Welcome to TSMC's 4th Quarter 2012 Earnings Conference and Conference Call. This is Elizabeth Song, 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 dialing lines are in listen only mode. As this conference is being viewed by investors around the world, we will conduct this event in English only.
The format for today's event will be as follows. 1st, TSMC's Senior Vice President and CFO, Ms. Laura Ho, will summarize our operations in the Q4 and for the full year of 2012 followed by our guidance for the Q1 2013. Afterwards, TSMC's Chairman and CEO, Doctor. Morris Chang will provide his general remark and a couple of key messages.
Then we will open the floor to questions. For those participants on this 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 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 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 your participation today. My presentation will start with financial highlights for the Q4 and a recap of 20 twelve financial performance, followed by the guidance for the Q1. In the 4th quarter, despite inventory correction in the IC supply chain, demand for our products was higher than we expected 3 months ago, resulting in above guidance revenue and profit margins.
On a sequential basis, our 4th quarter revenue decreased 7% to TWD131 1,000,000,000. Gross margin was 47.2 percent, down 1.6 percentage point from the 3rd quarter. This is mainly due to lower capacity utilization, while cost improvements and favorable inventory valuation adjustment offset some of the decline. Operating margin was 35.2%, down 2 percentage points from the 3rd quarter. Operating expense as a percent of revenue increased 0.4 percentage point on a smaller revenue base.
Non operating items were small losses of NT7 million dollars in the 4th quarter as we recorded an impairment charge for certain invested companies. Overall, our 4th quarter EPS was $1.61 ROE was 23.8%. In terms of revenue by application, as I just mentioned, inventory correction in the IC supply chain has affected overall demand for TSMC's wafer. However, demand for mobile computing devices remained firm, making communication all declined by double digit. As a result, revenue contribution from communication related applications further increased from 49% in the 3rd quarter to 54% in the 4th quarter.
On a full year basis, communication increased 23% and represented 50% of our revenue wafer revenue. The major contributing segment include application processor, baseband, CMOS image sensor and wireless LAN, reflecting the strong demand for mobile computing devices. Another fast growing application is industrial and standard, which grew 42% year over year. The growth was mainly contributed by the increasing usage of power IC, data converter, touch controller and flash controller within mobile devices. This also reflected our success in developing specialty technology businesses.
If we look at revenue by technology, thanks to customers' strong demand for TSMC's 28 nanometer technology and the excellent execution by the operation team, Revenue contribution from this node jumped from 13% in the prior quarter to 22% in the 4th quarter. We see 28 nanometer as a very successful node for TSMC, which already accounts for 12% of our full year revenue in 2012. Looking forward, we remain confident 20 8 revenue contribution will exceed 30% for the whole year in 2013 and margin will be at corporate level starting from this quarter. Taking a look at the balance sheet. On the asset side, cash and marketable securities ended the quarter at TWD151,000,000,000 slightly increased from last quarter.
Long term investment increased to TWD66 1,000,000,000, mainly due to the RMB31.5 billion investment in ASML shares. This strategic investment will be recognized as available for sale in our balance sheet. On the liability side, current liability increased RMB23 1,000,000,000 mainly due to increase in payables to contractors and equipment suppliers as we as well as increase in short term loans based on mortgage impairment. Long term debt increased by RMB4.4 billion to RMB82 1,000,000,000 as we issued more corporate bonds in the 4th quarter. Our days of inventory increased by 6 days to 50 days, mainly due to higher working process for 28 nanometer product in response to a strong market demand and an increase of raw material.
On the cash flow side, we generated $85,000,000,000 from operations in the 4th quarter and invested $60,000,000,000 in capital expenditure. Overall, our cash balance increased $5,000,000,000 to RMB143 1,000,000,000 at the end of the 4th quarter. Due to higher operating cash flow and the lower capital expenditure, free cash flow improved from negative $2,000,000,000 in the 3rd quarter to positive $26,000,000,000 in the 4th quarter. Now let's take a look at the capital expenditure. We spent US2 $1,000,000,000 on capital expenditures in the 4th quarter.
As a result, full year CapEx ended at US8.3 billion dollars in line with our prior guidance. Let me make some comments on our capacity plans. As we continued adding capacity for 28 nanometer process technology, our total capacity increased 4% to around 4,000,008 inches equivalent wafers in the 4th quarter. For the full year, our 12 inches capacity had increased by 21% and the total and annual capacity increased by 14% to reach about 15,000,000 wafers. We expect the total capacity to continue increase to decrease slightly by 1.2% in the Q1 of 2013 due to fewer working days and scheduled maintenance.
Now I would like to give you a recap of our performance in the year of 2012. 2012 is a record year for TSMC. Our strength in technology and manufacturing made us well positioned in the mobile computing market. We are happy to mark the year with record sales and profitability, despite difficult macroeconomic environment. Compared with 2011, our revenue increased 18.5% year over year to reach NT506 1,000,000,000.
We continue to outperform in semiconductor and foundry industries. As for profitability, although the rising depreciation and fast ramp of 28 nanometer have indeed put pressure on our gross margin. Nevertheless, our gross margin has increased to 48%, a 2.7 percentage point increase from 2011, thanks to higher utilization of the capacity we invested in. Earnings per share increased 23.8 percent to NT6.41 dollars and ROE for the whole year was 24.6%, compared to the 22.3% in 2011. Before I dive in the Q1 guidance, I would like to brief you about the changes in our effective tax rate in 2013.
TSMC's tax rate is projected to be 14% in year 2013, which is significantly higher than 8.7% in 2012. The higher tax rate are due to the following reasons. First, the introduction of capital gain tax in Taiwan coupled with the increase of the AMT rate from 10% to 12% will cause our effective tax rate to increase by 2 percentage points. 2nd, higher tax penalty on our profit return earnings as we are making more net income, by keeping the same dividend. This will add 1.7 percentage points to our effective tax rate.
