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-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 dialing lines are in listen only mode. The format for today's event will be as follows: First, TSMC's Chairman, Doctor.
Mark Liu, will provide the opening remarks next, TSMC's Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the Q1 2020, followed by our guidance for the Q2 2020. Afterwards, Mr. Huang and TSMC's CEO, Doctor. C.
C. Wei, will jointly provide the company's key messages. Then Doctor. Du will host the Q and A session where all three executives will entertain your questions. As usual, I would like to remind everybody that today's discussions may contain forward looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward looking statements.
Please refer to the Safe Harbor notice that appears on our press release. And now, I would like to turn the call over to TSMC's Chairman, Doctor. Mark Liu
for his opening remarks. Good afternoon, everyone. My name is Martin 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, and we are in this together. In the meantime, I want to extend our best wishes to you and your families for staying safe and healthy. So 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 Q1 followed by the guidance for the current quarter. 1st quarter revenue in NT decreased 2.1% sequentially, which is less than seasonality due to the increase in HPC related demand and the continued ramp of 5 gs 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 CNY2.6 billion, mainly as 5 nanometer technology moved from R and D stage to mass production during the Q1. Operating margin increased by 2.2 percentage points sequentially to 41.4%. Overall, our first quarter EPS was NPL4.51 and ROE was 28.4%. Now let's move on to the revenue by technology. 7 nanometer process technology contributed 35% of wafer revenue in the first quarter.
10 nanometer was 0.5% and 16 nanometer was 19%. Advanced technologies, which are defined as 16 nanometer and below, accounted for 55% of wafer revenue. Now move on to the revenue contribution by platform. Smartphones increased 9% quarter over quarter to account for 49% of our Q1 revenue. HDT 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 the balance sheet. We ended the Q1 with cash and marketable securities of CLP 562,000,000,000.
On the liability side, current liabilities remain relatively flattish. On financial ratios, accounts receivable turnover days was 42 days. Days of inventory decreased 2 days to 53 days with higher wafer shipment in the quarter. Now let me make a few comments on cash flow and paybacks. During the Q1, we generated about NT203 billion in cash from operations, spent NT193 billion in CapEx and distributed RMB65 1,000,000,000 for Q2 'nineteen cash dividend.
We also increased RMB20 1,000,000,000 in short term loan mainly for hedging purposes. Overall, our cash balance decreased NT25 1,000,000,000 to NT431 1,000,000,000 at the end of the quarter. In U. S. Dollar terms, our Q1 capital expenditures reached RMB6.4 billion.
I have finished my financial summary. Now let's turn to our Q2 guidance. Based on the current business outlook, we expect our 2nd quarter revenue to be between $10,100,000,000 $10,400,000,000 which represent a 0.6% sequential decrease at the midpoint. Based on the exchange rate assumption of TWD1.30, gross margin is expected to be between 50% 52%, operating margin between 39% 41%. Now I will hand over the call to T.
T. 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-nineteen preventive measurement at To prevent the epidemic of COVID-nineteen, many of us around the world have had to change the way we live and work since mid January. Let me start with by sharing some things about what we take at TSMC.
Our top priority is to protect the health and safety of all our employees at all times. As an outbreak of COVID banking, we immediately suspended all non critical business travel and restricted visits on-site access with mandatory hair screening. All employees are required to do daily temperature checks, we hear declarations, wear mask all the time and practice social distancing in the office. Since late March, we have taken further preventive actions such as having employees work from home where possible. We are physically separating outside employees into rate and routines to reduce the risk of community spread.
On March 18, we valued 1 employee who tested positive for COVID-nineteen 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 safely trace all the other individuals who were in contact. The neighboring employees has all tested negative, while all other employees who were in contact had entered and completed the 14 day share quarantine and now back to work. As a result of the strict preventive measures 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 Q4 with revenue of RMB310.6 billion or US10.3 billion dollars in line with our guidance just 3 months ago. Our Q1 business declined about 1% sequentially, which is much less than seasonality due to the increasing HPC related demand and the continued ramp of 5 gs smartphone. Moving into Q2 2020, we expect our revenue to be flattish as weaker mobile product demand is expected to be balanced by continued 5 gs 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-nineteen in the first half of this year.
In the near term, we have observed weaker land demand in applications such as consumer electronics and automotive. Meanwhile, we have also observed better demand from HPC as compared to 3 months ago, driven by trends such as our 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-nineteen to continue to bring some level of disruption to the end market demand. For the full year of 2020, we now forecast normal semiconductor market, excluding memory growth, to be flattish to slightly decline, while country industry growth is expected to be 5 single digit to low teens percentage. For TSMC, although this uncertainty exists, we believe we can do better and grow at mid to high teens percentage in 2020 in U.
S. Dollar terms. All the above forecast for semiconductor, excluding memory market, foundry and PHMC, are based upon the assumption of COVID-nineteen stabilizing in June of this year. Now let me talk about the progress and development of 5 gs and HPC. With the recent disruption from COVID-nineteen, we now expect global smartphone units to decline high single digit year over year in 2020.
However, 5 gs network deployment continues and OEMs continue to prepare to launch 5 gs phones. We maintain our forecast for mid teens penetration rate for 5 gs smartphone of the total smartphone market in 2020. We continue to expect faster penetration of 5 gs smartphones as compared to 4 gs over the next several years with substantially higher silicon content. Thus, we believe 5 gs as a multiyear megatrend is still strong and will fuel the course of all 4 of our course platforms in the next several years. HPC will be another major long term course driver for TSMC.
In the next few years, a smarter and more intelligent world connected by 5 gs network will require massive increase in computation power. CPU, networking and AI accelerators will be the main goals everywhere for our HPC platform. Thus, while near term uncertainty exists, we are continuing to invest in our R and D and technology capabilities to capture the future opportunities from the strong 5 gs related and HPC makeup trend. 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. Now let me talk about the ramp up of N7, N7 plus and the status of N chips. In its 3rd year of ramp, N7 continued to see very strong demand across a wide spectrum of products for mobile, SPC, IoT and automotive applications. Our NTM class is entering its 2nd year of ramp using EUV Lithography technology, while paving the way for N chips. Our N6 provides a clear migration path for Next Wave N7 products, but the design rules are fully compatible with N7.
NCS has already entered its production and is on track for volume production before the end of this year. And GY have one more EUV there than N7 plus and will further extend our 7 nanometer family well into the future. We expect our 7 nanometer family to continue to grow in its 3rd year, and we affirm IRR contribute more than 30% of our wafer revenue in 2020. Now let me talk about our N5 status. N5 is already awarded production this good year.
Our N5 technology is a full node stripe for our N7 with 80% Dodge Vensitivity gain and about 20% speed gain compared with M7. N7. N5 will adopt the EUV extensively. We expect a very fast and smooth ramp of N5 in the second half of this year, driven by both mobile and SDC applications. We reiterate 5 nanometer watt contributes about 10% of our wafer revenue in 2020.
N5 is a Bondi Industries and most advanced solution with best PPA. We observe a higher number of paper outs as compared with N7 at the same period of time. We are also continuously enhancing to further improve the performance, power and density of our 5 nanometer technology solution into the future as well. Thus, we are confident that 5 nanometer will be another large and long lasting node for TXMC. Finally, I will talk about our N3 status.
Our N3 technology development is on track with which production scheduled in 2021 and target volume production in second half of twenty twenty two. We have carefully evaluated all the different technology options for our M3 technology, and our decision is to continue to use field electronics infrastructure to deliver the best technology maturity, performance and cost. Our N3 technology will be another 4 node Striderform RMB5 with about 70% logic density gain, 10 to 15 speed gain and 25% to 30% power improvement as compared with M5. Our 3 nanometer technology will be the most advanced of 1 grade technology in both PPA and transistor technology, one 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 2nd quarter and second half profitability outlook. We have just guided Q2 of 2020 gross margin to be similar to the Q1. Looking ahead to second half, we expect the steep ramp up of our 5 nanometer will dilute our second half gross margin by about 2 to 3 percentage points.
In addition, our overall capacity utilization may be impacted by the uncertainty from COVID-nineteen. 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 anticipation of the growth that will follow in the future years. While the impact of COVID-nineteen virus brings near term uncertainties, We expect the multiyear megatrends of 5 gs related and HPC applications to continue to drive strong demand for our advanced technologies in the next several years. Thus, we will affirm our 2020 capital budget to be between USD 15,000,000,000 $16,000,000,000 Now I will make some comments on our capital management and shareholder returns. The objectives of TSMC's capital management are to fund the capital 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 and A session, I would like to remind everybody to please limit your questions to 2 at a time before our management answers your
The first question we have is from the line of Randy Avan from Credit Suisse. Your line is now open.
Okay. Yes. Thank you. Good afternoon. First question, it was just 2 parts.
I wanted to go into the change in forecast versus January. If you could give an update on the change in expectation across our growth platforms, in which areas are you revising? And have you seen I'm curious if you've seen the change in customer orders or you're proactively expecting those to come? And the second part is if you sometimes give a view on inventory levels, factoring your sales have held up and flat in guidance. If you could give an expectation on where you think inventory levels at your customers are trending and if you're factoring in any risk of correction on inventory levels as some of the supply bottlenecks ease.
Okay. Randy, please allow me to try to make sure repeat your question. So your first question is 2 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 is part of our forecasting assumption of sort of what will happen in the second half? And then the second part of the question is on the fabless and inventory level that we see. Is that correct?
Yes, that's correct. Thanks.
All right. This is Yixiwei. Let me enter that while we change our forecast, because we do observe some of the end markets become soft. As I stated in the statement, we saw some consumer electronics such as smartphone or load balancing has been in the end market become much softer than we thought. However, so we do the forecast now based on the customers' order because of customer today, as I said, we do not see any significant reduction in our customer demand.
But we do expect the end demand will have some impact in the following second half of this year. As a result, we changed our volume value by our forecast as compared with January 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 that we announced in January.
Let me take the inventory part. The inventory level of our fabless customers that we track was healthy, exiting Q4 of last year. However, given the disruption from COVID-nineteen, we currently expect the inventory level to rise in first half of twenty twenty before digesting in second half of twenty twenty.
Okay. Randy,
do you
have a second question?
Yes. Okay. Second question, and it really gets into the U. S. There's been press stories about them considering equipment license restrictions.
And 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? And 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-nineteen if the impact appears a bit worse? Or is it pretty much locked in for 2020?
Okay. Sorry, Randy, you're a little bit breaking up. So let me try to summarize your question. So your second question, first, you relate to some of the new reports on the potential for U. S.
Equipment license restrictions. So you want to understand how does TSMC manage this risk? And then also as related to part of that, what is our CapEx flexibility for 2020 in case COVID-nineteen 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. However, these rule changes is still under track. And they are informations, but we know that the final rule is not yet finalized.
And after the finalized draft, there will be another 30 days of grading 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 are we have studied various scenarios.
And yes, there may be some near term impact. And we will take work with our customer dynamically, and we will take appropriate measures so that to minimize impact to TSMC. However, for the mid to long term, we think the underlying megatrend still holds. And some supply chain will be readjusted and the balance is up. So we will be able to still capture our mid to long term growth opportunities.
And therefore, the current long term CapEx, we do not see this impact by this change.
Okay. Does that answer your question, Randy?
Yes. And maybe it is the contingency if there's any flexibility either from this factor that doesn't go ahead or if it's more would be more on a forward basis. But if you have flexibility, say the COVID-nineteen doesn't get contained, it's largely most of the spending already planned out, kind of tied to those megatrends, but if you do have flexibility to adjust that or any potential in a downside case.
So you okay. So Randy is asking, do we then for our 2020 CapEx, is there any what is our flexibility in case of COVID-nineteen 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 multiyear megatrends of 5 gs 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 JPMorgan. Your line is now open.
Hi, thanks for taking my question. So 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 2, 3 times where we've had economic corrections, semiconductor industry has seen meaningful declines in revenues. Now we are looking at largely flattish for semi x memory. So are we expecting that we get a pretty strong rebound into the second half of the year in terms of so just wanted to go through TSMC's process of thinking about overall semiconductor industry growth.
And since we also expect small inventory collection 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. So why is semi ex memory this year kind of flattish? And how do we explain our full year outlook of mid to high teens?
And do we expect a more meaningful inventory correction in the second half of this year? Is that right?
That's right. Yes.
Well, the semiconductor, excluding the memory, as I said, the end market in the consumer electronics were declined. However, as I also mentioned that because of work from home or those communications created a lot of demand on the server and the WAD communication. So the HPC was very good as compared with our forecast in January. Net net, so we give kind of the semiconductor industry supports this year, probably means that those single digit growth could be a little bit negative. That's based on what our forecast today.
And what is the second question? You're asking sort of then do we expect meaningful inventory correction going into the second half? We cannot forecast it so accurately, but
Let me make add something, some color. Now as C. D. Just mentioned, based on our current outlook, our second half revenue is so called flattish or may decline slightly. That really gives you an idea that the inventory is digesting in the second half of the year as for now as we can see.
Okay. Can you go forward to that address yes, go ahead, Youss. Yes.
That addresses my first question. Thank you. Second question, could you talk a little bit about the shape of the 5 nanometer ramp up in second half of the year? I think previously, I think we have talked about this being faster than 7 nano 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 Fine Nano, 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 the in January, our forecast. Today, we still see the tape out very unscheduled, and the ramp up is also on schedule. Although we can see some of the equipment delivery has been delayed a little bit, but we are working with incredible vendors. All in all, we think that the 5 nanometers ramp up is on track, and we still see that you are contributing about a 10% of the total revenue. Okay.
Thank you, Sisi. Let's move on to the next caller on the line, please.
We have the next question from the line of Rohan Xu from Citi. Your line is now open.
Hi. Good afternoon. First, congrats on a very good Q1 result. I would like to follow-up from this whole year revenue growth Saketin. I think now you are looking for this mid to high teens percentage point growth for the whole year revenue.
So question is, do you factor in any equipment, material or any kind of ramp up schedule disruption by
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 tour delivery has been delayed from 2 weeks to about 1 month. However, as I said, we continue to work with tour vendors and minimize the impact on the capacity building. So for the whole year, we don't expect it to have a big impact.
Understood. But how about for the equipment start up, because of for this share in Hong or travel ban, I think the equipment that probably won't have enough engineers to do the equipment start up. Will that impact your ramp up schedule?
Well, that has been planned. From the outbreak of COVID-nineteen, we already work with the equipment vendors. So there are a range of enough engineering resources in Taiwan or all over the world. So we don't worry about that.
Okay. For my second question, I would like to ask about your technical management. Normally, I think in the past, you funded all of your capital spending from your operating cash flow. And now you just partly are funded by issuance of the corporate bond. I think Wendell explained this actually I would like to preserve cash for investment net growth.
So question is, first, for this issuance of the corporate bond, is there any upper limit you have 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 before was made before the COVID-nineteen. We look at future expansion plan. We look at the current interest rate, and we decided it's good timing to issue a low cost corporate bond just for any uncertainty.
Understood. Okay. And for your cash dividend, I think, Wendell, you said you would like to maintain a sustainable cash dividend in both quarterly and annual basis. So I understood, I think your annual basis policy is paying total cash no less than previous years. And how about your quarterly cash dividend policy?
Is this at least $2.5 per quarter or per share per quarter policy to PSMC?
Okay. Roland, so your question on the cash dividend, you say that we will not our sustainable cash dividend policy on an annual basis means we will not pay less than NTN 10 in any year going forward. Then your question is on a quarterly basis, will we pay less than NT2.5
on a quarterly basis? No. No. Okay. So 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. The quarterly cash dividend will not be lower than the previous quarter. And as a result, you won't have a lower annual dividend than the previous year. Okay.
So even for so let's say from now, we are paying $2.5 per share per quarter. So it means going forward, our quarterly cash dividend won't be less than $2.55 going forward, right? Yes, you are correct.
Yes. Okay. Thank you. Thank you, Robin. 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. Yes.
Hi, there. Good afternoon and thanks for taking my question. My first question is on 5 nanometers. It is TSMC's first full EUV node and it is now in production. So 2 part question.
One is, I know this year it is on track. But 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 nanometers or maybe revenue contribution? Secondly, now that we're in production, can you talk about the learning on 5 so far? Specifically, can you talk
a little bit about maybe cycle
time versus 7 nanometers, the yield ramp? And maybe on the cost side, how it compares to 7 nanometers just because it is the first EUV node? Thank you.
All right. You want to repeat the question? Sure. Okay. So Bill's question is on 5 nanometer EUV, two parts.
One, he wants to know that we are ramping new CAC ramp in the second half of this year, But what does 5 nanometer look like for 2021 in terms of customer adoption, the number of customers or the revenue percentage contribution in 2021? That's the first part. And then the second part is, can we share some of the learning that we have seen on 5 nanometer in terms of cycle time, yield or cost versus 7 nanometer? Well, Neil, let me answer the first part of first. This year, as we said, we are going to ramp up swiftly and smoothly.
And how about the 2021 continue to ramp up? That's that I can assure you. So how many customers or how many PayPal is actually, the customer come from everywhere. I mean, that's a mobile phone, HPC related and maybe some of them are from the IoT and automotive. We don't know yet.
But today, we've 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. And 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. But 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?
Yes. The second question is on COVID-nineteen. And it looks like the company is doing a really good job of managing it in terms of fab operations. But 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 that given COVID-nineteen?
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-nineteen, we changed our decision making process while we reduced our efficiency. I do believe this is a temporary phenomenon. And although I did say that we have very good team, I did say that we have a practice some work from home, but I don't anticipate that this one will continue. So for the long term, there's no change. JST was continuing to work closely with our customer, while devour our resources into R and D and will pursue the manufacturing excellency.
Affecting the 5th, superior 5th in the U. S, they are marketing medicine companies. Always to the interest of TSMC.
And currently, this U. S. Planning is more to, for the long term, tap global talent for TSMC rather than the risk management because we think at least with COVID-nineteen, it's an impact on human beings, mankind, that is the once in a century, and I think we learn to deal with COVID-nineteen
as a global community.
And while people are supply chain are cost effective and efficient at the same time.
So that is what I think.
So there's more abrupt competition change because of COVID-nineteen regarding this fab distributed construction.
Does that answer your question, Phil?
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 5 gs smartphone. So management mentioned that 5 gs total smartphone growth was revised on the total smartphone shipment, but the penetration of the 5 gs remains unchanged. So can you tell us that with this customizing or the current situation, any product mix shift when you do the revision? Or why is that high end 5 gs phone or low end smartphone, they're becoming the same?
Why is the penetration is there unchanged? And in addition, do you see the 5 gs smartphone penetration in different geography, do you see any changes when you do this revision?
Okay. Bruce, sorry, let me repeat your question and make sure we understand. Your question is on the 5 gs smartphones. As Sisi highlighted, you revised the total shipments down to a high single digit decline, but why do we still maintain a mid teens penetration rate for 5 gs smartphones? You want to know if we can talk about any product mix shifts that we see in this smartphone, for example, high end versus mid end versus low end?
And why our mid teens have 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 digit. However, we still see the penetration of the 5 gs smartphone as a certain kind of mid tier percentage. But the number of the 5 gs smartphone also reduced because of the same percentage with the total number being reduced so that the 5 gs phone also reduced. That's one thing. And what is the second question?
Bruce wants to know, do we have any detail on between high, mid, low end or by geography? That means too much of the details, I cannot release that information. But let me say that 5 gs smartphone has been very, very popular.
And we
expect that 1 to 4.
Okay. Okay. I tried to follow-up this because for the Q1, we definitely see that expensive or higher priced smartphone, the sales too is much weaker than the mid end and low end one. So that's why we are surprised that the penetration rate for the smartphone for 5 gs smartphone is unchanged. Do you have any rationale to support the forecast?
Well, there is a section NEM called 5 gs, right? And 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 spongey supply for everyone, do not see a meaningful orders cut as of now?
I mean, why is that to cause this kind of big time lag between the real and demand situation and their production?
Okay. Let me just repeat your question, Bruce. Your question is, when you investors are asking, when you look at the end consumer, you could see a very big correction. But why is TSMC not seeing any types of order cuts? Why is there a deviation between what we are seeing and market?
For the big time lag, as management mentioned earlier, management also expect or prepare some orders cut in the second half.
So the timing between the
production control and the consumer demand, the correction is more than 3 months or 5 months. Why is that caused this delay?
First, you are talking about the TSMC's observation from the end market to THMT's business. THMT has the leadership in the technology, and we are ramping up the 5 nanometer and 7 nanometer, and that has been very popular and widely used by all the customer. And not everybody offer this kind of technology coverage, right? And so we are not we in our technology and our renting up, we are not seeing any big impact yet. So that was some delay, the end market to TSMC sub business.
But we do see that the end market is dropping. So we also expect some demand from THM's customer will be adjusted. However, in this COVID-nineteen impact, we do believe that KJMC will be less affected as compared with the other countries.
So do you expect the orders coming in the second half? Do you expect the orders coming in the second half will more at a legacy node inside of our leading node. That's why TSMC can be better than competitors?
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, Jamie, for taking my questions. First one, I'd like to follow on the CapEx. So historically, when TSMC we don't remember it's 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 adjusted CapEx, sometimes even bigger magnitude.
This time, it looks like this time, the revenue adjustment is as long as 8% or high single digit. But CapEx remain the same. So my question is, first, is it because the QSMC sees something very important, very big in the very confirm in the pipeline till the end of this year or 2021 that you still need to spend no matter what? Or do you intend to sort of moving some flexibility here given that some equipment supplier or maybe one particular equipment supplier had very long lead time and not for the power to some extent. And you're also fighting with the competitors fighting with that equipment availability.
So 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. Your question is on our CapEx. And 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. So you want to know why are we not adjusting our CapEx flows because our full year outlook has been adjusted.
And you proposed 2 reasons. Is it because, A, we have confirmed customer demand for profile that goes into 2021 beyond, so that's why we continue to invest? Or 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 megatron, multiple year of megatrends of 5 gs related in HPC applications. And these trends 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. And that is the reason that we are reaffirming our CapEx numbers at this moment. To a certain extent, it may tend to go with your number one options, option A.
I think that do you have
a question?
Yes. My second okay, thank you. So my second question is, I think last quarter, the company gave us some guidance about your 4 major platform, HPC, mobile grew 20% plus IoT auto grew in mid teens. Can you give us an update now?
Okay. So Sebastian, you want to know what is our updated forecast for the 4 growth platforms for 2020?
For the whole year?
Yes, for this year.
Okay. Smartphone and HPG platform growth will be slightly higher than the corporate average. IoT will be similar and automotive will be below corporate average. Those are all in U. S.
Dollar terms.
Okay. Does that answer your question
to that? Yes, I answered. I have a follow-up on this one, if I may, that the smartphone is still above the coverage average. So that means the smartphone will still grow mid to high teens. So I guess the TSMC forecast the smartphone shipment to decline high single digit.
So this year, so which means that the content implied the content increase for TSMC is as 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.
Okay. 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. So I have the 2 questions. One is more short term and another one is long term, maybe 1 or 2 years later. So first of all, by comparing your guidance versus previous forecast, it seems like order cost reflects your 3rd quarter revenue.
So do you think this year the 3rd quarter revenue is going to be sufficient to know and in terms of the Q on Q growth? And 7 AM was pretty tight at the beginning of the year.
Charlie, we cannot hear you clearly. Can you move closer to the phone line and start? We couldn't hear your first question. Please repeat it.
Okay. I actually used a couple, so let me try it again. So first question is about your 3rd quarter revenue. Do you expect that growth is going to be subscriptional? And given some smartphone auto cards, do you still see 7 nanometer capacity is in shortage in 3Q?
Thank you.
Okay. So Charlie is asking a short term question on 3rd quarter. Do we expect our revenue to be 3rd quarter revenue to be sub seasonal? Do we expect 7 nanometer to remain full for 3rd quarter?
Charlie, we're not giving out the guidance for the Q3 yet, and it's still early, especially under this uncertain environment. We will have a clear picture in July and share with you.
Okay. What's your second question, Charlie?
Yes. Actually, Lin, I guess investors also want to know your internal scenario and that is about COVID-nineteen impact. I think at the opening remarks, you mentioned the company mentioned the right to peak in June. But there seems to be some signs of the 2nd wave outbreak globally. So in your case, a bear case scenario, what would be the key differences growth in 2020?
And by the way, the second question is very simple on 3 nanometer. I believe that customer number and demand in 3 nanometer can compare to what will you have on 5 nanometer? Just two questions of both. Thank you.
Okay. That's a little more than 2, but okay. Let me just repeat your ten questions. 1, you want to know our internal scenario for COVID-nineteen. We had said and Sisi had said that it's stabilized by June.
What if it's worse? What happens to our forecast? That's number 1. And then number 2, for 3 nanometer, what was our customer number of customers and the demand profile as compared to 5? Okay.
Let me answer the second question for the 3 nanometer. All right. 3 nanometer, as I said, we are our technology development is on track, and we are working with customers to further define the specs and then define the technologies. So as which one, I cannot say, but it's again, I can share with you is in mobile phone and HPC related applications. Now the first one, we are talking about the impact of COVID-nineteen, and we are giving our forecast based on the COVID-nineteen will be stabilized.
The impact or the spread over will be stabilizing in June. What happened if it's longer than that? I don't know. I mean that's if it's longer than that, the macroeconomies will be much worse than we thought and definitely will affect the semiconductor industry, will affect the foundry industry, and certainly, also you will affect the THMC. But we don't know yet.
Let's be hopeful that all the human beings will be saved and healthy and everything stabilizes to do. 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 twenty twenty. And you highlighted the fact that the mix would have adverse impact by as much as several points. I want to get your view of your flexibility in case coronavirus impact were to be more than just 1 quarter, what can you do to better manage utilization rate and therefore minimize the gross margin impact to only a couple of percentage points?
And I have a follow-up.
Okay. Madi, let me repeat your question. You're asking about our second half gross margin outlook. When our CFO has already highlighted the 2 factors impacting our second half gross margin. You want to know what if COVID-nineteen worsened?
What measures can we further take to better manage or do things to better manage our utilization rate to better support or help gross margin?
Okay. Generally speaking, if the COVID-nineteen syntax 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, Nadir?
Yes, yes. Just as a follow-up, if you were to pre build for your customer and customers' own demand were to weaken, then perhaps customers' orders beyond second half, looking into the first half of next year, could be adversely impacted. So maybe the adverse impact of a more prolonged coronavirus would have a gross margin downside into the into next year, into 2021 due to the fact that you're rebuilding for customers?
Okay. So maybe your question is a follow-up to Wendell. If we prebuild but the customer demand continues to weaken or worsen, then won't that create more issues for TSMC in 2021?
When we prebuild, we are pretty sure that the customers will take it. Yes, every demand will be there.
Thank you. Does that answer your question?
Yes. Okay?
Yes. Thank you.
All right. Thank you. Let's move on to the next caller, please.
Next question
is from Brett Simpson from Research. Your line is now open.
Yes, thanks very much. I just had a question on your second half implied outlook. I think it's still down 3% revenue just backing out what you said about Q2 and what you delivered in Q1. Now you mentioned in your prepared remarks that you've seen no major order cuts as yet. But 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 inventory up 75% in 2019. So 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. So given all this, I'm just wondering how big you think the 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?
Okay. Brett, so your question is basically, when you're saying that if you look at our Q1 business, there's a large increase year on year in our smartphone, in our revenue from China and increase at certain Huawei has seen an increase in their inventory year on year as well. So your question is how to reconcile this with TSMC's business outlook. But let me remind you, last year, 2019 Q1, if you're looking Q1 year on year, our business was impacted by photoresist. So it's not an apples to apples, but your question.
Right. So basically, the Q1 of this year, we see an inventory increase in our fabless customers, and we expect that continue to rise because of this COVID-nineteen impact. And we will start to digest in the second half.
Does that answer your question, Brett?
Well, just to understand better how Tiazza, how you're thinking about this because we haven't seen an inventory buildup 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 Fang Li from HSBC. Please proceed with your question.
Great. Thank you. Sorry, I have 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.
But you just gave a new guidance for the year. Is that an apple on apple? Are you including Samsung or not including Samsung in that number?
Not including Samsung. It's an apple to apples comparison. Okay.
So not including Samsung. Okay. And then the second question I had, you've also talked a bit quite a bit on this call about the work from home driving your HPC business, I guess, stronger than continue to drive that business. But outside of HPC, have you seen or I guess maybe this relates to 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 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 flattish and on the gaming console, increased. That's so far today that we observed.
Okay. Okay?
And also, just to as P. C. Said, both our forecast for foundry in January and today are including Samsung. So it's apples to apples, just to make that clear. Okay.
Operator, let's move on to the next caller, please.
Next is from Kiki Peo from Printful. Your line is now open.
Hi. Just to understand a bit more about your assuming the virus will stabilize in June. Can you translate the various assumptions stabilizing in June into handset demand? How much are you looking at handset demand for 2Q and 3Q?
Okay. So your question is under our assumptions for COVID-nineteen. What is our assumption for the handset demand in 2Q and 3Q? We give you a 4 years assumption, but I cannot be more specific. In 2Q, let's say that seasonality every year, the seasonality, the smartphone actually decreased, all right, and start to bounce back in 3rd quarter and the 4th quarter.
But how many units I can to be so specific to share with you?
Okay.
Okay. So that answer, do you have a second question? The 5 gs content increase impact is mainly throughout the
year or more towards the second half?
That's the last question. Thank you. He's asking the silicon content increase for 5 gs. Is it throughout the year? Or is it mainly in the second half of this year?
It's in the 5 gs world that I can take. Yes. So 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. So first of all, could you talk, I think just maybe stepping away from COVID-nineteen, hopefully you all can soon. So 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 2 to 3 years as we get through this process, which will potentially put some pressure on some of the potential IDMs as well?
And a related question is, I think Mark has answered in the past about potential M and A opportunities. Do we consider overseas fab acquisition as right strategy for TSMC to if it comes with a meaningful customer attached to it? I know that TSMC has not really done any meaningful fab acquisitions for a long time. I think probably 2,000 was the last being closed on with the business. But just wanted to understand how the management team thinks about fab acquisition as a potential strategy or any thoughts around that?
Thank you.
Okay. So, Fokul, you have two questions. One is on the IDM outsourcing and then do we see the further potential for further IDM outsourcing under this environment in the next few years? And the second part of your question relates to our potential M and A. And your meaningful customer business were to be attached to it?
Well, let me answer the IBM outsourcing question first. The current downturn might further accelerate outsourcing for IBMs, but we don't know yet. However, in the long term, IBM outsourcing will continue. As the foundry model has proven to be an economic win win situation for both foundry and its customers. Thus, as we said, we expect this one to continue to happen.
This is a long term strategy.
Yes. Let me answer the second question about the overseas fab acquisition. We do have continued scouting about the possible fabs, but those are mostly only mature fabs, and we don't see the possibility, but it all depends on the investment and return. If it economically makes sense, then we go it, but it's also it's very challenging for the mature fab to be again financially viable so far. So we still continue evaluating.
But obviously, fab attrition is unlikely to be a leading fab because our leading fab is a technology with very sophisticated complexity. Most of the design of the fab has performed like a TSMC fab with it's really a service body technical service body instead of the structure facility or component. Our fab really is a technical service body. That has to be built. And therefore, that challenge us to acquire a leading edge fab overseas.
Okay. Does that answer your question, Kukul?
Yes. Thanks. Okay, great. In the interest of time, maybe we'll take about 2 more questions. Let's move to the next caller, please.
Next is from Charlie Chan from Morgan Stanley. Your line is now open.
Thanks for taking my follow-up. So those are some old questions, but I want to get whether management has been solved. For example, the not acquiring, but any plan to build a establishment in the U. S? That is the first question.
Also, I also want to get some clarification because when you think recent news, China fact like SMIC is gaining share And I can see that makes some sense because the China is pursuing localization. So what is the pension forecast for your long term market share in China? And what's your strategy for to protect your China market share? Thank you.
