各位女士、先生，大家午安。我是台积电法人关系处的苏智凯。欢迎您参加台积公司2020年第二季的法人说明会。为防范新冠肺炎疫情扩散，本次法人说明会仍采电话会议进行。由于本法说会是向全球投资人同时连线转播，所以我们会全程使用英文，请您见谅。Ladies and gentlemen, welcome to TSMC's second 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-19, 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. First, TSMC's Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the second quarter 2020, followed by our guidance for the third quarter 2020. Afterwards, Mr. Huang and TSMC's CEO, Dr. C.C. Wei, will jointly provide the company's key messages. Then TSMC's Chairman, Dr. Mark Liu, will host a Q&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 appears in our press release. Now, I would like to turn the call over to TSMC CFO, Mr. Wendell Huang, for the summary of operations and current quarter guidance.
Thank you, Jeff. Good afternoon, everyone. Second quarter revenue was flat sequentially as the continued 5G infrastructure deployment and HPC related product launches offset weaknesses in other platforms. Gross margin increased 1.2 percentage points sequentially to 53%, mainly due to continuing high level of utilization and the absence of unfavorable inventory valuation adjustment, partially offset by TWD appreciation in the second quarter. Total operating expenses increased by TWD 1.19 billion, mainly as TSMC supported a range of COVID-19 relief efforts. Operating margin increased by 0.8 percentage points sequentially to 42.2%. Overall, our second quarter EPS was TWD 4.66 and ROE was 28.5%. Let's move on to the revenue by technology. 7nm process technology contributed 36% of wafer revenue in the second quarter, while 16nm contributed 18%. Advanced technologies, which are defined as 16nm and below, accounted for 54% of wafer revenue.
Moving on to revenue contribution by platform. Smartphones decreased 4% quarter-over-quarter to account for 47% of our second quarter revenue. HPC increased 12% to account for 33%. IoT decreased 5% to account for 8%. Automotive decreased 13% to account for 4%. Digital consumer electronics decreased 9% to account for 5%. Moving on to the balance sheet. We ended the second quarter with cash and marketable securities of TWD 605 billion. On the liability side, current liabilities increased by TWD 25 billion, mainly due to the increase of TWD 30 billion in short-term loans. On financial ratios, accounts receivables turnover days increased two days to 44 days. Days of inventory also increased two days to 55 days, mainly due to N5 ramp and stronger N7 demand. Now let me make a few comments on cash flow and CapEx.
During the second quarter, we generated about TWD 170 billion in cash from operations, spent TWD 127 billion in CapEx and distributed TWD 65 billion for third quarter cash dividend. We also increased TWD 30 billion in short-term loans and issued TWD 36 billion of corporate bonds. Overall, our cash balance increased TWD 37 billion to TWD 468 billion at the end of the quarter. In US dollar terms, our second quarter capital expenditures amounted to $4.2 billion. I have finished my financial summary. Now let's turn to our third quarter guidance. Based on the current business outlook, we expect our third quarter revenue to be between $11.2 billion and $11.5 billion, which represents a 9.3% sequential increase at the midpoint.
Based on the exchange rate assumption of one U.S. dollar to TWD 29.5, gross margin is expected to be between 50% and 52%, operating margin between 39% and 41%. Now I will hand over the call to C.C. for his key messages.
Thank you, Wendell. Good afternoon, ladies and gentlemen. Let me start with our near-term demand outlook. We concluded our second quarter with revenue of TWD 310.7 billion, or $10.4 billion, in line with our guidance given three months ago. Our second quarter business increased slightly in USD terms as a continual 5G infrastructure deployment and HPC-related product launches offset weakness in other platforms. Moving into third quarter 2020, we expect our business to be supported by strong demand for our industry-leading 5 nm and 7nm technologies, driven by 5G smartphone, HPC, and IoT-related applications. Looking at the second half of this year, COVID-19 continues to bring some level of disruption to the global economies, and uncertainty remain.
We have observed weak consumer demand in the first half of this year. Now expect global smartphone units to decline low teens% year-over-year in 2020. However, amid the COVID-19 pandemic, we also observed the supply chain making effort to ensure supply chain security and actively preparing for new 5G smartphone launches. We raised our forecast for 5G smartphone penetration rate to high teens% of the total smartphone market in 2020. For the full year of 2020, 5G and HPC-related applications will continue to drive semiconductor content enrichment. We now forecast the overall semiconductor market, excluding memory growth, to be flat to slightly increasing, while foundry industry growth is expected to increase to be mid to high teens%. For TSMC, although COVID-19-related uncertainties remain, our technology leadership position enable us to outperform the foundry revenue growth.
We believe we can grow above 20% in 2020 in USD terms, including the impact from the new U.S. regulations, which I will discuss in the next session. Our 2020 business will be supported by strong demand for our industry-leading 5 nm and 7nm technologies and our specialty technology solutions, driven by customers of 5G smartphone-related product launches and expanding HPC-related opportunities. Now, let me talk about the impact of new U.S. regulations. On May 15th, the United States Department of Commerce announced a set of new export control regulations. As a global and law-abiding company, TSMC will follow all the rules and regulations fully, no doubt about it. While there may be some impact from the new U.S. regulations, TSMC's purpose to unleash innovation remain unchanged. Our leading position in the semiconductor industry, build upon our technology leadership, manufacturing excellence, and customers' trust also remain unchanged.
