Happy New Year to everyone and welcome to TSMC's Q4 2019 earnings conference and conference call. This is Jeff Su, TSMC's Deputy Director of Investor Relations and your host for today. Today's event is webcast live through TSMC's website at www.tsmc dotcom. If you are joining us through the conference call, your dial in lines are in listen only mode. As this conference is being viewed by investors around the world, we will conduct this event in English only.
The format for today's event will be as follows: 1st, TSMC's Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the Q4 of 2019 and the full year of 2019, followed by our guidance for the Q1 of 2020. Afterwards, Mr. Huang and TSMC's CEO, Doctor. C.
C. Wei, will jointly provide the company's key messages. Then TSMC's Chairman, Doctor. Mark Liu, will host the Q and A session where all three executives will entertain your questions. For those participants on the call, if you do not yet have a copy of the press release, you may download it from TSMC's website atwww.tsmc.com.
Please also download the summary slides in relation to today's earnings conference presentation. 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. So please refer to the Safe Harbor notice that appears on our press release. And now, I would like to turn the microphone over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.
Thank you, Jeff. Happy New Year, everyone. Thank you for joining us today. My presentation will start with financial highlights for the Q4 and a recap of full year 2019. After that, I will provide the guidance for the Q1 of 2020.
4th quarter revenue increased 8.3 percent sequentially to TRY317 1,000,000,000, driven by high end smartphones, initial 5 gs deployment and HPC related applications using TSMC's industry leading 7 nanometer technology. Gross margin increased 2.6 percentage points sequentially to 50.2%, thanks to a higher level of capacity utilization and continuous cost improvement, partially offset by an unfavorable foreign exchange rate. Total operating expenses increased by NT3.6 billion dollars reflecting higher development activities for 5 nanometer and 3 nanometer as well as opening expenses in preparation for 5 nanometer ramp. Operating margin increased by 2.4 percentage points sequentially to 39.2%. Overall, our 4th quarter EPS reached N4.47 and ROE was 28.9%.
Now let's take a look at revenue by technology. 7 nanometer process technology continued to ramp strongly and accounted for 35% of wafer revenue in the 4th quarter. 10 nanometer was 1% and 16 nanometer was 20%. Advanced technologies, defined as 16 nanometer and below, accounted for 56% of wafer revenue, up from 51% in the 3rd quarter. On a full year basis, 7 nanometer contribution increased from 9% in 2018 to 27% of wafer revenue in 2019.
10 nanometer was 3% and 16 nanometer was 20%. Advanced Technologies accounted for 50% of total wafer revenue, up from 41% in 2018. Now let's take a look at revenue contribution by platform. Our 4th quarter revenue growth was driven mainly by smartphone and HPC. Smartphone increased 16% quarter over quarter to account for 53% of our 4th quarter revenue.
HPC increased 6% to account for 29%. IoT decreased 4% to account for 8%. Automotive remained flat and accounted for 4%. On a full year basis, smartphone and IoT led the growth with 12% 33%, respectively, while HPC, Automotive and DCE decreased 8%, 7% and 8%, respectively. If we exclude cryptocurrency from both years, HPC would have grown mid single digit in 2019.
Overall, smartphone accounted for 49% of our 2019 revenue HPC 30% and IoT 8%. Moving on to the balance sheet, We ended the Q4 with cash and marketable securities of JPY583 1,000,000,000, flat versus the prior quarter. On the liability side, current liabilities increased by JPY96 1,000,000,000 as we increased NT33 1,000,000,000 in short term borrowing mainly for hedging purpose, NT51 1,000,000,000 in payables to suppliers and RMB13 1,000,000,000 in dividends payable. On financial ratios, accounts receivable turnover days remain at 41 days. Days of inventory decreased 10 days to 55 days due to higher wafer shipments during the quarter.
Now let me make a few comments on cash flow and CapEx. During the Q4, we generated about TWD 203,000,000,000 in cash from operations, spent TWD170,000,000,000 in CapEx and distributed RMB52 1,000,000,000 for Q1 2019 cash dividend. We also increased 36,000,000,000 in short term loans for hedging purpose. Overall, our cash balance slightly increased 3,000,000,000 to RMB455 1,000,000,000 at the end of the quarter. In U.
S. Dollar terms, our 4th quarter capital expenditures reached US5.6 billion dollars and totaled US14.9 billion dollars for the full year. Now let's take a look at the recap of our performance in 2019. 2019 was a challenging year for the global semiconductor industry given rising macroeconomic uncertainties and supply chain inventory correction to name a few. However, we're able to grow our revenue by 1.3 percent year over year in U.
S. Dollar term and 3.7% in NT dollar term. Gross margin decreased 2.3 percentage points to 46%, primarily because of lower capacity utilization in the first half of the year. Operating margin decreased 2.4 percentage points to 34.8%. Overall, full year EPS slightly declined 1.7 percent to NT13.32.
On cash flow, we spent NT460 1,000,000,000 in CapEx, while we generated KRW615 1,000,000,000 in operating cash flow and KRW 155 1,000,000,000 in free cash flow. We also paid KRW259 1,000,000,000 in cash dividends, an increase of 25% from the previous year. I have finished my financial summary. Now let's turn to Q1 guidance. Based on the current business outlook, we expect our first quarter revenue to be between US10.2 billion dollars $1,000,000,000 $10,300,000,000 which represents a 1.4% sequential decrease at the midpoint.
Based on the exchange rate assumption of US1 dollars to NT29.9 dollars Gross margin is expected to be between 48.5% 50.5 percent operating margin between 37.5% 39.5%. Now I will look I would like to make one more comment on tax rate. In the past, we needed to accrue tax on undistributed earnings, which triggered a much higher tax rate in the second quarter. Now due to the tax regulation changes, we can offset the tax with our capital investments and no longer needs to incur the tax expense on undistributed earnings. Meanwhile, we're still subjected to the alternative minimum tax.
