Welcome to TFMC's Q3 2019 earnings conference and conference call. This is Elizabeth Sun, TSMC's Senior Director of Corporate Communications and your host for today. Today's event is webcast live through TSMC's website at www.tsmc.com. If you are joining us through the conference call, your dialed in lines are in a 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: First, TF and T's Vice President and Chief Financial Officer, Mr. Wendou Huang, will summarize our operations in the Q3 2019 followed by the guidance for the Q4. Afterwards, Mr. Bong and TSMC's CEO, Doctor. C.
C. Wei will jointly provide company's key messages. Then we will open both the floor and the line for the Q and A. For both participants on the call, if you do not yet have a copy of the press release, you may download it from TSMC's website at www.tsmt.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 the 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 to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and current quarter guidance.
Thank you, Elizabeth. Good afternoon, everyone, and thank you for joining us today. My presentation will start with the financial highlights for the Q3 followed by the guidance for the current quarter. 3rd quarter revenue increased 21.6 percent quarter over quarter to RMB293 1,000,000,000, driven by new product launches, both in premium software and high performance computing applications using TSMC's industry leading 7 nanometer technology. Gross margin increased by 4.6 percentage points sequentially to 47.6% mainly due to a solid improvement in capacity utilization.
Total operating expenses accounted for 10.7% of net compared to 11.2% in the 2nd quarter due to better operating leverage. Operating margin increased by 5.1 percentage points sequentially to 36.8%. Overall, our 3rd quarter EPS was NPM3.9 and ROE was 25.7%. Now let's take a look at revenue by technology. 7 nanometer technology saw very strong demand and accounted for 27% of wafer revenue in the Q3.
10 nanometer was 2% and 16 nanometer was 22%. Advanced technologies, which are defined as 16 nanometer and below, accounted for 51% of wafer revenue, up from 47% in the second quarter. Now let's take a look at revenue contribution by platform. All 4 of our growth platforms saw demand increases in the Q3. Smartphone increased 33% quarter over quarter to account for 49% of our 3rd quarter revenue.
HPC increased 10% to account for 29%. IoT increased 35% to account for 9% and automotive increased 20% to account for 4%. Moving on to the balance sheet. We ended the 3rd quarter with cash and marketable securities of RMB585 1,000,000,000, a decrease of RMB180 1,000,000,000 the 2nd quarter, mainly as we distributed to be rmb207 1,000,000,000 of cash dividends for 2018. On the liability side, current liabilities decreased by CNY127 1,000,000,000 quarter over quarter
as we
distributed 2018 cash dividend and accrued another TWD65 1,000,000,000 or NT2.5 per share for the Q2 of 2019 cash dividend, and that will be paid in January of next year. On financial ratios, accounts receivable turnover days decreased one day to 41 days. Days of inventory decreased 11 days to 65 days, reflecting higher wafer shipments during the quarter. Now let me make a few comments on cash flow and CapEx. During the Q3, we generated about NPL142 1,000,000,000 of cash from operations, spent NT98 1,000,000,000 in capital expenditures and distributed NT207 1,000,000,000 of cash dividend.
As a result, our overall cash balance decreased by NT197 1,000,000,000 to NTL452 1,000,000,000 at the end of the quarter. In U. S. Dollar terms, our 3rd quarter capital expenditures was $3,140,000,000 I have finished my financial summary. Now let's turn to Q4 guidance.
Based on the current business outlook, we expect our 4th quarter revenue to be between US10.2 billion dollars and US10.3 billion dollars which is the 9% sequential increase at the midpoint. Based on the exchange rate assumption of 1 to 30.6 MT, gross margin is expected to be between 48% 50%. Auto ID margin is expected to be between 37% 39%. This concludes my financial presentation. Let me follow by making a few comments about 2019 capital expenditures and TSMC's long term financial objectives.
I will first talk about our capital budget for this year. In TSMC, we build capacity according to our customers' demand. To forecast such demand, we take into consideration not only from each individual customer's indication, but also our own forecast based on macro as well as market segment outlook. Given the stronger outlook for 5 gs deployment next year, the demand for our 7 nanometer and 5 nanometer has increased significantly in the last few months. We have therefore decided to raise our full year 2019 CapEx by US4 $1,000,000,000 to meet this increased demand.
We now expect our 2019 CapEx to be between US14 $1,000,000,000 $15,000,000,000 About US1.5 billion dollars of the US4 $1,000,000,000 CapEx increase is for 7 nanometer capacity and $2,500,000,000 is for 5 nanometer capacity. Although we're not able to give you a formal guidance for our next year's CapEx until next January, We currently plan next year's CapEx to be somewhat similar to our revised 2019 CapEx. Now let me state our long term financial objectives. As the company's new CFO, I'm happy to tell you that TSMC's long term financial objectives remain the same. Our goal is to achieve revenue and net income CAGR in the next few years to be between 5% 10% in U.
S. Dollar terms. Gross margin to be about 50%, operating margin to be about 39% and ROE to be above 20%. Regarding our cash dividend policy, we reiterate that we will distribute about 70% of free cash flow as cash dividend. More importantly, TSMC is committed to a sustainable cash dividend on both an annual and quarterly basis.
Now I will turn the microphone to C. C.
C. C. Wei:] Thank you, Windho. Good afternoon, ladies and gentlemen. Let me start with our near term demand and inventory.
We conclude our 3rd quarter as reported by CFO with revenue of NPE293 billion dollars or US9.4 billion dollars dollars That is slightly above our guidance due to better demand from smartphone related applications in our forecast 3 months ago. Moving into Q4 this year, we expect demand from both smartphone and high performance computing related applications will continue to increase, thanks to our industry leading 7 nanometer technology that powers these applications. On the inventory front, our fabless customers' overall inventory is being gradually bypassed throughout the Q3. We now expect it reduced to a few days above seasonal level exceeding 3rd quarter and approach seasonal level by the end of this year. For the full year of 2019, we forecast both the overall semiconductor market, excluding memory and the Guangxi segment to decline by low single digit from their 2018 level.
However, we continue to expect PSMC to do better and achieve a slight annual growth. Now let me talk about the progress and development of 5 gs. 5 gs will drive AI applications and bring many benefits to the market. Performance will be greatly improved with data transmission speed up to 10 times faster as compared to 4 gs network. In addition, 5 gs data and device have about 90% reduction as compared to 4 gs, allowing for real time response and control.
The benefit from 5 gs will unlock new use cases such as AR, VR, real time translation and high quality gaming to enable. We believe smartphone OEMs will come out with many more innovative applications to take advantage of the 5 gs infrastructure. Since the middle of this year, we have been seeing an acceleration in the worldwide 5 gs development. This was the introduction and deployment of 5 gs network and smartphone in several major markets around the world, which leads to the increase of our CapEx for this year. We expect a faster ramp of 5 gs smartphones as compared to 4 gs, with the penetration rate of 5 gs smartphones to reach mid teen percentage of the total smartphone market in 2020.
Meanwhile, we expect the silicon content of 5 gs smartphones will be substantially higher than that of 4 gs smartphones. That is due to increasing functionality and additional ICs for more camera, RF circuit, modem, power management IC, etcetera. Our efficiency, speed and ability to incorporate additional functionality are critically important to 5 gs smartphones, which require TSMC's leading edge technology and will continue to fuel our growth for the next several years. Now I will talk about our N5 and N3 status. Our N5 technology has already entered with production with good yield.
N5 will adopt the EUV extensively and is well on track for volume production in the first half of next year. With 80 percent a 0 large density gain and about 20% speed gain compared with 7 nanometer. Our N5 technology is a 2 fold stride from our N7. We believe it will be the foundry industry's most advanced solution with the best density, performance and power until our 3 nanometer arrives. With Gen 5, we are further expanding our customer product portfolio and increasing our addressable market.
The initial ramp will be driven by both mobile and HPC applications. We are confident that 5 nanometer will have a strong ramp and be a large and long lasting node for TSMC. Now I will talk about N3. We are working with customers on N3 and the technology development progress is going well. Our N3 will be another 4 node from our N5 with PPA GaN similar to the GaN from N7 to N5.
We expect our 3 nanometer technology will be the most advanced of 1 gs technology in both TPA and transistor technology when it is introduced. Now I will talk about the ramp up of N7, N7 plus and the status of N6. Today, we are completing our 2nd year rental of N7. We continue to see very strong demand across a wide spectrum of products for mobile, HPC and IoT applications. N7 plus is an industry, the first commercially available EUV lithography technology.
N7 plus provides 15% to 20% higher density with improved power consumption when compared to N7. Then it's already in high volume production with yield similar to N7. We expect the strong demand for N7 plus continue into next year and are increasing CapEx to meet this demand for multiple customers. Now N6. Our N6 provides a clear migration path for the 2nd wave N7 product as its design rules are 100% compatible with N7, while providing 18% large expansion gain with performance to cost advantage.
N6 used 1 more EUV there than N7 plus N Series production is scheduled to begin in Q1 next year with volume production starting before the end of 2020. We reaffirm that 7 nanometer will contribute more than 25% of our wafer revenue in 2019, and we expect even higher percentage in 2020 due to worldwide development of 5 gs, accelerated demand from HPC, mobile and other application continue to grow. Finally, I'll talk about TSMC's advanced packaging business. Our advanced packaging solution enabled system integration with wafer level process allowing seamless integration of Wang Yan wafer process and back end chip packaging. The solution consists of cohort, info, system on integrated chips or SOIC and wafer on wafer for WOW.
We are seeing strong momentum for cohort and InFO for HPC applications as we continue to enlarge the integrated chip area to above to vertical size in 1 module. We are also working with a few leading customers on SOIC, which is an industry leading 3 d IC packaging solution. SOIC enables 3 d integration of multiple chips in close proximity to deliver the best possible performance, power and form factor. We target to start production in 2021 time frame with early adoption by HPC applications. As the industry continues to shift innovation to enhance system level performance, TSMC's differentiating advanced packaging solution will allow us to grow the business at the pace faster than corporate in the next few years.
And thank you for your attention.
This concludes our prepared statements. Before we begin the Q and A session, I would like to remind everybody to limit your questions to 2 at a time to allow all participants an opportunity to ask their questions. Questions will be taken both from the floor and from the call. If you would like to ask a question, please press the star then 1 on your telephone keypad now.
I wanted to ask the first question. I'm giving the high CapEx for this year and next year. If you can talk about the capital requirement for $5,000,000 in EUB, maybe how the equation with EUB coming in, how does that affect the capital intensity or should the CapEx per 1,000 leakers? And how do you see this in terms of pricing and maintaining the same level of profitability in prior
Okay. So Randy, you're asking about the how much EUV accounted for the capital expenditures?
I wonder how EUV changes your capital intensity or CapEx per k, if you're getting some benefit that is actually lowering that? But given the CapEx, it's still the same, you're seeing the higher CapEx per ks. And then how does that translate into profitability? How do you expect 5 to compare to, say, some of the prior nodes?
Well, I cannot talk too much about details, but definitely CapEx per k for $5,000,000 is that certainly higher than previous notes. However, if we combine everything together, as we stated at the beginning, we're still seeing our profit structure profitability remains the same.
And I'll ask one follow-up to that and then a second question. This year, like second half strong demand and leading edge tight, the gross margin guidance for 4th quarter is still it's a good margin, but it's 48 to 50. And I think the target is going
to hit 50. So maybe
if there's still a little bit of drag on the margin. And with next year bringing in a new node size, if you think you can catch that 50 for next year? That's just a follow-up for me.
Okay. For the Q4, it's just like we stated all along for our structured profitability. When you reach 90% of utilization, we target to reach 50% of gross margins. For next year, it's still early to say. The structural profitability or margins may be affected by the ramp in a 5 nanometer as at the beginning of ramping of every nanometer technology nodes, it will somehow be affected.
However, if the utilization is good, then we're still expecting to see the structural profitability continues.
And the second question I wanted to ask, because you had a strong Q3 recovery, you guided another good Q4. As you look to maybe an early look at next year, how should we think about seasonality? There's some concerns before 5 gs ramps. We have a correction on 4 gs. And then we have if the tariffs hit, we might have had some pre build.
So how do you see kind of early year risk to say a correction?
And can you pull in some demand, let's
say, a capacity site to maybe mitigate the magnitude of correction over the year?
You're talking about the seasonality of the smartphone that we observe almost every year. And so I don't expect next year to be dramatically different. However, we did see some of the 5 gs smartphones, the gross momentum is higher than we expected. So I would expect next year's seasonality is not so strong as we observe for this year. But it's too early to say because of the market is very dynamic.
Next question will be coming from JPMorgan's Gokul, Harry Hanup.
Thanks for taking my question. So first of all, if you look at the history, whenever TSMC has had a step up in CapEx that is typically accompanied by a step up in growth as well. So just wanted to kind of narrow down a little bit on the 5% to 10% growth, which is still kind of the kind of growth that we were expecting and
we were spending $10,000,000,000 to $11,000,000,000 So could you give
us a little bit
more detail or maybe narrow down the
forecast a little bit more for us because if
we say a $14,000,000,000 to $15,000,000,000 range, you're more for us? Because if we say a $14,000,000 to $15,000,000 range of CapEx that's closer to the high-thirty percent CapEx in the Philippines, higher than our previous range.
Gokul, let me answer the question carefully. Let's say that TSMC always build a capacity working closely with customer and to meet their demand. That's the number one, okay? We discuss with the customer on their demand. We make our adjustment also.
Now we are increasing the CapEx quite a lot. No doubt about it. But then that's due to some of the reason I can foresee for the future. First, the 5 gs ramp up is much faster than 4 gs as we expected. 2nd, TSMC actually is expanding our customer portfolio.
And in the same time, we're also expanding our product portfolio. And so put all the factors together, we have a good reason that we increase our CapEx this year and probably next year.
Maybe just given the highest growth in 5 gs and exited build out, could you talk a little bit about going to next year, do you expect 5 gs and smartphones to be the main driver? Or do you feel that HPC momentum is going to be even faster than smartphones and far from some of your customers that start to take a lot of market share?
To answer your question, actually, it's both. We expect smartphone to grow faster than I mean, that's not in terms of unit, but in terms of silicon content. And the HPC also grow, as I said, we are expanding our product portfolio and also our customer portfolio. So the addressable market is increased. That's all.
Just a follow-up question. I mean, at
the beginning of the year, we had a more conservative view on bi nanometer per se. Obviously, that view has changed. So just to calibrate, should we expect now that 5 nanometer revenue next year are likely to be higher than, let's say, 7 nanometer last year, 1st year of ramp up 7 nanometer?
I don't want to say exactly what is the percentage, but let me say that now we have more optimistic than 6 months ago. 6 months ago, I believe what I said is that we want to be very careful and a little bit conservative in building the 5 nanometer capacity. Now we tend to be more aggressive and the 5 nanometers CapEx is built up because of we as I said, we work closely with customers in both all the applications like a smartphone, HPC, even IoT and automotive.
Okay. Thank you.
Next question will be coming from UBS, Bill Lu.
Thank you. First of all, Mr. Huang, congrats on the new post and looking forward to working with you.
Going back to CapEx, given the big increase, can
you give us some guidance for modeling depreciation?
Depreciation for this year would be flattish compared with last year because a big chunk of the increase happens in the Q4. As to depreciation next year, based on what I just indicated about our capital expenditures for next year, it will be higher. However, the detailed number or more specifics, we plan to discuss it in January next year.
So if I look at when the new capacity is going to come online, is it mostly, say, Q2, Q3? Is that the right way to think about it?
Well, if you look at the tours lead time, your estimate is very good Q2, Q3 time.
Okay, great. Thank you. Doctor. Wei, for 7 nanometers, obviously, demand looks quite good. Can you give us some guidance for 7 nanos as a percentage of revenues by end of next year?
Higher than this year. Okay. Thank you.
Next question will be coming from Citigroup's Roland Shu.
Good afternoon. Congrats for the very good results in 3Q. And I think the first question is that you talked about the next year for 5 gs smartphone will be the key growth driver. So I thought you talked about not only because of unit growth, but also for the pandemic about the content increase. So do you have the number for the in dollar content per 5 gs model compared to your 4 gs?
That is year 4 to 830 as well.
Okay. The answer is we don't have that number. But if you compare it to the OG, where does the increase come from? Is it because on this bigger die size or because of more semiconductor silicon or you probably have an assessment on that side.
We do have some assessment to be frank with you because we know the die size. We know the number of the chips inside. I'll give you some of the bidding. We are using the more advanced technology, so the die size increase, the leading edge is not so much. But it did increase because of more functionality.
You can expect the people put the AI application inside or those kind of things. More important, as the last time, I believe I already mentioned that camera for one example. Now you can see more and more camera in smartphone, especially the high end smartphone. And also the mobile solutions, that one was silicon real estate to from 12 what is that, 20 megapixel to 40 megapixel. So more camera, higher resolution, more pixel.
And then also you need a lot of power minimizing to control the power consumption because of 5 gs, they consume a lot of power. So your power management IC has to be more advanced. So you put a more power management IC inside. And then you are talking about more channel in the communication. So the RF front end, the transceiver, everything, not only the die size were increased, actually, to adopt the more channel.
So it's it's moving to the higher leading edge technology also.
Thanks. So I guess for the high end of probably, the sound content will increase more, right? So for your the total 5 gs smartphone, you need to focus to be about mid teens of the total shipment. So do you have this 5 gs smartphone breakdown side, high and mid and low end?
We'll talk about it in January.
Okay. Thank you. My second question is, now we are raising our N7 plus strategy. So is N7 plus gross margin going to be very different from N7 we are enjoying now?
It's very close.
Okay. Thank you. And how about for N7 plus, is it going to take 7 to 8 quarters to bring up the gross margin to corporate average? We look at the N7 plus and N7 plus and N10 as the big nodes. So from that point of view, N7 nodes actually has reached corporate margins.
Okay. Thank you. Just a follow-up. So I know you don't comment on the AAP, but for the same amount of the regular shipment and unseparate class, is it going to contribute more revenue upside to GS and T?
You just mentioned we don't
No, I don't talk about revenue. I don't talk about anything. I'm
sorry, thank you.
Next question will be coming from CLSA, Sebastian Hung.
Thank you. And then is there any updated guidance on the CapEx intensity going forward versus prior guidance?
Okay. Yes. As you just mentioned, you can calculate the CapEx intensity this year will be over 40%. At the same time, as we indicated that next year's CapEx, although preliminary, is about the same level as this year. And we also see strong demand for our business next year.
Our CapEx intensity will be lower next year. And what from what we can see at this moment, it will then gradually come down to probably between 30% or 35% level going in after next year.
So we are now seeing going to 30% to 30% by 30% range in 2,000 20?
In a couple of years after 2020.
So potentially next year, just so you don't want to talk about that right now?
Right. The potential of capital intensity, you mean?
Lower to mid-thirty percent by 2020. It's lower than 40%. Okay. Thank you. Second question is on the gross profit margin.
We think that a couple of quarters or 2 quarters ago, the first half of this year, when TSMC, how disabled, saying that we are past the bottom and we're seeing the strong rebound in second half this year and also expect the gross margin will go back to 50% level, second half. And indeed, now you see the adjusted operating income coming back, revenue coming back in the second half as expected. But it looks like the gross margin
is lagging a little bit compared
to the revenue direction. So can you explain what's this factor that's driving gross margin recovery behind the revenue recovery?
Yes. I
think you're talking about the 3rd quarter gross margins. Whenever there's a big jump up in utilization quarter over quarter, There will be a negative hit on gross margins. It's called the inventory evaluation. I think I believe we mentioned about this some time ago. So as you can imagine, the utilization in the 3rd quarter is much higher than that in the Q2.
And therefore, there is an element of negative inventory valuation happened in the Q3. The amount is slightly over 1 percentage point. Now if utilization remains similar level, that factor will not happen.
But when we're looking at the 4th quarter gross margin guidance,
I know the high end, we reached the 50%, but it still looks like the range between the 48% to 50%. So I think there's still chance for coming to go back
to 50%, but it looks like the midpoint doesn't reach that yet.
So I think not just about the
2Q, but also the Q4.
Yes. As I mentioned earlier, our structured profitability remains the same, I. E, if we reach 90% of utilization, we are targeting 50% of gross margins.
Okay. Thank you.
Next question will be coming from Morgan Stanley's Charlie Chan.
Thank you. Congratulations for a very strong resource. So sorry to coming back to this question. So since you are raising kind of a long term CapEx outlook, including next year, why don't you just revise up your revenue CAGR assumption? I think 5% to 10% revenue should be too conservative.
Can you comment on that part? It's not about time to change the target. I would say still 5% to 10%, but it's in the corporate side, okay, I can say. All right. Thanks.
Yes. And in other words, on this capital intensity question, it's about the payback period, right? Because for me, I still cannot add up why your structural profitability can remain the same, whereas your capital intensity increased so much, right? So in other way, can you just comment about a payback period for your 7 nanometer and 5 nanometer investment? Is that becoming longer going forward?
I remember this topic was discussed last time. And I think our answer was that we don't look at payback period. We do look at return on invested capital. And from that part, we don't see that big a difference with the advanced technologies.
Okay. Thanks. And my next question is about the advanced packaging. I remember in the previous quarters, you commented Advanced Packaging should outgrow the front end business. So first of all, is this remains the same trend?
And also, how about the potential margin dilution from the packaging business? The forecast on the advanced packaging business, the growth rate is still faster than the silicon's growth rate. The wafer's revenues are growth rate. It stays the same, okay? Still, that statement still valid.
The gross margin, that's another consideration. The gross margin of the back end business actually is lower today, still lower than the wafer margin. And but we do get it, Quiz, it's a good business to go on that on two factors. 1, we really want to support our customer to improve their system performance. So we have to do it because of THMC is the only one company right now can support customers' advanced packaging.
2nd naturally is the CapEx intensity on the back end that's advanced packaging business is smaller. And so the asset turnover is better. So put all in all together, we sure think it's a very good business to pursue. And last one, this is a quick one, maybe for CFO. Because you revised up your CapEx, right?
So what is the free cash flow trend in the coming quarters? I guess we want to know potential the next potential quarterly given hike, what would be the timing?
Let me just answer it by saying that we will not lower our dividend quarter on quarter basis. So investor will get at least the same amount, if not more, compared to previous quarter or compared to previous year.
How about the free cash flow projection? Do you have a good number for coming quarters?
Yes, we do. But I don't think that really matters to your question.
Okay. Thanks.
If I may, I would like to remind Charlie that today all our shareholders are getting the $2 per share dividends today going into their bank account. And we have already announced that the next quarter quarterly dividend is going to be $2.50 dollars So it has already gone up. Next question will be coming from Goldman Sachs Bruce Loop.
Can I ask what is your 5 gs penetration forecast about 6 months ago? 5 gs smartphone penetration forecast 6 months
ago. 6 months ago, we don't think the 5 gs smartphone was in any significant amount for this year. And so No,
I mean, 6 months ago, what's your forecast for 5 gs smartphone shipment in 20
20? Single digit.
So basically, we increased from single digit to mid teens for the past 6 months. Can you tell us what's the rationale behind your changes because for the past 6 months, we still have a lot of concerns for the 5th month such as you know, and they say the specs are finalized, the cost structure is getting a lot higher, global telcos, they are not asset races. So can you give us some single digit to making which is a big change?
It's a big change. And all I can say is whether it's like NSA, SA or those kind of 5 gs base station installation. We work with our customer actually. We listen to them. And they also have their own customers to consider.
And so some of the areas in the world, they accelerated the 5 gs deployment. And that's why it result as compared with 6 months ago, we did not see this momentum. But then in these 6 months, that momentum has grown bigger and bigger. And so that's why we I cannot give you the specific number of which country or which region, but we did see the momentum continue to grow. And now our own estimate has almost doubled.
But the concern is still there from a lot of investors such as NSAO SA because you still cannot see the clear indication at the end of the day from the telcos, right? So that's why we are a bit surprised to see this kind of meaningful changes, right?
Yes. I have no way to comment on the carrier how they think about this kind of 5 gs deployment. But they are moving ahead and for the 5 gs applications, especially in some of the big countries. That's what we see.
Okay. My next question is that we always rely on management to comment about the fabulous inventories. I mean, we always talk about that. But moving forward, your top two customer, it might account for 30%, 40% of your business pretty soon and they might account for 70%, 80% of your advanced geometry. And they don't really report their inventory anyway.
So how can you give us something some other indicator for us to judge the industry growth or just the inventory level for the industry?
Just for the industry level, we the fastest company is still one of the big factor that we consider. As for my customer, actually, for THMC, the more importantly, we really work with our customer closely. So I'm not going to give you the exact number of my big customers, inventory, but we work with them. Believe me, we very closely work together, so we understand that their strategy and their inventory.
That's what I wanted to give you some hint. We cannot appeal my investor that we have to chop Tiffany. Even though I say that all the time,
you can charge check and see.
Thank you.
All right. I think this is probably about the right time that we go to the lines for questions. I think there are quite a few analysts waiting on the line for questions. So operator, could you please go to the first person on the line? Thank you.
Yes. We have a question from Brett Simpson from Arete Research. Please ask your question.
Yes. Thanks very much, Elizabeth. I had a question really on China. I guess in the last couple of years, we've seen your business double with Chinese customers. And I guess at the moment, it's pretty clear you're going through a very healthy inflection point with Chinese customers at the moment.
So can you talk about how you see this part of your business evolving over the next 1 or 2 years? And then I guess from a planning perspective, are you concerned that the rise of your China business comes at the sacrifice of other customers, particularly U. S. Companies? Thanks very much.
Brett, your question is with respect to the business we derive from China. As you have observed that our business has doubled in the last couple of years from China and you like to see the outlook for our business in China in the next 1 to 2 years and also the strong growth coming from China, whether it is coming at the expense of our other customers in other regions?
Well, we can see the strong growth from China because that's a very big market, especially in the semiconductor area. And we are happy to see that growth. And TSMC is offering the most leading edge technology to support our customers in China. And so to be exact, we are going to grow with the China market.
But
at the expense of other customer,
the answer is no because we support all the customer with all our strength and our capacity.
Okay. And maybe just a follow-up on 5 nanometers specifically. I guess maybe you can talk about whether you think a ramp of 5 nanometer will be similar to cryo nodes in way of terms or revenue. How should we think about the ramp up, particularly as we get through into the second half of twenty twenty? And on your CapEx increase, I think you've said in the past, you want to you plan to grow.
You've been quite consistent. You want to grow your top line 5% to 10%. And your capital intensity to support that growth would be around about 30,000,000 as a percent of sales. Now you're stepping up your capital intensity significantly, but you're not changing your growth outlook. Can you perhaps just explain your thinking there?
Thank you.
So first part of the question is with respect to 5 nanometer ramp, whether the ramp profile next year will be similar to our prior notes ramp profile? The second question is related to the substantial increase in the CapEx because in the past, TSMC has indeed said that we could have $10,000,000,000 to $12,000,000,000 CapEx to support a 5% to 10% CAGR. Now our CapEx is substantially higher than the $10,000,000,000 to $12,000,000,000 and therefore, does that mean that it's going to support a much higher CAGR on the revenue growth?
Well, let me answer the first question. First, the 5 nanometers of grams for next year, certainly, as compared with 6 months ago, we are right now even more aggressive and more optimistic about it. And hopefully, because we spend a big money, hopefully, that EOR ramp up much, In terms of revenue, we'll be much faster than 7 nanometer. In next January, we're going to talk about more. And so that also answers the second question that we spent we increased the KPIs quite a lot, of course, from $10,000,000,000 to $11,000,000,000 to about $14,000,000,000 to $15,000,000,000 With that money, we spend to buy the tours, to prepare everything.
We do expect that our core fees are what go beyond 5% to 10%. But right now, we are not ready to change the long term 5 years target yet. However, we are working on that.
Operator, please go to the next caller on the line. Thank you. Yes. Your next question comes from the line of Mehdi Hosseini from SIG. Please ask your question.
Yes. Thank you for the opportunity to ask a question. A couple of follow ups. When you make a reference to 5 gs, how should we think about opportunities from the networking, specifically base station? Thanks for the detailed color on the smartphone units.
You expect mid teen penetration. But how would you quantify opportunities from the networking, specifically base station? And I have
a couple of follow ups.
So, Nadir, your question is that although we have talked about 5 gs smartphone units for next year, but you would like for our management to talk about the 5 gs base station business next year.
Yes.
Actually, the networking is fundamental for the 5 gs infrastructure. And because of it's a shorter waveband, so that you can expect that the base station will be much more than 4 gs base station. On the SA or even for the NSAs implement. So we expect networking process will be much higher. The opportunity will dramatically increase.
Was it exactly for the number? We don't have an accurate number for right now.
Is network included in the HPC
category?
Yes. Okay. So the reason I ask this question is, let's say, if your customers are building too many 5 gs smartphone, could opportunities in networking actually help offset any downside risk to excess inventory built on a smartphone?
I think maybe you are asking whether or not the increasing demand in the networking side will offset the higher inventory or the inventory correction on the smartphone side. Is that your question?
Yes. If there is an inventory, I'm trying to better understand how networking could offset any risk of inventory build.
I did not catch what you said. The relation between the networking or the base stations are set up with the 5 gs smartphones inventory?
Sure. Let me clarify. I think one of the concern among investment community is, yes, there is a very strong built in for the 5 gs smartphone, But the risk is these phones are too expensive and perhaps there is a risk that your customers' build plan are too aggressive. In that context, could opportunities on the networking side be large enough for TSMC to help alleviate any downside risk on the phone or excess inventory on the phone side? Oh, I see.
Okay. Let me repeat your question. You say that my customer are making the smartphone quite a lot of a large number. If the base station or networking did not catch up, is that the smartphone going to be inventory? The answer is no because of the 5 gs application will be implemented.
And you bought a 5 gs smartphone, still can use a 4 gs functionality, by the way. So it won't be a kind of inventory, as you mentioned about it. Provided, you get not enough 5 gs base station.
So, Madi, I think what Madi is saying is that you don't have to worry too much about 5 gs smartphone inventory because there will be sufficient demand to take off those products.
Yes.
Thank you. And then just a very quick follow-up. In the past, you have talked about advanced packaging accounting for high single digit of overall revenue in 2019. And that mix would go into the teens in the next decade. Are those targets remain intact?
Advanced packaging used to account for about high single digit percent of TSMC's revenue. The question is will that continue to increase to maybe high teens of TSMC's revenue?
It will continue to increase, but it's not a high teens. It's still the high single digit, but the gross rate is higher than the silicon wafer's gross rate.
Okay. And then is cryptocurrency stable? Should we be concerned that maybe some of these growth is driven by crypto? Or do you see crypto is pretty stable and with minimum downside risk?
Alright, you're talking about cryptocurrencies and mining. We did see the Bitcoin's prices increase starting from this year until now. However, let me state the TSMC's policy and strategy. We will support cryptocurrency mining subsidies with available capacity. That's what we said.
We are not going to take in more CapEx for that.
Great. Thanks so much for answering the questions.
Thank you. Operator, could you please go to the next caller on the line? Thank you. Your next question comes from the line of Sangheon Iyer from Consiglio. Please ask your question.
Yes. Hi. Thank you for the opportunity. I just wanted to understand, given the recent developments that are happening in Hong Kong and the elections that we're heading in Taiwan next next calendar year, Do you see that we might have to revisit the CapEx plans given the trade wars and the intensity of the trade wars that are increasing?
You think about the trade war between the 2 big countries, is that going to affect the THMC's pay tax plan? Yes. In terms of Hong Kong situation or what do you think about it? Let me say it again, TSMC build capacity working closely with customers to meet customers' demand and our own judgment. We did not put that kind of trade tension in the world into consideration, although we think that any trade tension or trade war between any countries will have a negative impact to the semiconductor industry.
Right. I mean, so hypothetically, if you were to assume that in the election that comes in presidential election in January, if things were
to go towards a party that's in more favor of a one state kind of a thing,
would that have an incremental impact in
terms of how the trade war is seen from TSMC's perspective?
No, we don't think so. Even we have a general reaction in the next general result won't affect the TSMC's strategy. That because of we can we do the business according to the demand, according to the market situation and have very little impact from the politics
in Taiwan.
Okay. Good
to hear the question.
And sir, finally yes, yes, to a large extent, yes. That was helpful. And one more thing, sir. In terms of the 5 gs CapEx that we have been talking about,
so there
have been on the high speed SPC segment, there have been delays in terms of the shifts at the next node coming through from your large customers. When you see that 5 gs rollout will be pretty strong and also the HPC side seems to pick up strongly, is there any indication from your customers that the launch on the next node is going to be pretty soon? What gives us
the visibility here?
Let me try to see if I understand your question. You are asking us about the visibility of our customers' demand for our next node technology, how much visibility we have with respect to seeing the demand bump in for the next node?
Next node, you are mentioning about the 5 nanometer and the 3 nanometer?
5 nanometer for now.
Yes. Let's say 5 nanometer. Judging from we increase the CapEx for the 5 nanometer, you know our position and you know our forecast on the 5 nanometer business. So it will be good, and I cannot tell you how many percentage more, but I think the 5 nanometer TSMC is going to do a very good job and going to have a high market share. Great.
Thanks a lot, sir.
Thank you. Operator, let's move to the next caller on the line. Your next question comes from the line of Shuxi Zhu from S&P Global.
I just have a brief question follow-up on the China issue. I was wondering, is there any change in the numbers of your Chinese clients in recent years, especially in this year? And if it is possible that we can gather a specific number of the Chinese customers or the percentage of the Chinese customers as of the total clients? Thank you.
The number of customers in China actually is more than 100. So it changes all some of them changes all the time. Of course, there are some bigger ones and smaller ones. I'm not sure if this is your question.
Yes, sure. Just is there any change of this number in this year?
The number of customers generally increases.
It increases. And may we know the portion of the Chinese customers in terms of your overall customers or the percentage?
You mean the revenue or number of customers?
The number of customers.
We have over 400 active customers globally. And if you look at the China, if it's somewhat over 100, that gives you an idea. Does that answer your question?
Yes. Great. Thanks. Very helpful. Yes, that's all my questions.
Thanks.
Okay. Thank you. Do we have any questions on the floor? Okay. Let me come back to the floor.
First of all, we will have a follow-up question from TD Group's Roland. