[Non-English content] Ladies and gentlemen, welcome to TSMC's first 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 Chairman, Dr. Mark Liu, will provide the opening remarks. Next, TSMC's Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the first quarter 2020, followed by our guidance for the second quarter 2020. Afterwards, Mr. Huang and TSMC's CEO, Dr. C.C. Wei, will jointly provide the company's key messages. Dr. 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 on our press release. Now I would like to turn the call over to TSMC's Chairman, Dr. Mark Liu, for his opening remarks.
Good afternoon, everyone. My name is Mark Liu here. Before we start our financial report, I want to take a moment to thank each of you for joining us online today. To many of you from different parts of the world in this very time of devastating pandemic, our thoughts and hearts are with you. TSMC so far safeguarded our global operations successfully, but we do not take it for granted. We will continue our utmost efforts to weather this storm. We are in this together. In the meantime, I want to send our best wishes to you and your families for staying safe and healthy. Now let me turn the microphone over to Wendell for the summary of operations and current quarter guidance.
Thank you, Mark. Good afternoon, everyone. My presentation will start with the financial highlights for the first quarter, followed by the guidance for the current quarter. First quarter revenue in TWD decreased 2.1% sequentially, which is less than seasonality due to the increase in HPC-related demand and the continued ramp of 5G smartphones. Gross margin increased 1.6 percentage points sequentially to 51.8% thanks to higher level of utilization, which was partially offset by an unfavorable exchange rate. Total operating expenses decreased by TWD 2.6 billion, mainly as 5 nm technology moved from R&D stage to mass production during the first quarter. Operating margin increased by 2.2 percentage points sequentially to 41.4%. Overall, our first quarter EPS was TWD 4.51 and ROE was 28.4%. Now let's move on to the revenue by technology. 7 nm process technology contributed 35% of wafer revenue in the first quarter.
10 nm was 0.5% and 16 nm was 19%. Advanced technologies, which are defined as 16 nm and below, accounted for 55% of wafer revenue. Move on to the revenue contribution by platform. Smartphones decreased 9% quarter-over-quarter to account for 49% of our first quarter revenue. HPC increased 3% to account for 30%. IoT increased 8% to account for 9%. Automotive decreased 1% to account for 4%. Digital consumer electronics increased 44% to account for 5%. Moving on to balance sheet. We ended the first quarter with cash and marketable securities of TWD 562 billion. On the liability side, current liabilities remained relatively static. On financial ratios, accounts receivable turnover days was 42 days. Days of inventory decreased two days to 53 days with higher wafer shipment in the quarter. Let me make a few comments on cash flow and CapEx.
During the first quarter, we generated about TWD 203 billion in cash from operations.
Spent TWD 193 billion in paybacks and distributed TWD 65 billion for second quarter 2019 cash dividend. We also increased TWD 20 billion in short-term loans mainly for hedging purpose. Overall, our cash balance increased TWD 25 billion to TWD 431 billion at the end of the quarter. In US dollar terms, our first quarter CapEx reached $6.4 billion. I have finished my financial summary. Let's turn to our second quarter guidance. Based on the current business outlook, we expect our second quarter revenue to be between $10.1 billion and $10.4 billion, which represent a 0.6% sequential decrease at the midpoint. Based on the exchange rate assumption of one US dollar to TWD 30, gross margin is expected to be between 50% and 52%, operating margin between 39% and 41%. I will hand over the call to C.C. for his key message.
Thank you, Wendell. Good afternoon, ladies and gentlemen. We hope everyone is staying safe and healthy. Let me start with the COVID-19 preventive measurement at TSMC. To prevent the epidemic of COVID-19, many of us around the world have had to change the way we live and work since mid-January. Let me start by sharing something that we take at TSMC. Our top priority is to protect the health and safety of all our employees at all times. At the outbreak of COVID-19, we immediately suspended all non-critical business travel and restricted visitor on-site access with mandatory health screening. All employees are required to do daily temperature checks with health declaration, wear a mask all the time, and practice social distancing in the office.
Since late March, we have taken further preventive actions, such as having employee work from home where possible, and physically separating on-site employees into red and blue teams to reduce the risk of community spread. On March 18th, we found one employee who tested positive for COVID-19 and immediately began receiving appropriate care. Today, this employee has recovered, is out of the hospital, and is staying at home for additional quarantine. We were able to swiftly trace all the other individuals who were in contact. The neighboring employees has all tested negative, while all other employees who were in contact has entered and completed the 14-day health quarantine and now back to work. As a result of the strict preventive measure taken by TSMC, we have not seen any disruption of our fab operations so far. Now I will talk about our near-term demand outlook.
We concluded our first quarter with revenue of TWD 310.6 billion, or $10.3 billion, in line with our guidance given three months ago. Our first quarter business declined about 1% sequentially, which is much less than seasonality due to the increasing HPC related demand and the continued ramp of 5G smartphone. Moving into second quarter 2020, we expect our revenue to be flattish as weaker mobile product demand is expected to be balanced by continued 5G deployment and HPC related product launches. While we have not seen significant order reduction from our customers so far, we do observe supply chain dislocation and weaker end market demand from COVID-19 in the first half of this year. In the near term, we have observed weaker end demand in applications such as consumer electronics and automotive.
Meanwhile, we have also observed better demand from HPC as compared to three months ago, driven by trends such as work from home. Looking ahead to the second half of this year, due to the market uncertainty, we adopt a more conservative view as we expect COVID-19 to continue to bring some level of disruption to the end market demand. For the whole year of 2020, we now forecast the overall semiconductor market, excluding memory growth, to be flattish to slightly decline, while foundry industry growth is expected to be high single digits to low teens %. For TSMC, although this uncertainty exists, we believe we can do better and grow at mid to high teens % in 2020 in US dollar terms.
