Ladies and gentlemen, welcome to TSMC's Q2 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: First, TSMC's Vice President and CFO, Mr.
Wendell Huang, will summarize our operations in the Q2 2020, followed by our guidance for the Q3 2020. Afterwards, Mr. Huang and TSMC's CEO, Doctor. C. C.
Wei will join me provide the company's key messages. Then TSMC's Chairman, Doctor. Mark Liu will host a 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 appears 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 operations and current quarter guidance.
Thank you, Jeff. Good afternoon, everyone. 2nd quarter revenue was flat sequentially as the continued 5 gs 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 NT dollar appreciation in the 2nd quarter. Total operating expenses increased by NT1.19 billion, mainly as TSMC supported a range of COVID-nineteen relief efforts.
Operating margin increased by 0.8 percentage points sequentially to 42.2%. Overall, our 2nd quarter EPS was N4.66 and ROE was 28.5%. Now let's move on to the revenue by technology. 7 nano process technology contributed 36% of wafer revenue in the 2nd quarter, while 16 nanometer contributed 18%. Advanced technologies, which are defined as 16 nanometer 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 2nd 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 percent. Moving on to the balance sheet. We ended the 2nd quarter with cash and marketable securities of TWD605 1,000,000,000. On the liability side, current liabilities increased by TWD25 1,000,000,000, mainly due to the increase of TWD30 1,000,000,000 in short term loans. On financial ratios, accounts receivables turnover days increased 2 days to 44 days.
Days of inventory also increased 2 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 Q2, we generated about TWD170 1,000,000,000 in cash from operations, spent TWD127 1,000,000,000 in CapEx and distributed R65 1,000,000,000 for 3rd quarter cash dividend. We also increased R30 1,000,000,000 in short term loans and issued R30 6,000,000,000 of corporate bonds. Overall, our cash balance increased RMB37 1,000,000,000 to RMB468 1,000,000,000 at the end of the quarter.
In U. S. Dollar terms, our 2nd quarter capital expenditures amounted to 4,200,000,000. I finished my financial summary. Now let's turn to our 3rd quarter guidance.
Based on the current business outlook, we expect our 3rd quarter revenue to be between US11.2 billion dollars and US11.5 billion dollars which represents a 9.3% sequential increase at the midpoint. Based on the exchange rate assumption of US1 dollars to NT29.5 dollars gross margin is expected to be between 50% 52%, operating margin between 39% 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 2nd quarter with revenue of NT310.7 billion dollars or $10,400,000,000 in line with our guidance given 3 months ago. Our 2nd quarter business increased slightly in U.
S. Dollar terms as a continued 5 gs infrastructure deployment and HPC related product launches offset weakness in other platforms. Moving into Q3 2020, we expect our business to be supported by strong demand for our industry leading 5 nanometer and 7 nanometer technologies, driven by 5 gs smartphone, HPC and IoT related applications. Looking at the second half of this year, COVID-nineteen 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 and now expect global smartphone units to decline low teens percentage year over year in 2020.
However, amidst the COVID-nineteen pandemic, we also observed the supply chain making effort to ensure supply chain security and actively preparing for new 5 gs smartphone launches. We raised our forecast for 5 gs smartphone penetration rate to high teens percentage of the total smartphone market in 2020. For the full year of 2020, 5 gs 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 increase, while foundry industry growth is expected to increase to be mid to high teens percentage. For TSMC, although COVID-nineteen 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 U. S. Dollar 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 nanometer and 7 nanometer technologies and our specialty technology solutions, driven by customers of 5 gs smartphone related product launches and expanding HPC related opportunities. Now let me talk about the impact of new U. S. Regulations. On May 15, the U.
S. Department of Commerce announced a set of new export control regulations. As a global and or 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 strength 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 megatrend of 5 gs 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% to 10% CAGR in U. S.
Dollar terms. Next, let me talk about our N5 ramp up and N4 introduction. N5 is a 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 5 gs smartphones and HPC applications.