Okay. So you have two questions, Charlie. One is what is our plans for a fab in
the U. S, to build a
fab in the U. S? And then secondly, you're asking about China, that SMIC is gaining market share. There's increased localization. So what is TSMC's share outlook for China and strategy to protect ourselves?
Okay. Let me answer the first question regarding U. S. FAST. We are now actively evaluating
the U.
S. FAB claim. And as I told the investor before, there
is a cost gap, which is hard to
accept at this point. Of course, we have we're doing a lot of things to reduce that cost. One of them, there are 2 obstacles currently is under actively evaluating is if we do a U. S. Fab, it will have to be a leading HVAC or at least close to leading HVAC.
And the supply chain for the leading HVAB, at this point, it appears that we need to also establish at the same time. And 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 it in
the HVAC
can be cost effective in the U. S. And secondly, of course, as I said earlier, this fab has to be an engineering service body. It is in Taiwan, all the fabs are very highly technical people. In the past, all master degree in the world.
And we try to duplicate that in
the U.
S. It takes a lot of planning and organization to be able to enable such effect. So but they are as I said, they are opportunities for us to be there. We try and hopefully, we can better test the global challenge for TMC in the long term, expanding the new site in U. S.
Jeffrey, to repeat the second question. The second question is that how do we view the competition in the market in China? Charlie points out that you believe SMIC is gaining share and there's increasing trend of localization. What is TSMC's strategy? Okay.
I don't think that SMIC is gaining share, to answer your question first. TSMC has been very competitive in everywhere. We are everybody's are going to be in every location. We offer the best technology, best service. We're working with customer closely.
So we are pretty successful in gaining market share rather than just losing the market share. Let me say that. And specifically for China's foundry, we also were competitive because of a lot of China customers have been working with the TSMC. I know that SMIC has been very aggressive, but so far, we are competing very well. That's all I can say.
Okay. Thank you. Operator, I believe we thank you, Charlie. Operator, let's move on to the last question from Sebastian at CUSA.
Sir, your line is now open.
Yes. Thank you. Thanks, Chen, for squeezing me in. So I have 2 follow ups. The first one, I just want to double check that if I hear it correctly.
I think the CICE earlier mentioned that you have reserved the higher numbers of tape out on M5 versus M7 at the same stage. Is that right?
That's right.
Okay. So if I if my note is correct, then in your year 1 manufacturing, year 1 mass production, the 7, you have 30 plus take out on 7, and year 2 NTE you have 50 plus and then you go on to like 100 something. So I think this year is year 1, 2, 5. So we can't say that you have 30 plus 5 nanometer tape out at this point.
Well, I'm not willing to release the actual number, but all I can say is now in M5, we have customer from smartphone, customer from HPE related area. And the activity, actually, we saw more tape out as compared with the same period of N7 So the N5 actually is complicated, and I would believe the customer will take more time to work with THMP as early as possible. That's what they are taking. Okay. Okay.
Do you expect mFly to be potentially bigger than M7 in terms of the capacity issue?
Yes. Certainly, we expect that.
Okay. On the capacity wise, not revenue capacity.
On the capacity wise, where is the no coming right now?
I mean, say, the 2 years out.
We don't comment on the capacity, but I know, Sebastian. But as CP said, it's fine for the other node. Do you have a second question?
Yes. Second question is, I remember, I think, most of the time, I think, in the past few months, when we or media asked about the TSMC questions about like U. S. Potential further sanction on Huawei or China on technology side. I think TSMC always I think most of the time your answer is that was not official in terms of the business.
I want to answer any hypothetical questions. But I feel like I think this time TSMC, the company is addressing the questions more clearly, although there's no official announcement yet and there's no official answer yet. So am I interpreting that or filling that right that it seems like your the risk or the possibility of this potential sanction is higher or you indicate to something else?
Okay. Sebastian, let me just make sure we understand your question correctly. So your question is on the potential rule changes from the U. S. That reading news reports in the past that TSMC has has always said, we don't comment on hypothetical, but you see today maybe our comments you're asking if our comments today reflect a change in the tone or the view even though nothing no official rule change has been announced?
Well, yes, there's no official rules yet announced. But just to 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. So we do think there is an urgency from the industry that having that rule changed will hurt the U.
S. Semiconductor community, and we share the same feeling.
Okay?
Okay. All right.
All right.
Thank you, Sebastian. Okay. 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 in 24 hours from now, both of which will be available through TSMC's website at www.tsmc.com.
So thank you for joining us today. We hope everyone continues to stay healthy and safe and hope we hope you will join us again next quarter. Goodbye and please have a good day. Thank you.