Good afternoon, everyone, and welcome to TSMC's Q1 2021 earnings conference call. This is Jeff Hsu, TSMC's Director of Investor Relations and your host for today. To prevent the spread of COVID-nineteen, TSMC is hosting our earnings conference call live via live audio webcast through the company's website at www.tsmc.com, where you can also download the earnings release materials. If you are joining us through the conference call, your dial in lines are in listen only mode. The format for today's event will be as follows: 1st, TSMC's Vice President and CFO, Mr.
Wendell Huang will summarize our operations in the Q1 2021 followed by our guidance for the Q2 2021. Afterwards, Mr. Huang and TSMC's CEO, Doctor. C. C.
Wei, will jointly provide the Company's key messages. Then we will open the line for Q and A. As usual, I would like to remind everybody that today's 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 call over to TSMC's CFO, Mr.
Wendell Huang, for the summary of operations and current quarter guidance.
Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the Q1 2021. After that, I will provide the guidance for the Q2 2021.
1st quarter revenue increased 0.2% sequentially in NT dollars or 1.9% in U. S. Dollars. Our Q1 business was supported by HPC related demand, balanced by a milder smartphone seasonality than in recent years. Gross margin decreased 1.6 percentage points sequentially to 52.4%, mainly due to relatively lower level of capacity utilization and an unfavorable foreign exchange rate.
Total operating expenses slightly increased by NT0.8 billion, mainly due to level of R and D activities for the N5 family. Therefore, operating margin decreased by 2 percentage points sequentially to 41.5%. Overall, our first quarter EPS was Nt5.39 and ROE was 29.5%. Now let's move on to revenue by technology. 5 nanometer process technology contributed 14% of wafer revenue in the Q1, While 7 nanometer accounted for 35%, advanced technologies which we now define as 7 nanometer and below accounted for 49% of wafer revenue.
Now moving on to revenue contribution by platform. Smartphone decreased 11% quarter over quarter to account for 5% of our first quarter revenue. HPC increased 13% to account for 35%. IoT increased 10% to account for 9%. Automotive increased 32% to account for 4%.
DCE increased 10% to account for 4%. Moving on to the balance sheet. We ended the Q1 with cash and marketable securities of NT797 1,000,000,000. On the liability side, current liabilities increased by NT45 1,000,000,000 mainly due to the increase of DKK49 1,000,000,000 in short term loans and increase of DKK50 1,000,000,000 in accrued liabilities and others, partially offset by the decrease of TWD51 1,000,000,000 in accounts payable. Long term interest bearing debt increased by NT23 1,000,000,000 mainly as we raised NT21.1 billion of corporate bonds during the quarter.
On financial ratios, accounts receivable turnover days increased one day to 40 days. Days of inventory increased 10 days to 83 days primarily due to N5 wafer prebuilt. Now let me make a few comments on cash flow and CapEx. During the Q1, we generated about TWD228 1,000,000,000 in cash from operations, spent DKK248 1,000,000,000 in CapEx and distributed DKK65 1,000,000,000 for Q2 2020 cash dividend. Short term loans increased by DKK52 1,000,000,000 while bonds payable increased by DKK18.5 billion due to the bond issuance.
Overall, Our cash balance increased $4,600,000,000 to $665,000,000,000 at the end of the quarter. In U. S. Dollar terms, our first quarter capital expenditures totaled 8,800,000,000 I have finished my financial summary. Now let's turn to our 2nd quarter guidance.
Based on the current business outlook, we expect our 2nd quarter revenue to be between US12.9 billion dollars and US13.2 billion dollars which represents a 1% sequential increase at the midpoint. This revenue guidance includes The minor impact from the power outage that occurred yesterday at our fab 14 in Thailand. Based on the exchange rate assumption of 1 U. S. Dollar to NT28.4, gross margin is expected to be between 49.5% 51.5 percent.
Operated margin between 38.5 percent and 40.5 percent. The sequential decline in quarter gross margin is mainly due to the margin dilution from higher 5 nanometer contribution, The slower rate of cost improvement as our fabs continue to run at a very high level of utilization and the absence of positive inventory revaluation. This concludes my financial presentation. Now let me turn to our key messages. I will start with our near term demand and inventory.
We concluded our Q1 with revenue of NT362.4 billion or US12.9 billion dollars which was in line with our guidance. The slight sequential increase was mainly driven by HPC related demand, balanced by a milder smartphone seasonality than in recent years. Moving into Q2 2021, we expect our revenue to be flattish as HPC related demand will continue to grow offset by smartphone seasonality. On the inventory front, Our fabless customers' overall inventory was healthy, exiting Q4 of 2020. Amidst the lingering macro and supply uncertainties, we expect our customers and the supply chain to gradually prepare higher levels of inventory throughout the year as compared to the historical seasonal level.
We expect this to persist for a period of time given the industry's continued need to ensure supply security. Looking ahead to the second half of the year, we expect our capacity to remain tight throughout the year, supported by strong demand for our industry leading advanced and special technology. For the full year of 2021, We now forecast the overall semiconductor market excluding memory to grow about 12%, While foundry industry growth is forecast to be about 16%. For TSMC, We are confident we can outperform the foundry revenue growth and grow by around 20% in 2021 in U. S.
Dollar terms. Next, let me talk about our capital budget for this year. Every year, our CapEx is spent in anticipation of the growth that will follow in future years. As we enter a period of higher growth Underpinned by the multi year structural megatrends of 5 gs related and HPC applications, We believe a higher level of capital investment is necessary to capture the future growth opportunities. In order to meet the increasing demand for our advanced and specialty technologies in the next several years, We have decided to raise our full year 2021 CapEx to be around US30 $1,000,000,000 About 80% of the 2021 capital budget will be allocated for advanced process technologies including 3 nanometer, 5 nanometer and 7 nanometer.
About 10% will be spent for advanced packaging and mask making and about 10% will be spent for specialty technologies. Now Let me turn the microphone over to C. C.
Thank you, Wendell. We hope everybody is staying safe and healthy during this time. First, let me talk about the capacity shortage and demand outlook. Our customers are currently facing challenges from the industry wide semiconductor capacity shortage, which is driven by both a structural increase in long term demand as well as short term imbalance in the supply chain. We are witnessing a structural increase in underlying semiconductor demand as a multiyear megatrend of 5 GE and HPC related applications are expected to fuel strong demand for our advanced technologies in the next several years.