As we observed some delays earlier this year in N5 Tour deliveries due to COVID-nineteen, we now expect 5 nanometer to contribute about 8% of our wafer revenue in 2020. We also introduced N4 as an extension of our 5 nanometer family. N4Y have compatible design rules and a highly competitive performance to cost advantages as compared to N5 and we are targeting next wave of N5 products. Volume production is targeted for 2022. Thus, we are confident that our 5 nanometer family will be another large and long lasting node for TSMC.
Now I will talk about our N3 status. N3 will be another 4 node straight from our N5 with about 70% logic density gain, 10% to 15% speed gain and 25 with 5 nanometer. 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, which production is scheduled in 2021, and volume production is targeted in second half of twenty twenty two.
We have already demonstrated 256 megabit SRAM functionality. N3 Logitech test chip is fully functional with year ahead of plan. The device performance is also on track. Our 3 nanometer 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 well into the future. Finally, let me talk about our U.
S. Fab plan. On May 15, 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 gap. This fab will start with 5 nanometer technology with 20,000 wafer per month capacity. Production is targeted to begin in 2024.
The U. S. Firewall enabled TSMC to 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 talent to sustain our technology leadership. Now let me turn the microphone over to our CFO.
Thank you, C. C. Let me start by making some comments on our second half profitability outlook. We have just guided Q3 2020 gross margin to decline by 2 percentage points sequentially to 51% at the midpoint, primarily due to the margin dilution from the initial ramp up of our 5 nanometer technology in the 3rd quarter and the less favorable foreign exchange rate. As compared with our expectation 3 months ago, our 3rd quarter gross margin midpoint is higher, mainly supported by the high level of overall capacity utilization despite the uncertainty from COVID-nineteen.
Looking ahead to the Q4, we expect a continued steep ramp up of our 5 nanometer to dilute our 4th quarter gross margin by about 2 to 3 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-nineteen virus brings uncertainties in 2020, we have seen our business holding up well so far, thanks to our technology leadership at 5 and 7 nanometer nodes. Looking ahead, the multiyear megatrends of 5 gs 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 USD 16,000,000,000 to USD 17,000,000,000 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 and A session, I would like to remind everybody to please limit your questions to 2 at a time before our management answers your question. For those of you on the call, if you would like to ask a question, please press the 0 then 1 key Now, let's begin the Q and A session. Operator, please proceed with the first caller on the line.
Yes, thank you. The first to ask question Gokul Hadi Halland, JPMorgan. Go ahead please. Yes. Hi, good afternoon and thanks for taking my question and great results in a tough time.
Just a quick question on how we think about N3 development. Do we feel that N3 since you talk about mark production in second half of twenty twenty two, usually the new node starts sometime in Q2. I just wanted to understand, are we thinking about a slightly slower ramp for N3 compared to what we have had in the 1st 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. Reputation starts to come in, how do we think about managing capacity? Do we feel that the capacity can get filled up relatively quickly once one of our leading customers, you have to stop shipment to them? Or do we feel that there could be a couple of there could be some time where there could be a little bit of underutilization?
Okay. Thank you, Gokul. Let me try to 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 'twenty two versus typically the second quarter. So 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. So the schedule and also the ramp up, also the progress, we're 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 rich production in next year and ramp up in the second half. As all the schedule is working with our customers.
Okay. And then Gokul, your second question is on the leading edge. And 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?
It should be no problem because of as we just stated that the 5 gs is a megatrend and also HPC related application continue to be very strong. And we observe that all our customer are very actively prepared for these 2 application, 5 gs and HPC. In addition to that, we also observed that our customers are trying to secure their supply chain security and which is fairly important with this COVID-nineteen
uncertainty.
Do we feel that even for N5 that is applicable or
It's even with N5, yes.
Let me 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. And for the long term, as C. C.
Mentioned, we are very we're still optimistic.
Okay. Thank you, Gokul. Can we have the next caller here, please?
Next to ask questions, Sebastian Ho, CLSA. Go ahead please.
Hi. Good afternoon, gentlemen. Thank you for taking my questions. So my first one is, wanted to get some digital brand about how do you evaluate the feasibility and possibility of building up advanced node fab without American contents, be it technology equivalent, IP material, etcetera, in the next 5 years or 10 years or even longer? Does it work?