3rd, a 0.9 percentage points increase caused by the expiration of certain tax exemptions. Lastly, the 0.7 percentage point is attributed to the absence of certain subsidiaries loss carry forward. Under the current tax environment, we expect the tax rate for 2013 and 2014 will be around 14%. I have finished my financial report. Now let me provide you our Q1 guidance.
Based on our current business expectation and the forecast, foreign exchange rate of 28.90, we expect our revenue to be between NT127 1,000,000,000 and NT129 1,000,000,000 In terms of margins, we expect the 1st quarter gross margin to be between 43.5% 45.5% and operating margin to be between 31.5% and 33.5%. This concludes my remarks. Let me turn the podium to our Chairman and CEO, Doctor. Morris Chang.
Good afternoon, ladies and gentlemen. I'll make a few comments on the last year's achievements on this year as a whole and specifically on Q1. And I will also comment on 28 nanometer technology and on 20 nanometer and the 16 FinFET and then finally on CapEx, this year's CapEx. Laurel has already reported the big financials of last year to you. Basically, last year was a year of achievements for us.
Revenue grew 18% to reach US17.1 dollars and EPS grew 24% to reach NT6 $41 per share. 28 nanometer technology was a resounding success. The production in 2012 increased more than 30 fold over 2011. And we have enjoyed throughout the year in spite of a lot of attempted competition, We've enjoyed throughout the year close to 100 percent foundry market share in 28 nanometer technology. We have also in the year 2012 further strengthened our R and D.
Our R and D expenditure increased from NT33.8 billion in 20 11 to NT40.4 billion in 2012. Our R and D people increased from 3,400 at the end of 2011 to 3,900 at the end of 2012. Now a few words on 2013 and the Q1 of 2013. For the full year 2013, we are forecasting a global GDP growth of 2.6%, which is a bit higher than last year's global GDP growth, 2.4%. Now we are forecasting 2.6% for next year I'm sorry, this year.
We are forecasting a world SC market growth of 3%. We are forecasting a fabulous company growth of 9%. We are forecasting a foundry industry growth of 7%. And we are forecasting a TSMC revenue growth much higher than 7%. So those are our forecasts for the full year 2013.
For Q1 2013, I have some comments on supply chain inventory to make. 3 months ago in the last investors conference in October, We expected our supply chain inventory to decline from 7 days from above seasonal in 4th quarter to one day below seasonal in Q1. That was our expectation 3 months ago that the supply chain inventory would decline from 7 days above seasonal in 4th quarter to one day below seasonal in the 1st quarter, altogether an 8 days decline. Now because many mobile product manufacturers have accelerated their new product launch this year. Instead of late in the year, they have now pulled ahead to earlier in the year.
And therefore, they need IC supplies, IC inventories earlier. So the supply chain inventory now is forecast to decline only slightly from Q4 to Q1. Instead of 7 days above normal to one day below normal, we're now forecasting that the inventory will decline from 6 days above seasonal. Well, instead of 7 days 3 months ago, we thought it was inventory was going to be 7 days above seasonal. Now we have better information and we think it's 6 days above seasonal in the Q4.
But the big change is that we are forecasting it to be high to only 4 days or above seasonal in the Q1, which is only a 2 day equivalent 2 day decline instead of the 8 day decline that we had forecasted 3 months ago. All this resulted in a higher first quarter than we thought 3 months ago. So now we expect the Q1 revenue to decline rather than 3 months ago, we expected to decline. The 1st quarter revenue, we expected to decline from the 4th quarter. We now expect the Q1 revenue to be essentially flat in U.
S. Dollars from the 4th quarter essentially flat from the 4th quarter in U. S. Dollars. A few more words on 28 nanometer technology.
After accomplishing a 30 fold increase in production, 28 nanometer capacity and output continue to ramp up aggressively this year. Production of 28 nanometer wafers in 2013 will triple that of 2012. I think the newcomers may ask, do you have customers? The old customers I think know us well enough not to ask that. Yes, we have customers.
High k metal gate will surpass oxynitride that's in the 28 nanometer. We have as you know actually 4 types. 3 of those are high ks metal gate and the earliest type that we introduced was the oxynitride. And indeed last year, the majority of the production was the oxy nitride. But the more advanced version, Taiki Metal Gate will surpass oxy nitride in the Q3 this year.
And in the Q4, it will even surpass the oxy nitride even more. Gross margin percentage of 28 nanometer in 1Q 2013 which is this quarter will be slightly higher than corporate average and is expected to remain so in 2013. It's neither dragging the corporate average down nor is it pulling it up. Now a few words on 20 nanometer and 16 FinFET. Both technologies are in progress in R and D.
Both represent state of the art leading edge technology not just in foundry, but in the whole SC industry. And enough discussions have taken place with enough customers with large requirements to lead us to believe that in both its first and second year production in both the first and second year production of 20 SoC and 1st year will be next year 2014. 2nd year will be the year after that 2015. In both those years of 20 SOC production, the volume of 20 SOC will be larger than 28 nanometer in its 1st and second year production, which were last year and this year. That's a long sentence, but let me repeat it in slightly different words.
We think that our volume of 20 SoC next year, 2014, will be greater than the volume of 28 nanometer last year. And we think the volume of KONA SoC in 2015 will be greater than the volume of 28 nanometer this year. So a few more words about CapEx. This year, it will be about $9,000,000,000 give or take if you're under $1,000,000 $9,000,000,000 88% of it will be for 28 nanometer, 20 nanometer, 16 nanometer building facility equipment. But basically 88% will be for 20 8, 20, 16 everything building.
