did I made it clear? That's the reason I'm pointing out. Now so we view on the 2016 on 20 as I already said, we see little competition. On the 16, if we put it on foundry to foundry or foundry to IBM basis, we are competitive. If you put it on a grand alliance to IBM basis, we are more than competitive.
Now I want to show you a few photographs of our new Gigafactory, which as I said is dedicated to 2016 2016. Now is there no pointer? Well, that's too bad. But I don't think there'll be any problem with this photograph or the next two, because you see the big building almost in the middle of the photograph. And that's our Page 5 of Feb 14 is located in Thailand and it will start it's the first one.
It's just 1 third of the gig effect, 1 third. I will show you the other 2 thirds in the next two photographs. And this third of this 16 20, millimeter, 20 millimeter Giga fab will start production, I said earlier, in early 2014 and this picture says February 2014. And this particular Phase V has a total floor space of 184 square meters. Next please.
Well, if you can switch it back please. This is finished. The building is finished. As I said, the equipment are streaming, being installed, being tested out to get ready for the volume ramp up in early 2014. Next photograph is the second one third of our 20 nanometer, 16 nanometer, gigafab.
And this one is only half finished, because volume production will start only in May of next year. And it's about the same size. The total floor space is 180,000 square meters about the same as the last one. Next please. This is the last one third of this new Gigafram.
And you can see that you don't see very much yet, but you see what's going on. It's very busy now.
I think
the foundation so on has been laid etcetera, etcetera. It will start production volume production in April of 2015. And its total cost base is about the same as each of the other 2. Altogether, these three phases of this mega fab mega fab is about 550,000 square meters. Just in comparison, our 28 facility, which is in Taichung is about 400,000 square meters.
So this one is 550,000,000 is dedicated for 2016 and 28 is about 400. And All right. Let's show the next photograph. Without a pointer, this is going to be more difficult. This is our Tainan campus or complex.
And In the upper part, you see the old fabs. Well, old they are most of them are less than 10 years old, but they are old compared to the new place that I just pointed out to you. Then right below them you see the new fabs. And there's one other side, it's our back end. That's where our 3 d IC is going to be.
That's where our co ops is also. And now actually yes, thank you very much. I think this will help. Well, I'm not going to point out the old fabs. But this is Phase 5.
That's the first of the new phases, Phase 5. And this is Phase 6 and this is Phase 7. Now I do want to point out one very, very important aspect of this to book that. Even though you see 3 separate buildings, they will all be connected. They will all these 3 will be connected by cleanroom links.
A few words on EUV. Last time, I think I pointed out that we had we just had a breakthrough last time on EUV or I should say ASML had a breakthrough on AUV. Now progress has continued. CYMA and ASML have demonstrated an EUV power output of 40 watts on their factory floor, the next step for ASML is to achieve 80 watts of source power. While there's still some distance to reach the source power of 2 50 watts, 40 already achieved, next milestone 80.
And then the economically dissolvable threshold is 2 50 watts. 2 50 watts will give us a throughput of 125 wafers per hour, which is the economic threshold. While there's still some distance to get there, we are collaborating with ASML very closely to ensure that EUV can become production ready by 10 nanometer, at least for the critical layers. Next, specialty technologies. Specialty technologies, when we say specialty technologies, we mean we include high voltage for power management ICs, mixed signal for audio codec, embedded flash for MCU, MEMS for motion sensors, CMOS image sensors for digital cameras.
Now in addition to those that we have been working on for a long, long time, in addition to those, the following specialty technologies are expected to grow significantly next year. Image signal processors stacked with CIS, that is processes stacked with the sensors, mixed signal for fingerprinting sensors, high voltage or small panel drivers, small panel drivers and better flash for near field communication, smart cards and touchscreen controllers. What differentiates CSMC in the specialty technology foundry arena besides the fact that we have the largest capacity in the broadest scope is our superior ability to integrate specialty devices, trash, CIS, RF, high voltage, power MOSFET integrate those specialty devices into our strong CMOS baseline while maintaining our CMOS IP compatibility. Those are all the comments I've prepared. I believe we are now open for.