Or even if it take a long time and tremendous efforts, would SMC ever consider that?
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. And that's why we say that we are working with federal government and also the state of Arizona To close again?
Yes.
Sorry. Just to repeat the question, I think Sebastian's 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 5 to 10 years, is it feasible? Is it worth it? And 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 2 years, there will be a new generation of technology come out to serve the best performance product. And therefore, we I think our main force is still pursuing the technology leadership, trying to overcome each generation's challenge.
And 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. So you're right, the 2 if we do that otherwise, the technology advancement will be extremely challenging, will be extremely difficult not to talk about 5 to 10 years alone. So 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 is I'd like to follow on the inventory situation. The first, can you update us on how you see the fabless data inventory at the end of Q2 and how you see that in the second half this year?
And also 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 stockpiles inventory in fear of being sanctioned. And also across the board globally, the whole supply chain has been raising the fixed level of inventory in the past few months in fear of supply chain disruption costs by COVID-nineteen. So but those are not reflected in fabless DOI. So how do we see about this inventory and potentially hidden excessive inventory situation going forward, which could do you concern about that to be a potential overhang at some point the 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.
And then your second part of your question is, are we concerned that the inventory mix 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? And is there a risk of inventory correction?
Okay. Let me answer that. The inventory level of our fabless customers that we track exited 1st quarter above the seasonal level. We expect a further increase in 2nd 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 5 gs 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 observed the supply chain active making efforts to ensure the securities and active preparation for 5 gs 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.
Yes. Hi. Thank you. Thank you for taking my question. I'm wondering if you can comment on the CapEx guidance for this year.
It's not raised to $16,000,000,000 to $17,000,000,000 I'm wondering what that increase is, whether it's 5 nanometer or something different? Secondly, related to that, can you talk about your CapEx intensity structurally, whether this is this increase is temporary and whether this is pulled in from next year therefore maintaining the longer term intensity or how we should think about that? Thanks.
Okay. Let me summarize your two questions, Bill. Your first question is in relation to our 2020 CapEx guidance and the range of $16,000,000,000 to $17,000,000,000 So Bill wants to know what is driving this increase? And then secondly, in terms of the capital intensity outlook
for this year is basically comes from the advanced technologies. And the capital intensity 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 Brad Simpson from RIT Research. Go ahead, please.
Yes, 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 relation
you will still be shipping wafers probably at elevated levels in Q3. But can you confirm whether or not you'll have any sales with Huawei in Q4? And if not, how do you manage your 5 millimeter utilization given the importance of Huawei as a customer? Thank you.
Okay. Let me summarize your question, Brett. With 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. And but as you heard, we made a CEC just made about 20 20's guidance is above 20%. That tells you we are relatively progressing well in filling up the left capacity left open.
Okay. Great. Thank you. Do you have a second question?
Yes. Thanks, Jeff. 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 the depreciation in 2020.
Can you confirm whether that's still the case? And I look at the first half depreciation and it looks like depreciation costs are down year on year.
So in order to get to mid
to high teens growth, that would imply a large increase in depreciation sort of in the 3rd Q4. So 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 depreciating for 2020 year on year? And then does this imply a pickup in depreciation in the second half on a quarterly basis?
Okay. Brad, our current estimate on 2020 depreciation year on year growth is still high teens growth. So 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. I want 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? And I have a follow-up.
Okay. Sorry, Mehdi, let me make sure we understood your first question. You're asking about M4 and M3, 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 kind of improvement, continuous improvement from N5. So it has improved speed, improved geometry just a little bit. N3 is totally a new node, All right. So that's N4 using the same equipment as 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. And 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?
And how do you see those trends trending into Q3?
So, Nadeem, your second question is looking at our HPC Nadeem wants to know what specific 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, Madhiv? The concern
is that maybe perhaps Huawei may have pulled in before you stop taking over and trying to better understand how that particular customer has computed wafer in the first half versus second half?
Sorry, Mehdi. No, we don't comment on specific customer.
Okay. Thank you, Nadine.
Thank you.
Thank you. Can we have the next caller on the line, please, operator?
