Welcome to TSMC's Second Quarter 2012 Earnings Conference and Conference Call. This is Elizabeth Song, TSMC's Director of Corporate Communications and your host for today. This is the first time that we are combining the quarterly earnings conference with the conference call, and 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 Q2 and give you our guidance for the next quarter. Afterwards, TSMC's Chairman and CEO, Doctor. Morris Chang, will provide his general remark on business outlook and state a couple of key messages. Then we will open the floor to questions.
For those participants on the call, if you do not yet have a copy of the press release, you may download it from TSMC's website at www.tsmc.com. Please also download the summary slides in relation to today's earnings conference presentation. Before we begin, I would like to remind everybody that today's discussions may contain forward looking statements that are subject to significant risk 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, good evening, and good morning to everyone. We had a very good second quarter. The financial results came in at the high end of each of the guidance. Revenue grew 21% Q over Q to set a record of TWD 128,000,000,000.
This strong demand for mobile computing devices and our leadership in 28 nanometer give us a strong growth in the 2nd quarter. On the margin side, 2nd quarter gross margin was 48.6% or 0.9 percentage point higher than that in the Q1. The increase of gross margin mainly came from the higher capacity utilization across all technologies. Although 28 nanometer gross margin is currently below corporate average, we expect it will reach to corporate average by Q1 2013. Operating margin was 36.5 percent in 2nd quarter, up 2.9 percentage points.
Both R and D and SG and A expense as a percentage of revenue decreased by about 1 percentage point each. You may notice that we had a loss of KRW 800,000,000 in the non operating items. This is mainly due to a one time impairment charge of TWD2.68 billion on our 5.6 percent holding in SMIC shares. This contributed to a 0 point our 2nd quarter EPS was NT1.61, ROE was 26%. Let's move on to revenue by product segment.
We have seen revenue from all applications increased sequentially among the 4 major product segments: communication increased by 27%, Computer increased by 20%. Consumer increased by 9% and industrial related revenue increased by 39% in the 2nd quarter. The high growth of industrial and standard application is mainly due to strong demand for ICs used in mobile computing devices such as power management IC and a touch controller. In terms of technology, revenue from 28 grew nearly 90% in the second quarter. We expect shipment of 28 to doubled in the 3rd quarter.
Revenue from advanced technologies that is 69 nanometer and below technology and beyond technology accounts for 61% of our 2nd quarter revenue. Take a look at the balance sheet. The cash and marketable securities ended the 2nd quarter at TWD188 billion. Accounts receivable and inventory amount went up as a result of business growth. Current liability increased by TWD86 1,000,000,000 mainly due to the accrual of dividend payable of TWD78 1,000,000,000 On the cash flow side, we generated TWD 70,000,000,000 from operations, invested JPY 59,000,000,000 in capital expenditure, repaid JPY 3,900,000,000 in short term loans.
As a result, our cash balance increased KRW7.6 billion to KRW178 1,000,000,000 at the end of the Q2. Free cash flow generated in the 2nd quarter was TWD 10,500,000,000. Let's look at the capacity. Our fab 15 began volume production of 28 nanometer in the second quarter and we expect to ramp at a faster pace in the second half of this year. Given our CapEx, we expect our total capacity to increase by about 14% year over year and 12 inches capacity will increase about 21%.
Now let me provide you our guidance for the 3rd quarter. Based on our current business expectation and a forecast exchange rate of 29.76, we expect our revenue to be between TWD136 1,000,000,000 and TWD138 1,000,000,000 which is a sequential growth of 6% to 8%. We expect the 3rd quarter gross margin is to be between 46% 48% and operating margin between 34% and 36%. This concludes my remarks. Let me turn the podium to
Chairman. Thank you, Laura, and good afternoon mainly, ladies and gentlemen. Today, I will make a few comments on 2nd quarter and third quarter, and then I'll also give you some color on world economy, supply chain inventory and our 4th quarter outlook. And then I will talk about a few major technologies of ours. And then lastly, I will talk about CapEx, capital intensity and growth.
Our second quarter was a good one. We were actually quite pleased with it. This year, every quarter, the major effort has been to ramp up 28 nanometers. And in doing so, of course, we did incur a lot of costs. And also as a result, the gross margin of 28 nanometer all year this year will not be up to the corporate average standard.
But in spite of all that and also in spite of an extraordinary item in the Q2, which Laura mentioned, the impairment charge of SMIC shares, which actually accounted for $0.09 earnings per share. In spite of the unusual costs in the 28 nanometer ramp up and the unusual item relating to the impairment charge of the SMIC shares. 2nd quarter was good, was very good. And we expect a good Q3. We'll see a growth, as Laura has already guided, at the midpoint of our guidance, we'll see a growth of about 7 percent in revenue in the 3rd quarter, sequential quarter to quarter revenue growth of about 7%.