COVID-nineteen has also fundamentally accelerated the digital transformation, making semiconductors more pervasive and essential in people's life. In addition, The need to ensure supply security is creating short term imbalance in the supply chain driven by supply chain disruption due to COVID-nineteen and uncertainties brought about by geopolitical tensions. Now let me talk about TSMC's investment plan and disciplines. TSMC's mission is to be the trusted technology and capacity provider for the global logical IC industry for years to come. In order to support our customers' growth, TSMC is taking several actions to help address the capacity shortage for our customers.
We are working hard to increase our productivity to drive more output to help support our customers For the near term, to address the structural increase in the long term demand profile, we are working closely with our customers and investing to support their demand. We have acquired land and equipment and started the construction of new facilities. We are hiring thousands of employees and expanding our capacity at multiple sites. TSMC expect to invest about USD 100,000,000,000 through the next 3 years to increase capacity to support the manufacturing and R and D of leading edge and specialty technologies. Increased capacity expected to improve supply certainty for our customers and help strengthen confidence in global supply chains that rely on semiconductors.
Our capital investment decision are based on 4 disciplines: technology leadership, flexible and responsive manufacturing, retaining customers of trust and earning the proper return. At the same time, we face manufacturing cost challenges due to increasing process complexity at DD Note, new investment in mature nodes and rising material costs. Therefore, we will continue to work closely with customers to share our value. Our value includes the value of our technology, the value of our service and the value of our capacity support to customers. We were looking to firm up our wafer pricing to a reasonable level.
We will continue to work diligently with our suppliers to deliver on cost improvement. By taking such actions, we believe we can continue to earn A proper return that enables us to invest to support our customers' of course and fulfill our mission as trusted foundry partners. With our technology leadership, manufacturing excellence and customer trust, we are well positioned to capture the growth from the favorable industry megatrend. We reiterate our long term revenue to be 10% to 15% CAGR from 2020 to 2025 in U. S.
Dollar terms. Next, let me talk about the automotive supply update. The automotive market has been soft since 2018. Entering 2020, COVID-nineteen further impacted the automotive market. The automotive supply chain was affected throughout the year, And our customers continue to reduce their demand throughout the Q3 of 2020.
We only began to see sudden recovery in the Q4 of 2020. However, The automotive supply chain is long and complex with its own inventory management practices From chip production to car production, it takes at least 6 months with several tiers of suppliers in between. TSMC is doing its part to address the chip supply challenges for our customers. In January of this year, TSMC announced that capacity support for automotive customers is our top priority. Since then, we have worked dynamically with our other customer to reallocate our wafer capacity to support the worldwide automotive industry.
However, the shortage further deteriorated due to the unexpected snowstorm in Texas and the fab manufacturing disruption in Japan. Together with our productivity improvement, We expect the automotive component shortage from semiconductor to be greatly reduced for TSMC's customer by the next quarter. Now I will talk about Taiwan water supply update. The water supply in Taiwan is currently tight due to the lack of rainfall in the past year. We have been prepared for this.
TSMC has a long established enterprise risk management system in place, which cover water supply risk as well. Through our existing water conservation measures, We are able to manage the current water usage reduction requirement from the government with no impact on our operations. We also have detailed response procedure to handle water shortage at different stages. We will continue our collaborative effort with the government and the private sector on water conservation and new water sources. With our comprehensive enterprise risk management system, We do not expect to see any material impact to our operations.
Finally, I will talk about N5 and N3 status. TSMC's N5 is foundry industry's most advanced solution with the best PPA. N5 is already in its 2nd year of volume production was year better than our original plan. N5 demand continued to be strong driven by smartphone and HPC applications. And we expect Yanfei to contribute around 20% of our wafer revenue in 2021.
N4 will leverage the strong foundation of N5 to further extend our 5 nanometer family. N4 is a straightforward migration from N5 with compatible design rules while providing further performance, power and density enhancement for the next wave of 5 nanometer products. N4 risk production is targeted for second half this year and volume production in 2022. Thus, we expect demand for our N5 family to continue to grow in the next several years, driven by the robust demand for smartphone and HPC applications. N3 will be another 4 node stride from our N5 and why use FinFET transistor structure to deliver the best technology maturity, performance and cost for our customers.
Our N3 technology development is on track with good progress. We continue to see a much higher level of Customer engagement for both HPC and smartphone application at N3 as compared with the N5 and N3 at a similar stage. Risk production is scheduled in 2021. The volume production is targeted in second half of twenty twenty two. Our 3 nanometer technology will be the most advanced foundry technology in both PPA and transistor technology, which it is introduced when it is introduced, I'm sorry.
Thus, we are confident that both our 5 nanometer and 3 nanometer will be large and long lasting nodes for TSMC. This concludes our key message. Thank you for your attention.
Thank you, C. C. This concludes our prepared statements. Before we begin the Q and A session, I would like to remind everybody to please limit your questions to 2 at a time to allow all participants an opportunity to ask their questions. Should you wish to raise your question in Chinese, I will translate it to English before our management answers your Now let's begin the Q and A session.
Operator, can we please proceed with the first caller on the line?
The first one to ask question, Randy Abrams, Credit Suisse.
Okay. Yes. Thank you. And I wanted to ask the first question just about Intel. They did announce their plans to reengage in the foundry sector.
And also, I think making it clear their goals are to get back to manufacturing leadership. So could you discuss how you're viewing them Now as a customer and also the assurances you're getting on business sustainability And how you're managing the potential risk if they improve manufacturing and pull back on some of the outsourcing plants?
Okay, Randy. Let me summarize your first question. Randy's first question relates to Intel and their recent announcement to reengage on foundry and get back to a manufacturing leadership position. So Randy's question is how does TSMC view Intel as a customer? What kind of business assurances are we getting on the sustainability of the business and how do we manage any of the potential risks?
Randy,
let me start with TSMC is everyone's foundry and support all our customer openly and fairly. NTIC is an important customer, And we will collaborate in some area and compete in other area. And we always work with our customer to develop the necessary technology to support their products. Now let me Coming a little bit on the competition. As a leading pure play foundry, TSMC has never been short on competition in our 30 plus year history.