Q and A. Right. Yes, this concludes our prepared statements. Before we begin the Q and A session, I would like to remind everybody questions to 2 at a time to allow all participants an opportunity to ask questions. Questions will be taken both from the floor as well as from the call.
Should you wish to raise your question in Chinese, I will translate it into English before our CEO or CFO answers your questions. For those of you on the call, if you would like to ask a question, please press the star then one comes from the floor and that would be Credit Suisse, Randy Abrams.
Thank you. The first question
on the margins, a short term and a medium term. For Q3 guidance, just want to see why you're guiding a decline for margins on a small increase in sales? And into 2014, as you ramp 20 nanometer with a steep ramp, do you see any margin impact in the early stage of 20 nanometer?
Randy, you're asking about the Q3 guidance on the margins. We are adding capacity in Q3. I was talking about another 6.5% building edge technology. The Q3, as Chairman just mentioned, we are going through the image correction period. So we expect the Q3 utilization will be lower than Q2.
That's the main reason that the revenue improved, the margin doesn't improve. You also asked how the going to 2014, when we ramp 20 nanometer, how would that affect our margin? Every new technology when it comes to mass production is in early beginning, it always start with the lower margin. But when the quantity starts to grow up, maybe after 7 or 8 quarters, the margin will be getting closer to corporate average. So we expect that will happen for 20 nanometer as well.
Can I have one follow-up on that question? Do you expect even with 20 amping up structural profitability will continue to see at least maintain or how do you see structural profitability and depreciation in 2014?
We are confident we can maintain the structural profitability.
Okay. The second question and it probably relates to some of the pictures of the big fabs that are getting built. And I want to ask if you have any concern, you spend the CapEx and some of these large customers switch boundaries, so that they switch boundaries every node and so you put a lot of investment. Just curious the assurance that if you bring in some of these projects, you can maintain that business for several nodes?
Switch boundaries, switch or check?
If you put in this fab capacity targeting some large customers, should be assured if you can maintain that customer relationship for several nodes?
Well, we realize that we don't always put in the amount of capacity that the customer requests. So we have not and we will not their capacity. So I don't know if that answers your question etcetera. My answer is that we try to anticipate what boundaries switch. You still look a little puzzled.
Maybe to rephrase it, because some of these customers are getting quite large in amount of capacity they demand. So for product generation, you build capacity for that customer, but because there's a huge volume at the next node it switches. Like if you They switch what? Switch their business to another foundry.
That does not happen. That does not happen. You must be in your experience must be with the commodity products. I'm sorry to say that because obviously your experience is not only with the commodity product, But I can assure you that I mean I kept emphasizing all through the last 10, 15 years that our strength was in 3 directions: technology, manufacturing and customer relationships. So when you say that customer works with us and then suddenly company works with us, and we build the capacity.
And then suddenly after the capacity is built, he switches a foundry. That does not happen. Thank you. For his sake as well as for ours.
Okay. Good. Next question
Chairman, you gave guidance before regarding 20% to 24% in Q2 with low single digit. Do you have any revision for that or you mentioned the same guidance? Q2 next year.
Q2 next year. How much 20 nanometer will account for our revenue?
Well, Q2 next year, I don't know, but for a whole year next year, I expect it will be in the high single digit percent of our total revenue. Thank you. I think that's correct, isn't it? For the whole year next year, I think 20 nanometers will be in the high single digit percent of our total revenue.
Thank you. My second question is, what is the outlook by segment in Q3 this year?
The what? Segment.
Segment outlook. I can go on. In Q3, computer will decline the most, followed by a communication with modest decline. And we expect consumer industrial for TSMC will go up in 3rd quarter. Thank you.
Next question, we will still be coming from the floor and it will be from JPMorgan, JJ Park.
Okay. First of all, congratulations for another good quarter. Very pressured. The first question is what's your view on the longer life cycle for the semi nano given increasing at the intensity moving down into chain in nano and then with that, I believe the chain in nano life cycle could be longer than the previous technology.
So your question is whether or not 20 nanometer will have a shorter life cycle as compared to prior nodes?
I think yes, probably. But well, I said our Gigafab is for both 2016. So yes, 2020 will I think we'll have probably, I'm not sure yet, in shorter life than 'twenty eight. But then we can really quickly convert the capacity to 16. I think 2020 and 2016 together will have a longer life than 28.