And since we will not be we will not have the impairment charge in the 3rd quarter, Our EPS growth between 2nd, 3rd will actually be stronger than 7%. Now so it looks okay. Now as we look into as we look further into the future, 4th quarter and the Q1 of next year, we do have some worrisome signs. World economy, as you know, and I will not draw on it, the outlook, I'm actually talking about the outlook, the future outlook of world economy, and I'm comparing it now with the outlook as most people saw it 4 months ago, 3 months ago or 6 months ago. The outlook now certainly has deteriorated in the last 3 to 6 months.
U. S, which matters the most to us because our market is still very much is majorly in the U. S. So the U. S.
Economy matters to us the most. It is it has gone into a less optimistic situation than we saw it even 3 months ago. The very good job creations record early in the year has now disappeared. There does not seem to be any political solution in sight for the forthcoming financial cliff at the end of the year. And the retail sales, recent data are not good.
And so the U. S. Outlook for the U. S. Economy has deteriorated in the last few months.
And then next to the importance to us of the U. S. Economy, You have Europe, Japan, Mainland China and Taiwan. And I would say that the outlook for any of those economies has not improved in the last 3 months. Now we, of course, have do pretty thorough, pretty extensive market research on our business.
And one key factor besides the world economy, One key factor, of course, is the supply chain inventory of our products. And that is not good. And I'll give you some numbers. In at the end of the first quarter, the overall supply chain inventory in days of inventory at the end of Q1 was 6 days below seasonal. At the end of second quarter, it was 3 days above seasonal.
And we are forecasting that at the end of the third quarter, it will be 12 days above seasonal. And this, of course, indicates that there will be a correction in the 4th quarter. And we indeed are forecasting that there will be an inventory correction in the 4th quarter to about at the end of 4th quarter, we forecasted that the inventory will be only 8 days above seasonal. So 12 days at the end of 3rd quarter, 12 days above at the end of the 3rd quarter and 8 days above at the end of 4th quarter. And we also look at our customers' days of inventory.
The fabless customers at the end of Q1 was 2 days below, and at the end of the second quarter was 4 days above. And we are forecasting that at the end of Q3, customers' DOI will be 10 days above 10 days above. And there will be a correction, but at the end of the 4th quarter, it will still be 6 days above. Now those numbers are for the fabless customers. For IBM customers, the pattern is similar.
The numbers are different, but the pattern is similar. So I'm not going to talk about them. Fabulous customers accounted for a very large the dominant majority of our sales anyway. We are now seeing a dip in our revenue in the 4th quarter, a dip from the 3rd quarter level, I think it will be a dip in our forecast, not just I think. Our forecast is that the dip will not be nearly as serious as the dip we experienced in the Q4 of 2,008.
That I wouldn't even call it dip. I would call that a plunge. But this one, I think, is a dip of certainly far more modest magnitude than that one. Now as to exactly how much it will be, I think it's too early to say, but we can see that there will be a dip. And we have, of course, accordingly made preparations.
We have seen it coming for at least a month, maybe 2 months now. We saw early signs of it actually 3 months ago, but that was those were very, very early signs. And but 2 months ago, we became surer. And 1 month ago, we became pretty sure that there will be a dip in the Q4. Now further, we also think that the dip will continue into the Q1.
And then still further, we see a pretty healthy recovery in the second quarter. So in summary, I'm saying that we will have a dip that will last 2 quarters, Q4 and Q1 next year. And by the second quarter, it will have rebounded pretty strongly. Those are the indications that we have now. Now I'd like to say a few words about our technology progress.
20 nanometer, it's progressing very well. Our output and our yields are both above the plans that we set for ourselves and the plans that we communicated to our customers early in the year. Early in the year means March I'm sorry, January, February of the year, we set our plans in output and in yields. And we, of course, tried ever since then, we tried to exceed the plan, and we had also communicated the plan to our customers at that time. And we have indeed exceeded the plan in both output and yields.
We expect to ramp up to about 68 1,000 wafers per month by the end of the year, 28 nanometer, 68,000 12 inches wafers per month by the end of the year. And by 4th quarter, we will be nearly caught up with the demand and we expect to fully meet the demand from the Q1 on Q1 of 2013 on, will fully meet the 20 nanometer demand. It is also then that we expect that the 28 nanometer gross margin will catch up with the corporate average. As I said, today, both the defect density and yields are better than 40 nanometer at the same stage of the volume ramp. And they are also better than what we have what we planned early in the year and what we communicated to our customers at that time.
Now next, a few words on 20 nanometer, 20 SoC. We have made very good progress on the 112 megabit SRAM yield. Now there are still challenges to overcome in reducing the in I'm sorry, I take it back. There are still challenges to overcome in meeting our yield plan of the entire chip. We have made very good progress on 112 megabit SRAM.