Then we know how to compete. We are We are continuing to focus on delivering technology leadership, manufacturing excellence and earning our customers' trust. The last point, customer's trust is fairly important because we do not have internal product that compete with our customer so we can be the trusted technology and capacity provider and for years to come. And if you ask other comment, how we support India, we support them as important customer. And we plan our capacity for the long term Industry megatrend also.
It's not for the short term demand.
Okay. Does that answer your first question, Randy?
Yes. No, that's good on the first question. The second question and topic I wanted to discuss, you mentioned in your prepared remarks about the There is a bit more geopolitical pressure with particularly U. S. But also Europe And China, they all are being aggressive about domestic capacity.
If you could give an updated view on your strategy, if any shift Set the margin, we've traditionally wanted a high scale in Taiwan. I'm curious for U. S. With the big land, just any plans to accelerate positioning with the potential eventually you could do mega fab. If you could give an update on Nanjing, if there's plans to expand from the current, I think you're at 20 ks.
And if from a customer level you're seeing shifts where more customers are starting to consider geographic location In the foundry consideration?
Okay, Randy. Let me try to summarize your second question. I think there's quite a few parts. I think, first, Randy's question is on looking at sort of the geopolitical landscape and looking at this talk of fabs in different countries. So I think Randy first wants to know what is our progress or how do we see particularly U.
S. Manufacturing? Secondly, in other areas? And then thirdly, he would like an update on the Nanjing expansion. And lastly, how do customers feel about the need to manufacture in different countries.
Is that correct, Randy?
Yes, that's correct. Yes, thank you.
Randy, That's a lot of questions.
You only give us 2.
Let me try to answer. The first one actually I would like to say TSMC is a had been a global company. We have a lot of Manufacturing side outside Taiwan, U. S, mainland China, Singapore. But let me comment on the U.
S. First. We have been in the U. S. For a long time though.
We set up a wafer tag that an 8 inches fab located in Upstate Washington back in 1996 and is continuing to operate and manufacture chips for our customer today. And now we are increasing our presence in the U. S. With an advanced 12 inches semiconductor fab in Arizona. And the progress is executing to our plan.
And we are happy that we are joined the effort to support semiconductor manufacturing in the U. S. You also asked about our status in Nanjing. Did that you ask?
Yes. The
5 in Nanjing is progressing well. We already complete the 4th phase of 20,000 wafers capacity installation and actually it's in production for a while. And we are we also have a plan. Depends on the customers' demand And depends on the economics, we have a plan to expand the capacity also, Okay. And other question in Taiwan, why we
also 2 others. 1, Randy is asking, Would with other regions also?
We never rule out any possibility with other region. But today, we already announced plans. We currently have no For the fab expansion plan in other areas such as Europe, but we did not rule out any possibility. However, I want to emphasize Taiwan will continue to be the main focus for TSMC. Our center of R and D and majority of production line were continue to be located in Taiwan.
Okay. Did that answer your questions?
Yes, that's clear. And maybe if you can clarify for customer decisions, just That approach with Taiwan, is there are you starting to see it get raised a bit more about customers shipping location? Are they still focused on The traditional just getting the best PPA, the best cost and delivery time.
Right. So Randy's The last part of this question is from a customer's perspective, is there a push by customers for this geographic diversification or what do customers want?
Well, our customer Welcome, we established a new fab in Arizona State, let me say that. However, The most important one to JEM is the technology, is the manufacturing, is the efficiency that TSMG provide, okay. Actually, that's the most important one, other than the consideration of geopolitical locations.
Okay, Randy.
Okay, great.
That's clear.
Yes, thank
you. That's
clear. Okay.
Thank you, Randy. All right, operator, can we move on to the next person on the line, please?
Next one on the line, Gokul Hadehalan, JPMorgan. Go ahead please.
Thanks for taking my question. My first question, could we talk a little bit about the RMB100 1,000,000,000 capacity plan For the next 3 years, is that primarily a CapEx number? Just assume Just seeing that this year already we are spending about $30,000,000,000 Should we be assuming that our CapEx is going to run around these levels or even higher In the next 2 years as well. So just wanted to clarify because there was some confusion about whether that's a CapEx number or a CapEx plus R and D number.
Okay. So I think Gokul, your first question is that we intend to spend $100,000,000,000 in the next 3 years. Is that a CapEx number? And then also what does that mean for the spending in the CapEx in the next 2 years?
Hi, Gokul. This is Wendell. Yes, dollars 100,000,000,000 is CapEx number. Now We've already guide that this year will be RMB30 1,000,000,000 but we're not going into the linearity in the next 2 years. You can actually have a feeling about what we will be spending in the next 2 years.
Got it. That's very clear. My second question is on the Inventory cycle and a lot of the capacity expansion that we are seeing in older technologies, TSMC also is spending about roughly $3,000,000,000 based on the new guidance on specialty technologies as well. The industry also seems to spending quite a bit of capacity there. What is TSMC's take in terms of when we are going to see A bit more normalization in some of this older capacity.
The TSMC also subscribed to the view that Even in 2022, we are likely to see some degree of capacity tightness or capacity shortage Our TSMC feels that we will likely resolve this towards the end of this year or early next year.
Okay, Gokul. Thank you. Let me try to summarize your second question. Your second question is looking asking about the inventory and particularly on the mature nodes. Looking at the expansion in the mature nodes and Gokul wants to know, I think that on the mature notes, could we see some type of overcapacity And you know or will can the tightness continue to persist or will we start to see some kind of overcapacity or oversupply towards the end of this year or in 2022.
Is that your correct Gokul?
Yes. Just to I think many of your competitors are Talking about 2022 also being undersupplied in many of these process notes, just wanted to hear TSMC's view on that.
Well, Gokul, let me answer the question carefully because of We cannot rule out the possibility of inventory correction or overbooking, something like that. But actually, we expect the structural demand to continue. And we will work with our customer closely actually and to develop some technology solution to meet customers' requirement and create a different differential and long lasting value to our customer. As a result, We actually we see the demand continue to be high and the shortage will continue throughout this year and maybe extended into 2022 also. Did that answer your questions?
Okay. So do you also feel that will continue to hold on to a higher level of inventory for quite some period of time. Is that the way you think about inventory as well?
