Good afternoon, everyone, and welcome to TSMC's 4th Quarter 2020 Earnings Conference Call. This is Jeff Su, 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 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 Q4 2020 followed by our guidance for the Q1 2020 Afterwards, Mr. Huang and TSMC's CEO, Doctor. C. C. Wei, will jointly provide the Company's key messages.
Then TSMC's Chairman, Doctor. Mark Liu, will host the Q and A session where all three executives will entertain your questions. As usual, I would like to remind everybody that today's discussions may contain forward looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward looking statements. Please refer to the Safe Harbor notice that in our press release. And now I would like to turn the call over to TSMC's CFO, Mr.
Wendell Huang, for the summary of
with the financial highlights for the Q4 and a recap of full year 2020. After that, I will provide the guidance for the Q1 of 2021. 4th quarter revenue increased 1.4% sequentially in NT terms or 4.4% in U. S. Dollar terms as we saw strong demand for our 5 technology driven by 5 gs smartphone launches and HPC related applications.
Gross margin increased 0.6 percentage points sequentially to 54%, mainly thanks to partially offset by the margin dilution from 5 nanometer ramp and an unfavorable exchange rate. Our utilization rate in the 4th quarter was at an extremely high level, partially due to more production output, of which some of the wafers will be shipped in the first quarter. Total sequentially to 43.5%. Overall, our 4th quarter EPS was 5.5 5 nanometer process technology contributed 20% of wafer revenue in the 4th quarter, while 7 nanometer and 16 nanometer contributed 29% 13%, respectively. Advanced technologies, which are defined as 16 and below accounted for 62% of wafer revenue.
On a full year basis, 5 nanometer revenue contribution came in at 8% of 2020 wafer revenue. 7 nanometer was 3% and 16 nanometer was 17%. Advanced Technologies accounted for 58% of total wafer revenue, up from 50% in 2019. Now moving on to the revenue contribution by platform. Smartphone increased 13% quarter over quarter to account for 51% of our 4th quarter revenue.
HPC decreased 14% to account for 31%. IoT decreased 13% to account for 7%. Automotive increased 27% to account for 3%. Digital consumer electronics increased 29 to account for 4%. On a full year basis, smartphone, HPC and IoT saw strong growth of 23%, 39% and 28%, respectively.
DCE also increased 2%, while auto decreased 7% in 2020. Overall, smartphone accounted for 48% of our 2020 revenue, HPC accounted for 33% and IoT accounted for 8%. Moving on to the balance sheet. We ended the 4th quarter with cash and marketable securities of NT 791,000,000,000. On the liability side, current liabilities increased by NT29 1,000,000,000 mainly due to the increase of $57,000,000,000 in accounts payable and the increase of $38,000,000,000 in accrual liabilities and others, offset by the decrease of DKK69 1,000,000,000 in short term loan.
Long term interest bearing debt increased by DKK28 NT1000000000, mainly as we raised DKK30,500,000,000 of corporate bonds during the quarter. On financial ratios, accounts receivable turnover days decreased one day to 39 days. Days of inventory increased 15 days to 73 days, primarily due to the ramp of leading notes. Now let me make a few comments on cash flow and CapEx. During the 4th quarter, we generated about TWD259 1,000,000,000 in cash from operations, spent TWD 89 1,000,000,000 in CapEx and distributed DKK 65,000,000,000 for Q1 2020 cash dividend.
Short term loans decreased by DKK 67,000,000,000 while bonds payable increased by CNY30.5 billion due to the bond issuances. Overall, our cash balance increased $56,000,000,000 to $660,000,000,000 at the end of the quarter. In U. S. Dollar terms, our 4th quarter capital advantages totaled $3,200,000,000 Now let's look at the recap of our performance in 2020.
We saw a strong growth in 2020 as our technology leadership position enabled us to capture the industry megatrends of 5 gs and HPC. Our revenue increased 31.4% in U. S. Dollar terms and 25 0.2% in NT dollar terms to reach TWD 1,340,000,000,000. Gross margin increased 7.1 percentage points to 53.1 percent primarily due to a higher level of capacity utilization and cost improvement.
Operating margin increased 7.5 percentage point to 42.3%. Overall, full year EPS increased 50 percent to TWD 19.97. On cash flow, We spent NT5 7,000,000,000 in CapEx while we generated NT823 1,000,000,000 in operating cash flow and DKK 315,000,000,000 in free cash flow. We also paid DKK259,000,000,000 in cash summary. Now let's turn to our Q1 guidance.
Based on the current business outlook, we expect our first quarter revenue to be between US12.7 billion dollars and US13 billion dollars which represents a 1.3% sequential increase at the midpoint. Based on the exchange rate assumption of USD 1 to USD 27.95, gross margin is expected to be between 50.5% 52.5 percent Operating margin between 39.5% 41.5%. The sequential decline in 1st quarter gross margin is mainly due to a slightly lower utilization rate in the 1st quarter, albeit it is still staying at the high level as well as an unfavorable foreign exchange rate. Now I would like to talk about the tax rate. We expect our 2020 tax rate to be in the range of 10% to 11%, and this will be equally applied to all 4 quarters of the year.
This concludes my financial presentation. Now I would like to I will start with the key messages for the quarter. I will start by making some comments on Our capital budget in 2020 2021. Every year, our CapEx is invested in anticipation of the growth that will follow in the next few years. Our capital investment decisions are based on 4 disciplines: technology leadership, flexible and responsive manufacturing, retaining customers' trust and earning the proper return.
In 2020, we spent USD 17,200,000,000 to capture the strong demand for our advanced technologies and support our customers' capacity needs. In order to meet the increasing demand for our advanced specialty technologies and further support our customers' capacity needs. Our 2021 capital budget is expected to be between USD 25,000,000,000 and USD 28,000,000,000. Out of the USD 25,000,000,000 to USD 28,000,000,000 CapEx for 2021, about 80% of the 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.