Yes. This is Greg Hiding of Randy Abrams, Credit Suisse. Go ahead please.
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 'twenty one, I know it's in early stage, but just factoring a full year, where you mentioned Huawei and also mentioned potential, but you don't rule out an inventory correction. And it does seem like Samsung at least is discussing a bit about some graphics and high end smartphone business.
So, I'm curious, I guess, the CapEx raise, what's driving it, if there are certain drivers that maybe listed on the 2021, how you're seeing that? And the implication it follows up on Bill Lou'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. So 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? And then what is the outlook for 2021 CapEx?
CapEx and sales. The sales, just factored 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 assessment?
Let me discuss. CapEx is a we do the CapEx based on long term perspective. If you talk about 20 this year's CapEx, meaning, of course, this shows our demand of N5 is very strong. And you talk about the next year's CapEx, it's really talk about 20 22's demand, which we see the continued increase of N5 demand and also we see the starting the launch of N3 technology. And we'll see by then how much the CapEx will increase and we report to you in due time.
Okay. Do you have a second question, Randy?
And if I could follow-up because you mentioned like sort of higher CapEx this year is a function that you expect next year to be even stronger. So could you talk a bit about I know you talked about the megatrends, but I'm curious if you're thinking about just what you had mentioned also like could next year have impact from the high base this year on the inventory buildup? And also, the full year, like in the Q1, Huawei is 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 it while we wait next year?
Okay. Randy's second question, he wants to he is thinking that potential possibility of inventory correction with the U. S. Regulations, Will that impact what is the impact to 2021 growth outlook and CapEx?
Yes. Randy, it's just too early for us to discuss anything about 2021. So we'll just wait until when the time approaches.
Okay. Thank you, Randy. Let's move on to the next caller, please.
The next one is Roland Chi from Citigroup. Please ask the question.
Hi, guys. Good afternoon. First question is, can you remind me again how does the inventory variation adjustment work every quarter? How about the 3Q? Is this inventory valuation adjustment favorable or unfavorable to the gross margin?
This is my first question. And second question, Ashish, you talked about that you are working with customers to minimize the impact of U. S. New regulation. And how are you going to do are working on that?
Okay. So Roland, your two questions. Your first question is, what is the impact of inventory revaluation? And then in the Q3, will it be a favorable or unfavorable impact? And 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.
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. When we 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 Q2, the quarter over quarter change in impact from inventory valuation adjustments was more significant.
And if you ask about Q3, at this moment, we believe the impact is less significant. Okay.
And then 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 of this is our company's strategy and our strength. But one thing I can tell you, we are based on the technology leadership and excellent manufacturing. That's all we did.
Okay. Thank you. Operator, can we move on to the next caller, please?
Yes. The next question, Charlie Chan, Morgan Stanley. Go ahead please.
Hi. Good afternoon, management team. So my first question is really about your above revision of the full year revenue guidance. So compared to last time, it was a mid- to high teens and now it's above 20%. I think that there's at least 5 percentage points of RIM growth in 2020.
But last time, your assumption is that pandemic can get control by June. And now, currently, there's a second wave pandemic in many countries. So how are you going to reconcile these kind of weak economy or healthcare crisis issue versus your very strong revenue guidance. Should I just attribute that to the higher 5 gs smartphone penetration or there's other factors that we should pay attention to?
Okay. Let me summarize your first question, Charlie. You're asking basically we have increased the full year outlook, but the risk of COVID-nineteen continues to remain. So how to reconcile a weak global economy with TSMC's full year outlook and what would be driving this besides 5 gs smartphone preparation?
Well, Charlie, we do observe the 5 gs smartphone, the momentum is getting stronger. So we understand the situation. However, we also observed that our customer are making effort to ensure supply chain security. So they might expect that there is a second wave, third wave COVID-nineteen, but since the end demand looks very promising, so they are not afraid to make sure that their supply chain will not be disrupted. Because of 5 gs, as you just mentioned, 5 gs spun themselves, demand is continuing to increase.
Okay.
Do you have a second question, Charlie?
Yes, I do. Thanks, Jeff.