There are still challenges to overcome in meeting our yield plan of the entire chip, which has both the logic and the SRAM on it, of course. Now our 20 nanometer SoC, we believe, is fully competitive with industry leaders, other companies, 22 nanometer for the served available markets that we serve. For our markets, We believe our 2020 SoC is fully competitive with anyone's 20 or 22 nanometer offering. And one important point to make is that our 20 nanometer has the industry's leading metal pitch of 64 nanometers. Our leading competitors have 80 nanometer metal pitch.
That allows an advantage in the device's density and die size. Now as for the timing, we expect our 20 nanometer technology to be qualified by the end of this year, and we'll be ready to support customers' tape outs in Q1 of 2013. Now today, last time, I mentioned that we will have a FinFET product after 20 SoC. And today, I'm glad to say that we have been planning the 16 nanometer FinFET. Right after our 20 nanometer planar, which is the 20 SoC, we will offer FinFET at 16 nanometer for significant active power reduction.
We expect to achieve speed and density speed and logic density levels comparable to industry's leading players' 14 nanometer FinFET. So we expect our 20 SoC to be competitive with competitors' 22 or 20 products. And we expect our 16 FinFET to be competitive with our competitors' 14 nanometer FinFET products. You might ask why are we calling it 16? The only reason, in fact, until 2 days ago, we were undecided on whether to call it 14 or 16 FinFET.
Now the only reason we decided to call it 16 FinFET is, 1st, we want to be somewhat modest. 2nd, we have told quite a few major customers of ours, the 16 FinFET, that designation. And we didn't want to confuse our customers by now switching to 14. But we expect it to be competitive with other people's 14 offerings. Now the 16 nanometer FinFET, our 16 nanometer feedback is expected to deliver about 25% speed gain given the same standby power over the 20 nanometer SoC.
It's expected to give 25% to 30% power reduction at the same speed and the same standby power. And for mobile products, it's expected to give 15% to 20% speed gain at the same total power. As for timing, we expect it to be about 1 year after 20 SoC, namely it should be ready for risk production at the end of 2013 or early 2014, about 1 year later than the 20 SoC. Now I want to make some comments about CapEx, capital intensity and growth. I know that several analysts have written about foundry industry's capital intensity and our TSMC's capital intensity and so on and so on.
So I'm addressing the subject today because I have seen all these reports. I have seen them without agreeing with them, you see, without agreeing with some of them anyway. There are some that I do agree with. Now why are we having such high capital intensity now? Well, I think this is actually a focus point of our internal discussion among our top level managers for the last 2 years now.
And basically, we invest in capacity to get future growth. So you look back at history. If you look at our TSMC history, during 'ninety seven-two, between 19 97 2,002. During that 6 year period, TSMC's capital intensity ratio stayed mostly above 60% during that 6 year period. And there was as you recall, there was a high-tech bubble bursting in late 2000 early 2000 and 1.
But in spite of that, in spite of that, our revenue CAGR between 97,007, Here, after having spent a lot of capital, having sustained high capital intensity for 6 years, 97 to 2002. Our revenue CAGR between 97,007, that's a 10 year period, was 20%. Compounded annual growth rate of 20% in revenue during the 10 year period, the first six of which was marked by high capital intensity. During that 'ninety seven to 2,007 period, foundry industry growth was 16% in the same period, and ours was 20%. As a result, our market share rose from foundry market share, rose from 31% in 'ninety seven to 43% in 'ninety seven in 'seven, yes.
31% in 297 to 43%, 2007. So when we had those internal discussions about capital, And that's really a major focus of our internal discussions, top level managers, I mean. We look at 4 things. First, are we going to be the technology leader in the capacities that we are investing in. So the first question is, are we going to be the technology leader?
The second question we ask ourselves is, are we going to be able to retain our leadership in flexible and responsive manufacturing. So we ask our question, technology, are we going to be leader? Manufacturing, are we going to be leader? 3rd question that we ask ourselves, are we going to retain the customers' trust, major, major customers' trust or perhaps are we going to even add customers? And then the 4th question we ask ourselves is at the price and cost we expect on the new technologies, the capacities of which we are investing in.
At the expected cost and price, are we going to be profitable? Are we going to be able to make the same kind of money that we have gotten accustomed to. Only if the answers to all four questions is yes. Only if we are confident in those 4 issues, 4 points, do we start to spend the capital money. Now, all right, I actually have not made the secret of that.
In 2010, I believe late 2010, I told you that 2010 was the 1st year we started to spend a lot of capital. In late 2010, I told you that our goal was to achieve in the following 5 years, achieve a growth of a EPS and I'm sorry, a pretax income pretaxprofitgrowthof10percentcaggr. In the 2010 to 2015 period, at that time, which was late 2010, I said that our goal financial goal was to achieve a 10% pretaxincomegrowthcagrandretain or exceed an ROE of 20%. 10% pretax income growth, 20% ROE. Well, that was 2 years ago, 2010.