Actually everything has a long life in PSMC anyway. We're still making 1 microphone. 1.5 point I guess we're not making 1 microm anymore. And so when you say short life or long life, if you refer to a customer's use, a specific customer's use, yes, maybe. But we have second wave, third wave and we have the specialty technology users who are something outside the second wave and third wave.
We have 2nd wave, third wave logic users. And then we have outside the second, third wave, we have the specialty technology, who in time sequence are usually in the second, third or fourth or fifth wave.
Okay. My second question is you mentioned about the competitive advantage at the K-twelve. And despite your competitor is going to use the gate loss from the 20 nanos, so based on the way to the how it would cost and how much time they require to commercialize gate last at the 28 nanometer from the gate first?
So your question is with regard to whether or not there will be competitors switching to gate locked at 28 nanometer and 20 nanometer, switching at 20 nanometer to gate locked. So how much time and how difficult it will be for such a competitor to switch?
I don't know. It depends on his capability, I think. I don't know. I think it takes a long time, that's for sure. A year maybe even longer.
And do I see anybody switching any competitors? I don't even know the answer to that. I do know that we don't see any serious competition at the 20 nanometer node.
Okay. I think it is about time that we should take a question next question from the call. Operator, please proceed with the next caller on the line. Your first question comes from Steven Talajo from HSBC. Please ask the question.
Great. Thank you for taking my question. I'm curious about you mentioned 3rd quarter utilization rates declining slightly. You mentioned the possibility of 4th quarter revenues also being down. You also talked about capacity being up a lot in the Q3.
So I guess I would like to hear you comment on utilization rates by node. And in particular, are you keeping the leading edge nodes full? And if not, the negative leverage effect to margins if the leading edge is not fully utilized?
Well, first to answer your question generally, I do think actually about a year ago, I predicted almost the same phenomena for the Q4 last year and the Q1 of this year. About a year ago in fact, it was a year ago, when I said that the 4th quarter might be down and the Q1 might also be down. Q4 last year, Q1 was in line with us. But the Q2, we will see a strong rebound. Said that in July of 2012, And it happened that way pretty much.
And now this year, July 2013, I see almost the same thing, except I think there is a bit of difference. The 4th quarter down could be a little more severe than the last year than the 4th quarter down last year. And however, the Q1 down will not be as severe as the Q1 down this year. I'm making myself clear. I think that last year incidentally our 4th quarter was down by about 7%.
And I just said now that well, anyway, it could be a little more severe than that. And the Q1, however, could be reasonably flat from the Q4. And however, the Q2 next year's Q2 rebound is going to be, I believe, a very strong one, just as this year's Q2 rebound was. So that's answering the question generally. And I think that our Q3 by the way, you said the Q3 you said Q4 will also be down.
Our Q3 is up. It's not Q3. Okay. And but you asked whether the margin you said?
Yes. I was just asking relative to the utilization rates by node, if the leading edge isn't as fully utilized, doesn't have a more profound impact to your margins?
20 nanometer is still fully loaded in the 3rd quarter. And how well it will be loaded in the 4th quarter is at this point unknown. But I think that it may be less than 100% loaded in the 4th quarters. Now the other nodes 45, 65, etcetera, well, they will not be some of them are still fully loaded in the 3rd quarter, but may not be fully loaded in the 4th quarter. But we're really not giving 4th quarter guidance right now.
So I want to limit that.
Okay. And then just one final question. This is really just a clarification. I think last quarter you spoke about 20 nanometer in its 1st year being bigger than what 28 nanometer was. This quarter you're now saying 20 nanometer is going to be high single digits percentages of revenue.
So I guess it depends what we think the total revenue number is going to be. I'm just curious is there a change there on what you think the total dollar contribution can be next year for 20 nanometer at TSMC?
Well, actually the 1st year of 28 nanometer was 2011.
I'm sorry.
Yes. The 1st year of 28 nanometer was 2011. And I'm quite sure that in 2011, 28 nanometer did not reach 8% of our total revenue.
Okay, understood. Thank you.
Next question, I think we'll still keep it on the call. So operator, please proceed to the next caller. Your next question from the phone comes from Mehdi Hosseini from SIG. Please ask the question.