All the above forecasts for semiconductor, exclude memory market, foundry, and TSMC, are based upon the assumption of COVID-19 stabilizing in June of this year. Now let me talk about the progress and development of 5G and HPC. With the recent disruption from COVID-19, we now expect global smartphone units to decline high single digits year-over-year in 2020. However, 5G network deployment continues, and OEMs continue to prepare to launch 5G phones. We maintain our forecast for mid-teen penetration rate for 5G smartphones of the total smartphone market in 2020. We continue to expect faster penetration of 5G smartphones as compared to 4G over the next several years, with substantially higher silicon content. Thus, we believe 5G as a multiyear megatrend is still strong and will fuel the growth of all four of our core platforms in the next several years.
HPC will be another major long-term growth driver for TSMC. In the next few years, a smarter and more intelligent world connected by 5G networks will require a massive increase in computation power. CPU, networking, and AI accelerators will be the main growth area for our HPC platform. While near-term uncertainty exists, we are continuing to invest in our R&D and technology capabilities to capture the future opportunities from the strong 5G related and HPC megatrend. We reaffirm our full-year growth at a high end of our long-term growth projection of 5%-10% figure in US dollar terms. Let me talk about the ramp-up of N7+ and the status of N6. In the third year of ramp, N7 continued to see very strong demand across a wide spectrum of products for mobile, HPC, IoT, and automotive applications.
Our N7+ is entering the second year of ramp using EUV lithography technology, while paving the way for N6. Our N6 provides a clear migration path for next wave N7 products as the designs are fully compatible with N7. N6 has already entered risk production and is on track for volume production before the end of this year. N6 will have one more EUV layer than N7+ and will further extend our 7 nm family well into the future. We expect our 7 nm family to continue to grow in its third year, and we affirm it will contribute more than 30% of our wafer revenue in 2020. Now let me talk about our N5 status. N5 is already in volume production with good yield. Our N5 technology is a full-node stride from our N7, with 80% logic density gain and about 20% speed gain compared with N7.
N5 will adopt EUV extensively. We expect a very fast and smooth ramp of N5 in the second half of this year, driven by both mobile and HPC applications. We reiterate, 5 nm will contribute about 10% of our wafer revenue in 2020. N5 is the foundry industry's most advanced solution with best PPA. We observed a higher number of tape-outs as compared with N7 at the same period of time. We will offer continuous enhancements to further improve the performance, power, and density of our 5 nm technology solution into the future as well. Thus, we are confident that 5 nm will be another large and long lasting node for TSMC. Finally, I will talk about our N3 status. Our N3 technology development is on track, with risk production scheduled in 2021 and target volume production in second half of 2022.
We have carefully evaluated all the different technology options for our N3 technology, and our decision is to continue to use FinFET transistor structure to deliver the best technology maturity, performance, and cost. Our N3 technology will be another full-node stride from our N5, with about a 70% logic density gain, 10%-15% speed gain, and 25%-30% power improvement as compared with N5. Our 3 nm technology will be the most advanced foundry technology in both PPA and transistor technology when it is introduced and will further extend our leadership position well into the future. Now, let me turn the microphone over to our CFO.
Thank you, C.C. Let me start by making some comments on our second quarter and second half profitability outlook. We have just guided second quarter of 2020 gross margin to be similar to the first quarter. Looking ahead to second half, we expect the steep ramp-up of our 5 nm will dilute our second half gross margin by about two to three percentage points. In addition, our overall capacity utilization may be impacted by the uncertainty from COVID-19. Thus, our gross margin in the second half of this year may be several percentage points lower than in the first half. Looking at our other profitability factors, our leadership in technology development and ramp-up remains strong. We continue to provide value to our customers and drive aggressive cost reduction. Thus, we believe our long-term gross margin target of above 50% is still a good target.
Now, let me talk about our capital budget for this year. Every year, our CapEx is spent in the anticipation of the growth that will follow in the future years. While the impact of COVID-19 virus brings near-term uncertainties, we expect the multi-year megatrends of 5G-related and HPC applications to continue to drive strong demand for our advanced technologies in the next several years. Thus, we reaffirm our 2020 capital budget to be between $15 billion-$16 billion. Now, I will make some comments on our capital management and shareholder returns. The objectives of TSMC's capital management are to fund the company's growth organically, generate good profitability, preserve financial flexibility, and distribute a sustainable cash dividend to shareholders.
With our solid financial performance, strong balance sheet and cash position, and capacity to take on debt, we're able to aggressively invest in our future to enhance our technologies and capabilities. This enables us to continue to outgrow the semiconductor industry, even in an extreme macroeconomic environment like this year. With our rigorous capital management, we remain committed to a sustainable cash dividends on both an annual and quarterly basis. Meanwhile, with the semiconductor industry's highest credit rating, we're able to bolster our cash balance by issuing corporate bonds at a low-interest rate. That concludes my message.
Thank you. This concludes our prepared remarks. 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 the participants an opportunity to ask questions. If you wish to raise your question in Chinese, I will translate into 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 star then one on your telephone keypad now. Questions will be taken in the order in which they were received. If at any time you would like to remove yourself from the questioning queue, please press the pound or the hash key. Let's begin the Q&A session. Operator, can we please proceed with the first caller on the line, please? Thank you.
The first question we have is from the line of Randy Abrams from Credit Suisse. Your line is now open.
Okay. Thank you. Good afternoon. First question was just two parts. I wanted to go into the change in forecast versus January. If you could give an update on the change in expectation across your growth platforms, which areas are you revising? I'm curious if you've seen the change in customer orders or you're proactively expecting those to come. The second part, you sometimes give a view on inventory levels. Factoring your sales have held up implied in guidance, if you could give an expectation on where you think inventory levels at your customers are trending, and if you're factoring any risk of a correction on inventory levels as some of the supply bottlenecks ease.