Yes, we expect the customer, almost all of them to prepare a higher level of inventory. That is because of today, political tension continue to persist. Even the COVID-nineteen, well received sometimes, we hope as soon as possible, but you are continue for a while. And put 2 factors together and we do expect them to prepare a higher level of inventory. And I believe we do already seeing that.
Okay, Gokul. Does that answer your second question? Thank you. Okay. Thank you.
Operator, let's please move on to the next caller on the line please.
Now we have Sebastian Ho from CLSA.
Good afternoon, gentlemen. Thanks for taking my questions. So first one is on the pricing strategy. So I remember 6 months ago, the company talked about sticking to the principle of respecting long term partnership with customers. And the company doesn't seems to want to change the pricing on the mature technology nodes, Which I mean 28 nanometer above.
So I'm wondering if that's still the case now or if the company now considers some And if it's the latter, what has changed for 6 months ago? Thank you.
Okay. Sebastian, so Sebastian's first question is regards to pricing. And he says that we always talk about long term partnership with our customers and he is saying in particular on the older nodes 28 nanometer and such, would we raise the price? So he's asking sort of what is the pricing strategy today and what has changed versus previously?
Let me answer that. For more than 30 years, TSMC has provided stable and predictable pricing and we have a refrain from optimistic from opportunistic or short term actions. But now as I said in my statement, the cost structure start to change structure change because of we have to invest on the leading edge technology, which has more complex than ever. And we also increased the mature technology node capacity, which a lot of them already been fully depreciated. And now we have to invest the new tools.
So we refrain from our Optimistic and short term action, but we also had to share our value. So we are working with our customer closely and we want to firm up our wafer pricing to a reasonable level. And we are also work with our supplier to deliver the cost reduction. And we want to earn a proper return that enable us to continue to invest to support our customers' growth. And in today's term, capacity support is the most important one they are looking for.
Okay.
Got it. That's fair.
Do you have a second question? Yes, sorry, go ahead.
Yes, I do have a second question. Thank you.
I think we are
for many reasons, we've seen that many countries globally, They plan or they want to increase their build their own semiconductor fabrication capacity domestically. We're also seeing some IDM. They are forced to increase their in sourcing or add some internal capacity because of the chip crunch. So my question is That IBM outsourcing has been one of the favorable driver for the funders industry and TSMC grow in the past 3 decades. And how do you see this trend involving in coming years?
And would you be concerning this could we do some overcapacity in A few years even if some of those may not be effective? This is my second question. Thank you.
Okay, Sebastian. Let me summarize Your observation that countries are pushing for more domestic manufacturing and IDMs are also Looking at expanding capacity. So Sebastian's question is looking at IDM outsourcing. Do we see this trend slowing down or how do we see it in the next coming few years? And could this result this capacity that's being built result in excess capacity?
Sebastian, let me say that in our long term forecast, We continue to see the IDMs outsourcing continue to increase. And So we prepare the capacity for that also. And we don't think that IDM tried to spend their own capacity while resulting in overcapacity situation Because of technology is the most important thing, let me say that. And we expand our capacity based on the customers' need and we saw the technology leadership that provided their product to be very competitive in the market. So they are all happy to work with TSMC in developing their product for now, for the future.
And so as a result, we continue to
Okay. Sebastian, does that answer your second question?
Yes, yes. Thank you.
Okay. Thank you. Operator, can we move on to the next person on the line please?
Next one to ask question, Charlie Chan from Morgan Stanley.
So first of all, can I ask about the change of the 2021 revenue guidance? Can you explain that Where is the upside coming from? I mean, by applications will be great. And does that include some pricing adjustments for just revised out the premium guidance? Thank you.
All right. I think Charlie's first question is relating to our 2021 revenue guidance and from now of around 20% to say what has changed versus last time. And he also wants to know, can we talk about by application, what is driving this change? And what was the last part of the question, Charlie, sorry?
Actually, that's it. Thank you.
Okay.
And does that include Capture some price hike as well. Thank you.
So his question is, What is driving the change in the growth guidance for this year? And he would like to know which applications are driving it? And does it include some price increases in this guidance?
Okay, Charlie. First of all, we don't comment on price. I can share with you that we're everyone's foundry. Our CapEx and capacity planning are based on the long term demand profile underpinned by the industry megatrends, not short term cyclical factors. We are seeing stronger engagement with more customers on 5 nanometer and 3 nanometer as compared to 3 months ago.
And we work closely with our customers to plan the capacity and we'll continue to focus our investments on advanced and specialty technology to support our customers' structural growth. Now this year, we expect in terms of platform, We expect that HPC and automotive platform growth will be higher than the corporate average And the smartphone and IoT will be close to the corporate average.
Okay. Understood. So it seems like the upside coming across border or just some Specific application, I know that HPC Automotive are growing better, but Just compared to last guidance, what was driving the upside?
Okay. Actually, All the platforms have upside compared to 3 months ago.
Okay. Got you. Thank you, Wendell. And then my next question is about your Capital intensity in the long term, I mean, I think 1 or 2 quarters ago, company updated the capital intensity. And As some points can fall back to like 35% capital intensity.
I'm not sure if that's the case for the Coming 3 years? And also linked to that, what does that mean to the long term gross margin trend? Because In today's conference call, I keep hearing some comments about structural cost increase. I'm not sure if you said about Chemicals or equipment price, but would that kind of impact companies' long term gross margin trend?
Charlie, let me share with you. Capital I'm sorry.
Yes. I think, Charlie, your question is on capital intensity. Looking at what is the capital intensity looking like the next few years And how does this correlate with our stated long term capital density of kind of mid-30s range? And then he also on the back of that, What does this mean for the long term gross margin trend?
Charlie, in terms of capital intensity, We have actually given out several points already. First of all, if you look at we're saying the next 3 years we will be spending And this year will be DKK30 1,000,000,000. We also say that in the next 5 years, we expect to grow between 10% to 15% revenue CAGR. So if you do math, you probably will have a good idea about where our capital intensity will be in the next 3 years. Now at this moment, we still expect that the capital intensity will go back to mid-thirty level in the longer term.
That's the capital intensity. In terms of gross margins, I think as CCS already mentioned, we see some challenges from manufacturing cost due to the increasing complexity of leading nodes, the new investment in mature nodes and some rising material costs. And therefore, we're taking actions To ensure that we earn a proper return by firming up our price, working with the supplier to drive the cost improvement. We expect that the 50% gross margin remains our target and is achievable.
Okay. That's very, very quick. So I so can I assume Part of that $1,000,000,000 CapEx associated to the cost increase? And If it is the case, how much of that is due to the cost increase
versus demand?
I think the last part of his question is that then out of the $100,000,000,000 and this higher capital intensity, how much is due to the cost versus the demand?
Charlie, basically we're seeing more engagement of our demand in the next few years. So I would say most of the CapEx come from The strong demand for our advanced technology and specialty technology, especially 5 and 3 nanometers.
Okay. Understood.
Thank you, Charlie. All right, operator, thank you. Can we please move on to the next caller, please?
Next one to ask question, Bruce Lu from Goldman Sachs. Go ahead please.
Hi, thanks for My
question on just speak was the KRW 100,000,000,000 CapEx. I think this is the first time for TSMC to announce a market year CapEx. I think this suggests like very strong growth even beyond 2023 or through 11.5%. So can you give us a little bit more Call about like what kind of occasion, demand, which is strong enough to give the company such as high confidence for the CapEx. I mean we've seen through the cycles, but how can we have confidence for the demand like 3 to 5 years down the road?
Also assuming TSMC mostly invest in other basements, do you foresee the mature market titans
Okay. So Bruce has Two questions. Both first is related to our CapEx with such a high level of spending, what is giving us the confidence that we see out over the next several years to And then his second well, maybe we'll go that first and then second question.
Okay. Let me answer that one first. And in fact, we are seeing stronger engagement with more customers on 5 nanometer and 3 nanometer. And the engagement is so strong that we have to really prepare capacity for it. And that's the main reason.
And so what is the second?
And then his second question is then looking at our CapEx With the majority of our CapEx being on advanced nodes, on the mature nodes then will the I think the supply demand gap and mature nodes further widened.
We did see the GAAP, but you'll know the capacity not enough to support all the products in the market. So we are working with our customer closely and to analyze the gap. And we are also preparing to invest on the mature node, as I said in my statement. But most important, We are developing the technology, specialty technology with a mature node and to support our customers' need. So their product can be very competitive in the market.
And so we can have demand secured for the next few years, and we decide to invest on the mature node capacity.
Okay, Bruce, does that answer your two questions?
Can I take you 1?
We have to limit to 2, sorry. There's a lot of people still waiting. Thank you. Operator, Can we move on to the next please?
Next one to ask question is Robert Sanders from Deutsche Bank. Go ahead please.
Yes. My first question thanks for taking my question is regarding your CapEx rising up to the mid-30s by 2023. Are you asking customers to commit earlier than normal on that capacity? And are you considering asking customers for prepayments? How do you derisk those capacity plans?
And are you seeing an increased willingness to single source? My second question was how far are you actually booked out on capacity? And at which node is the biggest gap between demand and
Okay, Robert. We'll take your questions one at a time. So his first question is Looking at our CapEx for the next few years, with this level of spending, do we see customer commitments that are earlier than normal? Are we looking for or things like prepayments from customers to secure their commitments? This is the first question.
Robert, let me answer this first. The $100,000,000,000 CapEx is decided because we see the fundamental structure demand increase from the megatrend, multiyear megatrend and the acceleration of the digital transformations. Now we cannot disclose the detail of our commercial terms with our customers. However, for us to make the investment decision will definitely require proper returns and secure customer commitments.
Okay. And then Robert, second question is how far are we booked in events in terms of our demand? And which nodes do we see the biggest gap between what customers may want?
Well, I can comment on which node because almost all the nodes are in Today is a high demand. However, let me stress again that Our investment in the capacities for the future many years to come because we work with customer closely And to plan for the next few years as capacity support to them and customer talking to TSMC And they are out of their product plan for the next few years, added to 3 to 4 years, and we plan the capacity for that.
Okay. Thank you, C. C. Thank you, Robert. Operator, can we please move on to the next caller, please?
And now we have Brett Simpson from R and T Research.
Yes. Thanks very much. I had a question on the crypto activity at TSMC. I guess we've seen record Hashi expansion around Bitcoin ASICs and GPU Mining in the last couple of quarters. So can you maybe share with us what portion of sales HPC sales is crypto at the moment.
And then as we get into the second half of the year, should we expect this to decline? And I wanted to get your perspective. A couple of years ago, we had extreme volatility around crypto. Bitcoin is now a $1,000,000,000,000 market cap. Is this good business for TSMC?
Do you think this time will be different? I just wanted to get your perspective on this.
Okay. So let me repeat your first question, Brett. He's asking about within HPC looking at cryptocurrency And he's asking what is the contribution we're seeing from cryptocurrency or crypto mining I should say to our revenue And do we expect this how do we expect this to go in the second half of this year? And then a longer term question, which is how do we view this business?
Let me answer the question. TSMC is the technology. Is a leading technology and that's why even cryptocurrencies are mining using TSMC technology a lot. But I don't can and I cannot comment on what is the percentage or how much of this particular market sector to our revenue. However, I can say that cryptocurrency mining today is more mature than it was 2 or 3 years ago.
And it remains a volatile market. However, we will continue to work closely with our customers in this field.
Okay, Brett. And do you have a second question? I'm sorry. Yes, I
wanted to Talk about the inventory levels on TSMC at present. It grew quite significantly. And I think you mentioned that this N5 related. Now many of your smartphone customers are saying they have shortages at leading edge and You're building inventories at 5 nanometers. So how do we reconcile that?
And then just looking at Q2, Would you expect inventories to rise again in the June quarter?
Okay, Brett. So you're asking about TSMC's inventory days, Right. And so Brad is asking what is leading to the increase in the inventory days at the end of Q1? And then how do we
Okay, Brad. We preview for our customers during seasonal level as we did before. Now when we start to ramp in the higher season, the inventory usually come down naturally as before.
Okay. Does that answer your question? No, thank you. Yes. Great.
Perfect. Thanks, Brett.
That's great.
Operator, can we move on to the next person on the line?
Now please welcome Roland Hsieh from Citigroup. Please go ahead.
My first question is also for this JPY 100,000,000,000 CapEx. Can you clarify, is this year's CapEx of JPY 30,000,000,000 included in this JPY 100,000,000,000 or not? And also, I use your long term capital intensity target. Last time is a long term, it's 3 to 5 years. And then I use this about JPY 30,000,000,000 CapEx maybe in 2024, Then it implies that your revenue in 2024 will likely to exceed RMB 90,000,000,000 or even bigger, Which is more than double than 2020's level.
So my question is, are there any challenges to you to recruit And the change up enough amount of the talent to support such a fast growth for you going forward.
Okay. Let me summarize your questions, Roland. So first Roland is asking this $100,000,000,000 CapEx, Does this include 2021 of around $30,000,000,000 And then he's asking about if we look at the longer term capital intensity, What does this kind of imply for 2024 and 2025 CapEx and capital intensity? And then another part is that with this pace of growth, how do we recruit the talent to support Our operations.
Roland, yes, dollars 100,000,000,000 include this year's CapEx. And we've talked about the 3 year $100,000,000,000 2021, 2022 and 2023. The capital intensity, I think as I said earlier, you can probably do some calculation and have a feeling about the capital intensity in those 3 years. Longer term, we do see that the capital intensity will go back to about mid-30s level at this moment.
And his second question is then how do we recruit talent to support our growth. Roland?
This is a very good question. Very good question. The talent people recruiting is one of our top priorities in recent years. And Fortunately, we have communicated with the government and get Taiwan government's strong support. So they are now pushing for a new program and to hire not to hire, to actually to adure the student to be in the semiconductor area, major in this area.
And internally, TSMC also have a voice or RAS system Right now, we just established to train all the newcomer, all the new engineer to be more they can grow faster. So externally, we got the help from Government internally we do our own part also to enhance such training. And that's the way that we try to meet the requirement of enough talent people inside TSMC.
Okay? Thank you, Roland. I think that was Yes,
but I think this actually one question.
That's two questions, Roland, okay? Operator, can we move on? There's still quite a
few people. Roland, we're happy
to have you get back in the queue. But let's move on to the next caller please for now.
Next one for question is Andrew Lu from Centrelink Securities.
Thank you for taking my question. My first question is, can we know what kind of Percentage of capacity increased on 8 inches specialty foundry and 12 inches mature And 12 inches of the bin for the next 3 years. Maybe just the average will be fine.
Okay. So Andrew's first question is on the capacity increase. He wants to know in the next 3 years, how much capacity are we increasing on 8 inches And then how much capacity are we increasing on the 12 inches
Andrew, let me share with you. We don't disclose that kind of details. But basically 80% of the CapEx will be spent in advanced technology, about 10% in advanced packaging and mass making another 10% in specialty technologies in the next 3 years.
Okay. Andrew, do you have a second question?
Because I do have the first second question, but the first question doesn't really answer. Can I have 2 more?
No. We do not comment on the capacity by 8 inches or 12 inches I think Wendell has just said.
Okay. Okay. Then second question is not related to price. Assuming the next year, our rebate to the customer has being removed. What kind of percentage
additional force we should factor into our model? Thank you.
Okay. So Andrew's second question is assuming next year that the rebates have been removed, How much will this drive additional growth in next year? And how should he factor this into his model?
Well, this kind of pricing is strictly confidential between TSMC and TSMC's customer. So I don't think that we can comment on that one, whether it's a rebate, whether it's any other activities.
Okay. Thank you.
Thank you.
Thank you. Operator, can we please move on to the next caller, please?
Next one to ask question is Sunny Lin from UBS.
Hi, good afternoon. Thank you for taking my question. So my first question is also on CapEx. So when you plan for CapEx for the share in the next few years, Do you think the equipment supply could be a potential biometric in terms of the additional upside that you can spend? Well, I think several equipment makers have mentioned that based on this year's industry KPIs, they are already at extreme supply tightness, especially for EUV.
So any color will be appreciated.
Okay. So Sunny's first question is that with our CapEx plan, Do we see or face any equipment bottlenecks in terms of securing the tools and equipment? And I think part of your question is also particularly with regards to EUV.
Well, let me answer the question. In fact, When we plan a KRW 100 billion CapEx, we also work closely with our supplier and to prepare in advance. So we don't expect certainly, we don't expect any bottleneck whether it is EUV or not. And actually, we work closely with them.
Got it. Right. So we'd be fair to assume that when you announced the KRW 100,000,000,000 CapEx for Next few years, it's already you already have commitment from your suppliers? Got it. My second question is on 3 nanometer.
Now we are just about a year before the mass production in second half of twenty twenty two. So at this point, How should we think about the revenue contribution in its 1st year of commercial production? I think for 5 nanometer and 7 nanometer, they could get to high single digit of revenue or even close to 10% in 1st year. So just want to get your thought on that.
Okay. So Sunny's second question is looking at 3 nanometer and with the schedule for production, How should we think about the revenue contribution from 3 nanometer in its 1st year?
Sunny, that's too far to talk about that. We will update you later on. Now it's about 2 or 3 years away. But we do expect it's a big and long lasting note just like the formal M5.
Okay. Thank you, Sunny.
Sure. Thank you.
Operator, can we move on to the next caller, please?
My first question is still similar to previous question about inventory days and inventory level. I think Both Wendell and C. C. Mentioned already that high inventory probably will persist for a while. But in what level we may start to worry about that?
Or what would be the checking point? Because so far, we all know that the demand outlook in TSMC is in particular in the advancement are quite tight. But what would be the checking point that we are closely follow? That's my first question. Thanks.
Okay. So Laura's first question is with regards to inventory and inventory levels. She understands the demand is tight, but do we worry about inventory levels? What are the type of checking points that we will look at?
Well, let me answer that question. Yes. I did say that our customers want to secure The supply actually at this moment, that's due to some unbalancing the supply chain. And they are preparing for the future also. But how we are going to do to Tested is what is the checking point.
Actually, let me say that we are working with our customer closely. If not daily, it's at least we check very often. And we make sure that all the demand 2 TSMC has been secured and we prepare the capacity for that.
Okay. And my second question is also about the mature node. I think C. C. Mentioned about some specialty design, Special technology for mature node.
I recall you mentioned before about the CIS progress And also the NiGHRI progress, can you give me more update or some Special technology you are working now with the mature node which may be the expansion in the next few years?
Okay. So, Laura's second question is looking at the mature notes and that Yixin mentioned that our strategy is to work with customers to develop specialty technologies at those mature nodes. So she's wondering if we can give a little more examples of what types of specialty technologies. Is that correct, Laura?
Yes. Thank you. And also, FDA SOI as well, if it's possible.
And FD SOI and other areas?
Well, let me answer the last one first. We don't work on the FD SOI per se. Okay.
But we developed
the specialty technology for CMOS image sensors, as I mentioned previously. And the technology continue to improve because if you look at the application of the CMOS image sensor in the smartphone, in the automotive, Yes, a lot, okay. And we also in fact, the most important one also is ultra low power That will develop the technology to meet the requirement of the mobile world. I mean that everything is portable. So, ultra low power is very important.
Gallium Nitride, all those kind of specialty, we continue to work with our customer. And for the future high frequency application or the high voltage applications. We also work on the RF Technology, radio frequencies is important because of 5 gs era. The RF become fairly, fairly important in application in the WiFi communication area
So following that question, do we have space or any capacity to further expand those technology here in Taiwan?
So Laura is asking then will space be a constraint or limitation for
Good question. We are working with our customer to expand our capacity whenever necessary.
Okay. Thank you, Laura. Operator, can we move on to the next person on the line, please?
Next on the line is Rick Shi from Daiwa Securities.
You so much for taking my question. I just got one question here. I think your top regarding your second quarter guidance, Revenue is going to grow sequentially in U. S. Dollar terms.
And also if I don't remember wrong, the window This say that your inventory increase in Q1 was mainly because your customers prebuilt Inventory for 5 nanometer, so that assume that your 5 nanometer contribution will also increase in Q2. So and also the Why your gross margin guidance for the Q2 is below your Q1?
Okay. So Rick's question is looking at the 2nd quarter and looking at the gross margin guidance, why is it Basically, what is lower than the Q1 or a sequential decline if you use the midpoint?
Okay. Rick, let me explain to you. The sequential decline is mainly due to mix as the contribution from M5 will increase, but it still carries a dilutive effect. And Secondly, we see a slower rate of cost improvement as our fabs continue to run at a very high level of utilization, leaving less time to do cost improvement activities. And lastly, and more technical It's the absence of a positive inventory revaluation in the quarter.
I see. Thank you. Thanks very much.
Okay. Thank you, Rick. Let's move on to the next caller, please.
Next one to ask questions is Allen Jang from Nomura Securities.
This question was not asked Before I wish to ask before end of the call, you state customers engagement on N3 and the N5 are stronger than what you saw Which drives your RMB100 billion CapEx for next 3 years. Okay. So I'm not up in this way. Compared with 3 months ago, Are you now projecting a bigger market share gain potential over the next few years at pure foundry market
Okay, Aaron. So Aaron's question is looking at the fact that we said customer engagement at 5 nanometer and 3 nanometer are stronger than what we saw a few months ago. So does this mean that we're going expect to gain bigger or larger market share as a result. Is that correct, Aaron?
Yes. And a bigger market share than expected 3 months ago.
Versus 3 months ago. Okay.
Let me answer that question. Certainly, as compared with 3 months ago, We have some progress in engaging with the customer to get their commitment to work with TSMC on 5 nanometer and 3 nanometer. And whether this one is the indication of TSMC's technology leadership, I would happy to say yes. We are continuing but the most important thing actually is that we are continuing to work with customer to develop The technology they need for their product, each customer has a different kind of preference, And we always can meet their demand.
Okay. Operator, can we move to the next caller, please?
Next one to ask question, Mathieu Hosseini, SIG.
Yes. Thanks for taking question. My first question has to do with some of the comparisons that you provided During last earnings conference call, you were comparing the capital intensity and the growth prospect to the period of 2010 And 2015. In that context, my question has to do with depreciation. Back then during the period of 20 through 2015 depreciation increased at a growth rate of 20%.
How do you see that growth rate Changing in the period of 2020 2025? And I have a follow-up.
Okay. So, Mehdi's first question is looking at I think looking at depreciation and looking at as we enter a higher period of growth, what does our depreciation look like? And also he is asking about the depreciation growth or increase, given that we expect to grow between 10% to 15% in 2020 to 2025 CAGR period, what does the depreciation growth look like this year and then beyond?
Okay. I can share with you that the depreciation this year will be around 30% higher than last year. And we are not ready to share with you the rest of the 5 year period depreciation at this moment.
Okay. Do you have a second question maybe?
Yes, I have a second question. You raised your CapEx spending given the increased demand by your customer, but your Revenue growth target remains the same at 10% to 15%. Why aren't you raising the revenue target As you're raising the CapEx.
Okay. So I think Wendy is asking that we raised the CapEx spending. And so why what is our view of the growth target 10% to 15%? Why are we not raising that as well?
Mehdi, actually, if you think about this 10% to 15% 5 year CAGR, it's Pretty big range. From what we currently forecast, the revenue target is still within that range, Maybe higher to the closer to the higher end than last time.
Okay. Thank you, Min Jin. Thank you. Operator, can we move on to the next caller please?
Now we have Randy Abrams from Credit Suisse. Go ahead please.
Okay. Yes. Thank you for the follow ups. The first one on the back end, that's keeping pace. Could you give an update on The spending and momentum you're seeing for the new SOIC and then also how the core loss of info are progressing?
Okay. So Rene's first question is on our advanced packaging solutions. He wants to know an update on how SOIC is progressing as well as COOS and the other solutions. Is that right, Randy?
Yes, that's correct.
Okay. Let me comment on the SOIC first. This is the most advanced backend technology I think that we offer to our customer. And it will start to small volume production in 20 And it's also actually adopted by a very high performance HPC applications. As for InFO and Coors, we continue to expand our customer portfolio.
And I expect that the business from InFO and CoWoS will start to will continue to increase in the next several years.
Okay, great. And just one quick one on that. You mentioned very high performance applications. SOIC in a couple of years as it ramps, should that be a big like also do you expect a pretty big ramp like we saw in the past for Info where it should be a good volume runner for TSMC. And then I wanted to ask the second question, just a couple of clarification on gross margin in second half.
5 will be getting more mature. So I'm curious factoring your depreciation guidance, 5 getting more mature. If your view is 50% gross margin or if you're running very tight utilization, we may be Able to stay a bit above the long term range in second half.
Okay. So a quick one, he want Randy wants to know SOIC, will it be a large contributor? How large can it be in a few years' time? How large can it be in a few years' time? And then also on gross margin, the gross margin outlook for second half.
We hope that SOIC is going to be adopted by all those HPC applications customer. But I cannot nail down that what is the specific revenue number in the future. But We do expect our back end service will continue to grow And the rate the gross rate will be a little bit higher than the corporate average.
Okay. Randy, About second half gross margin, it's a bit too early to give details on that. However, you've already mentioned several things. M5 will become bigger in contribution to the revenue. It still has carries a negative or dilutive effect on the margins about 2 to 3 percentage points.
Utilization is pretty still pretty tight And we continue trying to improve our costs under this very high utilization environment. So That's all the things we can share with you at this moment.
Okay. Sorry, Randy, I'm sorry, that's Two questions because we're yes, thank you. Operator, in the interest of time, I think then we'll take the last two callers, please.
Okay. The next one will be Gokul Harihan from JPMorgan.
Thanks for taking my floor of questions. My first question is how should we think about HPC in terms of the Demand cadence for 2nd and third wave. I think when smartphone was our big growth driver in the last 10 years, We had leading edge growth from processors, etcetera, but we also had a lot of other ICs in smartphones as well as other applications, which drove the 2nd, 3rd, 4th wave demand for any process node. So now that HPC seems to be one of the key drivers for growth, How do we think about 2nd, 3rd wave demand? Would it keep up in the first and second wave for N5, N3, etcetera?
Or should we think about TSMC will be doing more capacity conversion compared to in the past? That's my first question.
Okay. So Gokul's first question is looking at HPC and looking at how HPC is also along with smartphone becoming the 1st wave adopters of our leading edge nodes. He's wondering then though for the second and additional ways of demand. Will HPC how do we see HPC driving additional waves of demand or will we convert capacity?
Let me make some comment. Actually, the HPC application includes many different sub segment such as CPUs, GPU, networking, FPGA, AI accelerated, video gaming, etcetera, etcetera. And each one will have their own migration paths and product life cycle also. So we expect to see HPC not only in the first wave, but in additional waves of demand to support our leading node in the future actually. Did that answer your questions?
Okay. That's clear.
Do you have a second question?
Just wanted to Yes. Just wanted to follow-up on any thoughts from TSMC on the Arizona fast capacity. I think You already announced 20 ks of PIFO per month of 5 nanometer coming up in 2024. What has In your discussion with customers regarding any potential upside to this capacity, our customers asking for more capacity there.
Do you
feel that we right now, this seems more like a n minus 1 cadence because financial started in Taiwan in 2020 already. Do we feel that we will move to a more shorter or a quicker cadence for leading edge In, let's say, Arizona or U. S. Capacity, I just wanted to understand how TSMC is thinking about this right now?
Okay. Gokul's second question is on our U. S. Manufacturing and our fab in Arizona. He wants to know that our customers asking for more capacity or more production.
And also we start with And 5, I guess your question is what about the future plans for bringing additional technologies there and the cadence?
Okay. We are executing our plan in Arizona according to the schedule. And construction was started this year. Phase 1 production, as you said, you are starting 2024 with 20,000 wafer permits is 5 nanometer technology. But in fact, we have acquired a large piece of land in Arizona to provide flexibility.
So the further expansion is possible, but we will ramp up to Phase 1 first. Then based on the operation efficiency and cost economics and also the customer's demand to decide what the next steps we are going to do. Our customer welcome us to build capacity in the U. S. And our fab in Arizona will be available to support all our customers from around the world.
And just like other all the TSMCs are fab, no matter where they are and no matter where they're located.
Okay. Thank you. Operator, in the interest of time then can we let the last caller ask their questions please?
Yes. Last one to ask question, Sebastian Ho, CLSA. Yes.
Thank you. I only have one question. So I just follow-up on C. C. Comments earlier.
C. C. Mentioned that TSMC has been working closely with customer to analyze the gap between capacity and demand on the trailing edge nodes. So I'm wondering if you could share some color with us if we exclude overbooking portion And based on your best analysis, does the demand still significantly exceed supply? And how big is the gap if you have any rough number that can be shared?
Furthermore, based on the CapEx you and your peers are investing and the capacity expansion lead time, When do you think the tightness can be eased and or the whole shortage situation can be removed? That's the only question I have. Thank you.
Okay. Let me try to summarize your question, Sebastian. You're asking on the mature notes, The fact that TSMC works with our customers very closely, but also in looking at the supply demand of those older nodes. So with the additional capacity added, will when and will we eventually see an easing of the supply tightness at the mature nodes. Is that correct, Sebastian?
Yes. And also if you can if we exclude the overbooking part as your best estimate, whether the demand still
All right. To be frank with you, as I said, we work with customer closely. And so the overbooking is not in our calculation, although We did not exclude out of this possibility. But we do the very detailed analysis internally and as I said work with customer closely and so we prepare the mature nodes capacity for JEM. However, building a fab for more green fab start And also to install the capacity, it won't be available until 2023.
And This year and next year, I still expect the capacity tightening to continue and probably also next year. 2023, I hope that we can offer more capacity to support to our customers. And at that time, we start to see the supply chains tightening, so release a little bit. Okay. Sebastian, does that answer your question?
Yes. So is it fair For us to conclude that in the next 18 months, it is very safe to assume that we will still be in the supply tighter situation. Is that right?
For our customers, we are working with them. Let me say that, but it's still very tight. Yes, you are right. Okay.
Thank you.
Thank you, Sebastian. This concludes our Q and A session. Before we conclude today's conference, Please be advised that the replay of the conference will be accessible within 4 hours from now and the transcript will become available 24 hours from now, both of which are going to be available through TSMC's website at www.tsmc.com. So thank you for joining us today. We hope everyone continues to stay healthy and safe and we hope you will join us again next quarter.
Goodbye and have a good day.