Yes. Thanks for taking my question. That's a change. Early on in your prepared remarks, you talked about the growth rate of for high end smartphone peaking and the low to midrange is growing at a faster rate. And also you talked about the very expensive and very expensive 20 60 nanometer package under construction.
So do you think that profitability for the new smartphones, given the fact that they're going to be selling at a lower price, could help bring enough demand to fill these gigafams.
Nextly, I think I am able to capture the first part of your
again? Sure. Let me repeat the entire question. I'm just trying to better understand what does the Chinese think about the trend in the smartphone and the trend towards the low end. And would there be enough profitability for the fabs of established companies to migrate to 20 16 nanometer nodes?
So you want to your question is based upon the trend, the smartphone trend is towards faster growth on the lower end, whether or not there is still the need to fast ramp the leading edge nodes such as 2016? Is that your question?
Yes. Thank you.
You confirm that that was his question, but would you repeat the question for me?
Right. His question is the trend in smartphone is shifting towards higher growth at low end, but we are still building very fast, a leading edge capacity at 2016.
So we're still building
Leading edge capacity at 20 and 16. Yes.
I think the question was whether the low end will migrate to 16. Yes, I think so very definitely. Well, but it's only a question of time. And I don't frankly know 2016 well even the leading edge won't start using 2016 until 2015. And I think that the lower end manufacturers will probably be I would say at least 2 years behind 2017.
Are you worried about is he worried about our capacity utilization for 2016? Well, I don't know what I can say to assure you again and again and again. I mean this question came up almost for every generation. And I again, I think well, first the premise. The premise is that we do not build capacity until we are quite confident of the demand.
That's premise number 1. We do not build capacity until we are quite confident of the demand. And we look at demand not by market segment, but by customer. And we base the confidence on the work that we have already been doing with the customer. That's premise number 1.
We don't build capacity until we are reasonably confident, highly confident of the demand. The second premise is that we do have 1 page succeeding waves of customers when the first wave migrates to an even more advanced mode. We have second wave, third wave and we have specialty technology customers taking over the capacity that the first wave, the succeeding waves ahead of them have left behind.
Well, maybe my follow-up would be since you're very clear that you're not going to hold capacity ahead of demand. So would you comment or would you help us with any idea of how next year CapEx could look like at this point in time?
Next year's CapEx. Your question is next year's CapEx.
Next year's CapEx is will be about the same as this year.
Got it. Thank you.
Okay. Let's come back to the floor. The next question will be coming from the floor and would be coming from Morgan Stanley, Theo Lu.
Thank you. Doctor. Chen, you just talked about building capacity based on customers. I went back and looked at your annual report. Top 10 was 51% of sales in 2,007, last year was 59%.
Top 1 was 11% 2,007, 17% 2012. So quite a big increase in customer concentration. And I think probably you can expect that going forward, I guess, bigger, right, with a big customer coming on board. So top
2 could be 1 30 revenues. That makes it easier for us in terms of building capacity, in terms of estimate capacity, right?
Yes. But I guess I'm just wondering, does that you have more customer specific risk going forward and how you deal with that?
Well, there are always risks. You got risk crossing the street, but you take it. And I think that frankly the way I look at it, we want to make our relationship with our major, major customers such that the risk of their The way he put it, switching boundaries, all right. The way we work with customers, the major, major customers makes the risk of their switching boundaries almost as small as crossing the street.
I guess I'm not as much worried about them switching as much as one customer just doesn't do well
or it's a poor product line or something like that. As a what? A blowout?
I guess I think customer risk could be 1 is switching, but 2 is just one particular chip doesn't do well. Yes, sure.
Sure. That was physics. And as I said, remember what I said earlier that we don't always build capacity build as much capacity as they would like us to build. Everybody, I think, tends to be a little optimistic about his own new products or whatever, new market.
My second question is you broke out smartphones by high end, mid end, mid end. I think it was last year, maybe the year before, you had given a content for smartphone type of number for TSMC. Can you give us that maybe now versus in?
Do you remember the number? It was 84 something dollars. Wasn't that much? No. I
think we said $7 on average.