Okay. Randy, please allow me to try to make sure repeat your question. Your first question is two parts. You want to know what is driving the change in our forecast as compared to what we had said in January. Have we seen a change in the outlook for our different platforms? Have we seen changes in customer orders or as part of our forecasting assumption of sort of what will happen in the second half? The second part of the question is on the fabless and the inventory level that we see. Is that correct?
Yeah, that's correct. Thanks.
All right. This is C.C. Wei. Let me answer that why we changed our forecast. We do observe some of the end markets become soft. As I stated in the statement that we saw some consumer electronics such as smartphone or those kind of things has been in the end market become much softer than we thought. However, we do the forecast now based on the customer's orders because of customer today, as I said, we did not see any significant reduction in our customer demand. We do expect the end demand will have some impact in the following second half of this year.
We modify our forecast as compared with January, the number. To be specific, except for the HPC. The HPC has been very strong. All other three areas like smartphone, IoT or automotive are decreasing our forecast as compared with the launch in January.
Let me take the inventory part. The inventory level of our fabless customers that we track was healthy exiting fourth quarter of last year. Given the disruption from COVID-19, we currently expect the inventory level to rise in the first half of 2020 before digesting in the second half of 2020.
Okay. Randy?
Yeah.
Do you have a second question?
Yeah. Okay. It really gets into the U.S. There's been press stories about them considering equipment license restrictions. I'm curious if you could discuss how you're managing the risk or how much risk you see from that equipment license requirement that could affect one of your key customers. In terms of the CapEx budget for this year, do you still have flexibility to make any changes to this year, either for this factor or for COVID-19, if the impact appears a bit worse? Is it pretty much locked in for 2020?
Okay. Sorry, Randy, you're a little bit breaking up. Let me try to summarize your question. Your second question, first you relate to some of the news reports on the potential for U.S. equipment license restrictions. You want to understand how does TSMC manage this risk? Then also as related to part of that, what is our CapEx flexibility for 2020 in case COVID-19 situation or these restrictions, is there flexibility in our CapEx?
Yes, that's correct. Thank you.
Okay. Let me answer your question as much as I can. We are now aware of the recent development of U.S. trade rule changes. These rule changes are still under a draft, and they are in information, but we know that the final rule is not yet finalized. After the finalized draft, there will be another 30 days of grace period for the industry to respond. In general, we share the concerns, all the concerns of U.S. semiconductor communities, such as voices from SEMI or from SIA. While the draft is not finished, we have studied the various scenarios. Yes, there may be some near-term impact. We will take work with our customer dynamically, and we will take appropriate measures to minimize impact to TSMC. For the mid to long term, we think the underlying megatrend still holds.
Some supply chain will be readjusted and the balance is out. We will be able to still capture our mid to long term growth opportunities. Therefore, the current CapEx, long term CapEx, we do not see its impact by this change.
Okay. Does that answer your question, Randy?
Maybe it is the contingency if there's any flexibility, either from this factor if it does go ahead or if it would be more on a forward basis. If you have flexibility, say the COVID-19 doesn't get contained, is largely most of the spending already planned out, kind of timed to those megatrends. If you do have flexibility to adjust that or for any potential in a downside case.
Okay. Randy is asking, do we then for our 2020 CapEx, what is our flexibility in case of COVID-19 uncertainty and such?
Right. We will remain as flexible as we can as we continue to monitor the virus situation and work very closely with our customers. At the same time, the majority of our CapEx is spent on advanced nodes that drives our growth in the next year and beyond. As we expect the multi-year megatrends of 5G-related and HPC applications to drive strong demand for our advanced technologies in the next several years continue, we will continue to prudently invest for our future growth.
Okay. Thank you, Wendell. Let's move on to the next caller on the line.
The next question is from the line of Gokul Hariharan from J.P. Morgan. Your line is now open.
Hi. Thanks for taking my question. Could we go through a little bit in terms of how we think about forecasting growth? I think given that if you look at the last two, three times where we've had economic corrections, semiconductor industry has seen meaningful declines in revenues. Now we are looking at largely flattish for semi ex-memory. Are we expecting that we get a pretty strong rebound into the second half of the year? Just wanted to go through TSMC's process of thinking about overall semiconductor industry growth, and since we also expect small inventory correction happening in second half of the year, and I have a follow-up question as well.
Okay. Gokul, let me summarize your question. I think your question is asking, in the past, when there's a severe economic correction, the semi industry also sees a large revenue decline. Why is semi ex-memory this year kind of flattish? How do we explain our full-year outlook of mid to high teens? Do we expect a more meaningful inventory correction in the second half of this year? Is that right?
That's right. Yeah.
Well, the semiconductor, excluding the memory, as I said, that the end market is the consumer electronic, what declined. However, I also mentioned that because of work from home or those communications created a lot of demand on the server, on the work communication. The HPC was very good as compared with our forecast in January. Net net, we give a kind of the semiconductor industry support this year. Probably is that those single things they want to be a little bit negative. That's based on what our forecast today. What is the second question?
He's asking sort of then, do we expect a meaningful inventory correction going into the second half?
We cannot forecast so accurately.
No, let me add something, some color. As C.C. just mentioned, based on our current outlook, our second half revenue is sort of flattish or may decline slightly. That really gives you an idea that the inventory is digesting in the second half of the year, for now as we can see.
Okay.
Okay, Gokul, does that. Yeah, go ahead.
Yeah, that addresses my first question. Thank you. Second question, could you talk a little bit about the shape of the 5 nm ramp-up in second half of the year? Previously, we have talked about this being faster than 7 nm in 2018 and probably around 10% of revenues. Are you seeing any changes to that as a result of some of the weakness that we have seen in the consumer electronic vertical? Or for 5 nm, we are still expecting a similar kind of ramp as we expected in January. Thank you.
To be sure, we don't expect any change as compared with in January, our forecast. Today, we still see the tape-out very on schedule, and the ramp-up is also on schedule. Although we can see some of the equipment delivery had been delayed a little bit, but we are working with equipment vendors. All in all, we think that 5 nm, the ramp-up is on track, and we still say that you are contributing about 10% of the total revenue.
Okay. Thank you, C.C. Let's move on to the next caller on the line, please.
We have the next question from the line of Roland Shu from Citigroup. Your line is now open.
Hi, good afternoon. First, congratulations for your very good first quarter result. I would like to follow up for this whole year revenue growth question. I think now you are looking for this mid to high teens percentage point growth for the whole year revenue. The question is, do you factor in any equipment, material, or any kind of ramp-up schedule disruption for this supply chain due to this travel ban?
Okay. No, we did not see any disruption from the material supply or any supply chain activity that has been in disruption mode. Although I did say that because of shelter in home, that some of the tool delivery has been delayed from two weeks to about one month. However, as I said, we continue to work with tool vendors and minimize the impact on the capacity building. For the whole year, we don't expect it to have a big impact.
Understood. How about for the equipment start-up point of view? For this shelter in home or travel ban, I think equipment vendor probably won't have enough engineer to do the equipment start-up. Will that impact your ramp-up stages?
Well, that has been planned. From the outbreak of COVID-19, we already work with the equipment vendor. They arrange enough engineering resources in Taiwan or all over the world. We don't worry that portion.
Okay. Thank you. For my second question, I would like to ask about your capital management. Normally, I think in the past, you funded all of your CapEx spending from your operating cash flow. Now you just partly are funded by issuance of the corporate bond. I think, Wendell, explained this actually, I would like to preserve cash invest for next growth. Question is, I think first for this issuance of the corporate bond, is there any upper limit you have? I think in order to fund your CapEx, will you continue to issue this corporate bond?
Roland, first of all, we expect our operating cash flow to continue to be sufficient to finance our capital expenditure. Secondly, the decision to issue corporate bond was made before the COVID-19. We looked at our future expansion plan. We looked at the current interest rate, and we decided it's good timing to issue a low-cost corporate bond just for any uncertainties.
Understood. Okay. For your cash dividend, I think, Wendell, you said that you would like to maintain a sustainable cash dividend in both a quarterly and annual basis. I understood, I think that your annual basis policy is paying a total cash no less than previous years. How about your quarterly cash dividend policy? Is this at least a TWD 2.5 per share per quarter policy to TSMC?
Roland, your question on the cash dividend, you say that our sustainable cash dividend policy on an annual basis means we will not pay less than TWD 10 in any year going forward. Your question is on a quarterly basis, will we pay less than TWD 2.5 on a quarterly basis?
No.
Okay.
The quarterly cash dividend will be subject to change. However, the whole year annual cash dividend, I think that will be still maintained to no less than previous years. Right?
No. Roland, the quarterly cash dividend will not be lower than the previous quarter. As a result, you won't have a lower annual dividend than the previous year.
Okay. Even for less than a year from now, we are paying TWD 2.5 per share per quarter. It means going forward, our quarterly cash dividend won't be less than TWD 2.5 going forward, right?
Yes, you are correct. Yes.
Okay.
Okay.
Thank you.
Thank you, Roland. Let's move on to the next caller on the line, please.
Next question is from Bill Lu from UBS. Your line is now open.
Hi there. Good afternoon, thanks for taking my question. My first question is on five nanometers. It is TSMC's first full EUV node, and it is now in production. Two-part question. One is, I know this year it is on track. If you look at the customer adoption going to 2021, can you give us some ideas for maybe the number of customers that are going to use 5 nm or maybe revenue contribution? Secondly, now that we're in production, can you talk about the learning on five so far? Specifically, can you talk a little bit about the maybe cycle time versus seven nanometers, the yield ramp, and maybe on the cost side, how it compares to seven just because it is the first EUV node. Thank you. All right. You want to repeat the question? Sure. Okay. Okay.
Bill's question is on 5 nm in EUV, two parts. One, he wants to know that we are seeing ramp in the second half of this year, but what does 5 nm look like for 2021 in terms of customer adoption, the number of customers or the revenue % contribution in 2021? That's the first part. The second part is, can we share some of the learning that we have seen on 5 nm in terms of cycle time, yield, or cost versus 7 nm?
Well, Bill, let me answer the first part first. This year, as we said, we are going to ramp up steeply and smoothly. How about the 2021? Continue to ramp up. That I can answer you. How many customer or how many tape outs? Actually, the customer come from everywhere.
I mean, there's a mobile phone, HPC related, and maybe some of them are from the IoT and automotive. We don't know yet. Today, we got a lot of tape out from mobile and HPC related. The cycle time, the yield today is quite good. Actually, it's ahead of our plan. What is the cost? Cost is reasonable. Of course, we are continuing to work on productivity improvement so that we can share with our customer
As far as I can know, I can understand the cost, the cycle time are all very good. That's all I can say.
Okay. Do you have a second question, Bill?
Yeah. The second question is on COVID-19, and it looks like the company's doing a really good job of managing it, in terms of fab operations. I'm wondering if you could talk a little bit more about how this might impact your decision-making longer term. How would you change how you manage the company, given COVID-19? For example, does this change your view at all in terms of building a fab in the U.S.?
I don't think that because of COVID-19, we change our decision-making process or we reduce our efficiency. I do believe this is a temporary phenomena. Although I dare say that we have very important things, I dare say that we have practiced some work from home, but I don't anticipate that this one will continue. For the long term, there's no change. TSMC will continue to work closely with our customer. We have devoted our resources into R&D, and we are pursuing the manufacturing excellency. Affecting the plan to build a fab in the U.S., let Mark make some comments.
Well, we do the long-term planning always to the interest of TSMC. Currently, this U.S. fab planning is more to, for the long term, tap global talent for TSMC, rather than risk management. We think that at least the COVID-19 impact on humankind, that is a once in a century, and I think we will learn to deal with COVID-19 as a global community, and while keeping our supply chain cost effective and efficient at the same time. That is what I think. There's no abrupt position change because of COVID-19 regarding this fab distribution construction.
Does that answer your question, Bill?
Yes. Thank you very much.
All right. Thank you. Operator, can we move on to the next caller, please?
Sure. The next question is from the line of Bruce Lu from Goldman Sachs. You may now proceed.
Hi, good afternoon. I want to ask about the 5G smartphone. Management mentioned that 5G total smartphone growth with revised standard, total smartphone shipment, but the penetration rate for 5G remain unchanged. Can you tell us that, with this COVID-19 or the current situation, any product mix shift when you do the revision, or why is that high-end 5G phone or low-end smartphone, they decline to 10? Why the penetration rate remain unchanged? In addition, do you see the 5G smartphone penetration rate in different geography, do you see any changes when you do this revision?
Okay. Bruce, sorry. Let me repeat your question to make sure we understand. Your question is on the 5G smartphone. As CC highlighted, we revised the total shipments down to a high single digit decline. Why do we still maintain a mid-teens penetration rate for 5G smartphones? You want to know if we can talk about any product mix shifts that we see in these smartphones, for example, high-end versus mid-end versus low-end, and why our mid-teens has not changed, and also, if we can add some detail or color by geography.
Yes, thank you. Let me answer the question first. We did lower down our expectation or our forecast on the smartphone, the total unit, by high single digits. However, we still see the penetration of the 5G smartphone as a 10 kind of mid-teens %. The number of the 5G smartphone also reduced. Because of the same percentage with the total number being reduced, so that the 5G phone also reduced. That's one thing. What is the second question?
Bruce wants to know, do we have any detail on between high, mid, low end or by geography?
That's too much of the details. I cannot release that information. Let me say that 5G smartphone has been very, very popular, and we expect that one to grow. Okay.
Okay.
I try to follow up this, because for the first quarter, we definitely see that expensive or higher price smartphone, the sales is much weaker than the mid-end and low-end one. That's why we are surprised that the penetration rate for the 5G smartphone remain unchanged. Do you have any rationale to support the forecast?
Well, I think it's just named called 5G, right? All I can say is that it's going to be very popular
I see. Okay. Thank you. The second thing is that we have a lot of investors asking that because of current situation, the end consumer, the demand is facing some correction. Why is that TSMC, as a foundry supply for everyone, do not see a meaningful order cut as of now? I mean, why is that cause this kind of big time lag between the real end demand situation and their production?
Okay. Let me just repeat your question, Bruce. Your question is, investors are asking, when you look at the end consumer, you could see a very big correction. Why is TSMC not seeing any types of order cuts? Why is there a deviation between what we are seeing and end market?
The big time lag, because as management mentioned earlier, management also expect or prepare some orders cut in the second half. The time lag between the production control and the consumer demand correction is more than three months or four months. Why is that cause this delay?
First, you are talking about TSMC's observation from the end market to TSMC's business. TSMC has the leadership in the technology, and we are ramping up the 5 nm and 7 nm, and that had been very popular and widely used by all the customers. Not everybody offer this kind of a technology coverage, right? In our technology and our ramping up, we are not seeing any big effect yet. That was some delay, the end market to TSMC's business. We do see that the end market is dropping. We also expect some demand from TSMC's customer will be adjusted. However, in this COVID-19 impact, we do believe that TSMC will be less affected as compared with the other foundries.
Do you expect the order cut in the second half will more at the legacy node instead of our leading node, that's why TSMC can be better than competitor?
I would like to say yes, but let's wait and see.
Okay. Thank you.
Okay. Thank you, Bruce. Operator, let's move on to the next caller on the line.
The next question is from the line of Sebastian Wu from CLSA. Your line is now open.
Thanks, Jim, accepting my questions. First one that I like to follow on the CapEx. Historically, when TSMC, if I remember it right, every time when TSMC lower revenue guidance within the year, the CapEx will be adjusted lower accordingly. Even if just a 5% adjustment on the revenue, you also adjust the CapEx. Sometimes even bigger magnitude. It looks like this time, the revenue adjustment is as long as 8% or high single digit, but CapEx remains the same. My question is, first, is it because that TSMC sees something very important, very big, and very confirmed in the pipeline through the end of this year or 2021 that you still need to expand no matter what?
TSMC is sort of leaving some flexibility here given that some equipment supplier or maybe one particular equipment supplier has very long lead time, a lot of their power to some extent, and you are also fighting with your competitors, fighting with that equipment availability. You don't want to cancel that at this point. Which one is more true? Thank you.
Okay, Sebastian, let me re-summarize your question to make sure we understand.
Yeah.
Your question is on our CapEx. Your question is that while we have our full-year outlook, we have adjusted versus what we said in January, we are reaffirming our CapEx guidance in January. You want to know why are we not adjusting our CapEx load because our full-year outlook has been adjusted. You propose two reasons. Is it because, A, we have confirmed customer demand profile that goes into 2021 and beyond, so that's why we continue to invest? Is it B, that certain of our equipment suppliers may have a very strong bargaining power, so we have no choice, so to speak, but to continue to spend because our equipment supplier has a strong position. Is that correct?
Exactly. Thanks.
Sebastian, as we mentioned earlier, that we are looking at this megatrend, multiple year of megatrends of 5G related and HPC applications. These trend continues, the demand for our advanced technology will continue. Most of the CapEx that we spend this year is for the growth of next year and beyond. That is reason that we are reaffirming our CapEx numbers at this moment. I tend to go with your number 1 options, option name.
I think.
Okay.
Do you have the question now?
Yeah. Okay, thank you. My second question is, at the last quarter, the company gave us some guidance about the four major platform, right? HPC, mobile grow 20%+, IoT, auto grow mid-teens. Can you give us an update now?
Okay. Sebastian, you want to know what is our updated forecast for the four growth platforms for 2021?
For the whole year?
Yes, for this year.
Okay. Smartphone and HPC platform growth will be slightly higher than the corporate average. IoT will be similar, automotive will be below corporate average. Those are all in US dollar terms.
Okay.
Yeah.
Does that answer your question, Sebastian?
Yeah, that answers. I have a follow on this one, if I may. That the smartphone is grow still above the corporate average. That means the smartphone will still grow mid to high teens. I think the TSMC forecast the smartphone shipment to decline high single digits. This year, so which means that the content imply the content increase for TSMC is, I've had as like 20% plus this year in total. Is that right?
You have a very good calculation, and you are right.
Okay, got it. Thank you.
Thank you, Sebastian. Let's move on, operator, to the next caller on the line.
The next question is from Charlie Chan from Morgan Stanley. Please proceed.
Hi. Good afternoon. Thanks for taking my question. I have two questions. One is more short-term, and another one is long-term, maybe one or two years later. First of all, by compare your guidance versus previous forecast in DreamForce, the order cut reflects to your third quarter revenue. Do you think this year the third quarter revenue is going to be sub-seasonal, I mean, in terms of year-on-year growth? 7 nm-
Sorry
was that pre-type at the beginning of the y
Sorry.
Now you expect that-
Charlie.
Charlie, we cannot hear you clearly.
Yes.
Can you move closer to the phone line and start? We couldn't hear your first question. Please repeat it.
Okay. I actually use AirPods Pro, so let me try again. First question is about your third quarter revenue. Do you expect that growth is going to be sub-seasonal? Given some smartphone order cuts, do you still see 7 nm capacity is in shortage in 3Q? Thank you.
Okay. Charlie is asking a short-term question on third quarter. Do we expect our third quarter revenue to be sub-seasonal? Do we expect 7 nm to remain full for third quarter?
Charlie, we're not giving out the guidance for the third quarter yet. It's still early, especially under this uncertain environment. We will have a clearer picture in July and share with you.
Okay.
Okay.
What's your second question, Charlie?
Actually, linked with that, I guess investors also want to know your internal scenario analysis about COVID-19 impact. I think at the open remarks, you mentioned the company assumed the virus to peak in June. There seems to be some signs of a second wave outbreak globally. In your team's bear case scenario, what would be the TSMC growth in 2020? By the way, the second question is very simple. On 3 nm, do you expect the customer number and demand in 3 nm can compare to what you have on 5 nm? Just two questions for both. Thank you.
Okay. That's a little more than two, okay. Let me just repeat your two questions. one, you want to know our internal scenario for COVID-19. We had said, C.C. had said that it will stabilize by June. What if it's worse? What happens to our forecast? That's number one. Number 2, for 3 nm, what is our number of customers and the demand profile as compared to 5 nm?
Okay, let me answer the second question first.
Yeah. Okay.
Under 3 nm. All right. 3 nm, as I said, our technology development is on track. We are working with customers to further define the specs and then define the technologies. Of which one, I cannot say. Again, I can share with you is in mobile phone and HPC related applications. The first one, we are talking about the impact of COVID-19. We are giving our forecast based on the COVID-19 will be stabilized. The impact or the spillover will be stabilizing in June. What happens if it's longer than that? I don't know. I mean, if it's longer than that, the macro economies will be much worse than we thought. Definitely will affect the semiconductor industry, will affect the foundry industry, and certainly also it will affect TSMC. We don't know yet.
Let's be hopeful that all the human beings will be safe and be healthy, and everything stabilizing in June.
Okay, thank you, C.C. Operator, can we move on to the next caller on the line, please?
Sure. The next question is from Mehdi Hosseini from SIG. Your line is now open.
Yes. Thanks for taking my question. I want to go back to your comment about gross margin trend in the second half of 2020. You highlighted the fact that the mix would have adverse impact by as much as several point. I want to get your view of your flexibility. In case coronavirus impact were to be more than just one quarter, what can you do to better manage utilization rate and therefore minimize the gross margin impact to only a couple of percentage point? And I have a follow-up.
Okay, Mehdi, let me repeat your question. You're asking about our second half gross margin outlook. When our CFO has already highlighted the two factors impacting our second half gross margin, you want to know what if COVID-19 worsens, what measures can we further take to better manage, or can we do things to better manage our utilization rate to better support or help our gross margin?
Okay. Generally speaking, if the COVID-19 impact prolongs, we will expect a lower utilization. At the same time, what we have done before, and we may be able to do the same, is to pre-build some of the products that our customer said they will be looking for to receive. That's one way of minimizing the impact.
Do you have a second question, Mehdi?
Yes. Just as a follow-up, if you were to pre-build for your customer and customer's own demands were to weaken, then perhaps customer's orders beyond second half, looking into the first half of next year, could be adversely impacted. Maybe the adverse impact of a more prolonged coronavirus would have a gross margin downside into next year, into 2021, due to the fact that you are pre-building for customers?
Okay. Mehdi, your question here is a follow-up to Wendell. If we pre-build but the customer demand continues to weaken or worsen, won't that create more issues for TSMC in 2021?
When we pre-build, we are pretty sure that the customers will take it. Yeah. That the demand will be there.
Thank you.
Does that answer your question? Yeah. Okay?
Yes. Thank you.
All right. Thank you. Let's move on to the next caller, please.
The next question is from Brett Simpson from Arete. Your line is now open.
Yeah. Thanks very much. I just had a question on your second half implied outlook. I think it's down 3% revenue, just backing out what you said about Q2 and what you've delivered in Q1. You mentioned in your prepared remarks that you've seen no major order cuts as yet. If I just step back and look at your Q1, TSMC just posted smartphone sales growth up 50% year-on-year in smartphones when smartphone end demand is negative. Your China business in Q1 is up almost 80% year-on-year, and your biggest customer in China, Huawei, has posted inventories up 75% in 2019. Just looking at all this, maybe fabless customers are not building inventory per se, but it's clear that at the end customer, the OEMs, seem to be significantly stockpiling, and they're not cutting orders yet.
Given all this, I'm just wondering how big you think this stockpiling is at present further up the food chain, and why it won't lead to a more material decline in your second half outlook than you're suggesting. Thank you.
Okay. Brett, your question is basically, you're saying that if you look at our first quarter of business, there's a large increase year-on-year in our smartphone, in our revenue from China, and Huawei has seen an increase in their inventory year-on-year as well. Your question is how to reconcile this with TSMC's business outlook. Let me remind you, last year, 2019 first quarter, if you're looking first quarter year-on-year, our business was impacted by photoresist. It's not an apples to apples.
Right. Basically, the first quarter of this year, we see an inventory increase in our fabless customers. We expect that continue to rise because of this COVID-19 impact. It will start to digest in the second half.
Does that answer your question, Brett?
Well, just to understand better how you're thinking about this, because we haven't seen an inventory build up like this at the OEM level for some years, and I just wanted to understand how big you think this is at the moment at the end customer.
This is a very uncertain time. We don't want to quantify the numbers at this moment, but it is building, and it's above the last year's year-end level.
Okay. Thanks very much.
Okay. Thank you, Brett. Let's move on to the next caller on the line. We still have a few more.
The next question is from Frank Lee from HSBC. Please proceed with your question.
Great. Thank you. Sorry, I had two questions. My first question is more on just a bit of housekeeping related to your previous guidance you gave. I think back in January, you had guided for foundry growth to be up 17%, excluding Samsung's captive supply. You just gave a new guidance for the year. Is that an apple and apple? Are you including Samsung or not including Samsung in that number?
Not including Samsung. It's an apple-to-apples comparison.
Okay. Not including Samsung. Okay. The second question I had, you've also talked quite a bit on this call about the work from home driving your HPC business get stronger than you continue to drive that business. Outside of HPC, have you seen? I guess maybe this relates to it as well. What about just overall, if you extend it to the overall PC market, are you seeing some signs of stronger than expected, and could we see potentially a stronger than expected PC market for this year as a result of this trend?
We saw the demand from tablets has been increasing. That's what we saw. On the PC, probably flat-ish. On the gaming console, increasing. That's so far the data that we observed.
Okay.
Okay? Also, just to as PC said, both our forecasts for foundry in January and today are including Samsung. It's apples to apples, just to make that clear. Okay, operator, let's move on to the next caller, please.
Next is from KekYee Teoh from Princeton. Your line is now open.
Hi. Just want to understand a bit more about your virus assumption. You said that you are assuming the virus will stabilize in June. Can you translate the virus assumption stabilizing in June into handset demand? How much are you looking at handset demand for 2Q and 3Q? Thank you.
Okay. Your question is, under our assumptions for COVID-19, what is our assumption for the handset demand in 2Q and 3Q? We give you a whole year's assumption, but I cannot be more specific. In the 2Q, let's say that seasonality, every year such as seasonality, the smartphone actually decrease. All right? Start to bounce back in third quarter and the fourth quarter. How many units? I cannot to be so specific to share with you. Okay?
Okay.
Do you have a second question?
The 5G content increase impact is mainly throughout the year or more tilted towards the second half? That's the last question. Thank you.
He's asking the silicon content increase, for 5G, is it throughout the year or is it mainly in the second half of this year? It's in the 5G world, not the ICJ. Yeah. Throughout the year. Okay, operator, let's move on to the next caller. I believe it's a follow-up question from Gokul at JPMorgan, please.
Yes. Gokul, your line is now open.
Thanks for taking my follow-up question. First of all, could you talk, I think just maybe stepping away from COVID-19, hopefully we all can soon. In the past downturns, we have seen meaningful IDM outsourcing happen. I think if I think about GFC, we had multiple current customers of TSMC give up leading edge and move to TSMC. How should we think about or how is TSMC thinking about the potential for further IDM outsourcing over the next two to three years as we get through this process, which will potentially put some pressure on some of the potential IDMs as well? A related question is, I think Mark has answered in the past about potential M&A opportunities. Do we consider overseas fab acquisition as a right strategy for TSMC if it comes with a meaningful customer attached to it.
I know that TSMC has not really done any meaningful fab acquisition for a long time. I think probably 2000 was the last meaningful one. Just wanted to understand how the management team thinks about fab acquisition as a potential strategy, or any thoughts around that. Thank you.
Gokul, you have two questions. One is on the IDM outsourcing, do we see the further potential for further IDM outsourcing under this environment in the next few years. The second part of your question relates to our potential M&A, and your question is that in terms of an overseas fab acquisition, we'll be considering overseas fab acquisition if meaningful customer business were to be attached to it.
Well, let me answer the IDM outsourcing question first. The current downturn might further accelerate the outsourcing for IDMs, but we don't know yet. In the long term, IDM outsourcing will continue. The foundry model has proven to be an economic winning situation for both foundry and its customer, that as we said, we expect this one continue to happen. This is long-term strategy.
Let me answer the second question about the overseas fab acquisition. We do have a continued scouting about the possible fabs, but those are mostly only mature fabs, and we don't exclude the possibility. It all depends on the investment and return. If it economically makes sense, then we go it. It's very challenging for the mature fab to be, again, financially viable so far we've seen. We still continue evaluating. Obviously, fab acquisition is unlikely to be a leading fab because our leading fab is a technology with very sophisticated complexity. Also, none of the fab has performed like a TSMC fab. It's really a service body, technical service body instead of the structure, facility, or equipment. Our fab really is a technical service body.
That has to be built, and therefore, that challenge us to acquire the leading-edge fab overseas. Okay?
Thank you.
Does that answer your question, Gokul?
Yeah. Thanks.
Okay, great. In the interest of time, maybe we'll take about two more questions. Let's move to the next caller, please.
Next is from Charlie Chan from Morgan Stanley. You have your line open.
Oh, thanks for taking my call. Those are some old questions, but I want to get whether management has new thoughts. For example, not acquiring, but any plan to build a fab in the U.S.? That is the first question. I also want to get some clarification because the recent news keeps saying China fab like SMIC is gaining share, and I can see that make some sense because China is pursuing localization. What is the management forecast for your long-term market share in China, and what's your strategy to protect your China market share? Thank you.
You have two questions, Charlie. One is what is our plan for a fab in the U.S., to build a fab in the U.S.? Secondly, you're asking about China, that SMIC is gaining market share. There's increased localization. What is TSMC's share outlook for China and strategy to protect ourselves?
Okay. Let me answer the first question regarding U.S. fab. We are now actively evaluating the U.S. fab plan. As I told the investor before, there is a cost gap, which is hard to accept at this point. Of course, we're doing a lot of things to reduce that cost gap. There are two obstacle currently is under actively evaluating is, if we do a U.S. fab, it will have to be a leading-edge fab or at least close to leading-edge fab. The supply chain for the leading-edge fab at this point, it appears that we need to also establish at the same time. Currently, we are serving our supply chain partners, whether they will be able to go along so that the quality of the material to support a leading-edge fab can be cost effective in U.S.
Secondly, of course, as I said earlier, this fab has to be an engineering service body. In Taiwan, all the fabs are very highly technical people. In the fab, all master degree and above. We try to duplicate that in U.S. It takes a lot of planning and organization to be able to enable such a fab. As I said, there are opportunities for us there. We try. Hopefully, we can better tap the global talent for TSMC in the long term, expanding the new site in the U.S.
Jessica, could you repeat the second question?
Sure.
The second question is: how do we view the competition and the market in China? Charlie points out that he believes SMIC is gaining share, and there's increasing trend of localization. What is TSMC's strategy?
Okay. I don't think that the SMIC is gaining share, to answer your question first. TSMC has been very competitive everywhere. We are everybody's foundry. In every location, we offer the best technology, best service. We're working with the customer closely. We are pretty successful in gaining market share rather than just losing the market share. Let me say that. Specifically for China as a foundry, we're also very competitive because of a lot of China customers have been working with TSMC. I know that SMIC has been very aggressive, so far we are competing very well. That's all I can say.
Okay. Thank you. Thank you, Charlie. Operator, let's move on to the last question from Sebastian at CLSA.
Your line is now open.
Yes. Can you hear me? Thank you, chair, for squeezing me in. I have two follow-ups. The first one, I just want to double-check that if I hear it correctly, I think the CCO earlier mentioned that you have reserved the higher numbers of tape out on N5 versus N7 at the same stage. Is that right?
That's right.
Okay. If my note is correct, then in your year one manufacturing, or year one mass production for 7 nm, you have 30-plus tape outs on 7 nm, and year two, N7, you have 50-plus, and then you go on to 100-something. I think this year is year one for 5 nm. We can say that you have 30-plus of the 5 nm tape out at this point.
I'm not willing to release the actual number, but all I can say is now in N5, we have a customer from smartphone, customer from HPC-related area.
Okay.
The activity, actually, we saw more tape-outs as compared with the same period of N7, because N5 actually is complicated. I would believe that customer will take more time to work with TSMC as early as possible. That's what they are taking.
Okay. Do you expect N5 to be potentially bigger than N7 in terms of the capacity?
Yeah. Certainly, we expect that.
Okay. On the capacity-wise, not revenue, capacity.
Oh, on the capacity-wise.
Volume.
Where's the note coming right now?
Let's say the two years out.
We don't comment on the capacity by note, Sebastian. As C.C. Wei said, N5 will be a very big node. Do you have a second question?
Yes. Second question is that I remember, most of the time, in the past few months when we or media have asked TSMC questions about U.S. potential further sanction on Huawei or China on technology side, most of the time your answer is that that is not official in terms of you guys don't want to answer any hypothetical questions. I feel like, this time, TSMC, the company, is addressing the questions more clearly, although there's no official announcement yet and no official answer yet. Am I interpreting that or framing that right, that it seems like the risk or the possibility of this potential sanction is higher, or you indicate to something else?
Sebastian, let me just make sure we understand your question correctly. Your question is on the potential rule changes from the U.S. that reading news reports in the past that TSMC have always said, "We don't comment on hypothetical," but you're asking about comments today because they change in the tone or the view, even though no official rule change has been announced.
Yeah, there's no official rules yet announced. Just let you know, the U.S. Semiconductor Community Societies wrote multiple letters to the White House as well as the Commerce Department, urging this rule not to be changed. We do sense there is an urgency from the industry that having that rule changed will hurt the U.S. semiconductor community. We share the same opinion. Okay.
Okay.
All right.
That's it. Thanks.
Thank you, Sebastian. Okay, 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 in 24 hours from now, both of which 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 please have a good day. Thank you.
Goodbye.
Thank you.