We're building new buildings now in fact facility or we have been building new buildings for quite a while facilities and equipment. 5% will be for R and D equipment. That's basically 10 nanometers and beyond. Yes. And COOS and whatever.
2% for specialty technology equipment and that is power, embedded flash, microcontroller, imaging and so on, 2% of capital. And 1% is for the piece of land that we just acquired in June. I think I told you about it last time, did I not? I think I told the conference about it. We bought a piece of land in June, I think, which is about, I understand 15 or 20 minutes driving from our Xinchu headquarters.
So those are the comments that I've prepared.
All right. This concludes our prepared statements. Before we begin the Q and A session, I would like to remind everybody to limit your questions to 2 at a time to allow all participants an opportunity to ask questions. Questions will be taken from both from the floor and from the call. CEO or CFO answers your questions.
For those of you on the call, Now let's begin the Q and A session. First question goes to Deutsche Bank Michael Zhou comes from Michael. Hi,
Chairman. Could you give some update for your LED and solar business? Thank you.
Yes. LED on both LED and solar, our strategy is 1st to achieve a technological distinction, either better performance than competitors than current competitors or better cost than current competitors anyway, a technological distinction. Before we start large scale production, before we put a lot of capital money into it, etcetera. That's the philosophy. That is the strategy philosophy for both solar and LED.
At this point, I think we are perhaps a little further ahead in LED than in solar. I think the environment is a bit more friendly to the LED also. So in LED, we are forging our way ahead. And in fact, in the Q4 last quarter, we already had some commercial revenue. I mean by commercial revenue, I mean more than samples, but really real product for real money.
So we already had some revenue. And we expect the revenue to increase pretty dramatically this year. I don't know whether it's going to be 30 fold or not, but it will increase pretty dramatically this year. Now on solar, as I said, the environment is not as friendly because the world has a at least silicon solar capacity glut. And major countries are putting up incentives for more production.
And however, we think that our thin film, our CIGA, CIGE technology is a pretty promising one. And we are spending a lot of R and D money to try to achieve a distinction with the SIGA technology. But we are not in the commercial production, commercial revenue stage yet.
Thank you. Follow-up question is, would your LED be based on silicon substrate or traditional software substrate?
I guess it's I guess, I think we said that earlier.
We actually have both. We have both.
Well, you answered the question. You answered the question then.
Yes, I think we have both.
Thank you. 2nd question is
I'm not sure if the answer is right.
I will verify this and let you know.
Okay. Thank you. My second question is, what is your total capacity increase in 2013? And would you increase some capacity for 20 millimeters well? Thank you.
With the CNY 9,000,000,000 CapEx, we expect to increase the total capacity this year versus last year about 10%. We are putting money on 20 nanometer. Yes, we have a small pilot lines for 20 nanometer.
While in 3 can compose the long sentence, I said we are planning our capacity accordingly. That means we are spending money on 20 nanometer. We will be spending money on 20 nanometer capacity. Thank you.
Next question comes from Citi, Roland Xu.
Hi, Chairman and Laura. My first question is to Laura. Under your RMB9 1,000,000,000 CapEx spending this year, so how is the depreciation increase this year?
With the RMB9 1,000,000,000 which is very much front end loaded, about 2 third front end loaded in first half and 1 third in second half. We expect depreciation is will go up around 23%, 24% year over year. This is very similar to this year. This year, the efficiency went up by 22%.
Okay. So this is a little bit bigger than 20% you guided last quarter. So why is the reason?
As I just said, we'll be front end loaded. So depreciation will happen earlier for the whole year. Okay.
So how about the Q1 depreciation?
1st quarter depreciation will be only slightly higher than 4th quarter, but starting from Q2, you will increase faster.
Okay. I think my follow-up question for this one is on the IFRS, actually the depreciation years actually can be revisited every year by the company. So are you considering to change your depreciation year on your 20 nanometer, 20 nanometer or even 15 nanometer investment. Since most of this investment on this back end online equipment for this metal interconnection actually can be shared. So that means the investment on the back end online for this technology, the lifetime technology longer than previously technology.
Are you considering to revisit the depreciation years for the investment on this note?
Actually our economic life of our technology has always been longer than the depreciation year, which we use 5 years. We have no plan to make it longer. But for certain Itur, actually the economic life might be lower than 5 year, So those parts we may consider to use lower depreciation years.
That's the other way. I think he is suggesting that since a lot of equipment can be used for 20 nanometers and 16 and so on we can make the life longer. Well, thank you for the thought. We will think about it.
Okay. Thank you. My second question actually is to Chairman. Again, Chairman is commenting this year, PS and E growth will be much greater than 7% of the foundry. So can you comment about what's the growth driver to drive such great growth?
And also do you see any momentum change for the IT and auto team in this year? Thank you.
Well, first of all, let me say that I'm not trying to be coy when I say that our growth will be much higher than 7% without specifying a number. I'm not trying to be coy. It's just that if I say if I predict more specifically, I think that we'll get a call from the Taiwan SEC that we want. So that's the reason. So now you asked about the driver.
The driver is the 28 nanometer. And you will just a quick back of the envelope calculation will show you that the growth of 28 nanometer this year will actually be greater than the total growth of the company. If the total growth of the company even if the total growth of the company is much higher than 7%. When I was talking about a what? This year's production of 28?
Triple. Triple, yes. So that work is and I think your question was originally on what customers and I'm not going to comment on customers. But I will say that the driver is 28 nanometer technology.
So how about the IDM, IDN Company's contribution this year? What? IDN, especially for Japanese IDN Company.
You know the answer or should I answer it? Should I answer it with
I also know the answer.