Next, let me talk about our capital intensity outlook. As we have said previously, Our long term capital intensity is in the mid-30s percentage range. However, when we enter a period of higher growth, Our CapEx needs to be spent ahead of the revenue growth that will follow, so our capital intensity will be higher. For example, during 2010 to 2014, our CapEx spending increased threefold as compared to the previous few years, and our capital intensity range between 38% to 50%. Because of the increased investment, we were able to capture the growth opportunities and deliver about 15% growth CAGR from 2010 2015.
Today, as we enter another period of higher growth, we believe a higher of capacity capital intensity is appropriate to capture the future growth opportunities. We now expect a higher growth CAGR in the next few years, driven by the industry megatrends of 5 gs and HPC investment to continue to drive our technology leadership, enable flexible and responsive manufacturing and earn customers' While our leading those capital costs continues to increase due to increasing process complexities, it is expected to be compensated by continuing to sell our value, which includes the value of our technology, service, quality and capacity support and diligently working on cost improvement. With this level of CapEx spending in 2021, We reiterate that TSMC remains committed to a sustainable cash dividends on both an annual and quarterly basis. Now let me turn the microphone over to C. C.
Thank you, Windho. Hi, everyone. This is CZ Wei. Good afternoon. We hope everybody is staying safe and healthy during this time.
Now let me start with our near term demand and inventory.
We concluded our 4th quarter with revenue of NT361.5 billion dollars or 12.7 driven by 5 gs smartphone launches and HPC related applications. Concluding 2020, The semiconductor industry excluding memory increased about 20% year over year. TSMC's revenue grew 31 point percent year over year in U. S. Dollar term.
Moving into Q4 2021, Our business continues to be strong supported by HPC related demand recovering in the automotive and a milder smartphone seasonality than in recent years. On the inventory front, our fiberglass customers' overall inventory was digested throughout the Q4, we now expect it to approach the historical season exceeding 2020 better than our forecast 3 months ago. We observed that the supply chain are changing their approach To inventory management, there are lingering macro uncertainties. Looking ahead, we the supply chain and our customer to prepare a higher level of inventory compared to the historical season level for a longer period of time given the industry's continued need to ensure supply security. Next, let me talk about the automotive supply tightness.
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 increased demand in the 3rd quarter. We only began to see sudden recovery in the 4th quarter. However, the automotive supply chain is long and complex. While many of our technology node has been tight throughout 2020 due to strong demand from our other customers.
Therefore, in the near term, as demand forms the automotive supply chain is rebounding, The shortage in automotive supply has become more obvious. In TSMC, this is our top priority and we are working closely with our automotive customer to resolve the capacity support issue. Now I will talk about our 2021 outlook. For the full year of 2021, We forecast the overall semiconductor market excluding memory to grow about 8%, while foundry industry growth is forecast to be about 10%. For TSMC, we are confident we can outperformed the foundry revenue growth and grow by mid teens percentage in 2021 in U.
S. Dollar term. Our 2021 business will be supported by strong demand for our industry leading advanced and specialty technologies where we see strong interest from all 4 growth platforms, which are smartphone, HPC, automotive Next, let me talk about TSMC's long term growth outlook. We are entering a period of higher growth as a multiyear megatrend of 5 gs and HPC related applications are expected to fuel strong demand for our advanced technologies in the next several years. We expect global smartphone units to grow 10% year over year in 2020 1, we forecast the penetration rate for 5 gs smartphone of the total smartphone market to rise from 18% in 2020 to more than 35% in 2021.
We expect the silicon content of a 5 gs smartphone to continue to increase as compared to a 4 gs smartphone. We continue to expect faster penetration of 5 gs smartphone as compared to 4 gs over the next several years As 5 gs smartphone benefit from the significant performance, bandwidth and latency improvement of 5 gs networks To drive more AI applications and more cloud services, we believe 5 gs is a multiyear megatrend That was a never award where digital computation is increasingly ubiquitous, which will fuel the growth of all 4 of our growth platform in the next several years. As we enter the power and greater need for energy efficient computing and therefore require leading edge technologies. Thus, HPC is an increasingly important driver of TSMC's long term growth and the largest contributor in terms of our incremental revenue growth. With our technology leadership, We are well positioned to capture the growth from the favorable industry megatrend.
We now expect our long term revenue growth to be 10% to 15% CAGR from 2020 to 2025 in U. S. Dollar terms. Now I will talk about the N3 status. N3 will be another 4 node strike form of N5 with up to 70% logic density gain, up to 15% performance gain and up to 30% power reduction as compared with 5 nanometer, our N3 technology will use FinFET transistor structure to deliver the best technology maturity, performance and cost for our customers.
Our N3 technology development both HPC and smartphone application at N3 as compared with N5 and N7 at the similar stage. Risk production is scheduled in 2021 and volume production is targeting second half of twenty twenty two. Our 3 nanometer technology will be the most advanced foundry technology in both PPA and transistor technology when it is introduced, thus we are confident our 3 nanometer will be another large and long lasting node for TSMC. Finally, I will talk about TSMC 3 d Fabric. TSMC has developed an industry leading and comprehensive wafer level 3 d IC technology roadmap to enhance system level performance.
Our differentiated chiplet and heterogeneous integration technology drive better power efficiency as smaller form factor benefit for our customer while shortening their time to market. These technology, including chip stacking solution such as SOIC as well as advanced packaging solutions such as info and cobalt. We observe chiplets are becoming an industry trend. We are working with several customer on 3 d fabric to enable chiplet architecture. SOIC's more volume production is targeted in 2022.
SoIC is expected to be first adopted by HPC applications where bandwidth performance, power efficiency and form factor are aggressively pursued. We expect revenue from our back end services, which including both advanced packaging and testing to grow at a rate higher than corporate average in the next few years. This concludes our key message. Thank you for your attention.
Thank you, C. C. This concludes our prepared statements. Before we start the Q and A session, I would like to remind everybody to please limit your questions to 2 at a time to allow all the participants an opportunity to ask their questions. Should you wish to raise your question in Chinese, will translate into English before our management answers your question.
Now let's begin the Q and A session. Operator, please proceed with the first caller on the line.
The first one to ask question Gokul Hariharan from JP Morgan.
Thank you for taking my question. Happy New Year and fantastic results and guidance. So let me I'll ask a question first on 3 nanometer. That's okay. How should we think about the size of 3 nanometer.