And we have now raised our goals. It is not 10% anymore. Although the ROE, we still keep it equal or greater than 20% ROE. But the growth, the pretax income growth goal is more than 10% now. I'm not prepared to answer you yet what it is.
But let me assure you that when I say it's more than 10%, I don't mean that it's 10.1%, okay? It's significantly above 10%. And so and we believe that this is not only the right strategy. It is the only strategy if you want to do well by your shareholders. We believe it's the only strategy.
And as far as this year's CapEx is concerned, at this point, we are still following the guidance that we gave you last time, I believe, dollars 8,000,000 to $8,500,000 At this point, we're still following that. But next year, I am we are not going to forecast until early next year. But I think I have already given you a view of our reasoning and our strategy and our objectives. So but as to the exact number, I will not give you until early next year. All right.
I believe those I have finished my prepared comments. I believe we are open for questions. Are we not?
Yes. This concludes our prepared statements. Before we begin the Q and A session, I want to remind everybody to please limit your questions to 2, no more than 2 at a time to allow all participants an opportunity to ask questions to the management. Questions will be taken from the floor as well as from the call. Should you wish to raise your question in Chinese?
I will translate it to English before our CEO or CFO answer your question. For those of you on the call, if you would like to ask a question, please press the star then 1 Our first question comes from the floor and that goes to Bank of America Merrill Lynch, Dan Hyler.
Thank you very much, Elizabeth, and thanks for the new format. Hopefully, we'll all get a little more sleep. And I hope you're feeling better. It sounds like you have the same quote that I have, Doctor. Chang.
Quick question. On the IDM models here, we've seen this the IDM model work for kind of high volume businesses such as the CPU business and the memory business. Given the huge amount of demand and growth in the application processor market that we're seeing proliferate, in the mobile area. And with competitors scaling up their manufacturing facilities, I'm wondering if it would help TSMC's efficiencies to start to dedicate some lines or specific fabs to be more product focused as you go forward in these very high volume businesses? Or will you keep your very large broad based fabs?
So the question is, are we going to dedicate more lines to products, specific products, is that right?
Will your manufacturing strategy change, yes?
No. Well, you first started to talk about IBM, and were you asking me about the future of the foundry fabless model? You wrote about that also. Do you
think you need to dedicate some fabs to product specific areas that are very high volume?
Actually, yes, I think that's almost a natural outcome the way the market is trending. I think that they are going to be larger customers. And now it makes complete sense to dedicate a whole fab to just one customer, a whole fab or 2 whole fabs in fact to just one customer. Now remember, we made our mark in serving many customers. In fact, that's a really part of our secret sauce of success, the ability to serve many customers to their satisfaction.
And we'll still retain that capability. But there are customers that are getting bigger and bigger. So it makes sense that we dedicate a whole fab or even more than a whole fab to just one customer. As far as specific products are concerned, well, right now, we are already concentrating. For instance, Taizong will have the vast majority of 28 nanometers, whereas Thailand will have the vast majority of 20 SoC and 16 FinFET.
And both of those manufacturing centers are under one manager. Taichung is under one manager. Thailand is under one manager. I don't know whether I answered your question.
Yes, you did. Thank you very much. Second question, and then I'll get back in the queue. We heard you today, as well as ASML talk about 20 nanometer ramp towards, I think, tape outs in next year, in 2013. And we're seeing obviously some significant challenges currently, as you highlighted, in 20 in 20, 28 nanometer with HiK metal gate.
Given that you've got HiK metal gate challenges, double patterning on 28, 2 big changes. What's the visibility in your sense in really being able to execute 20 nanometer in the second half of next year? Would we see be able to see volume there? And what gives you a level of confidence?
I think that we'll start some production of 20 nanometer next year, but small scale, very, very low, what we would call risk type of production next year. But 2014 will be a ramp year for 'twenty SLC. And we are pretty sure of that.
Just a quick clarification. Your earlier comment, you had talked about FinFET, that you would be competitive at 20 nanometer with your
Yes. In answer, I haven't included 20 SoC, which is planned, will ramp in 2014. And we believe that the 'sixteen thin fab will ramp in perhaps the second half of twenty fifteen.
Okay, great. And just one clarification on something you said, if I may. You talked about TSMC being competitive at 20 nanometer relative to the industry leader who's at 22.
Competitive.
Competitive, right. That competitor, I believe, is doing FinFET at 22. So are you including that in your statement? Okay.
But I also said in our served markets, yes, which will not include high performance CPUs.
Sure. Mobile. Thank you.
All right. Since we have people on the conference call, so I'm just going to open the line to the call first. We'll take our next question from the call. Operator, please proceed with the first caller.