I think, yes, I do expect the IBMs in Japan to contribute more. But compared to the contribution that the 28 nanometer technology will make, the Japanese IDMs increase our sourcing to us. It will be relatively small.
All right. I think somehow this time there are quite a few analysts who used to attend our conference in person here are actually overseas this time and they are on the call. So I think we will now take our next question from the call. Operator, please proceed with the first caller.
The first question on the line today comes from the line of Daniel Helyer from Merrill Lynch. Daniel, please go ahead.
Thanks for that. Thank you, Elizabeth. I'm sorry that can't be there at this time. Just a quick question, I guess 2. First relates to Doctor.
Leuchteng's growth outlook. As you mentioned, foundry growth up 7%, fabless up 9% in 2013, TSMC much bigger than that. And you did mention 28 nanometer. I want to ask maybe talk a little bit more in terms of some of the end markets because I did notice that your computer and consumer businesses were pretty good in 2012, showing a strong pretty strong growth. I'm wondering in the noncommunications business, what your prognosis is for your businesses in 2013?
I didn't get it.
If we exclude the communication related applications, what would be the growth for GSMC, those non communication related business growth?
Well, I think that almost all the 28 nanometer is communications related, right? There are some computers too. There are some computers. Yes. But what would you say?
I mean, I'm here roughly calculating with you, Dan. So I think that maybe 1 third is computers. One third of the 28 nanometer growth is computers. So that leaves 2 thirds communications related. So with that quote then if we try to answer your question now, I think the rest of it I think is almost the same.
It doesn't change very much.
Okay. Great. So fair to say you don't need to see significant
loud, but not very clear. So if you maybe slow down a little bit then and so and pronounce each word more clearly maybe they will help.
Thank you. Thank you. I'm trying to save time for my colleagues. Okay. So fair to say that the growth this year that you're bullish about, you really don't need to see necessarily a big recovery in consumer or computer to achieve your bullish forecast that you can pretty much generate that kind of growth singularly from communications.
Is that a fair summary?
Yes. I would say fair summary. But I think really a more basic answer is that we intend to generate our growth with new technology.
Great. Okay. Thanks. My second question relates to the cost of 28 nanometer as many companies fabless included have obviously again concerns that perhaps 20 nanometer cost per transistor would see a pretty significant uptick. You have a pretty bullish forecast as well and outlook for that.
Do we need to see pricing increase either by chip companies and others to pay for this? Or do you think Moore's Law is pretty much intact at 20 nano?
Moore's Law is what?
I think Dan's question is some customers are saying that when we get to 20 nanometer the cost per transistor actually is higher. Will TSMC pass on the cost to our customers? I'm not going
to answer that. I will just repeat what I said earlier in my statement that enough discussions have taken place with enough customers who have large requirements to lead us to believe that the volume will be very large.
No, that's fine. No, I'm actually wondering if some of the chip companies have said they may need to increase their prices and they're willing to try to do that. The expectations are that costs will be higher generally, I think from your customers. So I just wanted to get your perspective on that.
Well, again, you're asking me to say something about price and I really am not going to say anything about price. But I would just say that enough discussions have taken place with enough customers. I mean, of course, those discussions involve price discussions too. And they are not just they were not just technical discussions.
So they
Yes. Not so much about price just as kind of the economics, but obviously the design ecosystem is getting very, very good and manufacturing is getting better. I just wondered how things are progressing. Thanks.
Okay. We will continue on the call. Next question will also be coming from the call. Operator, please proceed to the next caller.
The next question on the phone line today comes from the line of Randy Abrams from Credit Suisse. Randy, please go ahead.
Okay. Thanks so much. My question first is on competition. You mentioned in the prepared remarks near 100% share on 28 nanometer last year. Could you talk about how you're viewing the effective capacity and competition on 28 nanometer as it matures this year and whether you're seeing competitors ramp up?
And if you could give an early view on your market share in the early stage of 20 nanometer?
I don't know what the 28 nanometer capacity is. Incidentally, when I say 28, I mean when I said 28, I meant 28. And I don't include 32 nanometer. If you include 32 nanometer, which is not 28 nanometer by the way, but if you include that, then you will of course we have a lower market share than almost 100%. And the capacity will be correspondingly a lot bigger.
Okay. But could you say if you're seeing more competitors on say 20 eightthirty two as the node matures this year? And as you look at the tape out activity on 2020, do you view the same
We don't group them together. 32 is not 22. 32 is not 28. Randy, isn't it? Yes.
Thank you.
No wonder, okay.
Yes. Now can I say something about competitors in general, the advanced technology competitors? Well, you know who they are as well as I do. So I think every one of them is a formidable competitor. But I also think that we are ready to tackle to fight every one of them as we have always been ready to fight every new competitor.
I remember all the growing the power and drove when we had UMC, we had SMIC, then we had GlobalFoundry and now we have Samsung and we have Intel. Well, every one of those, I think everyone was a formidable competitor at the time. Everyone was. And we take everyone very, very seriously. But we also fought with everyone in the past and with the current competitors that have just appeared on the scene, we always we have always felt that we have a lot of strength.
And I think in the past, I have gone over our strengths. And if you want me to repeat them, I'll be very happy to repeat them. But I'm just afraid of boring you enough. Okay.
They're good. If I could follow-up on the R and D investment where you had significant growth in 2012. Could you talk about whether you expect the same growth in R and D and OpEx as a percent of sales? Or as you accelerate your sales growth rate, do you think there's a bit of operating leverage?
Well, we expect a great deal from our increased R and D spending from our strengthening of the R and D more and more strengthening. First of all, I said a little earlier that the growth engine in the next few years is going to be technology. Our growth engine is going to be technology. And we have proven it now already with 28 nanometer. And we are going to prove it with 20, with 16 and then a little later with 10.
So why are we why have we so dramatically increased our R and D effort in the last few years? Number 1, all right, because technology
is going
to be our growth engine. And I have said more than once, more than 2 or 3 times in fact that as far as Moore's Law is concerned, if anyone is going to pursue Moore's Law to the end, we will be there. So a large part of the money is being spent on the further pursuit of Moore's Law. And that of course also includes EUV, the investment that we have made in ASML and it also includes the more path finding type of R and D to improve transistor performance. So now a smaller part will be spent on coals.
And then another part, which is perhaps a bit greater than what's spent on COOS will be spent on specialty technologies and better flash and imaging, power, power management and all those specialty technology that we expect to fill our more mature capacities. We grow on new technology and we stay profitable both with the new technology and with the backfilling of the capacity by specialty technologies. I guess those are about the main uses of R and D fund, R and D money. Those are the biggest reasons for us to expand R and D. 1st, relentless pursuit of Moore's Law, all facets of it, performance as well as cost as well as density and including EUV and transistor performance improvement.
2nd, CO OPOS and Specialty Technologies. So those are the main
uses. Chairman, I think Randy's question hopefully include with all these increases in R and D whether R and D as a percent of revenue will go up.
No. I well, I mean, I'm not going to predict for the very distant future. But for this year and my plan now is to keep it at about 8%, because as I said, the next few years will be either growth years or strong growth years. Each one of the next few years will be either a growth year or a strong growth year. Well, by strong, I mean double digit.
By growth year, I mean, I don't consider it 1% growth year. So I mean, 1% to 10% is a growth year. And strong growth year is double digit. So the next few years, I expect every one of them will be either growth or strong growth. And so R and D expenditure will go up even though the percentage is percent of revenue, it's not going to change very much.
It's I don't think it's going to decrease.
Okay. Thank you, Doctor. Chen.
We'll come back to the floor now. Our next question comes from Donald Lu from Goldman Sachs.
My first question is, if I hear correctly, Chairman, you said fabless growth is 9%, foundry is only 7%. I mean, why foundry usually grows even faster?
I think it must have to do with the inventory change and all that stuff. So maybe Yes. I saw the numbers and I really had the same question, but it wasn't important for me to ask. I didn't feel it was important enough to ask the guy that gave me the numbers. The guy that gave me numbers is our veteran forecaster who is sometimes right and sometimes wrong.
Okay. So it must be not very important.
I think it has to do with the inventory change, yes.
Okay. Just follow-up on that. I mean communication in terms of demand is growing really strong in the last few quarters. What how much is your revenue from smartphone and tablet today?
How much from smartphone and tablets?
Why don't you say it? It's about 32%. 32%. Okay.
My next question is more on the You mean our total revenue 32% is from smartphones and tablets.
For the whole year? Yes. Last year. For 2013.
In 2013, 32% were from smartphones and tablets and that's including like touch controller and all those components. Okay. My next question is on structural profitability. Yes. My favorite subject.
The first part is the currency is moving in an adverse kind of direction. What's the impact of the currency on gross margin in Q4 and Q1? So we have idea on apple to apple basis.
Every 1% of FX change will have a 0.4 percentage point of our margin impact.
Okay. And for the whole year, would we expect structural profitability to trend in either direction?
Actually our structural profitability this year will be slightly better. I mean about 1 percentage point better than last year, 100 basis points better than last year. On the other hand, we have a couple of uncertainties. One quite large and one not so large. The quite large one is the loading of the more the mature the all the technologies except 28.
28 nanometer, we are quite confident we'll have a utilization rate of around 100%. But all the other technology lines may have a lower utilization than last year. And keep in mind that last year was a tough comparison. Last year everything was loaded close to 100%. And so I'm not saying at all that this year our utilization will be bad, but I'm saying that last year was a tough comparison.
And so even though our structural our definition of our structural profitability is leaves utilization to one side. So our structure probably this year will be better than last year. A little less than 1 percentage point better than last year. But if you start to talk about actual profit margin, then you have to take into account the utilization. And as I said, the large uncertainty is a relation.
And utilization, we have quoted numbers before. What's that?
Yes. It's 1% utilization translating to about 0 point 35 to 0.4 percentage points.
Almost like exchange rate. Every percentage less utilization means 0.35 to 0.4 percentage point less gross margin. So anyway, utilization is the greater uncertainty. And then exchange rate of course is uncertainty too. Here, it's only I say it's perhaps not as big and uncertain because my goodness I sure hope that the exchange rate doesn't vary over the map.
Okay.
Okay. Next question, we will also stay with the floor and will come from Morgan Stanley's Bao Lu.
Yes. Hi, Doctor. Choe. Hi, Laura. Doctor.
Choe, if I hear your comments today, it seems like you are positive for the next multiple years and not just this year, Whether it's the CapEx comments, whether it's saying that 20 nanometer is going to be bigger than 28, it all points towards several good years ahead of us. Now for that to happen, I think, obviously, technology, you need to migrate. And I think we can all feel pretty good about that. But the end market also has to be growing at a much bigger, faster pace than before as well. I'm wondering if you could talk about what gives you the confidence in multiple years out?
And because it's a very different comment than you're saying customer forecast are good for a couple of quarters. And then secondly, what size are you looking for that things aren't going to be that good?
I think Bill your question is what is what would be the growth drivers for the end market, right? End market?
In multiple years, I mean 4 years, all right? Last year, I meant 5 years and now I mean 4 years, okay? So it's not multiple, multiple, multiple years, okay? It's 4 years, okay? And then and you are concerned that the workload may end in the next 4 years.