As a result, we will still have a full year tax rate approximately 12%, and this will be equally applied to all 4 quarters of the year. This concludes my financial presentation. Let me follow by making a few comments about near term demand and inventory and 2020 capital budget. We concluded our 4th quarter with revenue of TWD 317.2 billion or $10,400,000,000 slightly above our guidance, mainly due to better demand from smartphone related applications than our forecast 3 months ago. Concluding 2019, the semiconductor industry, excluding memory, declined 3%, while foundry was flat.
TSMC's revenue grew 1.3% year over year in U. S. Dollar terms, outpacing both the semiconductor x memory and foundry industry growth. On the inventory front, our fabless customers' overall inventory continue to be digested throughout the Q4. We now expect it to reduce to the seasonal level exiting 2019, setting up a healthier inventory base entering 2020.
Moving into Q1 2020, despite mobile product seasonality, our business is expected to be better than the seasonality in recent years, supported by continued ramp of 5 gs smartphones. Now I will talk about our capital budget in 2019 2020. We expect the ramp of 5 gs related and HPC applications to drive strong demand for our advanced technologies in the next several years. In order to meet this increased demand and support of customers' capacity needs, we raised our 2019 CapEx guidance by $4,000,000,000 to $14,000,000,000 to $15,000,000,000 and we ended up spending $14,900,000,000 Our 2020 capital budget is expected to be between US15 $1,000,000,000 $16,000,000,000 Out of the US15 $1,000,000,000 to US16 $1,000,000,000 CapEx for 2020, about 80% of the capital budget will be allocated for advanced process technologies, including 3, 5 and 7 nanometers. About 10% will be spent for advanced packaging and mask making and about 10% for specialty technologies.
With this level of capital spending in 2020, we reiterate that TSMC remains committed to a sustainable cash dividends on both an annual and quarterly basis. Now let me turn the microphone to C. C.
C. Wei:] Thank you, Wiggo. Good afternoon, ladies and gentlemen. Let me start with our 2020 full year outlook. For the full year of 2020, we forecast the overall semiconductor market growth, excluding memory, to be 8%, while foundry industry growth is forecast to be about 17%.
For TSMC, we are confident we can outperform the foundry revenue growth by several percentage point in U. S. Dollar term. Our 2020 business will be supported by strong demand for our industry leading 7 nanometer and 5 nanometer technologies, where we see strong interest from all 4 growth platforms, which are mobile, HPC, IoT and Automotive. Now let me talk about 5 gs and HPC as the major long term growth driver of for TSMC.
We continue to see strong deployment of 5 gs Networks and Smartphones in several major markets around the world. We reiterate mid teens penetration rate for 5 gs smartphones of the total smartphone market in 2020. We also forecast a faster penetration of 5 gs smartphone as compared to 4 gs over the next several years, while silicon content of 5 gs smartphone will be substantially higher than that of 4 gs smartphone. In addition, the significant performance, bandwidth and latency improvement of 5 gs network will drive AI application and unlock new usage cases such as real time response and control across many different types of connected end devices. We believe 5 gs is a multiyear megatrend that will enable a world where digital computation is increasingly ubiquitous, which will fuel the growth of all four of our growth platform in the next several years.
With 5 gs driving exponentially core in the amount of big data being generated and continuous improvement in algorithm, a smarter and more intelligent world will require massive increase in computation power. Thus, HPC become another major long term growth driver for TSMC. CPU networking and AI accelerator will be the main growth area for our HPC platform. By working diligently to provide the foundry industries the most advanced technologies and making it available to all the product innovators, TSMC can expand the pool of innovators who feel the semiconductor industry grows. With the successful ramp up of N7, N7 plus and the upcoming ramp up N6, N5 and N3, we are able to widen our customer product portfolio and expand our addressable market.
We also see growth in networking thanks to 5 gs infrastructure deployment over the next few years. With 5 gs and HPC applications as a major growth driver, We now expect to grow at the high end of our long term growth projection of 5% to 10% cater in U. S. Dollar terms. Now I'll talk about the ramp up of N7 plus and the status of N6.
As N7 enter its 3rd year of ramp, we continue to see very strong demand across a wide spectrum of product for mobile, HPC, IoT and automotive applications. Our N7 plus is entering its 2nd year of ramp. N7 plus is the industry's, of course, high volume production with EUV photolithography technology while paving the way for NCX. Our NCX provides a clear migration path for next wave engine products as its design rules are fully compatible with N7, while providing 15% to 20% higher density, with improved power consumption when compared to N7. N6 is on track for risk production in 4th quarter this year and volume production before the end of this year.
N6 will have 1 more EU video than N7 plus and will further extend our N7 family way into the future. We expect our 7 nanometer family to continue to grow in its 3rd year and contribute more than 30% of our wafer revenue in 2020. Now allow me to talk about our N5 volume production. Our N5 technology is a full known stride from our N7 with 80% logic density I'm sorry, with 80% logic density gain and about 20% speed gain compared with 7 nanometer. N5 will adopt EUV extensively and is well on track for volume production in first half this year and with good year.
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 expect 5 nanometer to contribute about 10% of our wafer revenue in 2020. N5 will be the foundry industry's most advanced solution with the best PPA. We will offer continuous enhancement 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 TSMC.
Finally, I'll talk about our N3 status. We are working with customers on N3 design and the technology development progress is going well. We have many technology options in development, and we carefully evaluate all the different approaches. Our decision is based on technology maturity, performance and cost. Our N3 will offer another full node scaling benefit in terms of performance, power and density as compared with our N5 technology.