The first question today comes from the line of Mehdi Hosseini from Susquehanna. Mehdi, your line is now open.
Yes, thanks for taking my question and thanks for the new format. Two questions. Doctor. Chang, you talked about the Q4, Q1 trend. At the same time, the 28 nanometer gross margin should reach the corporate average.
So how should we reconcile lower shipment as a result of customers reducing inventory with a better margin profile for 28 nanometer? And I have a follow-up.
The question is why couldn't we delay shipments until the margin becomes better? No, no.
I think the As
you mentioned a dip in shipment in Q4, Q1 timeframe, and that obviously will have an impact on utilization rate and margin. How should I reconcile that with 28 nanometer margin profile that is actually improving and reaching the corporate average?
Mehdi, your question is Q4 and Q1 will appear to be a down quarter where we will have some margin pressure. At the same time, our 28 nanometer margin will go to the corporate level by Q1. And so how do we reconcile these 2?
Well, the way to reconcile those 2 is that 28 nanometer will only account for about 20% of our revenue in the Q4 this year, and it will account for a little more than 20% of our revenue in the Q1 of next year. While the 28 nanometer gross margin will be climbing is climbing and will be climbing, the rest of the products margin will drop because of lower utilization.
Got it. And then my follow-up to do with the 28 nanometer and 20 nanometer capacity for next year. How should we think about the additional 20 nanometer capacity compared to the 20 nanometer pilot line? Do you have any thoughts on how aggressive you want to be at the same time you want your customers to try out the 20 nanometer? And I'm just kind of confused how those 2 how the product portfolio for those 2 nodes are going to converge.
So you're asking us about the capacity plan next year for 28 nanometer as well as for 20 nanometer. That's right?
Yes. I would just And
especially as some of the 20 nanometer may move to 20 nanometer.
Let me just describe our capacity plan in the following way. This year, we will be spending between $8,000,000,000 $8,500,000,000 in capital CapEx. About $1,000,000,000 to $1,500,000,000 will be spent on 20 SOC, 20 nanometer. I think around $6,000,000,000 will be spent on 28 nanometers and the rest just awesome hands, including R and D. So this year, the vast majority of the capital spending is still on 28, but 20 nanometer has already made a significant appearance in CapEx.
Next year, there will still be some capital spending on 28 nanometer, but relatively small. And the vast majority will be on 20 nanometer. And that spending that kind of spending, the pace of spending on 20 nanometer will continue into 2015. And of course, in 2015, the 16 nanometer thin fab will also be making an appearance. And fortunately, the conversion from 20 SOC to 16 FinFET is quite good.
In other words, we don't expect any significant loss in the conversion from 20 nanometer capacity to 16 nanometer capacity.
Got it. Thank you.
All right. So now we will switch back to the floor. The first question goes to Deutsche Bank's Michael Zhou. Hi,
Chairman. One question is, would you invest in ASML EUV given that the industry leader is going to invest in EUV? And what's your view?
What's your industry leader?
As you mentioned before, yes. And what's your view for the competition between ASMLUV and the Nikon's motor e beam? Which one will become
I'm sorry, I didn't get that. You were asking about ASML? ASML. What you said competition?
The competition between ASML's UV and Nikon's motor e beam methodology. So which one will become the industry standard going forward?
Well, which one will become well, I think that it appears that EUV let me put it another way. It appears that the E beam, multiple E beam is behind EUV. But EUV progress has not been very good either. But we still we're still going to need the EUV even though the progress to date has not been very satisfying. But if you compare it with the E Beam, I would say that e beam is certainly behind EUV.
Does that mean are you going to invest in ASML's EUV going forward given that your competitors move?
We are actively negotiating with ASML. And actually, ASML brought up this investment R and D deal to 3 companies together, 3 industry leaders together. And now, of course, one of them decided to do it first. That's okay. So and we are we have been for more than half a year now, And recently, of course, since one of our colleagues has already signed, so of course that kind of got our attention again.
So our discussions with ASML have become even more active recently, yes. But we are still in active negotiations with ASML.
Thank you.
Our next question goes to Morgan Stanley's Bao Lu.
Doctor. Cheng, you just raised your pretax income CAGR from 10% to something more than 10%. Can you talk about what is behind that? Because is it a higher expectations now for market share? Is it the whole industry that you think is going to grow faster?
Is it profitability? What exactly is behind that more bullish outlook? Thank you.
What there are 2 main things behind that. 1 is that our lead in both technology and manufacturing, I believe, is strengthening has strengthened. Remember, starting in 2010, we didn't just increase CapEx, we also increased R and D. Our R and D is right now R and D is double, double what it was in 2,009. So it was a 2 pound thrust back in 2,009, 2010.