I mean, anyway, the economy may set up. No, of course, we're not predicting anything like that. And we are just following the conventional consensual economic scenario, which is that the developed countries U. S. And Europe will grow very slowly, while actually U.
S. Will grow sort of medium slowly 2.5% perhaps and Europe will do worse. And Japan also will do worse than the United States. Now of course, one never knows what the new Prime Minister is going to do. One knows what he has already done.
And what he has already done seems to be a bit on the positive side. But anyway, we're assuming that. And we are also assuming that the developing economies will do quite well. China principally, but also a lot of other countries that China now exports to. Now all these smartphones and some tablets that China makes are not for Chinese consumption.
They go to other countries. They go to other developing countries. And we believe that those developing economies will do quite well. So that's our macroeconomic scenario. As far as the market is concerned, the application market is concerned, we are we predict that the mobile products will be the dominant new products on the computer scene.
And I think that they will continue to eat into the traditional notebook PTC market. So I think these are really not they are pretty conventional assumptions. And those are the assumptions that we're making when we say that we are going to grow quite strongly in the next 4 years, 4 years now 2013, 2014, 2015, 2016. Yes.
I'm also wondering if there's anything that you're looking at that might change your mind?
A lot of things could change my mind. What do you have in your mind? I think a lot of things could change my mind. I mean, if if the U. S.
Economy suddenly falls apart, then Then there's that will be a very big change and pretty significant change. It won't change everything, but it will be a significant change.
Second question is maybe for Laura. We're now in, I guess, what the 5th or 6th quarter of 28 nanometer production. And typically, you would expect to see pricing start to come down a little bit. But this year there's also a move from poly to high key metal gate. So can you help me with how should we think about pricing for 28 this year versus how I forecasted for the previous notes?
We look at the structure of profitability other than just look at the pricing. So it has to work both on the pricing and also for the cost end. I think Chairman and I just said from this quarter, the 28 nanometer with high utilization will track to corporate level margin. And going forward, we'll keep maintain like that. I think on the longer term, that's what we also intend to do to maintain a similar level or even slightly higher standard gross margin.
Quill, as you know that we cannot talk about specific prices. All right. Thank you for the understanding. Now, we'll go back to the call. Operator, please proceed with the next caller.
Caller.
Your next question on the phone comes from the line of Andrew Lu from Barclays. Andrew, please go ahead.
Thank you. Doctor. Chen and Laura, thank you for taking my question. My first question is regarding earlier, Doctor. Chen mentioned the year 2014, the 20 nanometer volume will be higher than 12 and the 15 will be higher than 13.
Is that including 16 FinFET in year 2015 as well? No, it does not. So only Haki Minogue?
Right.
Okay. Thank you.
If you go to 2016, then I'll tell you something different. But let's not go there for the time being.
So do you suggest there will be no 16 fintech production in year 2015?
I think it will be relatively small.
Thank you. My second question is the CoWoS on the 2.5D packaging. If you are charging customer $5,000 per wafer, if you are doing 20 for for customer on cobalt, what additional value you can get from this customer basis?
Well, I think the advantage that a customer will get is that we will be in charge of everything. I mean, we will be responsible for the whole thing till it's all packaged. And so if we if he uses another OSAT then who is going to be responsible for the yields? I think it will be a more difficult situation. And so our advice to our customer is to let us handle the whole thing.
Now of course we have to be competitive in price and all that. And of course we're willing to draw that. But at the end I think that it will be advantageous for the customer to have us handle the whole thing.
Yes. But can we make some revenue
back of
the course? For example, if we sell the customer $5,000 wafer, can we get additional $2,000 $3,000 on the this entire whole thing back in?
Well, things are getting a little expensive aren't they? But then applications still grow. And I think that, of course, in free market economy every price finds its equilibrium. So there needs to be enough demand and enough supply for there to be a price. So that's how it works.
And we feel quite confident that we can find this equilibrium and it will make it worthwhile for both the customer and for us to do this. Otherwise, it won't be a business. And we think it will be a business. We think it will not be a significant business until 2015, 2016. As I said earlier, even a year ago, I said that it will not be a $1,000,000,000 or more business until 2015 or 2016 and I still feel that way.
Thank you.
We will continue with the call. And operator, please proceed with the next caller on the line.
The next question on the phone comes from the line of Mehdi Hosseini from SIG. Mehdi, please go ahead.
Yes. Thanks for taking my question. I have one question for Doctor. Chang and one for Laura. It was interesting to hear Intel as part of your competitors.
Doctor. Chang, can you please elaborate at what technology node and what kind of end market application or segments you view Intel as becoming a more fierce competitor?
So, Maggie, your question is according to TSMC's view at which technology node will Intel becomes a more fierce competitor to us. Is that right? Yes.
Did he use the word figures? Intel is very fierce to me now already whether they are a competitor or not. At what now? Well, my goodness, I think that they are competitors to us. Don't they have at least 2 foundry customers already?
Is it 2? Is it more? 2, yes. So they are a competitor. And I do believe that I think Intel said it themselves and I believe them that they will be very selective and they will not go out in a general way.
They are not going to be like a PSSC. I don't know whether they said it complementarily or deprecatingly. I imagine it's the latter actually. So but anyway, I believe it. They are going to they're not going to be like a TSMC, which means that they will be selective and they will not be a general competitor.
Now as a selective competitor, I think they're already a competitor and I think they intend to be a bigger competitor in the future. And they can do that anytime they become qualified.
Got it. And then my follow-up has more to do with the P and L. If R and D is going to stay around 8%, how should we think about SG and A for 2013? Is that also going to stay in the 4% to 5% range?
SG and A is in the 4% roughly 4% range. Okay.
Thank you.
If revenue gets higher growth, it can be maybe 3.5% to 4% in that range.