What we have seen is over the past 2 years, 20 nanometer was a very big node. 7 nanometer came out to be roughly 17% bigger if you think about peak revenue compared to 28 nanometer when you had new Jason is coming in. Given the big CapEx plan that you're also applying, should we think that 3 nanometer, 1 bit ramp up fully, would be substantially bigger than 7 nanometer In terms of fee revenues, just wondering how we should kind of think about the size of this purchase loan? And could you also talk a little bit about the opportunities within HPC? Right now, you are already engaged with multiple HPC customer.
Could you talk a little bit about CPU, integrated CPU, obviously, which is something on everybody's mind? Could you talk a little bit about how TSMC would be exposed to this market as well as we go into the 3 nanometer era?
Okay. Gokul, sorry, this is Jeff. Let me please summarize your questions, 2 questions. We'll take them in the 1 by 1. Gokul's first question is with regards to 3 nanometer and about the size of our 3 nanometer.
He notes that in the past, we have had very big nodes such as 28 nanometer and then 7 nanometer. So Gokul wants to know in terms of the peak revenue contribution, do we expect or should N3 substantially bigger than N7. That's his first question, correct? [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:]
Yes. He has to keep considering the setup and CapEx as well. Thank you.
Well, Gokul, let me answer your question by saying that we do expect the 3 nanometer will be widely used in HPC related applications in addition to the smartphones. So with this kind of engagement with our customer, we do expect our revenue will be Eager, certainly. There's no doubt about it. So what is the next And then Gokul, I
think the second part of your question is looking at what are our opportunities in high performance computing. Gokul notes that we have multiple customers engage, but in particular, he is asking about the progress or the status of CPU opportunity And
what do we see as the drivers of HPC? Gokul, we don't specifically one of our HPC's applications such as CPU to say that what is the gross rate. But let me tell you that CPU networking and AI accelerator will be the main course area into the HPC applications. Did that answer your question?
Could you be a little bit more specific on X86? I think you already had group success in 7 nanometers penetrating the market, should we think that the 3 to 6 market share continues to move up a lot as we get into 3 nanometer?
Okay. So Gokul, I guess your question is really on the X86 and looking at 7 nanometer has done well. As we get to 3 nanometer, will our exposure to X86 continue to increase? [SPEAKER UNIDENTIFIED COMPANY
REPRESENTATIVE:] Again, we don't specifically come in on very specific area. We work with our customer continuously and to supply the very good technology to support your business.
Okay.
Thank you. I'll go back in the queue.
Thank
you. All right. Thank you, Gokul. Operator, can we move on to the next person on the line, please?
Next one, last question, Randy Abrams, Credit Suisse. Okay. Yes. Thank you. I have 2 questions First on the you talked about the automotive and I assume also your mature nodes are very tight.
You traditionally haven't added that much capacity on mature nodes and 8 inches Could you discuss within that because you have some mix of that how you're seeing A strategy to add capacity for those notes? And could you also look at auto has been only about 3% of revenue. Should we expect a meaningful pickup in this vertical both the mature applications and also from New areas like EV and ADAS.
Okay. Randy, let me summarize your question. You're asking first On the automotive side, he notes our comments that automotive supply is tight. Do we expect a pickup in the automotive vertical? And then also in looking at the mature notes, will auto benefit on mature notes And then ADAS and other trends in automotive, how do we see?
Well, let me say that Now we see the automotive industry need a lot of semiconductor component and that including the leading edge technology for the ADAS system and also some of the mature technology for a lot of applications like a sensor, like a power management IC. We do see right now is a little bit shortage on the automotive, the mature technology supply, and we are working with customer to mitigate the shortage impact.
And then Randy is also asking second part on our mature notes. Given the tightness, will we consider to add capacity for the mature nodes?
We always work with our customer to technology's capacity, all those kind of thing. For mature node, we used to convert some of the large capacity into specialties. Right now, the trend stays the same.
Okay, great. And my second question is off, sorry, 2 parts. Just want to ask on gross margin and inventory. The gross margins you've improved 4 points year over year, part of that utilization, but depreciation Fossil was up 45%, NT dollar moved against you 6 points. So could you discuss if you've had a breakthrough on the cost reduction side?
And it's now I think last quarter you said about 50%. But given what you've seen on cost reduction and coming off 54%, if You could have better confidence on margin, could continue to do better. And then I just ask out quick on inventory. Was it up 15 days? Historically, you draw down WIP at the Q4, but maybe the trend like inventory was rising into early in the year?
Okay. Randy, let me summarize your questions. Two parts. First is on the gross margin. He notes that our gross margin improved throughout the year, and Randy wants to know if there is a breakthrough on the cost side.
And therefore, the long term outlook for our gross margin, is it still 50% or not?
Right. Randy, this is Wendell. You just mentioned that our depreciation increased 45% year over year. I think The number should be 15% year over year.
Okay. I was looking Q4 to Q4. I think Just the Q4 over Q4?
Right, right. Now in terms of gross margin in the long term, we believe 50% gross margin is reasonable and achievable. There are 6 factors affecting our profitability: the ramp of leading edge technology, price, cost, mix, utilization and foreign exchange rate. Take foreign exchange rate, for example. In 2020, the average dollar against NT rate was $29.43 It is now trading between 27.90 to 28.
That is already a 5% appreciation of NT. So every 1% of appreciation of NT will affect our gross margin by 40 basis points. The other thing is the in the Q4 of last year, as we mentioned, the utilization rate was very high, extremely and that's the abnormal level of high utilization rate cannot sustain. Therefore, in this quarter, We believe the utilization rate will come down a little bit, albeit it is still at a very high level. Now every point of utilization rate change will impact the gross margin by 40 basis points.
A third example will be the ramp in our leading edge technologies. We mentioned last time that we expect M5 ramp in 2021 to affect our margins by 2 to 3 percentage point and we still think that will be the case. So if you take all of those into considerations, We believe 50% gross margin is reasonable and achievable in the long term.
And then Randy had also asked about our days of inventory increasing in 4th quarter.
Right. And that's partially because As we have a very high utilization in the 4th quarter, but some of the wafers will be shipped in the Q1 as opposed to ship in the Q4.