The 2 pound thrust was to increase both R and D and capital significantly. And R and D is now double what it was in 2,009. At any rate, I believe that the reason two things behind why we raised our pretax income growth goal. 1 is that we believe that our technology lead has strengthened. And we have maintained our manufacturing lead, which we have had all along and our customer trust lead, which we have had all along.
And the other reason, of course, is that the handheld products, the mobile products, the smartphone and the tablets. I mean, that was something that we did not completely foresee in 2010. And in 2010, we did not foresee this mobile products market, not as clearly as we do now anyway. So those are the two reasons why we raised our goal.
Great. My second question is more short term. You talked about this dip or inventory correction in 4Q and 1Q of next year because of the macro factors and such. That to me feels kind of like last year when the macro got a little bit worse. You saw a little bit of a maybe a 2 quarter period where you were growing below seasonal patterns.
If you look at this year versus last year, are they similar or worse or better?
You're right. I mean, it's very similar I think it's a very similar situation. Well, with some difference, I think that the European situation was certainly I think this year, we are worse than last year. And Mainland China, I think, last year, we're talking about a slowdown from 10% to 9%. And now this year, we're talking about a slowdown from 9% to maybe 7.5%.
So but basically, it fuels the high hopes early in the year. And mainly, those high hopes are based on general economic progress. Last year early last year, there was high hopes about world economy also. And then the hope was dashed later on in the year. And now this year, early this year, there was high hope again, it's being bashed now.
Yes. And the inventories, I think, were working were based on that also. The high hopes gave rise to the high inventories in the supply chain. Everybody was everybody hoped. Everybody had high hopes.
And yes.
Okay. Next question is Barclays, Andrew Lu.
You're okay, Andrew. No, no. Can you
is, are you going to see are we going to see a double digit decline in any of these Q4 or Q1?
Double digit decline in what? Revenue. You mean what time period are you talking about?
Q4 or either Q1?
A sequential double digit decline? As I said earlier, I don't really want to predict so early. But right now, we are looking at something that's in the gray zone between single digit and double digit. But you know, my goodness, you know, you forced me to give you an answer, all right? And I mean, don't blame me if it turns out to be much better than that.
Always possible. Second question I have, actually decent calculation. Assuming due to all these 28, 20 16 FinFET investment continue, we might remain to see the capital sales ratio remain at 50%. And plus I actually calculate the cash dividend if we stick at $3 per share and that will take out about 15% to 16% of revenue as well. So total combined is about 65% revenue as a regular basis cash outflow.
And our EBITDA margin, EBITDA divided by revenue is about 60%. So each year, we are going to have a 5% short on revenue as a cash. And this doesn't include the potential we might invest ASML. So what's our financing plan through the equity and debt for the next 5 years based on these changes? Thank you.
Laura, will you relieve his concern?
Andrew, there will be few years that our free cash flow may not be good or may not be sufficient to pay the $3 dividend. But since we have
Yes, you don't mean that. We're going to keep the $3 dividend. Okay.
Since we have quite strong balance sheet and we have started to borrow by issuing some corporate bond starting from last year, This time frame interest rate is very low, so we were able to get a 1.3, 1.4 type of interest rate for 5 year or 7 year. So we will leverage that for the period that we will have a very high capital intensity. And we believe when the revenue catch up and profitability cash flow catch up later and we will be in good shape. So we're not too worried about that. Yes.
No, no plan for equity.
Debt financing and actually the latest ASML deal sort of gave me kind of a made me think also. I mean, there are other normal ways, innovative ways and so on. I'm not saying that we'll do it, But the answer to your question is debt financing, no equity, maintenance of at least $3 cash dividend, and now in addition to those definite answers, Maybe there are innovations, which we haven't decided on yet.
Next question goes to Citigroup's Roland Xu.
Good afternoon, Doctor. Chen. Two questions for me. First, since now we are talking about the 15 nanometer feedback, so my question is what next to 16? So the 14 nanometer still on your technology roadmap or after 16 maybe we will move to maybe 11 or 10?
10 maybe.
Is 14 still in your roadmap? Pardon me? Is 14 nanometer still on your roadmap?
14? Yes. I don't think so. I don't think so.
Okay. So that means for TSMC
16, our 16, we believe will be competitive with other people's 14.
Yes, understood. So I'll have the 14. And so how is your EUV?
What is our EUV?
EUV, yes, I think that will be introduced at what kind of the technology?
I think it will come in at 10, at our 10.
And my second question actually is similar to Andrew's question. I think that since given TSMC now, we have a heavy invest on 20 nanometer, next year 2020 and going forward 2016 and also we have EUV on 10. So my question is, are TSMC considering to invite your key customers to invest in TSMC like what ASML is doing now, invest the technology leader to invite technology leader to invest ASML. So
I must clarify the careless comment I made earlier when I talked about innovative things such as we are not but actually, we've made a definite answer to Andrew's question. We are not considering any equity offering at all. Okay. Not even we're not considering equity offering, not to a customer, not to investors, no. Thank you.