So I
think a lot of things happened over the past months, right? Another thing that I would take it as a U-turn is your decision for the U. S. Fed intention, because half year ago, I remember the comp was like the cost is pretty high, logistics doesn't make sense. So what exactly is the trigger for U Change this U.
S. Operation decision? And you'll be very kind of view if I can add a very small question, because the management care as well. Your 4th quarter seasonality, because based on your new full year guidance, if you take it at 20% or 21% low bar, the 4th quarter revenue may decline sequentially. You said that kind of fair comment?
Thank you.
Okay. Well, Tommy, your second question relates to our U. S. Fab plan. And you want to know why 6 months ago, we were talking about the cost gap being a major challenge and now we have decided to go ahead.
So what has changed?
Okay. 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. But in the past, indeed, the cost the GAAP prohibited us to make those decisions. More recently, I think since last December, I think the things is getting a turn. And we did get the positive encouragement from the U.
S. Administration and about the cost gap. Actually the U. S. Administration and the State of Arizona combined, they do 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. And how do they close the cost gap? As you have reading, we the U. S. Congress, both in Senate and the House, are all driving for the incentive packages aimed at revived U.
S. Semiconductor manufacturing. And with that, I think they do have a way to fulfill that commitment to make up the cost gap. And that was the major decision turning point.
And then Charlie, he snuck in a third question, which he wants to know our outlook for Q4 given the full year guidance.
Okay. Charlie, it's also too early to talk about Q4, but I think you can do the math and come up with certain estimation. But what we can say is our second half will be growing will be higher than the first half.
Okay. Thank you. Let's move on to the next caller on your line, please.
The next one to ask questions, Bruce Lu, Goldman Sachs. Over here please.
Hi. Thank you for taking my question. I think given your positive progress in 3 nanometers and 5 100%, especially regional CapEx, Can we assume that similar to previous node like 7 nanometer or 12 nanometer that the 1st year of 3 nanometer can achieve 10% of the wafer revenue and the 2nd year of the 5 nanometer can achieve 30% of the wafer revenue?
Okay. So Bruce, your first question is regards to N5 and N3. Bruce wants to know with the progress in N3, can it be contribute 10% of the wafer revenue in the 1st year?
And he also wants to
know, can N5 contribute 30% of the wafer revenue in its 2nd year?
Okay. Bruce, both of them are really too early to talk about it. We certainly hope that there will be pretty big notes, but we will definitely let you know when time is closer.
Do you have a second, Bruce?
Yes. I think just to double check, we raised our 5 gs penetration shipment forecast, but we lowered the overall smartphone shipment forecast for 2020. And how about the actual number for the 5 gs smartphone shipment? Is that the penetration is up because of the lower total smartphone shipment or the 5 gs smartphone shipment itself is going up as well?
Okay. So your question second question, Bruce, is that we the global smartphone shipment, we now lower to low teens decline, but we raised the 5 gs penetration to high teens. Is this simply because of a lower smaller global base or what is the 5 gs penetration number?
C. Wei:] For the 5 gs penetration, as I said, the momentum continue to increase. So even with the total smartphone number being decreased at the low teens, but the 5 gs percentage continue to increase. And that's what we observed. And also the 5 gs semiconductor content is higher than the 4 gs and high especially high end is much higher.
So that's what we base on.
Okay. Thank you, Bruce. Operator, can you move on to the next question on the line, please?
The next caller ID is Aaron Zheng from Nomura Securities. Go ahead, please.
Thank you for taking my question.
Can I ask a follow-up to Bruce's
question just right now? He was asking by lowering the total smartphone demand to low teens, down 15% to 15% now from the earlier version of down 5% to 10%, but raising the 5 gs penetration rate to 15%, 20% from earlier only mid teens at 15%. And in terms of the absolute, absolute 5 gs phone demand or selling number, it's a 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 5 key smartphone in terms of units
increased? The answer is yes.
Okay. Thank you.
What is your second question?