We will continue to build upon our trinity of strengths and conduct our business with integrity to ensure our value and contribute to the semiconductor industry. In the near term, we will work dynamically with our customer to minimize the impact to our business from new U.S. regulations. In the mid to long term, we believe the underlying mega trend of 5G-related and HPC applications remain intact, and supply chain can adjust and rebalance themselves. With our technology leadership, we are well-positioned to capture the mid to long-term growth opportunities. We reaffirm our goal to grow at the high end of our long-term growth projection of 5%-10% CAGR in U.S. dollar terms. Let me talk about our N5 ramp-up and N4 introduction. N5 is the foundry industry's most advanced solution with the best PPA.
N5 is already in volume production with good yield, while we continue to improve the productivity and performance of the EUV tools. We are seeing robust demand for N5 and expect a strong ramp of N5 in the second half of this year, driven by both 5G smartphones and HPC applications. As we observed some delays earlier this year in N5 tool deliveries due to COVID-19, we now expect five nanometer to contribute about 8% of our wafer revenue in 2020. We also introduce N4 as an extension of our five nanometer family. N4 will have compatible design rules and a highly competitive performance to cost advantages as compared to N5, and will target next wave of N5 products. Volume production is targeted for 2022. Thus, we are confident that our five nanometer family will be another large and long-lasting node for TSMC. Now I will talk about our N3 status.
N3 will be another full node straight from our N5, with about 70% logic density gain, 10%-15% speed gain, and 25%-30% power improvement as compared with 5 nm. Our N3 technology will use FinFET transistor structure to deliver the best technology maturity, performance, and cost. Our N3 technology development is on track with good progress. N3 risk production is scheduled in 2021, and volume production is targeted in second half of 2022. We have already demonstrated 256 megabit SRAM functionality. N3 logic test chip is fully functional, with yield ahead of plan. The device performance is also on track. Our 3 nm technology will be the most advanced foundry technology in both PPA and transistor technology when it is introduced, which will further extend our leadership position way into the future. Let me talk about our U.S. fab plan.
On May 15th, we announced our intention to build an advanced semiconductor fab in the U.S. We have received a commitment to support this project from both the U.S. federal government and the state of Arizona. We are working closely with them, as well as our supply chain partners, to build an effective supply chain and make up the cost scale. This fab will start with 5 nm technology, with 20,000 wafer per month capacity. Production is targeted to begin in 2024. The U.S. fab will enable TSMC to expand our technology ecosystem and better service our customer and partners. At the same time, as TSMC global presence increases, it will allow us to better reach global talents to sustain our technology leadership. Now let me turn the microphone over to our CFO.
Thank you, CC. Let me start by making some comments on our second half profitability outlook. We have just guided third quarter 2020 gross margin to decline by two percentage points sequentially to 51% at the midpoint, primarily due to the margin dilution from the initial ramp-up of our 5 nm technology in the third quarter and a less favorable foreign exchange rate. As compared with our expectation three months ago, our third quarter gross margin midpoint is higher, mainly supported by the high level of overall capacity utilization, despite the uncertainty from COVID-19. Looking ahead to the fourth quarter, we expect a continuous steep ramp-up of our 5 nm to dilute our fourth quarter gross margin by about two to three percentage points. Now 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 the next few years. While the impact of COVID-19 virus brings uncertainties in 2020, we have seen our business holding up well so far, thanks to our technology leadership at 5 nm and 7nm nodes. Looking ahead, the multi-year megatrends of 5G related and HPC applications are expected to continue to drive strong demand for our advanced technologies in the next several years. In order to meet this demand and support our customers' capacity needs, we have decided to raise our full year 2020 CapEx to be between $16 billion-$17 billion. We also reiterate that TSMC is committed to sustainable cash dividends on both an annual and quarterly basis. That concludes my key messages.
Thank you, Wendell. This concludes our prepared statements. Before we begin the Q&A session, I would like to remind everybody to please limit your questions to two at a time to allow all participants an opportunity to ask questions. Should you wish to raise your question in Chinese, I will translate it to English before our management answers your question. For those of you on the call, if you would like to ask a question, please press the zero then one key on your telephone keypad now. Questions will be taken in the order in which they are received. If at any time you would like to remove yourself from the questioning queue, please press zero two. Now, let's begin the Q&A session. Operator, please proceed with the first caller on the line.
Yes, thank you. The first to ask question, Gokul Hariharan, JPMorgan. Go ahead, please.
Yeah. Hi, good afternoon, thanks for taking my question, great results in a tough time. Just a quick question on how we think about our N3 development. Do we feel that N3, since you talk about mass production in second half of 2022, usually the new node starts sometime in Q2? I just want to understand, are we thinking about a slightly slower ramp for N3 compared to what we have had in the first year for N5 as well as N7? That is my first question. My second question is, when we think about leading-edge, once the U.S. regulation starts to come in, how do we think about managing capacity? Do we feel that the capacity can get built up relatively quickly once one of our leading customers, you have to start shipment to them?
Do we feel that there could be some time where there could be a little bit of underutilization?
Okay. Thank you, Gokul. Allow me to summarize your question. Your first question is related to N3. How do we think about the N3 development? We have said the mass production timing is in second half 2022, versus typically the second quarter. Should we expect a slightly lower ramp of N3? This is your first question.
Okay. Let me answer that, Gokul. In fact, we develop our new leading-edge technology, we work closely with our customer. The schedule and also the ramp-up, also the progress, we all working with customer closely and determine when and to be the best timing. So far, our N3 development is very smooth and successful, and we still target the risk production in next year, and ramp-up in the second half. All the schedule is working with our customers.
Okay. Gokul, your second question is on the leading edge. In light of the recent U.S. regulations, how will we manage our capacity at the leading edge? Will we see a gap in the utilization, or will we be able to fill it up?