Okay. And then one final question. Is there any way you can elaborate the number of tape outs at 20 nanometer? Or if you can elaborate or quantify like how many customers or anything that will give us a sense of how the early demand looks like?
Laura, you want to answer that question or you don't want to answer that question? Up to you. It's up to you whether to answer the question or don't answer the question.
I will not answer this question.
He's asking how much of PayPal
for 20 nanometer. How much of PayPay?
PayPal. PayPal. PayPal. Okay. For 20 nanometer, no, I guess I would just limit myself to the comment that I already made that we have had enough discussions with enough customers who have large requirements that lead us to believe that the volume required in 2014 and in 2015 will be bigger than the 28 nanometer volume in 20122013 respectively.
Did you get that this time? Yes. Thank you.
Okay. Now we are coming back to the floor. Any questions? Okay. Next question comes from JPMorgan, Rick Chu.
Yes. Happy New Year, Chairman. And likewise to you. Thank you. Just one question from me.
You mentioned about earlier about your customer inventory. Is going to be still 4 days above seasonal in Q1. Supply chain inventory. Supply chain inventory. Yes, rather than one day below seasonal in Q1.
So would that negatively affect your Q2 load in? Because that means your customer may exit Q1 still with excess inventory.
That's pretty smart. Rick. Rick. Yes. I think it means that the second quarter growth may not be quite as strong because Q1 is higher than we thought.
Our scenario 3 months ago, 6 months ago was that Q1 will be low and Q2 I think 6 months ago I even used the word strong rebound. Did I not? Rick? Yes. Yes.
And but 3 months ago, I deliberately omitted the word strong, but I said there'll be a rebound. So now I can maintain my words that I used 3 months ago. There will be a rebound. But it will not be a strong rebound as we thought it was going to be 6 months ago. 6 months ago, we thought Q1 would be quite low.
In fact, 6 months ago, we thought the Q4 and Q1 will be quite low. And it has now turned out that the Q4 was quite a lot stronger than we anticipated 6 months ago. And the Q1 is also stronger than we anticipated 6 months ago. But then second quarter, the strong rebound that I referred to 6 months ago in the second quarter would not be quite as strong as we thought 6 months ago. I mean, all this came about because I said too much, I guess.
So maybe the thing to do is not to say very much is keep a mouth shut. Then I think it'll be a less interesting conference.
Thank you.
If there's no more questions from oh, there is. Okay. Next one well, the next question comes from HSBC, Stephen Peleo.
Just two quick questions. 1, some of the
longer term concerns to follow-up Bill's question. I think we are in the steepest part of this transition now to the smartphone revolution. I think maybe it's even the majority of smartphones are shipping today than feature phones. So it's the glory days, I guess you could say. And we were talking even a year or 2 ago about how much your dollar content increased with the silicon content increased.
So this is a 1,000,000,000 unit market, maybe a 2,000,000,000 unit market even in a couple of years. But clearly, we are passing that threshold that's kind of now 50%. So we do worry 2 years from now, 3 years from now where maybe smartphones are As
you said, dollars 1,000,000,000 $2,000,000,000 market. The units. Units. Units. Yes, yes.
And so
we do worry what's that next 1,000,000,000 plus unit market that's going to have the same kind of silicon content increase that we've enjoyed in the smartphone revenue?
I wish I knew. I wish I knew. Does that answer your question?
I don't know as well. The one follow-up I will say is that, I think the math says that your 28 nanometer revenues now are bigger than all of UMC. So congratulations that formidable competitor is a distant image in the rearview mirror.
I think it's a lot bigger than you.
I think it is a lot actually.
But I do want to talk a little bit about the surrounding nodes, I guess. First going up to 40 nanometer because a lot of guys are still there and it is still more than 20% of revenues for you. Is there any more intense pricing environment or intense competition? Are people picking up second source in 40 nanometer here?
We I think that our 40 nanometer market share has dropped. I know it has dropped. We are just and we anticipated that and we certainly we're not going to just fight to we're not going going to lower our price below what we intended to lower to. We had our price strategy And we're not going to do anything different on price to in order just in order to keep the market share. But we do try to let it drop in a controlled manner.
And the way we do fight to make the job a sort of controllable one is to backfill the capacity with specialty technologies. Specialty technologies are actually migrating upwards. They are just 2 or 3 or 4 generations behind the latest graphics, the latest APs and so on. On. Images were still at they are still at which generation?
90. 90.
90. Yes. But they will be migrating to 65. 65, yes. So and they have migrated from 0.13 earlier.
I mean that's just one example. And another example is all these microcontrollers and so on, they're still at what?
1.8.
1.8. And they'll be migrating into 0.13 and so on. And the power stuff is 0.25. 0.25. Yes.
And they've been migrating into 0.18 and so on. So that's the strategy. That's the picture. That is the strategy. And as I said earlier or I said a small part of R and D money is being spent.
And the small part is really not that small. It's quite a large group. It's of course much smaller than the more small pursuit. But it's important to us to develop these to let them migrate into the older technologies were important to us.
I'd like to just
do 2 quick follow ups
to that. I really appreciate you guys commenting on 28 nanometer mix for the full year and corporate average gross margin. Could you just help us think if we were trying to forecast the bottoms up gross margins for you by node? So what is a 40 nanometer relative to your corporate average? What is the mature node relative to your corporate average gross margins?
You obviously don't have to be specific, but help me understand if I'm trying to think about bottoms up gross margin forecast.
I will give you a general philosophy, all right? It was a philosophy that I started 27 years ago when TSMC was started. My philosophy then and my philosophy now is I want all the products we make to be within a pretty narrow gross margin range. So that remains true till today. I don't want I mean, heck, the reason I started this philosophy was because I hated to have to pick because of the growth volume.
