Welcome to TSMC's First Quarter 2013 Earnings Conference and Conference Call. This is Elizabeth Sun, 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 call, your dialing lines are in listen only mode. As this conference is being viewed by investors around the world, we will conduct this event in English only.
The format for today's event will be as follows. First, TSMC's SVP and CFO, Ms. Laura Hou will summarize our operations in the Q1 followed by our guidance for the current quarter. Afterwards, TSMC's Chairman and CEO, Doctor. Morris Chang will provide his general remarks and couple of key messages.
Then we will open the floor to questions. For those participants on the call, if you do not have a copy of the press release, you may download it from TSMC's website at www.tsnc.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 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 statement. 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 your participation. Today, my presentation will start with financial highlights for the Q1 2013 and followed by the guidance for the Q2. Our first quarter revenue turned out better than guidance due to more favorable exchange rate and stronger mobile demand and TSMC's strong precision in 28 nanometer.
Compared to the previous quarter, 1st quarter revenue increased 1% to TWD 133 billion. On the margin side, gross margin was 45.8%, down 1.4 percentage points from the Q4 last year. Higher capacity utilization and the anti dollar depreciation contributed to a favorable impact to our gross margin by 3 percentage point. However, the inventory valuation adjustment on a quarter over quarter basis has impacted our gross margin by 4.4 percentage point. This is consistent with the accounting treatment under ROC GAAP number 10 as before.
First quarter operating margin was 33.5 percent, down 1.8 percentage point from the prior quarter due to higher opening expense for 15 capacity expansion for 28 nanometer. Non operating items was a gain of NT1.3 billion dollars for this quarter, much better than the loss in the Q4 of 2012. The difference is mainly due to the lack of impairment charges of RMB1.5 billion we took in the Q4 last year for certain invested companies. Also in the Q1, we disposed a portion of these mixed shares at a profit of RMB700 1,000,000,000 versus its value on our book. Overall, our EPS was $1.53 ROE was 21.3%.
As you may have noticed, we are preparing financial statements in accordance with Taiwan IFRS starting this year. To illustrate the difference, we prepared a comparison table on the both ROC GAAP and the Taiwan IFRS using 2012 number as example. I would like to highlight a few items here and you can find a more detailed explanation on TSMC website. On the profit side, TIFRS require us to reclassify some items among operating and non operating items. For example, technical service income were reclassified from non operating item to revenue.
Also loss of impairment of idle assets will be reclassified from non operating expenses to other operating expenses, etcetera and etcetera. The overall impact on our net income is small increase of RMB200 1,000,000,000 in profitability, which is less than 0.1% of our total net income. On balance sheet, the key changes for TSMC is the reclassification of sales return allowance from deduction in accounts receivable to other current liabilities. Therefore, the balance of both accounts receivable and other current liabilities increased. This leads to a 4 day increase in accounts receivable turnover day in calculation.
Now let's move back to revenue analysis for the Q1 of 2013. Overall, revenue from all applications showed better than seasonal quarter over quarter changes in the Q1. As mobile product IC designers accelerated preparation for new product launches, Demand for communication related applications showed the strongest growth of 4%. Computer increased by 3%, consumer increased by 3%, and industrial revenue declined by 2% in the Q1. If we look at revenue by technology, demand for our 28 nanometer technology remained robust.
28 nanometer contribution to total wafer revenue further increased from 22% in the 4th quarter to 24% in the Q1 of 2013. With solid demand and a smooth ramp, we expect 28 nanometer revenue continue to grow each quarter and we are confident the 28 nanometer wafer revenue for 2013 will triple that of 2012. Overall, advanced technologies defined as 40 nanometer and below accounted for 47% of our total wafer revenue, up from 44% in the Q4 last year. Let me make a few comments on the balance sheet. Our cash and marketable securities increased $38,000,000,000 to $185,000,000,000 at the end of the Q1, mainly due to a process from issuance of corporate bonds.
By the same token, our long term interest bearing debt increased $45,000,000,000 to $127,000,000,000 Looking at financial ratio, our accounts receivable turnover days remained flat at 43 days and days of inventory increased by one day to 51 days. On the cash flow side, in the Q1, we generated RMB74 1,000,000,000 from operations, invested RMB80 1,000,000,000 in capital expenditure and raised NT45 1,000,000,000 through corporate bonds. In the U. S. Dollar term, our capital expenditure was $7,000,000,000 in the Q1.