We should be no problem because as we just stated that the 5G is a mega trend and also HPC related application continue to be very strong. We observe that all our customer are very actively prepare for these two application, 5G and HPC. In addition to that, we also observe that our customers are trying to secure their supply chain security, which is very important with this COVID-19 uncertainty.
So, may I add-
Do we feel that even for N5 that is applicable or?
It's even with N5. Yes.
May I add to that? I think for the short term, some impact is inevitable. Currently, we work closely with our customer, very dynamically trying to fill up the capacity. For the long term, as C.C. mentioned, we're still optimistic.
Okay. Thank you, Gokul. Can we have the next caller here, please?
Next to ask questions, Sebastian Hou, CLSA. Go ahead, please.
Hi. Good afternoon, gentlemen. Thank you for taking my question. My first one is, wanted to get some, [dig your brain ] about how do you evaluate the feasibility and possibility of building up an advanced node fab without any American contents, be it technology, equivalent IP material, et cetera, in next five years or 10 years or even longer. Does it worth it or even if it take a long time and tremendous efforts, would TSMC ever consider that? Thank you.
Well, let me answer that question. We know that the U.S. fab as compared with the fab in Taiwan, the cost structure is actually a little bit higher. That's why we say that we are working with federal government and also the state of Arizona.
I'm sorry.
To close the gap.
Yeah. Sorry. Just to repeat the question. I think Sebastian, his question is asking about building up an advanced node fab or production line without using any so-called American contents, whether in terms of equipment, technology, or IP materials. He wants to know in the next five to 10 years, is it feasible? Is it worth it? Is this something that TSMC would consider?
Let me pick up this one here. The semiconductor technology is very unique in this industry. The technology continue to improve. Every two years, there will be a new generation of technology come out to serve the best performance product. Therefore, I think our main force is still pursuing the technology leadership, trying to overcome each generation's challenge. To do that, I think our current focus is still working with our equipment partners, dealing with utilize the best of the kind equipments that we can have to pursue our business growth. You're right.
If we do that otherwise, the technology advancement will be extremely challenging, will be extremely difficult, not to talk about 5-10 years alone. That is not our current effort at this point.
Okay, Sebastian, do you have a second question?
Yes. Thank you for that. Very clear. Second question, I would like to follow on the inventory situation. First, can you update us on how you see the fabless days of inventory at the end of Q2, and how you see that in the second half this year? On the inventory side, it looks like it's getting increasingly difficult to look at the inventory from a comprehensive perspective. Fabless DOI may not be enough because apparently there's a lot of the Chinese companies stockpile the inventory in fear of being sanctioned. Across the board globally, the whole supply chain has been raising the safe stock level inventory in the past few months in fear of supply disruption caused by COVID-19. Those are not reflected in fabless DOI. How do we see about this inventory and potentially hidden excessive inventory situation going forward?
Do you concerned about that to be a potential overhang, at some point a destocking could come? Thank you.
Okay, let me summarize your second question, Sebastian. Both of it relates to the inventory situation. The first part is, what is, in for TSMC tracking our fabless customers, what is the fabless DOI exiting 2Q and the outlook into second half? That's the first part of your question. Your second part of your question is, are we concerned that the inventory situation may see some hidden or discrepancies due to whether it's COVID-related supply chain disruption or the U.S. regulation and such? Will this lead to a hidden inventory risk? Is there a risk of inventory correction?
Okay. Let me answer that. The inventory level of our fabless customers that we track exited first quarter above the seasonal level. We expect a further increase in second quarter, and then stay at a high level in the second half as the supply chain is making efforts to ensure supply chain security, and our customers are in high anticipation and preparing for new 5G smartphone product launches in the second half of this year. We cannot rule out the possibility of an inventory correction sometime down the road. We observe the supply chain active, making efforts to ensure the security and active preparation for 5G smartphone launches. We will just have to wait and see how the sell-through goes.
Okay. Thank you, Sebastian. Can we move on to the next caller, please? Operator, please move on to the next caller.
Thank you. The next caller is Bill Lu from UBS. Go ahead, please.
Hi, thank you. Thanks for taking my question. I'm wondering if you can comment on the CapEx guidance for this year. It's now raised to $16 billion-$17 billion. I'm wondering what that increase is on, whether it's 5 nm or something different. Secondly, related to that, can you talk about your CapEx intensity structurally, whether this increase is temporary and whether this is pulled in from next year, therefore maintaining the lower trigger intensity, or how we should think about that CapEx?
Okay. Let me summarize your two questions, Bill. Your first question is in relation to our 2020 CapEx guidance and the range of TWD 16 billion-TWD 17 billion. Bill wants to know what is driving this increase. Secondly, in terms of the capital intensity outlook over the next few years.
Okay. The CapEx increase from three months ago for this year is basically comes from the advanced technologies. The capital intensity of this year will be slightly lower than 40%, and over the long term, it will gradually go down to about mid-30s.
Okay. Thank you, Bill. Let's move on to the next caller, please. Operator?
The next caller is Brett Simpson from Arete Research. Go ahead, please.
Yeah, thanks very much. I wanted to ask about your relationship with Huawei, and how you see the impact of the U.S. regulation on your business with Huawei in the second half of the year. My understanding is that you will still have a relationship, you will still be shipping wafers, probably at elevated levels in Q3. Can you confirm whether or not you'll have any sales with Huawei in Q4? If not, how do you manage your 5 nm utilization, given the importance of Huawei as a customer? Thank you.