We expect our 3 nanometer technology will be the most advanced foundry technology in both PPA and transistor technology, 1 hundred and eighty introduced. We will announce more details about our N3 technology at our TSMC North America Technology Symposium on April 29. Thank you for your attention.
Okay. Thank you. This concludes our prepared statements. Before we begin the Q and A session, I would like to remind everybody to please limit your questions to 2 at a time to allow all the participants an opportunity to ask questions. Questions will be taken from both the floor and from the call.
Should you wish to raise your question in Chinese, I will translate into English before our management answers your question. So now let's begin the question and answer session. Our first question will come from the floor, Credit Suisse, Randy Abrams.
Yes. Thank you. I guess with the trade war eased a bit, there's still a couple maybe political issues out there. So I wanted to just start with that. The first one, if you could give some color on TSMC's U.
S. Content and just if maybe the calculation, there's talk about the content threshold lower to 10%. And if there's some talk the equipment may be excluded from that calculation. So if you could give a bit more color about that. And then second, with more of the geopolitical concerns about some of the military technology, You've talked in the past about not needing to or having more scale with the fabs in Taiwan, but if any new considerations on the fab location?
Yes. Happy New Year, everyone. On the possible further tightening up export control from the U. S. Government, I think this is they haven't really announced what the specifics about the rules.
So everything I say here can only is a speculation. So in particular, I don't want to comment on particular customers. But one thing for sure is our business profile is massive. We are everyone's foundry, and we will deal with each customer fairly and equally. Secondly is we has been and we will follow the law and regulation.
So upon the regulation being effective, we will carefully study and evaluate product by product our eligibility in the export. And we have a we really have a very sophisticated export control system. As you might know, every product is calculated automatically. Every product is different in terms of their content. So it's really difficult to describe to you generally what is the content percentage is.
But I can just tell you that whatever you read on newspaper is not true, okay? So we are prepared to deal with this new export control regulation.
Yes. Thanks for clarifying, especially that it's not a node by node, which some of the press was speculating. The second question, I just wanted to ask on the higher CapEx where it came in the high end of guidance and a higher range of CapEx for 2020. If you could talk maybe the areas where the incremental increase, both just from an investment where that new spend is coming And maybe what changed on the demand side versus a few months ago to lift the budget? And then the second part, because of this higher base, how you're looking at kind of the base over the, say, the following year, because now we have a 2 year higher elevated spend, if say, some moderation from there?
Yes, we did increase substantial amount on the CapEx. Let me give you some color why we did that. Okay, we expect actually, we expect mobile phone and HPC, these two segments probably goes above 20% this year and with another 2 segment, 2 platform, automotive and IoT, probably in mid teens. So put all together, we are to increase the capacity. We work with our customer to fulfill their demand.
And so that's a result of we increase our capacity. Now your question about our growth?
Yes. The second question was where the spend, say like 5, 7 versus back end, so where are the additional increase?
Okay. A little bit on 7 that we announced last year and then most of them leasing 5% and then prepare for 3% and 10% in the back end and 80% in the leading edge technology, like 7, 5, 3 altogether.
Okay. And then the 2 maybe the follow-up I had was just the moderation of CapEx, if you expect that to maybe moderate from the very high level next year? In the back end, 10% would be $1,500,000,000 for CapEx. But I'm curious maybe between back end and mask, if really over $1,000,000,000 back end CapEx?
You're right. I mean, the back end including the mask.
Okay. But I guess of that, do you think the back end CapEx is over $1,000,000,000 investment on that side?
No. Okay.
And then could you talk about the moderation for
I
think Randy, the last part of your question is talking about our CapEx this year and last year is at a higher level. Looking out the next several years, where do we think the CapEx will be?
That will depend on our growth, right? Yes. If we enjoyed a good growth in these 2 years, I think and if it's a success introduction of our N3, I mean, the CapEx probably will not drop. Yes.
Okay. Thank you. Let's go on to the next question. We'll take it from the floor. Citigroup's Wenglen Xu, over here.
Thank you and Happy New Year. First question, I just follow on the CapEx. Yes, so with this 15 to 16 CapEx spending, so how many of the total capacity increase is going to be this year? And how about last year with this almost RMB 15,000,000,000 CapEx spending, how many percent of the CapEx increased last year? Thank you.
Wendell, with your number, discuss this question.
You're asking about the capacity increase? Yes. Right. Okay. Of course, the increase mainly come from advanced technologies, right?
So for 2020, we're looking at mid single digit capacity increase. Last year, a low single digit number.
Okay. And then how about the total depreciation is going to be this year?
It will increase by high teens in 2020.
Okay. And second question is for the gross margin. For your Q1 revenue guidance, U. S. Dollar is down slightly.
However, apparently, in the Q1, we have fewer working days. So it means that your utilization in Q1 definitely is going to be much higher than 4Q. And also for 7 nanometer, last quarter, we said that we already gross margin has already reached corporate average. And also, I believe in Q1, we probably won't have the inventory revaluation. So all on this, is your gross margin guidance 48.5 percent to 50.5 percent a little bit conservative?
Thank you.
The utilization, we expect it to increase a little bit. And of all the factors that you just mentioned, there is also a potential factor, which is foreign exchange rate impact. There are 6 factors affecting our profitability: the development and ramp of our advanced technology, pricing, cost, utilization, technology mix and foreign exchange rate. So when you put all these together, that is how we came up with the guidance.
Okay. Thank you.
Thank you, Roland. All right. Next question will come from Goldman Sachs, Bruce Lu.