We expect the total CapEx to be front end loaded for the whole year. Overall, our cash balance increased RMB43 1,000,000,000 to RMB186 1,000,000,000. Free cash flow ended at negative RMB7 1,000,000,000, dollars mainly due to higher capital expenditure in the Q1. Lastly, let me make a few comments on our capacity plan. In the Q1, due to fewer working days and scheduled maintenance, our total capacity decreased 1% to around 3,900,000 8 inches equivalent wafers.
While we continue to add 28 nanometer capacity, our 2nd quarter capacity will pick up to a level close to 4,000,000 wafers, up 3% from the Q1. For the full year, our 12 inches capacity is expected to increase 17% in 2013, contributed by the ramp of Feb 15 and our total annual capacity will increase 11% year over year to reach around 16,500,000 wafers. I have finished my financial report. Now let me provide you our 2nd quarter guidance. Based on our current business expectation and a forecast exchange rate of 29.82, we expect our revenue to be between TWD154 1,000,000,000 and TWD156 1,000,000,000 representing about 17% Q over Q growth.
In terms of margins, we expect the 2nd quarter gross margin to be between 47.5% 49.5% 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 for his remarks.
I would like to make some comments on industry outlook and on 1Q and 2Q. And then on our technology development 28, 2016 as well as specialty technologies. And finally, I will talk about this year's capital expenditures. For the industry outlook, for the full year 2013, our estimate of global GDP remains unchanged at about 2.6% growth. At Sea market, we now estimate to be about 4% growth.
That is up from the 3% earlier estimate due mainly to memory price recovery. Fabless Industry, our estimate of Fabulous Industry Growth Remains Unchanged at 9%. Foundry industry, we now estimate to grow at 10% that is up from 7%, mainly due to the rise of our own estimate of our growth. TSMC growth will be much higher than the foundry industry growth of 10% that I mentioned earlier. On inventory, supply chain inventory at the end of 4Q was close to seasonal, was reasonably balanced, close to the seasonal norm.
And we expect it to remain slightly above seasonal in all four quarters this year. And basically, we feel that it is reasonably it will be reasonably balanced every quarter this year. On 1Q and 2Q of 2013, We are pleased with our Q1 performance and we are encouraged by the business prospects of the Q2 as Laura has already guided. Both quarters are stronger than seasonal. We attribute our strength to 1st mobile related applications whose demand remains strong and TSMC's strong position in 28 nanometer technology, which has become widely adopted by many mobile related applications.
Now a few comments on 28 nanometer. I said before and I say again, our capacity and output continue to ramp up aggressively. Both our production and our revenue of 28 nanometer wafers in 2013 will triple the production and revenue of 2012. This year, our volume and our revenue will triple that of 2012. Our High K Metal Gate version will overtake the oxynitride version in Q3 of this year.
Market share this year is expected to remain very high due to first, we have better yields on 28 LP which is the oxynitride version. We have better yields on the oxynitry version than competition. 2nd, our differentiated offering in High ks Metal Gate, Namely, we have GateBlast versus competition's GateFirst, offers better performance for our customers' products. So two reasons why our market share will remain very high. First, the 28 LP, the oxynitride version has better use than competition.
2nd, our HiK Metal Gate version is different from what the competitors may offer because we are gate 1st and theirs is gate 1st. And our gate last version our gate last is better performance for our customers' products. Lastly, I have been asked a couple of times how our gross margin is doing on the 28 nanometers. And I'm happy to report that the gross margin of 28 nanometers will be slightly higher than corporate average this year, the whole year, every quarter. A few comments on 20 nanometers and 16 nanometers FinFET.
On 20 nanometers, risk production has started in the 1st quarter that is last quarter. Engagements with customers are on schedule, have scheduled 20 product tape outs for this year from multiple customers. Many of these tape outs will drive high production volume. And yield progress on 20 nanometer is on track. On 16 nanometer FinFET, we have said several times that this is a change in cadence in our new technology introduction.
It used to be 2 years per node. And in the case of 16 nanometer FinFET, it follows just 1 year by 1 year the 20 SOC. So it is a quickening of our cadence. And that is because of market requests market requirements, customers' requests. Compared with the 20 nanometers, the 16 FinFET has same metal pitch, but tighter front end FinFET design rules.
The reason we can introduce it so quickly after the 20 is because the 16 FinFET can leverage the learning from 20 nanometers in interconnect and in double patterning. The yield improvement of the 16 FinFET is ahead of schedule. It is on track to begin volume production within 1 year from 20 nanometers. Now for 20 nanometer and 16 nanometer as a whole, I expect that they will be in combination a bigger node than the 28 nanometers. If it was on the competitiveness of our 20 nanometer and our 16 nanometer.
I have 3 points to make. First, TSMC technology is based on an open environment, the Open Innovation Platform, OIP. That open platform facilitates and invites innovations from all participants in the OIP. The participants include of course most importantly our customers and they also include design ecosystem partners of course TSMC itself is a very important part of this open platform. The second point I want to make is that, we have been collaborating with our customers and ecosystem partners for more than 15 years.
Through the ecosystem, OIP, TSMC's technology has been collaboratively optimized for SoC development. With our customers, we have been optimizing our technology for SoC development. And then together with our customers established power efficient ARM based architecture and comprehensive mobile IPs with our ecosystem partners, we are confident that our customer products with TSMC's 20 and 16 nanometer technologies are very, very competitive. I think that is already proven by our customers' enthusiasm of our technologies 2016. Now a few words on specialty technologies.
We don't want to neglect them at all. We talk about advanced technologies most of the time, but especially technologies are growing even faster. And they already account for a very significant volume in our revenue. And I'm talking about fingerprinting technologies, motion sensors technologies and products, near field communication products, audio codec, power management, touch sensors and an old friend, but still a very exciting technology that is
CIS,
the imaging products cameras. These enhanced requirements for human machine interfaces will fuel the growth of TSMC's specialty technology businesses in mixed signal, MEMS embedded fresh and high voltage. And most of those technologies are now embedded in our less than leading edge technologies, 40, 65 nanometer, 90 nanometer, 0.18, 0.15 etcetera, etcetera. Finally, CapEx, capital expenditures. CapEx will be between 9,500,000,000 dollars $10,000,000,000 this year.
This is an increase from the last guidance we gave, which was about $9,000,000,000 Basically, we have stepped up the preparation for the ramp up of 20 nanometer and 16 nanometer. We have pulled some of the capital in, because we want to be to have as high yields as possible when we do start ramp up volume ramp up. And of course, we are continuing to build up 28 nanometer capacity. Therefore, approximately 90% of the capital expenditures are for 28 nanometer, 20 nanometer, 16 nanometer, both building facility and equipment. Another 5% is for R and D and that's mainly for 10 nanometer, 7 nanometer etcetera.
And 2% for specialty equipment and that's on the specialty technologies that I just mentioned. And 1% for the land in June, which we announced a few months ago. Basically, I feel that the company is entering or has already entered a new growth period. We started to invest in this growth period even at the depth of the recession in early 2009. And we have been investing in increased R and D, in increased capital for several years now.
And we have begun to see the benefits. We have been scaling new highs in revenue for 4 consecutive years including this year. And we have scaled new highs in net income for 3 of the last 4 consecutive years. And the best part is that the best is yet to come. Thank you.
Okay. 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. Okay.
Our first question comes from the floor and it would be from Goldman Sachs, Donald Lu.
Chairman, Laura and Elizabeth Minhang. Maybe I should use English here. My first congratulations on the very good second quarter guidance that was right. First question is on the 20 nanometer. Some investors and also your customers has been talking about the cost per transistor might start to go up after double patterning etcetera, etcetera.
And what's your view on this impact to the supply chain, your profitability and your customers' profitability and the adoption of technology, etcetera? And my second question is TSMC's just want to hear from you again the return and the profitability for future nodes 20 nanometer and 16 nanometer. Thank you.