Okay. Let me summarize your question, Brett. It's regard to the relationship with Huawei. Brett wants to know what is the impact on our business from Huawei in the second half of this year. Will we?
With other customers. Currently, we're working with them. As you heard, CC just laid up our 2020's guidance is above 20%. That tell you that we are relatively progressing well in filling up the capacity left open. Yeah.
Okay. Brett, thank you. Do you have a second question?
Yeah, thanks. Just a follow-up. I wanted to ask about depreciation for this year. I think previously you talked about mid to high teen growth of this depreciation in 2020. Can you confirm whether that's still the case? I looked at the first half depreciation, and it looks like depreciation costs are down year-on-year. In order to get to mid to high teens growth, that would imply a large increase in depreciation sort of in the third and fourth quarter. If you can just clarify exactly how we should think about depreciation for the next couple of quarters, that would be great. Thank you.
Okay. Brett is asking his second question is our depreciation outlook for 2020. Do we still maintain, what is our depreciation for 2020 year-on-year? Does this imply a pickup in depreciation in the second half on a quarterly basis?
Okay. Brett, our current estimate on 2020 depreciation year-over-year growth is still high teens growth. That gives you an idea of what the second half depreciation will be. It will be higher than the first half.
Okay. Thank you, Brett. Can we have the next question on the line, please?
The next one on the line is Mehdi Hosseini from SIG. Please ask your question.
Yes. Thanks for taking my question. Wanted to go back to your N4 and N3. How should we think about the migration and, specifically, to what extent this is driven by converting rather than installing new equipment? I have a follow-up.
Okay. Sorry, Mehdi, let me make sure we understood your first question. You're asking about N4 and N3, how to think about the migration, and is there a conversion, tool conversion involved between N4 and N3. Is that your question?
Correct.
Okay.
All right. Actually, the N4 is a kind of continuous improvement from N5. It has improved the speed, improved the geometry just a little bit. N3 is totally a new node. All right? That's N4 using the same equipment as a N5. N3, we expect it to have a high percentage of the tool continue to be used from the N5, but N3 is a totally new node.
Okay. Thank you. Do you have a second question, Mehdi?
Yes. My second question has to do with your HPC revenue growth in Q2. It was significantly higher compared to Q1. Can you please elaborate which specific sub-segment within HPC is doing better? Is it driven by communication or computer? How do you see those trends trending into Q3?
Mehdi, your second question is looking at our HPC sequential growth in the second quarter. Mehdi wants to know what specific sub-segments are driving that increase, and what is the outlook.
Well, Mehdi, I don't think we want to break down the details on the different platforms. Sorry about that.
Okay, Mehdi?
Sure. The concern is that maybe, perhaps, Huawei may have pulled in before you start taking orders, and trying to better understand how that particular customer has consumed wafer in the first half versus second.
Sorry, Mehdi. No, we don't comment on specific customer.
Okay. Thank you, Mehdi.
Thank you.
Thank you. Can we have the next caller on the line, please, operator?
Yes. Next one we're having.
Okay.
Thank you. My first question, I wanted to ask a bit more on the CapEx raise as that's more a function of what you mentioned, the forward demand outlook. If you could give a view on 2021, I know it's in early stage, but just factoring a full year. You mentioned Huawei and also mentioned potential, like you don't rule out an inventory correction. It does seem like Samsung at least is discussing a bit about some GAA business. I'm curious if it's the CapEx raise, what's driving it, if there's certain drivers that maybe existed on the 2021, how you're seeing that. It follows up on Bill Lu's question, but implication for 2021, if it seems like it might be a bit lower CapEx, if you're spending a bit ahead of that now.
Okay. Randy, let me summarize your first question. Your first question is really, what is driving our raise for the 2020 CapEx? What is the drivers for that? What is the outlook for 2021 CapEx?
CapEx and sales.
Yeah.
The sales, just factoring in your comments about inventory, if your competitor is taking a bit of business and also your view that we could have a, or don't rule out an inventory adjustment.
Let me discuss. We do the CapEx based on long-term perspective. If you talk about this year's CapEx, meaning, of course, this shows our demand of N5 is very strong. If you talk about the next year's CapEx, it is really talk about 2022's demand, which we see the continued increase of N5 demand, and also we see the starting the launch of N3 technology. We'll see by then how much the CapEx will increase, and we will report to you in due time.
Okay. Do you have a second question, Randy?
Yeah. If I could follow up because you mentioned, the higher CapEx this year is a function that you expect next year to be even stronger. Could you talk a bit about what I know you talked about the mega trends, but I'm curious if you're thinking about just what you had mentioned also, could next year have impact from the high base this year on the inventory build-up? Also that you have a full year, like in the first quarter, Huawei's out, there's probably pent-up demand being tight, but how do you view a full year if you're not shipping to Huawei? Unless you're counting on, by that point, some partial license to Or if in your base case, you're assuming not shipping to Huawei next year.
Okay. Randy's second question. He is thinking that with potential possibility of inventory correction with the U.S. regulations, what is the impact to 2021 growth outlook and CapEx?
Randy, it's just too early for us to discuss anything about 2021. We'll just wait until when the time approaches.
Okay. Thank you, Randy.
Thank you.
Let's move on to the next caller, please.
The next one is Roland Shu from Citig roup. Please ask your question.
Hi, thanks. Good afternoon. First question is, can you remind me again how does the inventory valuation adjustment work every quarter? How about the 3Q? Is this an inventory valuation adjustment favorable or unfavorable to the gross margin? This is my first question. Second question, actually, you talked about that you are working with customer to minimize the impact of U.S. new regulation. How are you going to do working on that, again?