Let me so, okay, this at my this question that I was trying to compare the outlook offered by TSMC for the industry and the outlook given in the year beginning 6 months ago. In the year beginning, TSMC was saying that the semi at coding memory was going to grow by 8% and now it's going to be flattish to slightly grow, which means I think overall demand, including everything is lower than it was 6.6 ago. The Tongju growth in the year beginning was 17%, but now it's pretty much unchanged mid to high teens growth. His and his growth in the year beginning was superb for industry growth. Now, it's above 20% growth.
Okay. So, my question is over the last 6 months, TSMC along with actually everyone in the world, particularly in tech has experienced 2 difficult challenges, including 1, COVID-nineteen and 2, Huawei, issues. But it turns out that TSMC is doing even better than there was not to these issues. So I wonder, obviously, I think the CEO already answered that the 5 gs F2 unit demand is going to be higher than you saw 6 months ago, which is one, I think, key reason. But it looks to me that the 2 negative factors are still huge.
Actually, either one of them is big, right? So, but it will turn out to be greater than if there's no negative impact. So, how should we think about this? Earlier also, Chairman said that.
Aaron, okay. I think let me summarize your question because it is quite long. I think to 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 X memory growth in January, we said plus 8. Now we said flat to slightly up. Foundry growth in January, we said 17% increase year on year, now we say mid to high teens, but for TSMC growth, we're now seeing greater than 20%.
So given the challenges in this year from COVID-nineteen 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 7 nanometer and 5 nanometers technology. And 5 gs, again, I would like to say that 5 gs is the momentum is getting strong. And including also HPC, I'm sorry.
All right. Thank you. Operator, can we move on to the next question please from the line?
Next, we're having Gokul Hadi Hagan, JPMorgan. Go ahead, please. Thanks for taking my follow-up question. First of all, I just wanted to understand, we are running a 20 plus percent growth this year. Any thoughts on I think we expect some of these megatrends to last.
Any thoughts on why we are changing our long term and target, especially given you are presenting more CapEx? So for ROIC, it's similar and probably we need to
be at a slightly higher growth rate.
That's my first question. 2nd, 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 fill that your customers have undertaken? And can you tell us in the last several years, it was very few years that JMP outgrew the silicon oxide industry or the foundry industry by a significant margin. And this seems to be one of those where even smartphone is not really growing, it's actually declining, while Q3 is growing more than 20%. So just wanted to understand, there is quite a bit of that, which is real demand and market share gain in leading edge.
But any thought on how much of that do you feel that some of this inventory and supply chain security industry that you have some other building?
Okay. Gokul, 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?
We certainly 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 7 and 5 and that's why we gain our advantage.
Okay. And then your second question, Gokul, to repeat again, is that with the strong growth we see this year and the megatrends that we identified for the next several years, is there 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 5% to 10% CAGR. Remember, this kind of forecast is a rolling forecast. So we continue to have confidence on our technology and also our market share and solve our goals.
Okay. Thank you, Gokul. Operator, can we move on to the next caller from the line?
Next one, we are 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. Okay. Thank you. So I have two follow ups. First one is that the 5 nanometer revenue contribution is lower from 10% to 8%.
The total revenue outlook is rate. So, if we do the math, the 5 nanometer revenue probably lower, about 15 percent compared to April. April compared to January guidance is actually 20% lower. So, how do we attribute this? Is it to the customers' gas station in May or any other reasons?
And furthermore, it also means that the other technology nodes are growing stronger. So what's driving the other applications and nodes? Also, can you give us an update on your expectation of growth for the 4 major platforms with the new re buy sub guidance? Thank you.
Okay. So let me summarize Sebastian's question. He wants to know what is driving the difference in terms of N5 today versus 6 months ago and what other nodes then are stronger.
And then he also wants
to know the 2020 outlook growth outlook by platform.
Okay. Sebastian, actually, compared to 6 months ago, our N5 revenue actually increases. And so do the other nodes. Maybe you can double check the math. Yes.
Okay.
And then the 2020 growth outlook by the 4 platforms.
Oh, okay. All the platform will grow except the automotive,
okay?