Happy New Year. I tried to suggest more granularity color for the 5 gs penetration rate. Management just meetings in 2020. Can we have more color in terms of that, whether it's sell in or sell through or what kind of geography distribution, what kind of distribution between high end and low end for the 5 gs?
Well, I can only say that the 5 gs penetration is higher than the 4 gs. And you know a few countries that they are moving faster than the other area, right? And that all we know. But we are making the judgment look at the installation of 5 gs infrastructure, and we look at each country's adoption, and we do our own estimate. That's why we come up with the mid teens penetration.
So it's more from the top down perspective instead of like button up from like each product line. Is that right?
We do both. We can make a judgment.
So if you do both, can you give us
some color about like distribution for the high end? That's our
companies, a competition. Okay.
Bruce, do
you have a follow-up?
Yes, of course.
Can I double check that the assumption of Ting's penetration is based on like there's no change in terms of deminisceral?
That's a good question. The change of diminished rule is still speculative. So our forecast, we assume the business as usual.
I understand. I think
the yes, the number we currently forecast does not include the deminisceral titan change. But for the whatever the export control is coming up, we think the 5 gs momentum will continue. If any interruption will be very short term. After going through the supply chain changes and share exchanges, I think the momentum will come we're just as strong.
Okay. Your second question?
The second question is regarding to the management. You used to mention that the TSMC becomes more important in terms of geopolitics situations. So does that change your cost of your does that change your equation in terms of building out the fab, the cost structures. So in the past, we only care about the manufacturing costs as a main cost factors. But given the current situation, do you think that you have to put that into your consideration as well, I.
E. You may keep on saying that building a factory outside of Taiwan is a lot more expensive than doing that in Taiwan. But with all the geographical risk that build a factory outside of Taiwan becomes like, do you see the increasing pressure on that? Do you want to do we expect any changes on that?
Yes. The cost in Taiwan is the lowest among all regions across the world. We have been studying it continuously. And that decision is made to the best interest of our customers. Yes, the geopolitical is evolving, but we still listen to our customers as the priority.
And at this point, our customer when asked to be manufacturing in the higher cost region, their answer is we cannot be competitive this way. So to increase the to maintain the competitiveness of our customer, currently, this is fab layout we're having. In the future, right now, it's too early to say and still our customer prefer we have the lowest cost production size and doing business with us.
So what if they are willing to pay for a higher price?
They may be special products, but by and large, it's unlikely. Understood. Thank you.
Thank you. All right. We have let's move to the line. We have quite a few callers on the line. So operator, can we take the next call from the line, please?
Sure. Your next question comes from the line of Gokul Aryehavan from JPMorgan. Please ask your question.
Thanks and Happy New Year. My first question is on margins. Given that we are looking at a very strong demand pickup, could we talk a little bit about any change in the view on longer term gross margins? Could we see meaningful improvement in gross margins beyond the 50% range that we have been in the last 4 to 5 years? And also, could you talk a little bit about the margin dilution impact in second half of twenty twenty from 5 nanometer?
Is it likely to be more modest given there's a very strong 7 nanometer demand also through the course of this year. And I had a follow-up question. Thanks.
Okay. Thank you, Gokul. Let me just repeat your question to make sure we got it right. So your first question is asking about sort of with given the strong demand pickup, is there any change to long term gross margin target? Why could it not be beyond or above 50%?
And then your follow-up or in addition to that is looking at this year, could the margin dilution from our 5 nanometer ramp in 7.5 be more modest given the continued strong demand of our 7 nanometer?
That's right. Thanks, Jeff.
Right. We continue to use 50% gross margin. We think it's still a very good target. Of all the 6 I just mentioned the 6 factors that will affect our profitability. One of them actually relates to the ramp of new nodes.
So the ramp of every new node, we will see margin dilutions. This relates to your second question. And indeed, we are seeing a margin dilution in the second half of this year from the M5 ramp. Is it going to be better than before? Yes, but only slightly, okay?
And the other factors that I just mentioned include the foreign exchange rate, which is really uncertain for anybody to guess. So at this moment, we believe the 50% gross margin is still a good target for us.
Okay? Gokul, do you have a second question?
Yes. Could you talk a little bit about what we are seeing in the N-two to N-three nodes? Should we anticipate any recovery in the situation in 28 nanometer, even overall from regrowth seems to be rebounding? And second part is on 12 and 16 nanometer, given a lot of the smartphone customer seems to be migrating to 7 nanometer and even 5 nanometer because of the adoption of 5 gs, there be any challenge to back fill 12 and 16 nanometer as these customers migrate to more advanced process nodes?
Okay. So let me just repeat to make sure we understand again. You're asking about our N-two and N-three. So first part of your question is, do we see any recovery in the demand for 28 nanometer given the overall strong demand that we see this year? And then the second part of your question is that with a lot of products going from 12 and 16 nanometer very quickly to using our 7 and our 5, will we have challenges or difficulty to backfill twelvesixteen?
All right. Let me answer 28 nanometer first. With the strong market growth, 28 nanometer, we did see a little bit better than we expected. However, we have reiterated saying that 28 nanometers of capacity has been overbuilt in this industry. So the utilization is still below our average in 28 nanometer.
We expect it will be improved in next 1 to 2 years when we develop a new specialty technology for all our customer to utilize it. And we start to see the sign because of from new tape outs, so we can be sure that 1 to 2 years later, that the utilization rate will go back to company's average.
And also 'twelve and 'sixteen?
12 and 16, we did not see that. Today is still very strong demand, and they continue to be a very high utilization rate. It's all because of we developed that we continue to improve the technology, and so it's being utilized. The first wave smartphone HPC and now it's IoT Automotive.
Okay. Does that answer your questions, Gokul?
Yes. Thank you very much. Okay.
Thank you. We will take the next question from a caller on the line, please.
Yes. Your next question comes from the line of Bill Lu from UBS. Please ask your question.
Yes. Hi, there. Thank you very much and Happy New Year. Question on 5 nanometers. I remember when 7 was ramping, you gave us numbers on the number of tape outs.
I'm wondering if you can help us with 5 nanometers either also by giving us number of PayPal. So maybe just comparing it to 7 and through where it's higher
or lower.
Okay. Bill, sorry, you broke up a bit at the end, but I think I understood your question. You want to ask us if we can give you some comparison of the number of Kpals at 5 nanometer versus our 7 nanometer at a similar stage?
Well, the 5 nanometer is
Thank you.
Yes, 5 nanometer tape out is a little bit less than 7 nanometer compared at the same stage of the time. However, the most important thing is that the high volume tape out is almost equal. And so we expect that our 5 nanometer ramp is very fast and smooth, and you want to contribute about 10% to this year's revenue.
Okay. Do you have a
slight So is the expectation then sorry, just to finish up my first question. So is the engagement then that Pang Nam will be in terms of wafer capacity as big as 7?
We are building the capacity right now and to meet the customer's demand, very high demand. So that's all I can say.
Great. Second question is a follow-up on Gokul's question on 28 nanometers. As you develop these specialty technologies, can you talk about what kind of applications are expected to use these new spectrum technologies?
You want to repeat or
Yes, sorry. Okay. Because you're breaking up a little bit. You're asking, Bill, on 28 nanometer, we talk about developing specialty technologies, for 28 nanometer. Your question is what type of applications will be used or the specialty technology is targeting?
Well, let me be a little bit specific. We are developing the 28 nanometer into 22 nanometer geometry. And ultra low power is one of the direction we are working on, which can be applied to a lot of IoT devices and also applies to some specialties such as CMOS image sensor and all others.
Okay. Thank you, Bill. Let's move on. We'll take one more question from the line and then come back to the floor.
Your next question comes from the line of Brett Simpson from Avedi
I just
had a question on China. China was more than 100% of your Q4 sales growth on a year on year basis and sales more than doubled in 2019 from China despite the headwinds from crypto. Can you maybe talk a bit more about the regions, what's driving so much growth? And how should we think about China growth specifically in 2020? Thank you.
Okay. Brett, please allow me to repeat your question. Your question is about our China business. You point out that it was 100% of our 4th quarter growth and grew quite strong in 2019 despite the drop off in cryptocurrency. So you want us to comment on how we should think about China as a percentage of sales and future growth drivers going forward.
Is that correct?
That's right. Thanks, Jia.
Well, China is about 20% of our business and has been stable around that number last year, this year.
So what's
changed is I think the last year, we see the China growth particularly strong. And other regions such as U. S. Property growth is less. So that is the disjunction for this way.
But to continue going on, I think, we expect to maintain this level.
Let me add some color to it. The Samsung, the China's major business with TSMC is also still 5 gs and AI, the same thing. 2 years ago, probably we have some kind of big increase in the cryptocurrency, but right now, it's become normal situation.
Okay. Brett, do you have a second question?
Just to follow-up on that question.
Looking at 2020, can you maybe just sort of help us with the drivers for growth from China? Do you think it will be mainly 5 gs smartphone related? Is there going to be quite a meaningful contribution from other markets like HP3? Any more color would be very helpful.
[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] All right. It will be 5 gs related. Both are smartphone that will be increased and also the networking that's in the SPC area. That's 2 major area that China's business that will be increased in 2020.
Okay. Brett, do you have a second question?
Yes, thanks. The second question is really part of it as HPC. Can you maybe talk about how much of your 7 nanometer capacity is running HPC at present? I think you were planning to ramp that in the second half of 'nineteen, but any more color on the portion of 7 nanometer running HPC would be helpful. And how does this scale as we look at 2020, the use of 7 nanometer for HPC?
And I think you mentioned 5 nanometer HPC chips would actually ship in 2020. What would this be used for? Any more help there would be great. Thank you.
Okay, Brett. Let me just repeat your question. The first part is, how much of our 7 nanometer capacity is for HPC products. How much was this last year? How do we expect this capacity for HPC to scale at 2020 for 7 nanometer?
And then the second part is for 5 nanometer, what types of HPC products or applications are being used on 5 nanometer?
Well, we do not disclose the capacity breakdown for specific node. In terms of revenue on the HPC, in N7, actually, all I want to say is it continue to grow, to increase and we expect that this momentum will continue in the next few years. For EN5, as we said, is driven by mobile phone and HPC. Still, the 2 biggest increase in this year.
Okay. Thank you. Let's come back to the floor for open the floor for questions. Next question will come from Morgan Stanley's Charlie Chan.
Thanks. Happy New Year. So my first question is about your future technology developments, right? So next year, I'm not sure if you're going to introduce so called 5 nanometer probe process. And can you comment that a little bit?
And if there is an extension of the current 5 nanometer, does that mean possibly to your gross margin improvements? So that is the first question.
We continue to improve the performance of each node. So next year, you're talking about 5 Pro?
Yes, 5 nanometer Pro or
Or whatever. Okay. Okay. It will be better than this year's 5 nanometer. That's for sure, all right?
And all the major customer will use it. And so the gross margin improvement, that will be the same as a previous note. It takes about the 7th quarter to 7th quarter to reach the company's average.
Okay. So I would assume that 5 nanometer gross margin will continue to improve into next year? That's for sure. Okay. And next is, I'm really interested in your 3 nanometer, right?
So currently, what is the visibility, meaning the cost per transistor? Do you think you can really reduce the cost per transistor label at 3 nanometer? And I'm also curious, given this assumption, do you think HPC or mobile will be a bigger user for your coming 3 nanometer, for example, CPU or smartphone AP?
Per transistor cost, I believe we continue to reduce, okay? That's for sure. Now who is going to use it? That's a major question. Again, still high end smartphone and HPC will be the users, all right?
I cannot be more specific to tell you whom, but that's it.
Can I switch back to some near term follow-up?
Let's stick with 2 questions first and then we get back in the queue, we can come back. Thank you, Sean. That's all right. Thank you. Next question will come from CLSA's Sebastien Ho.
Thank you. Happy New Year. So my first question is to follow-up on Chairman's comments about that you see the 5 gs momentum continue to be strong even if there's a change on the U. S. Exporting rule, maybe just some near term disruption because TSMC has evaluated the supply chain change.
So can you elaborate more about what's the supply chain chains you have seen to make you such a give you such confidence that there will be just a near term disruption even there is some change on the exporting rule?
Well, this is a forward looking analysis. So I think some of you also did analysis. Basically, the smartphone you have to look at this smartphone demand for a year and there is and then look at the 5 gs penetration per year. Who will be the smartphone supplier, it can change? Who will be their shares?
And where the 5 gs base station being produced that will change. So all these things, it really depends on the it boils down to really the forward looking smartphone demand, would that be interrupted? That's the analysis. I think that if any disruption, it will be a shorter term, yes.
Okay. So my follow-up question on that is smartphone we understand. So A brands that lose share, B, C brands will pick up. But what about the infrastructure? If there is a disruption on the infrastructure because one of the key infrastructure supplier may not have the critical processors.
So which means the whole 5 gs infrastructure build out maybe slowed down, postponed? And what's the point of having those 5 gs smartphone with the whole supply chain, whole 5 gs thesis being postponed?
I think industry will find I think there's no business is just one player for too long, okay? The second, third player will sooner or later will come up and it could be pretty soon. And it's in our business always in a competitive environment. So yes, we have a number 1 enter the market, but the number 2, number 3 is not too far away.
Okay. My second question is on the guidance that the company gave this year that the foundry industry is growing 17%, right? Sammy excluding memory is about 8%. I think if I look at historically the usually, I think the formula for TSMC's growth is usually the global GDP and semi is about like 2%, 3% point above that Foundry a little bit above that and TSMC is a little bit above that. So TSMC get 5% to 10% of the CAGR.
So I think that is very simple formula. But has the formula changed? So I mean that historically, semiconductor is highly correlated with the global GDP growth to some extent. So if TSMC, where the foundry just been growing faster, is it like the foundry TSM become the outlier? Or is it because also that you're implying that the whole industry whole economy is growing faster?
Now this time, we have higher growth rate, right, for foundry and for TSMC. It all because of driven by 5 gs and AI's application. So whether we can increase our forecast, for example, TSMGO, we say 5% to 10% CAGR is that our goal. We certainly hope that we can exceed that, but this year is still too early to say. But we state what we say.
The fund g industry will be 17% and TSMC will be better than that.
Sebastian, let me add to this. This year, the formula does change a bit. We put it in the Korean captive Korean player foundry captive into the foundry, okay, which is they do that and constantly. So this time, we put the Korean players captive into the foundry business. So that's why you see the growth quite faster, yes.
Okay. So but if we also look at I think the company also made a comment that you're seeing your 5 year CAGR to be higher at the high end of the 5% to 10%. So it's not just 1 year, right? It's just a flash of the pin. So I think if you look at the longer time frame, which means I think there will be more I think the correlation with the global GDP, I think that make more sense, more representative.
So does that also means that like semis and tech innovation is going to drive the global economy grow faster in the next couple of years? Or is it just because the GOB still grow as the growth at 2%, 3%, but semi foundry TSMC become the outlier? That gap is getting bigger.
We don't want to say it's an outlier. We continue to forecast global GDP still in a normal situation, provided the trade tension between the 2 big countries did not deteriorate. But for semiconductor, I want to say that the content of the semiconductor in our life continue to increase, provide see that you can see the big example in the smartphone, you can see the big example in the automotive and you can see that IoT is a big increase also. So now it's changing our world And that all because of semiconductor content. It's not because of GDP started to become grow faster.
And it's not because of semiconductor, it's an outlier. It will continue to be this way.
Yes. And remember, last year, as Wendell said, the semi industry ex memory was a year of decline. So obviously, there's a base effect in play as well for 2020.
Yes, sure. But I'm talking about 5 years. Sure.
Okay. Thank you. Let's move back to the line,
Your next question comes from the line of Mehdi Hosseini from SIG. Please ask your question.
Yes. Thanks for taking my question. I have one clarification. When you were referring to 5 nanometer, does that include 6? And if it doesn't, what is your view of availability of 6 nanometer by year end 2020?
Do I have to repeat the question? You said that 5 nanometer is including 6 or not. No, 6 is 7 nanometers of AML. So we look at the 7, 7 plus, 6 as one family. 5 is another big node.
Okay. And you're still on schedule to have 6 available by end of this year, correct?
Volume production at gend of this year, right now is ready for our customers to tape out.
Sure. Okay. And then in terms of just the we're talking about the growth more than 20%. At the same time, one of the leading microprocessor manufacturer based in North America has talked about increased outsourcing. And I just want to get your view, when you look into the longer term, would that would there be a structural change in semiconductor manufacturing where TSMC would actually be able to grab a higher market share because there will be more outsourcing specifically from a key company based in North America.
All right. Let me repeat your question, Mehdi. I think you're asking us to comment on the potential for an increased outsourcing from a major microprocessor or CPU vendor? Long term, could this be a structural change and the potential for long term longer term outsourcing?
C. Wei:] Yes. We
certainly welcome that outsourcing continue to grow. And for TSMC, all I can say is we develop the technology to meet our customers' requirement. And we are confident that we are the best technology leader, and we have excellent manufacturing. And of course, as a result, we expect that we gain some market share out of it. But that is for the future for TSMC's growth, and I cannot be more specific than that.
Okay. Thank you. Let's move on. We have a follow-up question from the line from JPMorgan's Gokul Hariharan.
Thanks, Jeff. So quick question on the high end of the 5% to 10% growth. Could you talk a little bit about why only high end of 5% to 10% given the CapEx increase seems to be 40% to 50% from the last kind of $10,000,000,000 to $11,000,000,000 kind of CapEx range over the last 5 years. Any reasons why we are a bit more cautious? Do we feel that the 5 gs cycle after a couple of years could start to kind of decelerate, especially given this year we are already starting off with a very strong 20% kind of growth.
So just wanted to think about the puts and takes in terms of the high end of 5% to 10% and why not stronger than that growth given the big jump in CapEx and indication that CapEx could stay around these levels even going into the 3 nanometer era?
Okay. Gokul, let me try to summarize your question. Basically, Gokul is asking why our long term growth target is only at the high end of 5% to 10% when our CapEx has increased 40% to 50% versus the 10,000,000,000 to 12,000,000,000 in the past. He is asking or wondering, is this because we think take a more cautious view that 5 gs cycle may be strong this year and next year, but may slow down after that? And so why do we still say at the high end of 5% to 10%?
Last year, before we increased the CapEx, we were looking at somewhere in the middle of that 5% to 10%. But afterwards, when we see the ramp in 5 gs deployment, we increased the CapEx and now we're looking at high end of the 5% to 10% range. So that is the difference. Also, let me explain this from a capital intensity point of view. Last year, while we increased the CapEx, the capital intensity was over 40%.
This year, we think it will be lower than 40%. And from next year on, although it's still pretty early, we think it will be somewhere between 30% or 35%, which is pretty similar to the old norm that we used to say before.
Gokul, do you have a second question?
Yes. Just one more broader question for Doctor. Liu. At a board level, could you talk a little bit about how the Board thinks about DSMC's positioning as a boundary for everyone, everybody's boundary, given the broader geopolitical changes that are happening. I don't want to go into each episode in terms of like the change in the remittance rules, etcetera.
But thinking 4 to 5 years out, what are the steps that the Board has been filtering to kind of to ensure that JMP can remain heavily found even in most challenging kind of geopolitical environment and a lot more policy kind of risk surprises over the last 5 to 7 years.
Okay. Let me try to summarize your question. Again, I think he's asking Gokul is asking for Mark to please share your thoughts on from a Board level TSMC's positioning as everyone's foundry. Of course, we're facing a lot of different geopolitical changes and challenges. Gokul doesn't need us to comment on each one.
But generally, how are we thinking about 5 to 7 years out, how TSMC can position ourselves and how we can remain to be everyone's foundry?
Yes. The first of all, currently, we discussed the strategy with the Board and the Board fully agree with our current strategy, okay? And of course, this strategy contains several necessary components. First of all, we develop our technology ourselves. All the technology IP and know how and technology all developed in Taiwan here.
Secondly is another necessary element is our technology has to be leaders. When you're technology leaders, people will have to come to you. And that's how we maintained to be everyone's foundry. There are exceptions, of course, because of their domestic trade policy that I cannot overcome. But basically that so far, this strategy should be able to play on.
Okay. Does that answer your question, Gokul?
Yes. Thank you very much.
All right. Thank you. Let's come back to the floor and see if there's any follow-up questions from anyone? Morgan Stanley, Charlie?
Thanks for taking my follow-up. So first of all, for Q1, you mentioned that utilization rates are higher, but in terms of U. S. Dollar revenue go down slightly. So what is the ASP or promise change here?
Thanks.
So Charlie is asking that we said Q1 the utilization rate will slightly increase, but our guidance shows a slight decrease in the revenue in terms of U. S. Dollars. So why is that does that imply an ASP change?
Last year, Q4 or even Q3 last year, part of the wafer revenue come from wafers prepared in the first quarter first half of twenty nineteen when the utilization was pretty low. And we're pretty much digesting all of those
already. Okay. So it looks like the year is open, right? But do you see any kind of any next data points, for example, any segment or any customers cutting forecast or orders recently? Can you comment on that?
No, we did not see that.
Okay. And lastly, it's a little bit subtle, right? CapEx, I think 3 months ago, I think the guidance for this year CapEx is $14,000,000,000 to $15,000,000,000 But now it's like $1,000,000,000 higher. So what is that additional cadence for? Is it mainly for 7 nanometer or 5 nanometer?
Well, other than the advanced technology, we also mentioned earlier, we also increased the CapEx this year for specialty technology as well as advanced packaging. So those are the areas that we are focusing on.
And lastly, if I may, I guess, market share question. We appreciate that the company provide your assumption for industry growth. So I guess, first of all, we want to clarify, when you add Korea Captive Foundry in the comparison, you said apple to apple comparison, meaning do you include that into last year's revenue base?
I think we did, right? Yes, we did.
Okay. So include an apple to apple comparison, it's up 17%.
Up 17%.
Okay. And then relates to China competitors market share. I think that's a fair use.
I think that's probably needs to correct it. I don't think we include the foundry growth in last year, the Samsung captive supply. So the growth is 17%, it's particularly high.