Okay. Thank you. Thank you, Randy. Operator, can we move on to the next caller,
Next one, we have Sebastian Ho from CLSA.
Thanks, gentlemen, for taking my questions. Happy New Year. First question is, I want to follow-up on the gross margin side. So if I look back in the past two quarters, the your gross margin actually is all turned out to be Either at the high end or the surprise to the upside to your original guidance, while revenue is much on the high end of the guidance, While the Taiwan dollars continue to appreciate it, second half of last year's, so which means that the margin to be better than what you originally guided for 2 quarters consecutively. So my question is whether or not The 1Q outlook margin is too conservative again.
And second to that is whether our structural Affability will need to revise up just as our 5 year revenue growth target has just been revised up officially. Thank you.
All right. Sebastian, let me summarize your first question, your observation that in the past two quarters, our gross margin has come in at the high end or slightly above the high end of our guidance, revenue at the high end and the currency appreciation is there. So Sebastian's question is First, is the Q1 gross margin guidance too conservative and what about the outlook for our longer term structural profitability, does it need to be revised
Okay. Sebastian, if we compare 4th quarter to 1st quarter, 54% in 4th quarter and the midterm of our guidance for Q1 is 51.5%. The 2.5 percentage point difference actually mainly come from the utilization as well as the unfavorable foreign exchange So at this moment, we are still sticking to this guidance, although obviously, we will work hard to continue to improve The gross margins. As for the long term gross margin, as I just reported earlier that we are maintaining the 50% gross margin to be reasonable achievable Based on the elements, the 6 factors that I just talked about, Each of those factors will affect our growth profitability in long term.
Sebastian, do you have a second question?
Yes, I do. Thanks, Jeff, and thanks, Wendell. My Second question is on your CapEx outlook. Apparently, that at least that's a significant upside surprise to me and I think also to the consensus estimate. So the last time I think the incoming company raised the CapEx from RMB10 1,000,000,000 to RMB12 1,000,000,000 level to the RMB15 1,000,000,000 to RMB17 1,000,000,000 level, Then that resulted in the 30% revenue growth in 2020.
And then, so my question is that I think the CapEx we invest for the future growth, so whether or not this another step up the CapEx to like to 25,000,000,000 to 30,000,000,000 This year will represent an acceleration of the growth in 2022 or 'twenty three? Thank you.
Okay. So Sebastian's question is looking at our CapEx guidance for this year, dollars 25,000,000,000 to dollars 28 1,000,000,000, it is above his expectation. So he's looking at the last time we have an increase in acceleration to CapEx hedge from 10% to 12% to 15% to 17% resulted in us growing 30% this year, 31% this year. So what is the outlook for our growth in 2022 or the future years?
Okay, Sebastian, it's too early to talk about specifically about 2022. But as C. C. Mentioned, in the next 5 years, our target CAGR is between 10% to 15%. So that's already higher than the original target of 5% to 10% CAGR that we used to have before the last conference call and that's also because of the higher capital investment that we are ready to make to capture the higher growth opportunities underpinned by the multiyear megatrends in the industry.
Well, let me add something. This is CZ Wei. This is a 10 2 quick things CAGR is based on a very high number of 2020, so we still forecast 10 to 15 CAGR that will tell you that how much of capacity we need to invest.
Okay. Thank you. Thank you, Sebastian. Thank you. Operator, can we move on to the next caller, please?
Next one, we have Bruce Lu from Goldman Sachs.
Hi, thank you for taking my question. Great result and great guidance. I think the big difference is this time is that you raised the long term revenue CAGR from 5% to 10% to 10% to 15%. Can you tell us that what in terms of this kind of incremental changes, how much the growth is coming from HPC and what are the drivers for that? In terms of like smartphone Growth, I mean the 5 gs penetration is already like 30 something percent in 2021.
Moving forward, how much growth Xiaoyu, for you, is coming from the dollar content growth or the shipment growth? Or can you provide more colors on the growth?
Okay, Bruce. So your question is really about our long term growth outlook with our growth target CAGR of 10% to 15%. Your Your question basically is by the different platforms such as HPC, what is the growth contribution? And in looking at smartphone, how much is dollar content, how much is unit contribution? Well, let me answer the question by actually,
the growth rate From the HPC application, it's higher than the corporate average and smartphone is very close to the corporate and also automotive is higher than the corporate average. IoT close to that corporate average. Did that answer your question?
Yes. Thank you. Okay. My next question is I want to ask more about Structural profitability, I understand that all these six factors for the profitability, but that's Based on the assumption that structural profitability remain unchanged. So do we consider to move up the structural profitability because of the Current supply structural growth for the company or the structural patterns for
visibility given the higher growth outlook and also the tightness in supply at Legacy nodes or legacy technologies, will we consider to move up the structural profitability target?
Bruce, as I just mentioned, we are maintaining the financial objective, I. E, the factor profitability. For example, I just use an example in foreign exchange rate utilization and also the ramp of leading edge nodes. And for example, the leading edge technologies, the complexities increases, the CapEx per k is more expensive than before. So we are working very hard with the customer to sell our value, the service value, the technology value and also the capacity value and firm up the wafer pricing.
At the same time, we also work very closely with our suppliers to continue improve our cost so that altogether, we can maintain and earn a proper return in the leading nodes compared to those of the previous few notes. As a result, we are maintaining our structural profitability goal as 50% of gross margin. Okay.
So understand. Let me clarify that whatever you
Again, in
terms of your cost saving, you will still return it to your customer and maintain your 50% profitability target?
There are 6 factors. So all you add all of them together, it's
Understood. Thank you.
Okay. Thank you, Bruce. Operator, can we move on to the next caller on the line, please? Thank you.
Next one to ask question, Charlie Chan, Morgan Stanley.
So first question is also about the CapEx. So in the past, for you to spend huge CapEx on leading edge is usually for
the smartphone application given that the key user is Apple.
So this time, you almost doubled
your CapEx level. Does that means that there is a significant This is the first question. Thanks.