Okay. Okay. My second question is also follow-up on the 5 gs smartphone and also the total smartphone guidance you just gave and the other analysts you asked about. So I wonder it looks like the total 5 gs smartphone numbers, absolute number is raised. And I wonder how you based on the forecast on the final sale numbers or based on the forecast that you're seeing from your smartphone SoC fabs?
Thank you.
Well, we based on the one you work with our customer. So that's a number that our customer demand to TSMP. Of course, they are also doing their forecast as we did.
Okay. Thank you, Sebastien.
So let me let me check out.
Yes, Sebastien. Sorry. Okay. Let's move on to the next caller.
Next one, we're having Madhih Hossaindi, SIG. Go ahead please.
Yes. Thank you so much for taking the follow-up. I'm a little bit confused and I was wondering if you could help me. All the 5 gs smartphone data points suggest that the smartphones that are selling through are priced well less than US300 dollars And also,
your commentary suggests that despite the fact that COVID
has had a second wave, your outlook is actually stronger. So how can I reconcile 5 gs smartphone, which is mostly driven by low end and the second wave of COVID with your outlook?
Okay. Mindy, your question is how your observation is that 5 gs smartphone sell through is mainly coming through at the low end 5 gs smartphones, priced at US300 dollars or less. And with the potential second wave of COVID, how can you reconcile this low end demand with what TSMC is seeing? Is that correct?
And also your outlook for the year, because earlier in last, I mean, conference call you said your outlook is based on call it, normalizing by June, but
it seems like there's a second wave.
So, Nadeem is also asking because in April, we said, our outlook was premised on stabilization of COVID by June. But now it looks like COVID-nineteen continues. We
don't actually, we don't confirm there is a second wave of COVID-nineteen per se, but we leave that one alone. We do observe that our customers have combined to TSMC. And you mentioned that 5 gs is only in the low end. We do expect there's a lot of new 5 gs phones pretty high end in the second half of twenty twenty. And that's what we base on our assumption.
Okay? Thank you.
May I
add one follow-up on CapEx?
Okay.
The $1,000,000,000 of increase to 2020 CapEx, is that equally distributed between front end equipment and back end? Or is it more in one particular area? What's driving the incremental increase?
Okay. So, Madhiv, your second question is what's the increase in the CapEx guidance? Is it more driven by the front end or the back end for 2020?
Yes. Well, basic is front end.
Okay. Thank you. Operator, let's move on to the next caller.
Next one, we are having Luo Shen from KGI. Go ahead, Eddy.
Hi, good afternoon. Thank you for taking my question and congratulations for the good results. Actually, my question is also related to the advanced packaging. Because that we mentioned that we have about $3,000,000,000 for the advanced averaging last year for the revenue contribution. I'm just wondering what the latest guidance for this year, any revenue target for advanced packaging?
And also, what's our plan looking forward in this space? On the incremental increased CapEx, do we also have some plan in this space?
Okay. So Laura's question is related to the advanced packaging. She wants to know, last year, I believe it was not $3,000,000,000 it was $2,850,000,000 So what is the growth outlook for this year, number 1? 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 legacy process and also like 28 nanometer. We all know that advanced packaging, we are very strong and fully loaded. I'm just wondering that for the legacy capacity and the utilization rate and especially for 28 nanometer, as Sisi also mentioned before that you see structurally over capacity in this space. Looking forward, can we expect improvement in the second half of next year given our good progress in the RFIC or CIS, etcetera.
Okay. So let me summarize your second question, Laura. It is looking at our mature nodes, what is the utilization outlook for our mature nodes and specifically for 28 nanometer? Do we see improvement in second half or twenty twenty one?
All right. Let me answer that. Our mature node, what we call it specialty, our mature Our machine knows that all dim actually is quite good except the 28 nanometer, okay? I still want to emphasize that 28 nanometer has been overcapacity for the whole industry. But 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 nanometer, 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, 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 for the future view and the potential shipments.
I think one is the regulation seem to allow some ways to shift to follow. I know you'll comply by the rules, but it seems to allow some way to shift directly to OSATs. So 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 it the standard product or general product to be able to ship to Huawei. And therefore, we think Huawei is a smartphone business. Most likely, they may strategize to stay by procuring general purpose products.