Yes.
We will now take our next question from the call. Operator, please proceed with the next caller on the line.
The next question on the line today comes from Brett Simpson from R8. Brett, please go ahead.
Yes, thanks very much. I have a question for Doctor. Chang around 20 nanometer. We've seen Intel recently and several of your customers talk about concerns over the transistor cost at 20 nanometer. It's not falling like it has in previous nodes, at least that's their perspective, because of the number of process steps that are increasing at 20 nanometer.
I wanted to get your perspective on this. And what do you think this means for the economics of the fabless business model? To what extent if the costs are going to be rising at 20 nanometer, can these costs be passed on up the supply chain? Thank you.
20 nanometer transistor cost. Basically, The capital intensity has also introduced a pretty high component of depreciation cost has raised that component, depreciation cost, in the advanced technologies. And now the way we are making it up is by our here, of course, the FinFET does have an advantage, at least ultimately. And we are going to the FinFET in 'sixteen. But for 'twenty SOC, we do have the advantage of our denser metal pitch that I talked about earlier.
The denser metal edge resulted in smaller die. And so even though the transistor cost might be higher, but with a smaller die, smaller chip, the economics works out very competitively. That's it's actually a pretty involved technical calculation, but that's the conclusion. The higher transistor cost, which is mainly because of the higher capital intensity, is compensated by the higher density, And that's basically the answer.
Got it. Thanks very much. And just a follow-up for Laura. Laura, can you perhaps talk about the relationship between depreciation and CapEx as we sort of go through this higher level of capital intensity? Because today, there seems to be a big gap between depreciation, sales and CapEx versus history.
So how does this really trend over the next couple of years? If you can maybe just give us some help there, that would be great.
Question is, how would the trend be given the high capital cost? What's going to be the ratio between depreciation and CapEx for the next few years, right?
Yes.
The ratio?
Ratio between what? Depreciation. Ratio between depreciation and CapEx. Well, actually, I mean, every dollar of CapEx equipment, every dollar spent on equipment is depreciated over 5 years. And every dollar spent on facilities is depreciated either over 10 years.
10 years.
Yes. And there are some that Yes.
And for the building, it's depreciated over 20 years. So they have 20 years for the building, 10 year for facility and 5 year for equipment.
Well, of course, about 80% of our CapEx is on equipment, I think. Exactly. So you asked about the ratio between CapEx and depreciation. Take 80% of the CapEx depending on what time what point in time in the year it's spent and then you spread it over 5 years, that's 80% of the CapEx. And I think roughly 20 year depreciation stuff is
Building.
Yes, I know, but it's like it varies from year to year. This year, next year, we're actually building quite a few buildings. So there are there is a greater component in our CapEx that's going to be depreciated over 20 years.
I think your question is more to that. I can give you one example for this year. You're asking a relationship between depreciation and CapEx. For example, this year, we were planning to spend $8,000,000,000 to $8,500,000,000 and with the depreciation about a little bit more than $4,000,000,000 So there's some relationship between the 2. But going forward, and actually it will depend on when you spend the depreciation, when you spend the money, which quarter, on what technology.
And we also have some 12 inches coming down from depreciation. So every year, the number is different. So it's very difficult to answer to keep a very simple answer for your question.
So we will continue to take our next question from the call. Operator, please proceed with the next caller.
The next question comes from the line of Mahesh Naganaria from RBC Capital Markets. Mahesh, please go ahead. Thank you very much. Doctor. Chang, I have a question on the 15 nanometer.
What is your confidence that you can accomplish that without EUV? And also related to that, if ASML supplies a stable machine, how long will it take for you to put it in production? I'm pretty sure you have 20 year problems to solve like with the radical and the resist and the line of definition. So how long will it take to solve those problems to put it in production?
Could you repeat the question?
Your question is, if we start with you said 15 nanometer, but I suppose you are referring to 10 nanometer because that's when we will start using the EUV. So No,
I think his question was how confident are we that we can accomplish the 16 nanometer without EU.
Okay. Isn't that right?
Yes. Yes. Well, the answer is yes. We are quite confident. We are very confident we can accomplish the 16 FinFET without EUV.
Now it's the second question that I didn't completely get. He talked about reticles and all that.
So you say if we get a machine from on the EUV, how soon will we begin the production? How soon will we be able to put the machine into production? Is that your question?
That is correct because I assume that there are multiple problems to solve once the machine is there also in the fab. So how many years it will take to put it in production?
After we get a machine, an EUV machine, how long will it take to get it to production? Is that the question? Yes. Well, we have had one machine for a year already. And I don't I can't tell when we will be using it in production yet.