Capacity becomes tight. You make more of this because it's high margin. And that was such an unnecessary burden on the manager's mind. Manny, I didn't want that. And now I still don't want that.
I don't want to have to pick between the various opportunities just because of gross margin. So a simple answer to your question is we try to keep the margins on all products within a pretty narrow range, I would say, is a 10 point range, but well not even that big. I would say it's a 7, 8 point range.
And my last question was just on some of the expanding your addressable market into things like LED, solar, packaging. If I try to corner you and ask you, when do you think those would be 5% of revenues? Would you give me a year? Solar, did you say? Your new market, solar, LED and Packaging, when do you think that it could be 5% of total
I'm not even counting on solar and LED. Those we have already spun out. Packaging as I said will be $1,000,000,000 in 2015, 2016. Dollars 1,000,000,000 by then is only a few percent. Thank you.
All right. I see there's still one caller on the line who has been waiting for a long time. So operator, let's open the line to the next caller.
Your next question on the line comes from the line of Brett Simpson from R. I. Research. Brett, please go ahead.
Yes. Thanks very much. Doctor. Chang, you mentioned this year wafer capacity for
20 nanometer will triple for
28 nanometer will triple for TSMC. But how do you assess the total industry supply at 28 nanometer this year for foundry? And what level of increase do you see overall? So what level of increase do you see overall? And what market share do you think might be achievable for TSMC at 28 nanometer this year?
All right. Brett, your question is what is our view on the overall supply of 28 nanometer this year and what TSMC's market share is going to be 28 nanometer this year. Is that correct?
That's right. Thanks.
Overall supply demand Capacity of 28. What is the number?
Yes. Right. Since we will be triple, what will be other people?
I don't think we give I was going to give the capacity, but then our CFO told me that we don't do that. But now market share there since our CFO didn't tell me not to do it, so I'll venture forth and say that I said that last year was almost close to 100%. So I do expect that it will drop slightly from there. But I think that this year maybe it will be close to 90%, okay?
Okay. That's helpful. And can you talk a bit about the 20 nanometer ramp schedule? So when specifically might we start to see first revenues for TSMC at 20 nanometer?
When will we see 20 nanometer revenue?
Yes. And when? This year. We are going to see quite a bit in 2014. Didn't I say that 2014 will be bigger than 2012?
That's right.
Yes. 2014 will be bigger than 2012 2018. For 20 12 for 20 8, yes. Okay. Got it.
Got it.
And then maybe just final question on inventory. Doctor. Chang, you mentioned this. Inventories supply chain inventories aren't falling as aggressively in Q1 as you first thought. How do you assess the situation beyond Q1?
Do you think that the industry's inventory levels gets back to normal levels in Q2? Or do you think it will take longer before this equilibrium takes place?
Well, you're asking me about Q2. And really we aren't ready to give our Q2 guidance yet. But I will say that our current view of 2nd quarter inventory supply chain inventory in the Q2 is also going to be higher than our previous view. In other words, the change from our previous view of inventory is that the previous view forecasted a pretty steep decline of inventory in the Q4, in the Q1 and in the Q2. And our current view is that the inventory will stay a lot flatter.
Great. Thanks very much.
Okay. We are coming back to the floor. Next question comes from Goldman Sachs, Donald Lu. My first question is on tax.
We have a new tax rate this year, which is quite taxing in a way.
You're right.
And I
mean there are various ways you might be able to reduce that. For example, going to a less taxing jurisdiction like Intel always does that. For example, Inso build a fab in Israel, Ireland, Thailand, etcetera. Would TSMC considering that given the change in tax rate?
I think we may consider that not only for the now purely on the tax reasons, because beauty of that outside of Taiwan is a big thing. You have to look into the efficiency, the cost and the local environment, etcetera, etcetera. So currently, we are not thinking just for the tax reason to go offshore. So maybe for the overall growth reason and any other reason, bigger picture reason, we may consider that.
I think Donald is thinking about Cayman Islands and so on. He's not thinking of moving our factory offshore, I don't think, right?
He's talking about that. I think those, I mean, whatever works. So that in the future years maybe we can model the tax rate might decline again at some point.
I'm not very optimistic about that. Yes, we are paying 14% this year. And I think you just said that you expect to pay 14% next year also, right? But basically the Taiwan corporate income tax rate is still not very high. I mean, 17%.
The United States has a 35% income tax rate. And now actually I looked up Zhen Jin, you looked up Intel's effective tax rate for me, right? What was it? Do you remember?
It's like 27%. No, no, no,
no, no. You looked up for me. It was a lot lower than that I think. Well, nobody knows. 27.
Was it 27% for the year? Yes. Good luck, I remember. I thought it was lower than that, but yes. I thought it was slower at least in the first, second.
Well anyway, it was all right. But the United States has a corporate income tax rate of 35%. And so anyway we do have a lot of things to consider. Yes. But I agree with you that the 14%, a jump of 5 point some points between last year and this year, I think that's certainly not a good thing for us.
Okay. Second question is on the treatment for ASML investment. You just said you are putting that all in the investment ready for sale. But there are 2 quarters of that. 1 is for the stock, 1 is for R and D investment.
But the later part, I mean, what can you sell? I mean, the part you will give ASML to help with R and D? That's
R and D support will be expenses will be on R and D expense when it comes.
And that would be expensed over certain years or? 5 years. 5 years. 5 years. 5 years.
Starting this year, right? Yes. Okay. So that's part of the R and D expenses, right? Exactly.
Okay. Great. Thank you.
All right. If there's no further question, I think we'll conclude this quarter's Investors Conference. Thank you very much for joining us, and I hope we will see you next quarter.