Okay, Charlie, so your question is on our CapEx. Charlie knows that in the past, our large CapEx on leading edge historically has been for smartphone platform. This year, of course, our CapEx number is much higher. So therefore, he is wondering whether it's intended for a particular customer on the CPU side.
Let me answer the question. In fact, we don't commence specific customer specific area, our CapEx guidance is based on the current long term demand profile Underpinned by the industry's megatrend.
Okay, Charlie. Do you have a second question?
[SPEAKER UNIDENTIFIED COMPANY
REPRESENTATIVE:] Yes, I do. So just some feedback to I think we all understand the megatrends 5 gs and HPC. So the last question was just to understand whether there is additional Kind of growth driver, for example, IDM outsourcing on top of the organic growth. But my next question, I think it should be More related to your strategy because I think your existing customer Intel, 2 days ago, they also commented about don't rule out the possibility of a license of foundry process. And actually, 20 years ago, back in 2000, I think you also licensed the largest semi process to national semi.
So I'm not sure if TSMC after 20 years, do you still kind of consider this kind of option, Meaning license your foundry process to your IDN customer or even Consider some option like a joint venture for the fab operation with your IDM customer.
Well, again, we don't comment on the specific topics or specific customer But let me tell you that we are working with our customer continuously and to expand TSMC's business to support our customers' demand. [SPEAKER
UNIDENTIFIED COMPANY REPRESENTATIVE:] Okay, okay. Got you. So I will be back to the queue. I have some follow-up. Thanks.
Thanks, Charlie. All right, operator, let's move on to the next person on the line, please.
Next to ask question, Brett Simpson from Arete Research.
Yes, thanks very much. Questions maybe first for Wendell. So on the revenue guide, I guess you're starting the year with a far better than seasonal Q1. But I just wondered, how do you see the year playing out? Should we expect in the second half Typical seasonality this year.
And then in terms of the CapEx guide for this year, obviously, there's a big step up. And spending is this year is normally a reflection of how you think about future capacity growth beyond 2021. So can we assume from the big increase in CapEx this year that your implied revenue growth in 2022 Would be higher than 2021. Thank you.
Okay. So Brett has two questions. 1 on the revenue guidance, We guided for mid teens for the full year growth for 2021. So he wants to know how does it play out throughout the year? Is there second half where we see the typical seasonality first half, second half split?
That's his first question.
Yes, from what we can see, second half is still higher than
the first half. And then the second part is also CapEx and growth, looking at the increase in our CapEx investment in 2021, noting that we typically spend CapEx In advance of the growth that will follow, Brett wants to know then should we expect a big year or a large growth year
Basisie just mentioned, over the next 5 years, we're looking at a higher range of CAGR. And also, the CapEx spend this year means future opportunity in growth not just for the next year but also the years after that. So we're looking at multiple years of growth opportunities.
Okay?
And maybe just one for C. C. Wei on N3. You mentioned N3 would have the best PPA. And we're seeing a lot of transistor innovation at Intel and Samsung in the next couple of years.
But you're planning to stick with FinFETs at 3 nanometer. And I'm just wondering how you see The transistor density at 3 nanometer, I think at N5, you've talked about 175,000,000 transistors per mill squared is the potential of N5, how should we think about N3 in that regard? And relative to some of the transistor innovation we're seeing At Intel and Samsung, are you happy with the FinFET roadmap? Thank you.
Okay, Brett. So your second question is regards to our N3 and our decision to continue to use FinFET transistor structure at 3 nanometer. You note that At 5 nanometer, we can deliver about 175,000,000 transistors per millimeter squared. So you want to know how this falls out at N3 or maybe in terms of our 3 nanometer in comparison to Samsung or others, how does it compare?
[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Well, as I said in my statement that Dazhao N3 still provide 70% of the logical density gain in addition to all the performance gain and the power reductions. Whether that's at 5 nanometer you got 175,000,000 transistor per millimeter square, That will depend on what the number in game 3. I think that will depend on customers' design. We continue to say that we offer the FinFET because of the technology maturity, The performance and the cost are the best combination for TSMC to serve our customer.
Okay. Thank you, Brett. Operator, can we move on to the next caller, please?
Next one, we have Roland Xie from Citigroup.
My first question is also for the CapEx spending and there are two parts of my question. So with this and your sharply increased CapEx spending, are you considering to sign long term contracts with customers, especially to those customers who are new to adopt your most leading edge technology to ensure a proper return of your investment? And second part of the question is, it seems like you have spent ahead In CapEx in EUV, because the lower productivity for EUV when you first rent EUV. So I would like to know how much CapEx on-site you expect after you have improved EUV productivity to the optimized level? Thank you.
Okay, Roland. We'll take your questions 1 by 1. Both of them relate to CapEx. First one is that with the higher level of CapEx that we have in 2021, Roland wants to know that would we consider signing long term contracts with customers, especially with customers that are new to To ensure that we are making a proper return. Roden, Sign a contract to guarantee the loading in the future is not
our common practice. We always work with our customer and continuous work with customer to serve their demand and we also put our CapEx or expanding our capacity according to our current long term demand forecast. All right. And did that answer your question? [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:]
Okay.
Yes, I take it.
Okay, Roland. And then your second question is also related to CapEx part Roland, let me summarize. I think you are saying that in our CapEx guidance, your assumption that the lower productivity of EUV is means leading to a higher CapEx level for TSMC. So your question is that if the productivity as the productivity of EUV improves, then how much reduction in CapEx could we see? Is that your question?
Am I summarizing that correctly?
Yes, exactly. Yes, exactly. Thank you. [SPEAKER UNIDENTIFIED
COMPANY REPRESENTATIVE:]
Well, let me answer that. We continue to improve the EU visa productivity We are working closely with suppliers and so far, we the improvement is obvious, Still not up to our expectation yet. As for the CapEx will be decreased because of improved productivity, this is in our CapEx plan already.
Okay. So going forward, I mean even you have higher EV productivity, the CapEx spending or CapEx Capital intensity probably will be still high next year or maybe in the near future.
Okay. So Roland, his question is that even with EUV productivity and factoring into our CapEx that our capital intensity could remain high even into next year.