I think that actually the fact of the matter is that by the time we use an EUV machine, which I think is in our 10 nanometer generation. I think by that time, this machine that we have had for a year will be obsolete, and we'll be getting new machines. And as to how long it will take to get a new machine, well, I that is you can tell that. I will tell you about the emerging machines, which we've been using immersion machines for years. And sometimes it doesn't take very long.
Sometimes it takes several months or half a year.
Okay. That's
very helpful. And just one more follow-up on can you give us and your estimate of where your competitors are on 28 nanometer production?
There's a lot of rumors about, but I do not believe most of those rumors. I really haven't seen anything real yet. Well, I've seen very, very little real yet.
Okay. Thank you very much.
All right. Now we will switch back to the floor. The next question go to HSBC, Stephen Pelayo.
Thank
you. Very impressive performance on your industrial business, up nearly 40% quarter on quarter, 22% of revenues. And that's now bigger than your Computing segment. That growth rate is actually bigger than your 40 nanometer and below. So I want to understand the outlook for this business.
Is this sustainable? Is this a step function higher and now sustainable? What are you thinking now for that industrial?
A pretty large part of it is goes into smartphones and tablets. And so we believe in the growth of those Laura, you mentioned already you told everybody, touch control and all that stuff and
Those MCU, data converter, flash controller, touch controller,
those type of things. Yes. Power, power, yes. And power.
But I guess
the question is, are these are new businesses for you, so there should be a level of sustainability to them? Or is this still kind of a cyclical thing and they're going to fall off as well?
Well, but I thought I was answering that question. I mean, mobile products are sustainable, aren't they?
All right. And then just maybe one more follow-up on the competitive landscape.
Are you cyclical? I think everything is cyclical, except maybe bread and rice.
And if I could just follow-up on the competitive landscape. We heard just this morning from Qualcomm looking to qualify more competitors. You talked about how you've raised your guidance for pretax profit. You were surprised at the strength of smartphones and tablets and stuff. Those customers are also looking for alternatives as well.
The last question was really just specific to 28 nanometer, but I want to ask in general, the competitive landscape, do you feel that it is becoming more intense and now your need to be much more aggressive in pushing 20 16 nanometer? Or do you think the competitive landscape is more of the same?
Well, competitive landscape has changed because competitors have changed. 3 years ago, 2 years ago, 3 years ago, anyway, when you talk about competitive landscape, you and I will both think of UMC, etcetera, with at that time, global foundry emerging. And now you ask me what the competitive landscape is. Competitive landscape is Intel, Samsung, Global Foundry, UMC. And now, 2 or 3 years ago, global foundry and the UMC were the almost the 2 only ones.
And now they are the 2 less important ones. So all right, you asked me what the competitive landscape is, I think I really think that you know the answer. I actually read the same thing that you do. Maybe you read even more than I do. The last thing I was reading was I haven't finished reading it.
It was Intel's call, the transcript. I read all those damn transcripts. I'm sorry. So, yes, I think it's a very competitive environment, very, very competitive. So it's our competitors have changed, and they are even more powerful and more intimidating than our own competitors.
Not that we are intimidated.
Okay. All right. So for the interest of time, I'm just going to allow one last question from the floor and that's Credit Suisse Randy Abrams.
Okay. Thank you. In the prepared remarks, you mentioned you're taking preparations for the dip. Could you talk about some of those preparations, if it's any change in spending or plans?
Preparations for the debt?
For the debt, the Q4 dip. You said you're taking some Oh,
the dip. For the dip. Oh, preparations. Well, we have already had 2 rounds of cost reduction in the last 2 months. The first round was I initiated and I made the responsibility of every fab manager and every functional manager of the company.
And that's, I guess, was about 30 or 40 of them, and each of them had a unit as for cost reduction. And the results were compiled, And it was a pretty significant round. But just 2 weeks ago, I called for another round of cost reduction. Clearly, our objective is to keep the gross margin and operating profit margin up as high as possible. So yes, so preparations meant rounds of cost reduction, cost and expense reduction, COGS and operating expenses reduction.
The follow-up question on the gross margin guidance, you guided for a small decline in the 3rd quarter on rising sales. If you could maybe talk about the factors in the margin decline? And maybe from these cost reductions, what we should think about OpEx growth in the next few quarters?
Laura, over to you.
Yes. Randy, if you look at our capacity by quarters, actually Q3 our capacity will go up by about 5%. So that's mainly for the 28 nanometer of course. So that's the main reason for this 7% growth in revenue, but not as high as the bottom line gross margin. I believe that's temporary.
And when we ramped the 28% to a bigger scale and with the improvement of profitability, I think this issue can be resolved.
Okay. I think we are about to wrap up for today's conference and conference call. And before we conclude, please be advised that the replay of the conference will be accessible 3 hours from now. Transcript will be available within 24 hours from now, both of which will be available through our website at www.tsmc.com. Thank you for joining us today.
We hope you will join us again next quarter. Goodbye and have a good day.