Okay. Roland, your two questions. Your first question is, what is the impact of inventory revaluation? In the third quarter, will it be a favorable or unfavorable impact? Your second question is, you want to know how we are dynamically working with customers to mitigate the impact of the new U.S. regulation.
Okay. Go ahead. Thanks.
All right. Roland, let me make some comments on the inventory valuation adjustment first. The impact on margins from inventory valuation adjustment is inversely correlated to that from changes in utilization. We normally report the net impact on margins from these two factors together. We will compare margins quarter-over-quarter. We will report the Q-on-Q change in impact from inventory valuation adjustments when it is more significant. In the second quarter, the quarter-over-quarter change in impact from inventory valuation adjustments was more significant. If you ask about third quarter, at this moment, we believe the impact is less significant.
Okay.
He's asking about how we work with customer dynamically to mitigate the impact of Huawei ban. I cannot tell you that how we are going to do it because this is our company's strategy and our strengths. One thing I can tell you, we are based on the technology leadership and the excellent manufacturing. That's all we did.
Okay. Thank you. Operator, can we move on to the next caller, please?
Yes. The next person, Charlie Chan, Morgan Stanley. Go ahead, please.
Hi. Good afternoon, management team. My first question is really about your upward revision of the compared to last time, it was a mid to high teen%, and now it's at both 20%. I think that is at least a five percentage point of revenue growth in 2020. Last time, your assumption is that the pandemic can get controlled by June, and now currently there's a second wave, third wave pandemic in many countries. How are we going to reconcile this kind of weak economy or healthcare crisis issue versus your very strong revenue patterns? Should I just attribute that to the higher 5G smartphone penetration, or there's other factors that we should pay attention to?
Okay. Let me summarize your question, Charlie. You're asking, basically, we have increased the full year outlook, but the risk of COVID-19 continues to remain. How to reconcile a weak global economy with TSMC's full year outlook, and what will be driving this besides 5G smartphone preparation?
Well, Charlie-
Yeah.
We do observe the 5G smartphone, the momentum is getting stronger. We understand the situation. However, we also observe that our customer are making effort to ensure supply chain security. They might expect that there is a second wave, third wave of COVID-19, but since that end demand looks very promising, so they are not afraid to make sure that their supply chain will not be disrupted. Because of 5G, as you just mentioned, 5G smartphones demand is continue to increase.
Okay. Do you have a second question, Charlie?
Yes, I do. Thanks. I think a lot of things happened over the past month, right? Another thing, I would take it as a U-turn, is your decision for the U.S. fab intention. Half year ago, I remember the comment was like the cost is pretty high, logistic doesn't make sense. What exactly is the trigger for you change this U.S. operation decision? It'll be very kind of you if I can add a very small question, because the management may care as well. Your first quarter seasonality. Based on your new full year guidance, if we take it as a 20% or 21% lower bar, the fourth quarter revenue may decline sequentially.
Okay.
Is that a kind of fair comment? Thank you.
Okay. Well, Charlie, your second question relates to our U.S. fab plan, and you want to know why six months ago, we were talking about the cost gap being the major challenge, and now we have decided to go ahead. What has changed?
Okay.
Yes. On the trigger. Yes.
Well, as you know, with expanding our technology ecosystem and reach to global talent, closer to our customer to get a better service, all benefits of a fab in U.S. In the past, indeed, the cost, the gap prohibited us to make those decisions. More recently, I think since last December, and I think the things is getting a turn, and we did get the positive encouragement from the U.S. administration about the cost gap. Actually, the U.S. administration and the state of Arizona combined, they seems to be able to close the cost gap we used to hold up against this decision. With their commitment, and we are preparing for that. How do they close the cost gap? As you have reading, the U.S. Congress, both in Senate and the House, are all driving for the incentive packages aimed at revive U.S. semiconductor manufacturing.
With that, I think they do have a way to fulfill that commitment to make up the cost gap. That was the major decision turning point.
Then, Charlie, he snuck in a third question, which he wants to know our outlook for fourth quarter, given the full year guidance.
Okay. Well, Charlie, it's also too early to talk about fourth quarter. I think you can do the math, and come up with certain estimation. What we can say is our second half will be higher than the first half.
Yeah.
Okay. Thank you. Let's move on to the next caller on the line, please.
The next one to ask questions, Bruce Lu, Goldman Sachs. Go ahead, please.
Hi. Thank you for taking the question. I think given your positive progress in 3 nm and 5 nm, especially regional capacity, can we assume that similar to previous node, like 7nm or 12 nm, that the first year of 3 nm can achieve 10% of the wafer revenue, and the second year of the 5 nm can achieve 30% of the wafer revenue?
Okay. Bruce, your first question is regards to N5 and N3. Bruce wants to know, with the progress in N3, can it contribute 10% of the wafer revenue in the first year? He also wants to know, can N5 contribute 30% of the wafer revenue in its second year?
Okay. Bruce, both of them are really too early to talk about it. We certainly hope that they will be pretty big nodes. We will definitely let you know when time is closer.
Do you have a second question, Bruce?
Yes. I think just double check that we raised our 5G penetration shipment forecast, but we lowered the overall smartphone shipment forecast for 2020. How about the actual number for the 5G smartphone shipment? Is that the penetrations are up because of the lower total smartphone shipment, or the 5G smartphone shipment itself is going up as well?
Okay. Your second question, Bruce, is that the global smartphone shipment, we now lowered to low teens decline, but we raised the 5G penetration to high teens. Is this simply because of a smaller global base, or what is the 5G penetration number?
The 5G penetration, as I said, the momentum continued to increase. Even with the total smartphone number being decreased at the low teens, but the 5G's percentage continued to increase. That's what we observe. Also, the 5G's semiconductors content is higher than the 4G, and especially high-end, is much higher. That's what we base on.
Okay. Thank you, Bruce. Operator, can we move on to the next question on the line, please?
The next on the line is Aaron Jeng from Nomura Securities. Go ahead, please.
Hey, thank you for taking my question. Can I have a follow-up to Bruce's question just right now? He was asking by lowering the total smartphone demand to low teens, down 16%-15% now, from the earlier version of down 5%-10%, raising the 5G penetration rate to 15%-20% from earlier, only mid-teens at 16%. In terms of absolute 5G phone demand or selling number, is the number being raised or pretty much the same as the prior version? That's a follow-up. Actually, this is a part of my first question, but it just happens to be a follow-up to Bruce's question.
Okay. Aaron, let me summarize your first question. Basically, Aaron wants to know, is our forecast for 5G smartphone, in terms of units, increased?
The answer is yes.
Okay?
Okay. Thank you. Okay.
What is your second question?
This question that I was trying to compare the outlook offered by TSMC for the industry and the outlook given in the year beginning six months ago. In the year beginning, TSMC was saying that the semi ex- memory was going to grow by 8%. Now it's going to be flattish to slightly grow. Which means, I think overall demand, including everything, is lower than it was six months ago. The foundry growth in the year beginning was 17%, now it's pretty much unchanged and mid to high teens growth. TSMC's growth in the year beginning was above the industry growth. Now it's above 20% growth. My question is, over the last six months, TSMC, along with actually everyone in the world, especially in tech, have experienced two difficult challenges, including one, COVID-19, and two, Huawei issue.
It turns out that TSMC is doing even better than there was no these issues. I wonder, perhaps, I think the CEO already answered that, the 5G absolute unit demand is going to be higher than you saw six months ago, which is one, I think, a key reason. Looks to me that those factors, two negative factors are still huge. Actually, either one of them is big. TSMC turned out to be better than if there's no these two negative impact. How should we think about this? Earlier also, Chairman said that-
Aaron, okay. Let me summarize your question because it is quite long.
Sorry.
In essence, what you're asking is. When you look at the industry framework that TSMC provided in the beginning of the year, and you look at the framework now, you point out that the semi ex-memory growth in January, we said plus eight, now we said flat to slightly up. Foundry growth in January, we said 17% increase year-over-year, now we say mid to high teens. For TSMC growth, we're now saying greater than 20%. Given the challenges in this year from COVID-19 and such, what is driving TSMC's stronger growth?
Well, I can answer that question by simply one word, technology leadership. Actually, we see a very strong demand from our seven nanometer and five nanometers technology. 5G, again, I would like to say that 5G, its momentum is getting strong.
Okay.
Including also HPC. I'm sorry.
Sorry. All right. Thank you. Operator, can we move on to the next question, please, from the line?
Next, we're having Gokul Hariharan, JPMorgan. Go ahead, please.
Thanks for taking my follow-up question. First of all, I just wanted to understand, we are running at 20+% growth this year. I think we expect some of these mega trends to last. Any thoughts on why we aren't changing our long-term 5%-10% target, especially given you're also spending more CapEx? If our ROC is similar, then probably we need to be at a slightly higher growth rate. That's my first question. Second, just wanted to understand what is management's view on how much of this year's outgrowth compared to the semiconductor industry has been some of this inventory build that your customers have undertaken over the last several years? It's very few years that TSMC outgrows the semiconductor industry or the foundry industry by a significant margin.
This seems to be one of those years where even smartphone is not really growing, it's actually declining, while TSMC is growing more than 20%. Just wanted to understand, there is quite a bit of that which is real demand and market share gain in leading edge. Any thought on how much of that do you feel is some of this inventory and supply chain security inventory that your customers are building?
Okay. Goku, let me summarize your two questions. Maybe I'll start with the second question first. You just want to know management's view, the fact that TSMC's growth in 2020 is outpacing the foundry industry, can we break down what is driving this? How much of it is from supply chain efforts to ensure supply chain security? How much of it is market share gains? How much of it is due to leading edge?
At this time, I don't think we can separate them so clearly on each one that is because of technology, because of share gain, because of HPC or something like that. Again, I would like to emphasize the need on the leading edge technology node on seven and five, and that's where we gain our advantage. Okay.
Okay. Your second question, Goku, to repeat again, is that with the strong growth we see this year and the mega trends that we identified for the next several years, will there be a change in our long-term growth target?
Well, we continue to emphasize that we will be at the high end of a 5%-10% CAGR. Remember, this kind of forecast is a rolling forecast. We continue to have confidence on our technology and also our market share, and so our growth.
Okay. Thank you, Gokul. Operator, can we move on to the next caller from the line?
Next one, we're having Sebastian Hou from CLSA. Go ahead, please.
Sebastian, are you on the line?
Sorry. I forgot to unmute. Can you hear me now?
Yes, we can hear you. Please go ahead.
Okay. Thank you. I have two follow-up. First one is that the 5 nm revenue contribution is lower from 10% to 8%, but total revenue outlook is 8%. If we do the math, 5 nm revenue, probably lower about 15% compared to April. If we compare to January guidance, that's actually 20% lower. How do we attribute this? Is it to the customers that got sanctioned in May or any other reasons? Furthermore, it also means that the other technology nodes are actually growing stronger. I wonder, what's driving the other applications nodes? Also, can you give us an update on your expectation of growth for the four major platforms with the new revised up guidance? Thank you.