What's the use of telling you this if you don't even remember what I told you last night? Well, anyway, the reason I try to test you is because I wanted to tell you a new number, but I just first want to test whether you remember the last one or not. In any case, for the high end and the middle end, the number has risen by about $1 The smartphones have become smarter, partly because they carry ICs, more ICs made by us. That's why the content has all value added in each high end and middle end has risen by about 8 dollars. The low end, I don't I haven't seen the number, but we have low end value?
Yes. Go ahead.
On the average smartphone, we have $7 performed. On the low end $4 middle end $6 and high end $9
So the average hasn't changed from before?
$7 okay. Great.
Our average has changed, but lower end has increased. In the lower end, you can't have $8 or $9 in the lower end. The consumers don't want to pay that. They don't need all those features either.
Our next question still comes from the floor and will be from Goldman Sachs, Donald Lu.
Xiaohao.
Sorry. I
got to be careful in asking questions, so I don't get a question back. My first question is on second, sourcing. I noticed a trend before 28 nanometer, there's always substantial amount of second sourcing going on. In 20 20,820 seems like very little. And in your speech, quoting your work you said, for FinFET we need substantial joint work between foundry and customer.
Does that mean the second source kind of business model is not going to
work very well in the
future in terms of foundry second source?
It's very difficult. Foundry second source has always been a difficult thing. And I think that but whether it will work, yes, I think it could work. But the second source usually will be considerably behind the first source.
Would this gap continue to increase with each node going forward?
I don't believe so. Certainly, let me put it this way. Where we are the first source, we are going to certainly do our best to prevent a second source, all right? Where we have the opportunity of become a second source, we will often refuse to be 1. It's very different.
It's I think it's difficult and I do not think it's the way to go for either the customer or the supplier.
Just follow-up on that question. If a customer for a particular product, is that still possible to source it at both TSMC and another foundry at the same time? Or is that the design process is so different, it's going to be
It's difficult for the same product. For the same technology, yes, I think I can see that it's possible. It's not only possible, but that's not really second source anymore. That's 2 first sources in the same technology. Okay.
So that's still possible.
And the second question is that today when you show those chip tranches of fab, you stress that all the gigafabs can be connected. And I noticed that compared to TSMC with Samsung and Intel, TSMC definitely have huge effects there to be collected versus the other 2 are more scattered around the world for various reasons. For KSMG, number 1, that will give you more cost advantage. Is that still the case for FinTech etcetera going forward?
Even you have one large very huge cost? Cost advantage, yes. I believe there is some cost advantage in connecting all the fab into 1 gigafab. But I think the main advantage is probably in time to expand or time to market. That is we qualify only once because and 1 big giga fab, we qualify only once.
Whereas if they are disconnected, if they are separate fabs, then usually we have to qualify each fab, yes.
On the same product for this,
yes. Well, on the same technology, let's say, yes.
And just to follow-up on that, does this also mean, Pierre, until we will probably not build the 12 inches fab, let's say, in the U. S. Or China, Is that a
strategy for you? So you are predicting things for me, Donald. No, I we always consider doing things, but I think every time in the past, we just run up against this stock, which is very costly to do it in a separate location in another very different location. Well, we have expanded our China fab considerably in the last 2 years. It is not what you knew 2 years ago.
It's twice as large as the size 2 years ago.
Is that
profitable? Yes. Why would we do it if we weren't?
Okay. Next question also comes from the floor and it will be for the 1st 1st. It is very profitable actually. Hopefully, next question is also related to very profitable question from Barclays Andrew Lu.
Doctor. Chen and Laura, I have two questions. First one, I remember last year almost at the same time, I think it's July 20 something, you mentioned the Q4 will be down. In that time, you say it will be full part of the double digit, have a close to 10% decline. So you end up with a rush order and Q4 revenue declined only 7%, the same for Q1.
Earlier you guided a similar decline like Q4 and now with 1% decline. Based on your current disability, earlier you mentioned it will be similar or worse than last year. Are you saying worse than 7% decline or worse than your original guidance last year when you give about 10%.
No, I meant worse than the actual 7%, yes. Could be worse.