Where the CapEx remained high or the CapEx intensity remained high is because of technology complexity. It's actually that N5 is much more complicated than N7, N3 much more complicated than N5. So most of the KPIK intensity coming from this technology advancement. Of course, EUV is a part of it, But it's not the only one reason.
Okay. Thanks. Okay. Then my
second question [SPEAKER UNIDENTIFIED
COMPANY REPRESENTATIVE:] Roland, I think that's Two questions already, sorry, because we still have several people in the queue. I would kindly ask you to get back into the queue, so Thank you. All right, operator, let's move on to the next caller on the line, please.
Yes. The next one we have Sunny Lin from UBS.
My first question is that I want to follow-up on 3 nanometer. I think just want to get a bit of color on your current visibility for the customer adoption into second half of Next year, how does it compare with the historical ramp of 5 nanometer and 7 nanometer and also the cost per transistor For 3 nanometer versus 5. Thank you.
Okay, Sunny, so your first question is on 3 nanometer. You want to know the visibility into customer adoption of 3 nanometer into second half twenty twenty two and how does it compare to 5 nanometer or prior nodes and also the cost per transistor at 3 nanometer, is it still declining?
Let me answer that. The cost per transistor actually start continue to decrease, but for your question about engagement with the customer, We see a lot of customers, especially from the HPC field, they are engaged with their activity with TSMC.
Okay. Sunny, do you have a second question?
Right. So just a very quick follow-up to my first question. Wonder if C. C. Will be able to provide any color regarding the ramp for 3 nanometer for second half of next year?
This early adoption from our customer is both in smartphone and HPC related applications. That's all I can say.
Got it. Thank you. And then my second question is for your 2021 gross margin. So with PPAC going up significantly, how should we think about your depreciation growth for this year and also the impact on gross margin? Thank you.
Okay. So Sunny's second question is on the 2021 overall gross margin with a higher level of CapEx spending, she wants to know what will be the year on year increase in depreciation and what's the impact to the overall 2021 gross margin?
Sunny, the depreciation in 2021 is expected to be between mid- to high 20s percent higher than 2020. And the impact of to gross margins, Well, it's too early to talk about the remaining quarters of the 2021. But as a general Feeling, if you look at the capacity utilization that I just mentioned, foreign exchange rate unfavorable and also the N5 ramp negative impact on our profitability, those are the factors that may affect our full year 2021 gross margins. But as I said, it's too early to talk about details on the remaining quarters,
Okay. [SPEAKER
UNIDENTIFIED COMPANY
REPRESENTATIVE:]
Got it. Thank you very much. Very helpful. [SPEAKER UNIDENTIFIED
COMPANY REPRESENTATIVE:] Sure.
Thank you, Sunny. All right, operator, let's move on to the next caller, please.
Congratulations for the good result and outlook. I also have the question about the CapEx and the gross margin trend. I think given your strong position in the most advanced technology and extremely high CapEx in recent years, I believe there must be some strong conviction on the outlook with your major clients. So can you Share with us your view that for the N3 1st year contribution will be similar to N5 that will have Probably more than 10% revenue for the 1st year mass reduction, can we expect that to happen? And also on the Gross margin side, given there might be some swing factor of your major IDM clients For outsourcing opportunity, how would you management the duration rate, which may impact your gross margin substantially?
That's my first question.
Okay, Laura, I think that's 2 questions, but your first question is On the N3, sort of noting our strong position in the advanced nodes and also the higher CapEx as an indication of the strong conviction on major clients, Laura wants to know what will the revenue contribution of 3 nanometer in its 1st year be similar to or how does it compare to 5 nanometer in the 1st year?
Laura, it's really too early to talk about that at this moment. But as C. C. Said, we believe N3, when it's out, is going to be another large and lasting note for TSMC.
Okay, got it. Yes. On the probably the swing factor of the utilization rate that may impact the gross margin potentially on the and particularly for Advanced Now, how should we look at the trend? How you management that?
[SPEAKER UNIDENTIFIED COMPANY
REPRESENTATIVE:] Okay. So Laura, second question is looking at our gross margin and then also looking at opportunities, for example, in a particular IDM, if there's swings in utilization, How would we manage that and how would that impact the gross margin? Is that correct, Laura?
Yes. Thank you.
We don't Laura, we don't comment on specific customers or business outlook. What we can say is we continue to work with our customers closely and to ensure that we provide this proper capacity to them and we also maintain a good utilization out of it.
Laura, let me add some colors. I think our business has been driven In the past few years by smartphones. Starting from this year on, HPC also jumped on the wagons. And therefore, we're looking forward looking, we see the traditional seasonality is can be moderated with multiple big customer in multiple market segments. So that's our confidence.
The other confidence is our CapEx includes 3 nanometer, also 5 nanometer. Our 5 nanometer is also very strong, stronger than we expected 3 months ago. So those 2 combined to give us the confidence to increase our CapEx.
Okay, Laura? [SPEAKER UNIDENTIFIED COMPANY
REPRESENTATIVE:] That's very helpful. Yes, thank you very much. That's very helpful.
Great. Thank you, Laura. Operator, can we move on to the next caller,
Next one, we have Robert Sanders from Deutsche Bank.
Yes. Hi. I've just got one question actually. Just could you please comment more on the wafer shortage situation And how severe it is at present? At which node do you see the shortage most acute?
Is it 65, 90 nanometer, 0.11, 0.13, whatever it is. And how far out are you essentially booked out at some of these nodes? And do you think there's upside to wafer pricing at
these nodes? Thank you. [SPEAKER UNIDENTIFIED
COMPANY REPRESENTATIVE:]
Okay. So Robert, your question is on the tightness or shortage in the wafer. He is asking, is it at particular nodes such as 65 nanometer, 90 nanometer, 0 point How short it is and how long it will last?
Robert, Most of the shortage actually is in the mature node. It's not in the 3 not in the 5 or in those area.
Okay? Can I just start with one follow-up, which is just You haven't traditionally built capacity there, but they could become path dependencies for the industry if they are continuing to be short? So would you actually consider building Greenfield to help the industry or you think that other foundries will handle that?
So Robert, your follow-up question is then given the short digital timeness on some of these mature nodes will be considered to expand, build new capacity at these mature nodes to alleviate any potential bottleneck risk?