Okay. Let me summarize Sebastian's question. He wants to know what is driving the difference in terms of N5 today versus six months ago, and what other nodes then are stronger. He also wants to know the 2020 growth outlook by platform. Okay, Sebastian. Actually, compared to six months ago, our N5 revenue actually increases, and so do the other nodes. Maybe you can double-check the math. Yeah.
The 2020 growth outlook by the four platforms.
Oh, okay. All the platform will grow except the automotive. Okay?
Okay. My second question is also follow on the 5G smartphone, and also the total smartphone guidance you just gave, and the other analysis you asked about. It looks like the total 5G smartphone absolute number is right. I wonder, are you based on the forecast on the final sellout numbers or based on the forecast that you're seeing from your smartphone SoC fabless? Thank you.
Well, we based on the one involved with our customer. That's a number that our customer demand to TSMC. Of course, they are also doing their forecast as we did.
Okay. Thank you, Sebastian.
all of that supports.
Yeah, Sebastian. Sorry. Okay, let's move on to the next caller.
Next one, we're having Mehdi Hosseini in SIG. Go ahead, please.
Yes, thank you so much for taking my follow-up. I'm a little bit confused, and I was wondering if you could help me. All the 5G smartphone data points suggest that the smartphones that are selling through are priced well less than $300. Also, your commentary suggests that despite the fact that COVID has had a second wave, your outlook is actually stronger. How can I reconcile a 5G smartphone, which is mostly driven by low-end, and the second wave of COVID with your outlook?
Okay. Mehdi, your question is, your observation is that 5G smartphone sell-through is mainly coming through at the low-end 5G smartphones, priced at $300 or less. With a potential second wave of COVID, how can you reconcile this low-end demand with what TSMC is seeing? Is that correct?
Also your outlook for the year, because earlier in last earnings conference call, you said your outlook is based on COVID-19 normalizing by June, but it seems like there's a second wave.
Mehdi is also asking because in April we said our outlook was premised on stabilization of COVID-19 by June, but now it looks like COVID-19 continues.
Actually, we don't confirm there's a second wave of COVID-19 per se. We leave that one alone. We do observe that our customers have demand to TSMC. You mentioned that 5G is only in the low end. We do expect there's a lot of new 5G phones, pretty high end, in the second half of 2020. That's what we based on our assumption.
Okay. Thank you.
May I ask one follow on CapEx?
Okay.
Just the $1 billion of increase to 2020 CapEx, is that equally distributed between front-end equipment and back end? Is it more in one particular area? What's driving the incremental increase?
Okay. Mehdi, your second question is, with the increase in the CapEx guidance, is it more driven by the front end or the back end for 2020?
Well, basic is front end.
Okay. Thank you. Operator, let's move on to the next caller.
The next one we are having Laura Chen from KGI. Go ahead.
Hi. Good afternoon. Thank you for taking my question. Congratulations on the good result. Actually, my question is also related to the advanced packaging. I recall that we mentioned that we had about $3 billion for the advanced packaging last year for the revenue contribution. I'm just wondering what the latest guidance for this year, any revenue target for advanced packaging? Also what's our plan looking forward in this space? On the incremental increase CapEx, do we also have some plan in this space?
Okay. Laura's question is related to the advanced packaging. She wants to know, last year, I believe it was not $3 billion, it was $ 2.85 billion.
$2.85 billion, yeah.
What is the growth outlook for this year, number one, and then what's the plan for advanced packaging, the outlook going forward?
Okay. We expect that the advanced packaging will grow probably similar to our corporate average this year. As to the CapEx increase, yes, a little bit, but mostly at the front end and with the advanced technology.
Okay. Do you have a second question, Laura?
Yes. My second question is about the legacy process and also 28 nm. We all know that advanced packaging, we are very strong and fully loaded. I am just wondering that for the legacy capacity and the utilization rate, and especially for 28 nanometers, as C.C. also mentioned before, that you see structurally over capacity in this space. Looking forward, can we expect improvement in second half or next year, given our good progress in the RFIC or the CIS, et cetera?
Okay. Let me summarize your second question, Laura, is looking at our mature nodes, what is the utilization outlook for our mature nodes, and specifically for 28 nm? Do we see improvement in second half or 2021?
All right. Let me answer that. Our mature node, or we call it specialty, our mature nodes loading actually is quite good except 28 nm. Okay. I still want to emphasize that 28 nm has been over capacity for the whole industry. We continue to improve it, and slowly. Of course, we can see the CMOS image sensor and also other applications that will move into 28 nm, but it's slower than we thought. However, it will be improved. We have confidence to say that.
Okay. Thank you, Laura. Operator, let's move on to the next caller.
Next one to ask questions, Randy Abrams with Credit Suisse. The line is open now.
Okay, yes. Thank you for the follow-up questions. First one, I wanted to just go back with a clarification on the Huawei. If you're factoring in for the future view, and the potential shipments. I think one is the regulations seem to allow some ways to ship to Huawei. I know you'll comply by the rules. It seems to allow some way to ship directly to OSAT. I'm curious either from that or perspective that you get a partial or full license if you're building that into the base case.
Actually, the current regulation spells do not prohibit the standard product or general product to be able to ship to Huawei. Therefore, we think Huawei's a smart business, most likely they may strategize to stay by procuring general purpose products.
Randy, part of your question is that from TSMC's perspective, are there alternative ways to ship to this customer, such as shipping to OSAT, or will we have a partial license?
No. We don't have alternative way to ship. No.
Okay.
Okay. If I can get the second question.