I think, 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, no. We don't have alternative way to ship.
Okay. If I can get the second question, if
you could
Randy, did you just are you still there?
I'm here. It's asking me to speak ramp up. Sorry. That might be available in 2020.
Sorry, Randy, you dropped off for a second. Can you repeat your second question again?
Yes. It's actually more about these half nodes. The 4 nanometer will be available, I think, mass production early 2022. So, with 3 coming out late in the year, if you're expecting that would be the steep ramp, so we could see high volume. It also could allow you, I think, with the tool reuse, a bit lower spend.
So I'm curious how you're thinking about that. And then also on the 6 nanometer, if you're still seeing most of the customers on 7 migrate to 6, where I think 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 where we with the timing differences of N4 and N3, where we see a lower spend as a result. Randy's view is that M4 will be early 2022, M3 will be late 2022. And then so with some conversion, will that result in lower spend?
And he also wants to know for our N6, we've talked about it before. Do we see a lot still a strong migration of our customers from N7 to the XN6?
But let me answer the second one first. On the N6, yes, we have been offered to our customer with a compatible actually, it's fully compatible to N7. So you have a good opportunity to catch the 2nd wave of 7 nanometers of product. With the same kind of strategy, we offer N4 to follow that N5. So we do expect the N5 as a product finally a lot of a large portion of the N5 product will move to N4.
So it's not too mixed with N3's progress or N3's ramp up. N3 is another 4 node. It's not it's more advanced, so it's by nature than N5. So N3 is N3. N4 is N4.
And then N6, do we still see strong mic?
Yes, I already said that N6 is a bottleneck in N7.
Okay. Okay, operator, let's move on to the next caller.
Next one, we are having Charlie Chan, Morgan Stanley.
Thanks for taking my follow-up question. So, two parts. Firstly, it's 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. And do you have a second question, Charlie?
Yes, I do. So every quarter, I ask this question about the Chinese competition and most people China competitors make they do Asia IPO with a very high valuation. Supposedly, those risk of money can spend for their future CapEx or even revenue growth, right? So 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 market share to China players, given they want their localization? Or you have any China strategy to accommodate to China's localization policy?
Thank you.
Okay. So 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 manufacturing and the customer relationship. And Huizhou is 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 are having Bruce Lee, Goldman Sachs. Go ahead please.
Thank you for taking my follow-up question. The first question is for the loan for the capital intensity. I think remember, I remember like 6 months ago, management was talking about capital intensity closer to 35%. So, do we foresee that the capital intensity norm will be closer to 35% or the norm will still remain at 30% to 35%?
Okay. Bruce, I think our comment is over the long run, it will go to about 35%, and that remains the same.
I see. Understand that. The second question is that we saw that TSMC announced 2 new factories for the packaging this year just due to
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? And what's the future outlook for the advanced packaging?
Okay. So your second question is the Bruce wants to know that we announced a large advanced packaging site recently. So 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?
Well, we do work with our customer closely, and we do see some increase on the demand of advanced packaging. And therefore, we try to enlarge our capacity, that's for sure. But let me stress that we enlarge our advanced packaging capacity for DTH, also for specialties. There's a new demand coming out and 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 is Sebastian Ho, CEO of LSA. Go ahead, please.
Thank you. So, I can follow on the CapEx increase, the RMB1 billion CapEx increase, which particularly knows do that go to? Thank
you. Sebastian wants to know with the increase in the CapEx to RMB16 1,000,000,000 to RMB17 1,000,000,000 from $15,000,000,000 to $16,000,000,000 previously, what node is the CapEx spending going to?
It's leading edge.
Okay. Got it. And then my last question is, I think the U. S. Senator has proposed to build Chiefs Act and American Funds Act in June.
So I wonder that how does that correlate with TSMC Arizona planned? And if that were to be passed, that bill should be passed, whether TSMC or non American company are eligible for potential subsidy?
Thank you. Sebastian, just to make sure we understand your question. Your question is 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. And if those bills in different form passed, I think the administration and state of Arizona will make this project happen.
Okay. Thank you, Sebastien. Thank you, Elliot. Thank you. 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 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.