Could be double
Well, actually, I kind of regret that I even went into this 4th quarter thing now. No, no, no, I don't expect it to be at I don't look, I think it will be a decline and but I normally don't even guide or forecast the quarter after this. But when I see something unusual happening, I do try to tell you in advance. And that was the case last time. And it's a year ago and it's the same case this time, same situation this time.
I see a very a finite possibility of the 4th quarter being down from the 3rd quarter. As to its magnitude, I really a little even when I said that maybe a little more serious than the minus 7% last year, I was taking a risk. So and that risk is greater than crossing the street by the way. Okay.
On our industry check, Intel will ramp our 14 thin fab by second half next year, probably will start to do the boundary for year 2015. And Samsung claimed they are going to jump from 28 to 14 FinFET similar last year 2015. Our FinFET also were mass produced from early 2015. So my question is based on these industry competitors and also some of customers' comments, ours from 16 SIM fabs, the size size is larger than our competitors' 14 thin fabs and performance are a little bit worse than compared to 14 thin fabs. Do you have any words to defend these statements?
No. I'm telling you that our 16 well, first of all, you have to remember nothing is out yet. Every business is talking, talking, talking. Okay? And then I stand on what I said, I guess it was 30 minutes ago now.
On a foundry to foundry competition, I believe we are being competitive on 16th. On a Grand Alliance versus IBM competition, I believe we are more than competitive.
Okay. I believe that this is about time for us to take a question from the call. Operator, could you please proceed to the next caller? Your next question from the phone comes from Brett Simpson from A. Wei Research.
Please ask the question.
Thanks very much. Doctor. Chang, you mentioned the competition are not ramping 28 High ks Metal Gate yet. You're not seeing any competitors there. And your loading will start to come down towards the end of this year and then rebound in Q2.
So during this time, we're going to see TSMC adding new capacity or ramping in new gigafabs. But also this time, we're going to have GlobalFoundry planning to add a lot of 300 millimeter capacity as they eventually get into 28 nanometer high k metal gate. So my question, are you concerned at all about overall foundry supply that's coming on stream over the next 12 months?
All right. Brett, your question is with respect to the over potential oversupply condition for 28 nanometer starting Q4 of this year. You are concerned whether or not TSMC as well as competitions are building continue to build 28 nanometer capacity, it will create a glut. Is that your question?
Yes. Particularly Global Foundry, you seem to be adding a lot of 300 millimeter capacity. And at some point, they will start to ramp up 28 nanometer high k metal gauge. So I'm trying to understand whether Doctor. Chang sees any oversupply conditions over the next 12 months, yes.
28 nanometer
oversupply
for next year, I don't think it will happen. You want to know the reasons why it won't happen? Look, I already said it. I think we have a substantial lead on yield and on performance in 28 nanometer. So while other competitors or at least some of the other competitors are talking about building capacity and even actually building capacity.
But I think that we will have a much higher utilization in our capacity than most competitors, much higher. And this has happened before when this impact has been happening all along in the last 15 years or so. While we always build capacity when we knew who our customers would be and at least we knew at least approximately what their demand would be, real demand. While we build our capacity on that kind of knowledge, our competitors often, often build capacity on speculation. So you might say, well, that's certainly not very advantageous to you either.
Well, no, it was not very advantageous to us. But we still managed to hold our profitability. We still over all these years in almost all nodes, 0.13, 90 nanometer, 60 nanometer, 65 nanometer, 45 nanometer, I mean, it has always happened. Our competitors build capacity on speculation. Well, the result in every generation was that we still got our profitability.
In fact, our structural profitability, as I pointed out, has improved. And we also had very much higher utilization in our capacity at each node than our competitors. And if you look at the history, you will find out this is why our profit I think even now, of course, Global is not a public company. And Samsung, Intel, I don't think exactly disclose their foundry revenue or income. But back when we had competitors, foundry competitors that disclose their revenue and earning.
We had only 50% of the revenue of the total industry, But we had 100% of the profit. So that means the rest of the competitors, I mean, they either have if they had negative profit or if they had positive profit, it was canceled out by some others negative profit. We had 50% of revenue and 100% of the profits. And I think that it will continue to be that way frankly. So I Can
I perhaps just ask a follow on question, Doctor? Chang, about wafer ASPs? Your wafer pricing has been rising quite nicely over the last 12, 18 months as you've ramped 28 nanometer much faster than prior nodes. Can you talk a little bit about how you see wafer ASPs trending over the next few years as you start to ramp up 20 nanometer and 16 FinFET? Should we continue to see wafer ASPs rise at similar levels?
Yes. The blended average price will continue to rise.
Great. Thank you.
All right. Let's come back to the floor. The next question will come from Citigroup, Roland Chu. Thanks.
That is my first question. Will they use 20 nanometer? Is that the question? Yes. I think some customers might.
Some, some. But I think a larger part of the customer a larger percentage of the customers will go to 21st and then 2016.
Okay. So the question will be for those 20 nanometer customer, will it be enough incentive for them to move to from 20 to 15? This is, of course, we know there are a lot of improvements from 28 to 16. How about the comparison from 20 to 15. Will there offer more incentive for customers to migrate to?
Well, now you're talking about performance and the power and that sort of thing. Now I think they get a bit too detailed for me to talk to you here.
I think we have said our advantage of 60 nanometer over 20 is for speed performance. It will be 20% faster at the same total power and it will be 35% better efficiency power given the total speed given the same speed.
Thank you. And my second question is on the gross margin side. I think in 3Q, certainly we are of course, we have more 20 nanometer wafer contribution. I think that's in the first quarter, 24%, 2nd Q1, 29%. Then 3% will be up to about 30%.
And also we have more high TMA tokens, so the brand ASP should be but still we will have the lowest gross margin. So can lower comment about maybe
28 nanometer continue to increase actually help the overall margin. Given the 3rd quarter, I was guiding a lower profitability, but not because of 28, 28,000,000 is doing very nicely and it will be fully loaded. Its other node will be less utilized. So to answer your questions, basically other nodes have lower utilization. Roland, are you done with all your questions?
Yes. Okay, great. All right. Next, He's the first that only take one question. Okay.
Next one comes from, I think you're Sai Wa, right? Sai Wa, Eric
Chen. Hi, father Chen and Dora. Very quickly, one question regarding to your China strategy. We talked about a lot of the high end, the mid end and the low end smartphone. And from my understanding, your market share and for the China car in the smartphone IC, lower end your market share for the global smartphone IC maker?
I don't know whether that's true or not. Okay.
My guess. So I don't
mean you're shaking your head to deny that it's true or what?
I don't think it is lower. Yes.
Okay. That's higher. And my question is that China smartphone IC maker, they care about the weather price. They care about the weather price. Price sensitive.
Yes. And they're probably barging the weather price and even more severe. And then again, they are more sensitive. So any strategy we have for those China either the cable PC IC maker or the smartphone IC maker, probably the one example is one guy just moved to the global foundry. So how do you think this trend?
No.
Again, anybody somebody moves to a competitor, I feel very sad. This particular one and the last time when I said I was very regretful when another one our customers moved to Intel. This particular one, I know I think I know what you're talking about. I know who you are talking about. I mean, I think I will use a word that's considerably less than regret, okay?
So, yes, we know that they are very price conscious and we try to work them. Well, actually, we I should say we try to work with our customers who have to work with their customers because their customers are the price conscious ones. Yes. So yes, But as I reported in my message, we've been quite successful so far.
Yes. Okay. Thank you. My second question probably got a long offer. But if we and for the CapEx for next year is spread from this year, what kind of how many percent times the competitive growth and depreciation expenses growth in the form this year?
I have no idea at this moment. Chairman just give you both part of the total keypad. So we have not calculated based on that.
Well, I gave him actually a little more than ballpark. I gave him the size of the diamond anyway. Are you a baseball fan? You know what I'm talking about? The ballpark is maybe 10 times the size of these diamond.
Okay. And actually the follow-up question is regarding to the CapEx. I just really want to know exactly why you're so confident for the demand. Yesterday, the Intel announced they are going to cut the CapEx
to Taiwan. Why am I so confident of the of what demand?
The market demand and your CapEx?
I'm confident because I have usually been right. Okay. Thank you, Mr. Wright.
All right. I think in the interest of time and this is already a little over about 100 minutes now. So I think we'll just end our investor conference for this quarter right now. And thank you for coming. We'll see you next.