Randy, are you still there?
Yeah, I'm here.
Sorry.
That would be available in 2022.
Sorry, Randy, you dropped off for a second. Can you repeat your second question again?
Yeah. It is actually more about these half nodes. The 4 nanometer will be available, mass production early 2022. With 3 coming out late in the year, if you are expecting that would be the steep ramp, so we could see high volume. It also could allow you, with the tool reuse, a bit lower spend. I am curious how you are thinking about that. Also on the 6 nanometer, if you are still seeing most of the customers on 7 migrate to 6, where previously expected majority could end up going to that half node. Thank you.
Okay. Your second question, Randy, is related to N4 and N3, and thus with the timing differences of N4 and N3, will we see a lower spend as a result? Randy's view is that N4 will be early 2022, N3 will be late 2022. With some conversion, will that result in lower spend? He also wants to know for our N6, we've talked about it before. Do we see still a strong migration of our customers from N7 to the N6?
Let me answer the second one first. On the N6, yes. We have been offered to our customer with a compatible, actually is a fully compatible to N7. You have a pretty good opportunity to catch the second wave of seven nanometers of product. With the same kind of a strategy we offer N4, to follow that N5. We do expect the N5's product, finally, a large portion of the N5 product will move to N4. It's not the two mixed with the N3's progress or N3's ramp-up. N3 is another full node. It's more advanced, so it's by nature than N5. N3 is an N3. N4 is an N4.
N6, do we still see strong demand?
Yeah. I already said that N6 is following the N7.
Sorry. Okay. Okay, operator, let's move on to the next caller.
Next one we're having Charlie Chan, Morgan Stanley. The line is open to you now.
Thanks for taking my follow-up question. Two parts. Firstly is about your N3 and the CapEx. Do you spend some CapEx for N3 this year, so that's another reason why you see a CapEx upward revision?
Okay, Charlie, your first question is that for 2020 CapEx, do we spend, does it include spending for N3?
Charlie, part of the CapEx this year is for N3, but that's not the reason for our increase in CapEx.
Okay. Do you have a second question, Charlie?
Yeah. I do. Every quarter, I ask this question about the Chinese competition and multiple Your China competitors today , they do A-share IPO with a very high valuation. Supposedly, the raise the money can spend for their future CapEx or even revenue growth, right? I'm not saying about in the recent quarter, but in the long term, do you think that is a threat and you probably may lose a market share to China players given they want the localization? Do you have any China strategy to accommodate to China's localization policy? Thank you.
Okay. Charlie, your question is that what is the threat from Chinese foundry competition? Do we see it as a growing threat? How do we respond?
Well, yes, Charlie, I also answer every time that we compete in technology and the manufacturing and the customer relationship. Whether it's in China, in other area, we stay the same. We compete in technology, manufacturing, and we have been keeping very good relationship with our customer. We won their trust.
Okay. Thank you. In the interest of time, I think we'll take the last two callers on the line.
Next one we're having Bruce Lu, Goldman Sachs. Go ahead, please.
Oh, good. Thank you for taking my follow-up question. The first question is for the norm for the capital intensity. I think I remember, like six months ago, management was talking about capital intensity will go back to 30%-35% for 2021. Earlier, management was talking about it will go back to closer to 35%. Do we foresee that the capital intensity norm will be closer to 35% or the norm will still remain at 30%-35%?
Okay. Bruce, I think our comment is over the long run, it will go to about 35%. That remains the same.
Obviously. Understand that. The second question is that we saw that TSMC announced two new factories for the packaging this year, just do the groundbreaking, and the size for the factory is pretty big. Do we anticipate that the advanced packaging penetration rate will be a lot higher in the advanced node? What's the future outlook for the advanced packaging?
Okay, your second question is Bruce wants to know that we announced a large advanced packaging site recently. He wants to know what is the penetration rate, so to speak, of advanced packaging in the leading nodes, going forward, and what is the outlook.
We do work with our customer closely, we do see some increase on the demand of advanced packaging. Therefore, we try to enlarge our capacity. That's for sure. Let me stress that we enlarge our advanced packaging's capacity for leading edge, also for specialties. There's a new demand coming out, we have to work with our customer to meet their requirement.
Okay. Operator, thank you. Bruce. Operator, can we take the last caller on the line, please?
Yes. The last one to ask questions, Sebastian Hou, UBS. Go ahead, please.
Yep, thank you. I kind of follow on the CapEx increase, the $1 billion CapEx increase. Which particular nodes did that go to? Thank you.
Sebastian wants to know with the increase in the CapEx to $ 16 billion-$ 17 billion, from $ 15 billion-$ 16 billion previously, what node is the CapEx spending going to?
Leading edge.
It's leading edge.
Leading edge.
Okay. Got it. Mark, the last question is, I think the U.S. senator has proposed two bills, CHIPS Act and American Foundries Act in June. I wonder how does that correlate with TSMC Arizona plant? If that bill were to be passed, will TSMC, a non-American company, are eligible for potential subsidy? Thank you.
Well.
Sebastian, just to make sure we understand your question. Your question is in related to some of the proposed regulations in the U.S., such as the CHIPS Act and the AFA. If these bills were to be passed, would it be eligible for TSMC or the industry?
Yes. It's well aligned with our request. If those bills, in different form, passed, I think the administration and State of Arizona will make this project happen.
Okay. Thank you, Sebastian.
Got it.
Thank you, everyone. Thank you. This concludes our Q&A session. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within four hours from now. The transcript will be available 24 hours from now, and both of them will be available through TSMC's website at www.tsmc.com. 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.