Thank you. Transistor car, 29 meter transistor car. Yes, the slope of decrease of transistor cost has been less in between 2820, the decrease in transistor cost is less than the decrease in transistor cost between $40,000,000 $28,000,000 But now the important point is that the value we offer in any new node is, I think, gradually shifting or has already gradually shifted from just pure lower transistor cost to the performance aspects, performance, speed and the power. And of course, in addition to speed and power, we also offer value in quick access to market and services and those things. So I think that there is there are opportunities for regaining the slope, the decrease of transistor costs.
There are opportunities for regaining it. For instance, I think that the recent developments in EUV, I think, are encouraging. And they do have they will have an important role to play if those developments continue to progress. Now on the other hand, the value that the new node offers in performance and power is exactly what our customers are looking for. And I think that, yes, the transistor cost reduction has not been so great, but I think the acceptance of the 20 nanometer SoC will prove, and I'm certain of the acceptance.
I think the acceptance will prove that the customers are still getting value. As to the return profitability of 2016, Well, I'm not prepared to offer you a quantitative measure of the return profitability. But I will repeat our goals in this 5 year period, I think starting 2012, starting 2012 to 2017, I guess. That is 10% per year compounded annual growth in profit before tax and return on equity of 20% or higher. And those targets I announced 2 years ago, I believe.
And we remain fully committed to those.
Okay. Next question. Next question also comes from the floor from Deutsche Bank's Michael
Chairman, as Q1 and Q2 sales momentum is stronger than seasonal. So do you think the inventory risk will be rising by the end of Q2? Or you think the demand can digest most of the output?
Inventory, whether or not inventory risk is going up, whether the supply chain can digest inventory this year?
Well, our inventory estimate is that it will only be slightly above seasonal in the next few quarters. Is that the question? But
can you give some color for Q2 outlook by segments?
Pardon me?
Q2 outlook by segments.
The outlook of different applications in Q2 segment by segment?
Yes. Laura, I can comment. Okay. I just announced the guidance that we will grow 17 percent. For us, every segment will grow across the board with the communication will grow the most mainly because the mobile devices.
Okay. The second question is I'm sorry.
This is your 3rd, so we have to go to another one. Okay. Okay. Next question also comes from the floor and that will be from Citibank's Roland Xu.
Hi, Chairman. First question is the on based application process has been widely adopted on the mobile applications. So can we give you a view about how do you think about the ARM based application process on PC, notebook or even server? Do you think that will be happen very soon or that will maybe take longer than expected time? Thank you.
Whether or not ARM based processor can enter into the PC space that's your question.
I think that certainly, it's I think it's a possibility. And I think, in fact, well, it's a possibility, but I that's not the first thing that comes to mind. I think the first thing that comes to mind is service. And so I think some of our customers have already targeting that some of our customers are already targeting that.
So before this adoption be ramped up, what kind of barrier or what kind of bottleneck technology needs to be resolved? And how TSMC can help to boost this kind of conversion going forward?
Your question is what kind of bottleneck that exists from our current customers' offering that if they want to go to PC, right? And what TSMC can do to help them debottleneck?
I don't think I can answer that question very well. I think that it is something that the I can't answer that question very well at this point.
You have a follow-up?
Yes. I think a follow-up is, I think for recently TSMC just have a news release talking about tech power with on code test 857 for 64 bit application process. So this is going to develop on TSMC 16 nanometer FinFET technology. So my question is except for this Cortex A57, 16 nanometer FinFET, do you have any 64 bit on application process on 20 nanometer or 28 nanometer technology? Thank you.
Well, just as I said, I think the question is whether we have any 64 bit applications in just as I said, I think some of our customers are targeting the server segment. So that's architecture.
Okay. I think we should go to the call for the next question. So operator, could you proceed to the 1st caller on the line? Dan Hayler from Bank of America Merrill Lynch. Please ask your
question. Thank you very much, Elizabeth, and congratulations, Chairman, for your highly successful growth strategy and execution on your technology. I had two quick questions. First, Doctor. Chang, in terms of the cadence, where you've noted a pickup, especially on 16 nanometer and your very strong growth in mobile processing and SoCs.
What does this mean for the N-one fabs? You're noting significant growth in your specialty processes. Are we seeing a cadence pickup in the mid tier technologies such that you'll be able to keep the n minus 1 fabs relatively full going forward?
So Dan, your question is in our leading edge technology, the cadence has become faster. And therefore, your question is whether or not the same cadence become faster for the N minus one technologies?
For the N-one?
N-one. So 1 or 2 generations. The bigger nodes. So 20 nanometer and then 28 is N-one,
40 is N-two. Well, cadence, I mean, in the past, it was 2 years. I mean, that's history already. So how does that become faster? I don't understand.
Yes. So I'm wondering that's exactly my question. So I'm wondering if there will be a excess capacity in the middle end of your technologies with the leading edge picking up and the mainstream technology remaining at 2 cadences?
Cadences? The specialty technologies, will they migrate faster than they used to?
How do you
keep? Right now, it looks like some of these battery technologies are skipping nodes. They're migrating from 0.18 to 90 perhaps rather than to 0.13 first and then 90. But they are going from 0.18 to 90 directly and they are going from 0.13 to 65 directly, skipping in all that's happening. I don't know whether that's what you're asking or not.
Is
it? Well, I'm the crux of the question is how do you keep your mainstream fabs full. When everything is moving at the same pace, you can keep your mainstream fabs full. So will there be a challenge to keeping your middle end technology fabs out? How do you address it?
I think you have come very close to the heart of my management problem, all right? Keeping the mainstream fabs full is almost as important as advancing the leading edge. And well, I understand your question, but if I tell you the answers, I will be telling these to my competitors also. So I'm not going to do that, yes.
But basically, basically, you
can already guess. I mean, it's why do I talk about these specialty technologies? The specialty technologies will keep the mainstream fabs full,
hopefully. Thank you for that. Yes. Great.
So Dan, you don't have the second question. Okay. All right. So then we come back to the floor. The next question comes from the floor of Barclays Andrew Lu.
Doctor. Morris Chang
and Loring.
I have two questions. Last time you mentioned 20 nanometer in next year, revenue will be larger than 28 last year. How about the percentage in each quarter, which means the total percentage revenue will be higher compared to year 2012. For example, last year, Q1 percentage 28% is about 5%, but 22% by Q4.
No, I'm not going to go into those details, but I repeat, I reiterate. I stand by what I said last time. That is that the volume of production volume output of 20 nanometers next year will be greater than 28 in 20 12. That I stand by. But as to percentage and so on.
Thank you.
Yes. Okay.
My second question, earlier you also mentioned migrate to 16 nanometer FinFET will be faster than the normal upgrade cycle about 2 years from 20 to 16. How about from 16 to 10?
No. It's going to be the same old slow cadence, 2 years.
Back to 2 years, won't be longer. Thank you.
Back to 2 years, yes.
Okay. Next question comes from the floor of Credit Suisse, Randy Abrams.
Thank you. Wanted to go back to the 2nd quarter guidance. It's well above most of the industry. Last quarter, I think you suggested 1st quarter was stronger, so it set up a higher base. So maybe what's driving the increased optimism whether
it's Currently, I found myself to be mistaken. Yes. Yes. 3 months ago, I thought the higher base well, in fact, was even 6 months ago. Yes, 6 months ago, I thought the higher base of the Q1 would make a significant growth in the second quarter very difficult.
But presently, I found myself to be too pessimistic.
Maybe as a follow on that, what drove that change where now you think you're mistaken from your prior view? Was it market share gains or you saw incremental market momentum? And do you think sustainability into second half, over the last couple years we saw a bit of dip after a strong first half?
Well, it is basically mobile products and market share gain. Now the mobile products, actually, there's one piece that I must mention, which we did not foresee very clearly 6 months ago. That's the China piece. The China piece is playing a pretty important factor in my present surprise.
Okay. The second question on 4.50 millimeter, it's pretty far out, but we're seeing Intel already spend about $2,000,000,000 to $3,000,000,000 on a 4 50 millimeter shell. When do you expect
On what? On what? On what? 18 inches On 4 50 millimeter, yes.
Yes. When is your expectation you'll have to start spending CapEx? And do you have any view on fab location at this stage?
Have we started to expect CapEx yet?
Not yet. We have started to spend R and D. We have a small team working on 450, but not ready to start on the meaningful way in CapEx.
I think his question is when do we tend to start CapEx? Well, I think our schedule is 2016.
In 2016 time frame, that will be the
time we start to think. So
it's too early yet.
Great. Thank you.
Randy has a part that you also asked for the location, right?
Yes. If you could suggest what you're thinking about that location?
Well, actually, we didn't we mention that when we acquired the Thailand land, yes.
Yes. The land we acquired in Zhunan is the R and D side for the 450, but not the production side.
Not the production, yes. It's going to take some time, but please the things take a little longer now than they used to, yes. I mean, each advanced mode of technology and the increase in the wafer diameter, it's well, you understand that I think that only 3 companies can afford to follow it through now, maybe 3, certainly including us. And because these things take more time and require more resources, both money and people, talents. So the 450, certainly, is going to take longer.
The transition from 300 to 450, it's certainly going to take longer than the transition from 200 to 300.
Okay. I think our next question we should take our next question from the call. Operator, please proceed with the first caller on the line. Eddie Halsini from SIG. Please ask your question.
Yes. Thanks for taking my question. And Doctor. Chang, thanks for providing some color on the number of petals for 20 nanometer. Could we could you elaborate on the types of customers or the number of customers or any color that you could provide on the 20 PayPal that you have so far for 20 nanometer?
And I have a follow-up.
Some color on the customers for 20 nanometer? They are
The types of customers that add up to 20 tape outs for 20 nanometer.
The type of customer, yes. I was going to give you those. Now we have the our traditional leading edge users, the graphics, the FEJA customers. And but recently, we have added another class of customers that's smartphones and tablets, the mobile product users. So those are the main classes of customers that will provide the chronic tape outs for our chronic SoC.
Thank you. And the follow-up I have is actually on 20 nanometer. Can you help me understand how important is interposer to the economics that 20 nanometer would provide, cost versus economics, does Interposer really make a big difference to what your customers could get out of 20 nanometer?
That would be related to our COWAS, right, the silicon interposer? Yes. Okay.
What was the question anyway?
Yes. What kind of benefit or importance that the interposer the COOS is to our customers at 20 nanometer compared to their cost?
It's basically it's just a denser. It's an integration. It's kind of more small on the circuit board. So denser packaging.
So if interfolio is not ready, is that going to make a big difference to your customer as they evaluate cost and benefits?
Is that going to be an important element when our customer evaluate the 29 hours?
I think so, yes. While we already have customers using it, yes. And I believe they evaluated them that way, yes.
Okay. Thank you.
All right. Now we can come back to our floor. The next question comes from HSBC, Steven Pelleo.
Great. Thank you. The foundry industry is roughly thought to be about $40,000,000,000 $50,000,000,000 If it grows about 10% this year that's equal to about what you're going to grow. So what does this mean for the rest of the industry? Are we seeing the competition even get to become a second source opportunity at
not on my page myself to worry about other foundries. Well, maybe I should ask
it this way. Our second source is starting to become viable enough that maybe they could cause some pricing pressures at some point at 28 nanometer this year?
Well, yes, there are 2nd sources on 28 nanometers. But second sourcing is not as simple in the foundry business. You have to work with the customer has to work with the foundry for quite a long time before he can use foundry. So this is not a commodity business. A commodity business, you can set up second sources very quickly.
But this business, you can't. But still, having said all that, yes, there will be second sources. But if you look at 2018 and I know that the analyst reports, the press have been talking about second sources and competition for TSMC in the 28 node. But the fact of the matter is that this year, which is the 2nd full year of production and ramp up for us, Even this year, we see relatively little competition and we will still have a very high market share of 28.
And just as a quick follow-up question. You talked about 28 nanometer growing each quarter. You talked about tripling year on year. You give capacity numbers for 300 millimeter and 200 millimeter. I'm curious what is your 28 nanometer capacity today?
And what do you think it will be at the end of the year? I don't know, monthly wafer starts per month something like that.
Do we review that Laura?
We do not review that.
All right. Then if you
just remind me what when is 20 nanometer revenues going to start being 1% or 2% or 3% of revenue? I think I forgot if you guys
20 nanometer? Yes.
20 nanometer is not started.
I know when do you expect?
1st half next year.
You're asking both questions.
She answered all this. She said first half of next year. I mean you actually set a pretty low hurdle. You said 2% or 3%, right?
It's the first 2% of 20. What quarter will be the first few percentage of revenues will come from 20 nanometer for TSA?
What quarter will be the first 2% quarter?
Based on current estimation, it will be roughly Q2 2014.
2014. Okay. Thank you.
All right. Next question also comes from the floor and that will be from Morgan Stanley's Charlie Chang.
Thanks for taking our question. SML yesterday commented that they are making a good progress in the EUV throughput. We are wondering if TSMC is seeing the similar trend And will TSMC change the timing of adopting EUV technology? And lastly, can management give us a sense what is the cost comparison between EUV and the non EUV for example at the 16 nanometer? Thanks.
Would you repeat that
question? Okay. So you are asking us to update on the EUV progress, right? And then the second part is the cost of using EUV versus not using EUV at 10 nanometer or
Yes. Maybe current nodes or the future nodes.
Current nodes, we don't use EUV. Future nodes, it depends on when EUV will be available. Your question is comparing the cost with or without EUV.
Yes, because it's up to your timing of whether you want to advance your EUV adoption timing? If you want to use it for 16 nanometer, then the comparison should be at a 16 nanometer? Thank you.
Well, all right. I think I understand the gist of the question. So let me try to answer. Actually, that question is probably more appropriate at the ASML analyst call. But let me try to answer what I can anyway.
EUV recently has had a break room. The wattage the power source wattage has now gone up to 40 watts. Now that will allow a throughput of some 30 wafers, 30 something wafers per hour, which is still far from enough To make it economically desirable, we'll need over 100 wafers per hour throughput. And that will require a power source of more than 100 watts. So there is still some distance to go.
But ASML is optimistic. And certainly, I mean, we certainly cheer them on. We are a stakeholder of ASML in more than one way. We are a financial investor. We are also going to be a significant user and hopefully significant beneficiary of the EUV.
So but all right. So now when are we going to use it? I think if we are optimistic, I would say that we will be using it at least partially in the 10 nanometer node. And anyway, I think I have given as much answer as I can, yes.
Okay. Next question will actually be coming from the line. Operator, could you please proceed to the next caller on the line? Brett Simpson from Arete Research. Please ask your question.
Yes, thanks very much. For Doctor. Chang, just wanted to ask on Intel. We saw this Ultera deal, and there's rumors Cisco is going to follow. And Intel on the call yesterday was talking about this foundry strategy where they're crawling today, but they want
to walk and then run over
the next couple of years. I'm just interested, how do you view Intel as a long term selective customers?
I didn't hear the entire question.
So your main question is how do we see Intel as a competitor?
I think you also asked about Alterra, didn't you? Yes. So it's Alterra, Intel is a competitor and?
No. The Altera going to Intel for 40 nanometer. So Intel also announced the plan to come in 2 countries. So how we see them?
Anyway two parts of the question. One is Ultera, the other is Intel, right? Okay. Ultera, I very much regret Alterra's decision to work on the 14 nanometer with Intel. Even though the financial impact is very, very small and Ultera remains a major and valued partner of TSMC's.
We have gained many customers in the last few years. But I really hate to lose even a part of an old one. We want them all really. I regret it. And because of this, we have thoroughly critiqued ourselves.
If there was a thing like an investigator investigative commission on what happened, we had it. And there were, in fact, many reasons why it happened, and we have taken them to heart. And it's a lesson to us. And I don't think that we at least we'll try our very best not to let similar kinds of things happen again. Now but I just want to emphasize that Alterra remains a major and valued partner of ours.
And I say this with Autelus concurrence. Now Intel as a competitor. I noted Intel's yesterday's analyst call in which they said they have now gone from core to walk and then we'll go on to run. That's all very beautiful metaphor. And then they also raised several conditions or several criteria 3 criteria, but there's really nothing new in those and they have set those before.
And I still view Intel as a selective picker among customers. As a foundry competitor, they will pick their targets and so on. And I don't view them as a general competitor because they have already set through the 3 criteria that they used, they have already set themselves that they will not be a general orphan competitor. But they are a very serious competitor to our customers. I mean that really I would say applies even greater pressure on us than Intel as a direct foundry competitor.
And they are very serious compared to our customers. Our customers rely on us. That is very serious pressure. And we respond to that pressure, of course. Yes.
We respond to that pressure.
Maybe just a follow-up question, Doctor. Chang. On the mobile guidance you've given for Q2, is this all being driven by existing customers? Or are you seeing something new in your customer mix going forward?
Your question is whether or not the strength of our Q2 business comes from new customer or
In mobile, yes.
In mobile or
No. I mean, obviously, something comes from new customers every quarter, but not big. I mean, we get new customers all the time. But big customers are not I mean, 2nd quarter strength is not due to 1 or 2 big new customers, no.
That's very helpful. Thanks. Can I maybe just ask one final question for Laura on depreciation? Just to get a sense for through the rest of this year, how much depreciation trend because it was flat in the March quarter?
You're asking about the March quarter? In general speaking, with the CapEx guidance, Chairman was talking about RMB 9,500,000,000 to RMB 10,000,000,000. We expect whole year depreciation will go up around 23% on year over year basis.
Thanks.
Yes. Okay. Now we are coming back to the floor. The next question comes from Daiwa's Eric Chen.
Hi, Doctor. Morris, Chen. And I'm sorry. My first question regarding to the gross margin. I saw the 28 nanometer process we took like the 4 to 6 quarter to have higher than the average gross margin.
So for the 20 nanometer process do we have any schedule or internal the plan? Thank you.
So Eric, your question is how long will it take for TSMC 20 nanometer to reach corporate gross margin? How long will it take, right?
Yes. Let's see. I think that we have kept some statistics on this sort of things. Very interesting. And I think it takes it took 6 quarters, 40 nanometer took 6 quarters 8 quarters, 7 to 8 quarters.
And 28 nanometer is taking about 8 quarters. And so you ask how long is 29,000,000 going to take? Well, I only have history to guide me, all right?
So how you think? I mean, take a guess. How you think? How long that will take? What?
Von, you're on this?
He wants you to take a guess.
Well, I think history is my best guess.
So I mean the 7th to 8th quarter.
Yes. Okay.
Thank you. And my second question regarding to the CapEx. And we see the CapEx pretty centralized and on the top 3, the semiconductor maker. And I will say for this year probably over 70% even 75% the CapEx among these 3. So how you think about this kind of CapEx centralization and how the TSMC look at the other 2 competitor in terms of the CapEx?
And the follow-up is regarding to the 28 nanometer process capacity. So Laura, if you don't mind, could you give us idea in terms of the Q1, Q2 and the whole year 28 nanometer process the capacity? Thank you.
So Eric, you have a question here on CapEx. You said that you observe CapEx tend to be centralized on the top 3 players
and Top 3 what?
Players, the top 3 companies.
Intel, Samsung and TSMC. TSMC.
So
your question is whether or not this is what kind of implication of this trend to Yes.
I would like to know this kind of CapEx, the centralization will accelerate or not and how the TSMC and to be outstanding one going forward and the Model 3?
Well, it looks like that only 3 companies can afford to keep investing. That's what you're referring to really.
Right. So what's the other 2, any strategy, I mean, for the CapEx we see the
You mean TSMC versus the other 2?
In terms of the CapEx.
Whether our CapEx will react to the other 2 companies CapEx.
Whether what?
Our CapEx will be responsive responding to
our No. Our CapEx is only responsive to our own needs.
Okay. So we are not going to see the CapEx over competition going forward. CapEx or?
Over competition. I never, never, never in the last 20 years engaged in any CapEx war with anybody. In the last ever since we started the company, our CapEx has always been responsive to just one thing that is our own needs, okay? Never mind what the other companies spent.
Thank you. Yes.
So Laura, you're asking the capacity for each quarter for 28?
8? Roughly ideal, yes.
Yes. I'm afraid I cannot tell you. What I can tell you is we are growing our capacity each quarter for 20 8. But in terms of overall CapEx spending, I think we're towards the end of spending by the end of this year for 28.
Okay. And very quick, the 28 nanometer process in Q2 in terms of quarter on quarter capacity growth, how many percent will be roughly?
I think it will be in line with our revenue growth. Okay. All right. If there's no other questions, we will end our investors' conference and conference call right now. Thank you very much for coming and we'll see you next quarter.