Well, actually, we are working with customer closely and moving some of their mature node to more advanced node where we have better capacity to support them. In addition to that, we also try to manage this shortage condition, try to mitigate the impact from this shortage. Okay.
Operator, let's move on to the next caller, please.
Next one we have Rick Xie from Daiwa Securities.
Hi, happy New Year guys. This is Rick. My first question is, I guess you guys mentioned that now your customers are Happy living with a higher inventory than the historical pattern because of the macro uncertainty versus COVID-nineteen. So I wonder If your customer would still be happy living with a high inventory than the normal historical pattern if the virus If COVID-nineteen is contained, so this is my first question.
Okay. Thank you, Rick. So your question is, The higher level of inventory that we're seeing partly is attributable to COVID-nineteen. What if COVID-nineteen is no longer Everyone has vaccine and it's no longer an issue. Will this continue?
Well, yes, first, They say that we really hope that the vaccine will work and but even it is working, it takes time And then also our customers still today, they still have a different approach for the inventory management as we said Because of the secure of the supply is more important than anything else in today's situation. So we don't think this is really to revert back to the historical level of the inventory.
Okay. Thank you. That's helpful. My second question is also regarding your CapEx because ship number this year is really high. So about 80% of your high CapEx this year is going to be spent for leading edge.
So I wonder how much of that portion It's actually for preparation of the capacity build for 2022 and beyond, not for this year. So can you share your idea with us?
Okay. So Rick, your question is on our CapEx, 80% about 80% is for the advanced notes. He wants to know how much of this Spending for the advance notice in preparation for capacity for 2022.
Rick, we invest this year actually for future year primarily. So it's not only for 2022, it may also be for the years following that. So that's I think that's something that I'd like to share with you.
Okay. That's helpful. Thank you. Yes, thank you so much.
No problem. Thank you, Rick. Okay, operator, let's move on to the next caller.
Next one, we have Andrew Lu from Sandlinx Securities.
Good morning, Thank you for taking my question. Can you hear me?
Yes, we can hear you.
Okay. My first question is if your customer has its own design rule, notes with the different metal and poly pitch spec from TSMC Can this customer use the in house manufacturing and TSMC foundry based on the same design or it needs to redesign the chip based on TSMC 5 nanometer, 3 nanometer design rule?
[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Okay.
Andrew, let me try to summarize your question. Your question is about customers' design rules. If the customer has Their own design rules, but with different metal and different poly pitch from TSMCs, could this customer use TSMC Foundry or use their in house manufacturing or do they need to use TSMC's design rules basically?
Andrew, we all work closely with our customer to support their design into TSMC's process technologies so we can manufacturing inside TSMC.
So customer doesn't need to change
Okay. I cannot answer this question because of is 2 parties cooperation. And as I said, we work closely with them to
Understood. My second question is Since our 3 nanometer, 4 nanometer nodes will keep ramping up next year, what about second half this year? Well, we have something like 5 nanometer plus or revision, 5 nanometer process for second half this Thank you.
Okay. So Andrew, second question is looking at second half of this year, noting that next year we'll have for example, N3 and N4, then second half of this year, do we have any new node or continuous improvement enhancement.
Andrew, we always continue to improve the technologies. Last year, we introduced our 5 nanometer to the market. This year, we continue to improve it and next year, we will improve further. So we never stop.
So something like a 5 nanometer plus?
That's what you are naming.
Okay. Thank you.
Okay. Thank you, Andrew. Let's move on to the next caller, please.
Next one, we have Mathieu Husseini from SIG.
Yes. Thanks for taking my question. First question has to do with the revenue mix forecast for Q1 by technology and platform. It would be great if you could provide
Okay. So Mehdi wants to know for the Q1 revenue by technology and revenue by platform.
Okay. Eddie, in the first quarter, HPC Automotive and IoT will increase sequentially, while smartphone will experience a milder seasonal decline compared to its recent seasonality.
And we do not provide a breakdown guidance of revenue Technology, Medan. Okay. So do you have a second question?
Yes. Just a Quick follow-up on CapEx. Does your €25,000,000,000 to €28,000,000,000 CapEx guide include investment for infrastructure in U. S?
So Madi's question is does our CapEx guidance this year include any investment for the U. S. Fab infrastructure?
Yes, it does. The U. S. Fab starts construction this year.
Okay?
Can you elaborate how much of the CapEx For the U. S?
Not at this point, Brandon.
Okay. Thank you, Madhiv. Thank you. Thanks. Operator, let's move on to the next caller.
Next one, Chris Asankar from Cowen and Company.
Yes. Hi. Thanks for taking my question. I also had 2 on CapEx. Number 1, pretty nice step up in CapEx this year from last year.
Is it fair to assume your investment in EUV is also up this year relative to last year? And then I have a follow-up.
Okay. So Krish's first in the CapEx we spend on EUV?
No, we do not disclose that details.
Got it. And then as a follow-up, Cece, you mentioned that how capital intensity is going to be high all the way through 3 nanometer, But you also said long term cap mix density should be in the mid-30s. So I'm just trying to square that by what do you mean by long term? Because it looks like The 3 nanometer is still going to be high. So the next few years, capital intensity might be higher than mid-30s.
So at what point should we expect it to get to mid-30s?
Okay. So Krish's second question is in terms of capital intensity with the capital intensity or CapEx per k at 3 nanometer being higher and then we're having a long term capital intensity returning to mid-30s. He wants to know when will we return to mid-30s capital intensity level. Is that correct, Krish?
Yes. Thank you.
Yes. We mean long term, meaning 3 to 5 years. I think 2010 to 2014 can be an example. During that period of time, the capital intensity rose from 38% to 50%, maintained at high 40s for a couple of years and came down afterwards. Something like that should be a reference, Okay.
Thank you.
All
right. Thanks, Krish. Operator, let's move on to the next caller, please.
Next one, Sohu Hardi Hassan, JPMorgan.
Yes. Hi. Thanks for taking my follow-up questions. One question on CapEx and depreciation. Do we are we having to spend CapEx a little bit ahead Of what we used to spend in past in the EUV era, is that a function of having to spend maybe 6 to 9 months ahead compared to, let's say, in the Immersion era?
That's one. And how should we think about depreciation with this jump in CapEx? Wendell, could you give us a little bit of guidance in terms of how we should think about depreciation this year and going ahead as well given the higher level of CapEx.
Okay. Gokul, let me summarize. Your first question is in terms of the CapEx. He wants to know that are we with CapEx, are we having to spend CapEx earlier now? And is this because of EUV that we need to spend more CapEx earlier?
Well, let me answer the question. The answer is yes because of there is a long lead time for the EUV tours. The tour is very complicated and the supply chain for the EUV takes a long time to prepare for it and as a result, THMT also had to plan in advance that's longer than the normal tools that we used to
Okay. And then Gokul's second question is looking at with the higher CapEx depreciation
Right. For this year, Gokul, we expect the depreciation to increase by mid-twenty percent to high 20 percent for 2021 over 2020.
Okay.
And maybe just add yes, even with that, we are comfortable with 50% structural gross margin.
So even with the higher growth in depreciation, Gokul is asking, are we still comfortable with a 50% gross margin?
[SPEAKER UNIDENTIFIED COMPANY
REPRESENTATIVE:] Yes, 50% gross margin as a long term target, we think it's reasonable and achievable.
Thank you.
Okay. Operator, in the interest of time, I think we'll take the last two callers. So can we proceed with the next caller on the line?
Okay. The next caller is Randy Abrams, Credit Suisse.
Okay. Yes, thank you. My first follow-up on U. S. And China, your over These sites, for the U.
S. Site you bought 1100 acres. Do you have plans to build out a mega fab or potential to build out multi phase of 20 ks wafers. And then for the China business post Huawei, where it's down to single digits, How's your outlook for the China and also expansion of the China from 20 ks?
Okay. So Randy, your first question is regards to capacity and fab expansion overseas. So Randy is asking in the U. S, in Arizona, we target 20 ks, do we will we continue to build it out into a mega fab type of site and he also wants to know in China, and I guess you're referring to Nanjing, do we have plans to further expand the capacity in Nanjing? Is that your question correct,
Randy? Yes, that's the question. Just the outlook to rebound China just post high silk and where it's down to mid single digit contribution.
Yes, this is Mark. Let me take your question. Yes, we recently acquired a big piece of land in Phoenix, 1100 acres, definitely that was the long term plan to have a mega scale production sites. But Currently, our plan is only work on the Phase 1 production and tuck in 2024 with 20,000 wafer per month. And we'll going forward, we'll see according to the market condition and the cost economics and provided by the government support to amend the cost differences to decide the next steps.
On China, yes, we do have plan to continue expand in China. But of course, the business in China of the leading edge will does have a reset, but we do expect the Demand in China will continue, and we will gradually accordingly increase our capacity
Okay. Great. My second question, if you could give I think you gave Q1, but the full year growth for each of the platforms and also for the back end where you're doubling CapEx, what's leading that investment between the info, COAS, SOIC growth outlook for back end.
Okay. So Randy is asking about 2021 growth, first growth outlook by platform And then growth outlook by the back end and then between the back end info cohort by
Okay. Randy, for 2021 by platform, we think HPC PC and automotive growth will be higher than the corporate average growth. Smartphone and IoT will be similar to the corporate average growth in U. Dollars terms. In terms of our back end business, we expect it to grow slightly higher than the corporate in 20 21.
We do not disclose details within the back end business.
Okay. Okay. Thanks a lot.
All right. Thanks, Fred. Thank you. Okay. Operator, can we move on to in the interest of time the last
Okay. The next one we have Sebastian Ho from Chip Lezay.
Yes. Thank you. I'm pretty lucky to be the last Two follow ups. The first follow-up is to follow-up on Mark's comments that I think Mark previously said that The company has noted its 5 nanometer demand also stronger than you thought 3 months ago. So So it's curious about if you can give us more details about which applications are you seeing the stronger than expected demand?
High performance computing.
So for hybrid computing, Is the typical dose comes from electronics or is more typical HPC or production related?
Sorry, I didn't hear that we didn't hear the last part, Sebastien.
Yes, sorry. I'm saying that the for the HPC part, is it More related to your existing customers or more related to the blockchain related
Let me just add a little bit color on this. High performance computing, as Wendell just will be the major growth driver of our business and this field is currently under Exciting changes. The hypermobile computing's architectures, as you know, from different customers, Everybody is striving to get the best performance with different architectures. So many, many more players getting into this field. So we see a stronger innovation is coming our way on N3 as well as on N5.
Okay, that's good.
Thank you.
Cryptocurrency, it's not on cryptocurrency, Sebastian, we don't count on that, but we support that.
Okay. Yes, that's fair. The second follow-up is follow-up to Wendell's comments on that. I think this year's Based on the guidance that we will see the CapEx intensity to go up to 50%. So if we calculate based on the revenue guidance, if we do some calculations, which means the free cash flow But this year, it could be the growth will likely to be pretty small or even flat, depends on how things go, but Definitely not as strong as past few years.
So my question is, is the company still sticking to The dividend policy that is 70% of free cash flow.
Okay. So Sebastian, your question is then in looking at the CapEx, looking at our revenue guidance, capital intensity this year being about around 50%, then the free cash flow growth may slow this year. So what is the outlook for the dividend? Do we still use 70% of free cash flow as the cash dividend formula?
Right. Sebastian, our dividend policy has 2 parts: 70% of free cash flow but not to be lower than the previous periods. So we remain committed to a sustainable and steadily increasing cash dividend. During the periods of higher investments, The focus will be more on sustainable. And as we harvest the growth, the focus will be on steadily increasing.
Okay. So thanks, Wendell. So given that you're paying the investors getting the dividend in this quarter, I mean, which is The earnings you made like 3 quarters earlier. So if we do the calculation simulation, which means that in the next 24 months, The investment will probably still getting NT2.5 per quarter. Is that a fair calculation assumption?
At least,
Thank you, everyone. 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. The transcript will become available 24 hours from now, both of which will 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 join us again next quarter.