Okay. So what is kind of apple to apple comparison there?
I think 6 points. So it will be 11% if it's apple to apple comparison.
Okay. So based on that kind of 11% industry growth, right, I think lots of investors are asking whether you are sort of losing market share in China because China want to push the localization, right? So Sun Che is talking about SMIC can take more orders from you guys at 40 nanometer. Can you also comment a little bit on this front?
Usually, we don't But let me tell you that what the newspaper say is not true.
All right.
Okay, clear. Thanks.
Thank you. Yes. Charlie, also let me just clarify. Last time, we did not say that 14 to 15 for 2020 CapEx. We said it would probably stay at a similar level as 2019, but we do not specifically say that dollar range,
all right,
just to clarify. All right, let's go back to the line sorry, we have a follow-up from SIG Medi.
Yes, thank you for the follow-up. I wanted to go back to your commentary about 5 gs phone and how should I think about opportunities if I were to think about the sub-six versus millimeter wave? And specifically, do you think that this year opportunities with mobile, you talked about a 20% more than 20% growth. Is that all going to be subsets? Or is that going to be a mix of the 2 technologies?
You want to repeat?
I think
the question is clear enough. If the 5 gs growth is because of sub-six or the millimeter wave, my answer is both, okay? That's the 5 gs cell phone and the base station is for sub-six and the millimeter wave.
Do you have a second question, Mehdi?
Yes. Actually, if I were to have a follow-up, do you think you would actually be building a millimeter wave phone or for millimeter wave, it's just going to be limited to base station?
Okay. Actually, the phone is much easier to build with millimeter wave plus sub-six. The base station probably will have a much higher number in sub-six rather than millimeter wave.
Okay. Okay.
Thank you.
All right. Let's come back to the floor. We have follow-up from Credit Suisse. Randy Abraham.
Yes. Thank you. You talked about the good investment in the back end. Last year, I think you said $2,500,000,000 was the revenue run rate in 2018. If you can maybe give a view of the size of the business now and maybe what type of growth you're expecting for this year?
Yes. The revenue size of back end was RMB 2,800,000,000 in 2019. We're expecting double digit growth for this year, mid teens.
Okay. And if I could ask on the 2 others that don't get as much attention, automotive and IoT. So automotive was depressed last year, but I think you're talking about a pretty big pickup to grow teens. Could you talk the areas like if it's just cyclical rebound or if there's certain types of product or components coming back for the automotive where you're gaining content share. And for the automotive sorry, for the IoT, where it was very strong growth, It's a big category.
So if you could maybe center on if there's a few particular pieces within an IoT driving the momentum for that category.
Well, actually, the growth this year is most come from the content increase rather than the unit increase. So we I just mentioned that it will be mid teens, right? Mid teens increase. Certainly, it's not mid teens units. You don't expect so many car being sold.
And so is the content the semiconductor contents increase more important than the unit.
And then Randy is also asking about for IoT. Are there specific areas or segments that's driving the growth in IoT?
C. Wei:] Wow. Wearable is very popular now everywhere. And according to our Chairman, his content also increased.
Okay. Thank you for that.
Next, we have a follow-up from Citigroup, Roland Chu.
Yes. Last time, CEO guided you expected the 7 nanometer revenue will continue to grow in 2020. So do you still hold in the view? [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Yes. So how much growth it will be this year?
So last year, we have 27%. Is this able to above the highest level of 20 nanometer around 34%? Growth. Okay. And also for 7 nanometer, do you see any competitor with the technology breakthrough and likely to impact or taking your market share in the near term?
Can you repeat the question? Sorry.
Yes. Do you see any competitors with 7 nanometer technology breakthrough and were likely to threat you or take your market share going forward?
We will continue to hold a very high market share. That's all we can say. And I don't comment on my competitor.
Okay. Thank
you. Yes, my second question is you said that you continue expanding your customer and the product portfolio. And so you have new customers and the products from cryptocurrency in 2018. And the last year, you have this new CPU foundry outsourcing as your new customer and technology. So how about this year?
Do you see any new customer or new applications to contribute to your growth? Thank you.
C. Wei:] This year's growth counting on my customer is what we engaged last year already. So as I said, we continue to expand our product portfolio and we continue to increase the number of our customer. So
I think the content increase along with 5 gs penetration is the major phenomenon, including the leading edge as well as the mature nodes. And it's just a widespread of customers or existing customers.
Okay. We have a follow-up here from CLSA, Sebastian Ho.
My first follow-up is, we heard that the 7 nanometer demand is very strong at TSMC and most of the customers are on allocation mode right now. So with another step up of CapEx for this year, I believe some of that also defaulted into 7 nanometer for this year. Do you still expect the similar tightness that your customer may experience on 7 nanometer by the end of this year?
We do have very high demand from 7 nanometer, and we work very hard to meet customers' demand. Last year, we announced that we put a RMB 1,500,000,000 more to increase the 7 nanometer capacity. We work hard to increase the capacity.
Yes. With 5 nanometer ramp up in the second half of this year, the tightness of 7 nanometer, we hopefully can be soozed a bit for the customers.
Okay. And is there are there any process nodes that TSMC is seeing not growing this year?
28 nanometer.
But 20 is already pretty low last year, but you're still seeing that not growing?
You say not growing, right? Yes, not growing.
All
right. So even for 2016, 2012 this platform, TSMC also expect that to go up? Okay. So that's why you say that the newspaper is wrong.
I don't want to source specific.
Okay. Well, that's pretty clear. Thank you.
All right. In the interest of time, we'll see if there's any last questions from anybody. If not, then 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 from within 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 you will join us again next quarter. Goodbye, Happy New Year and have a great day.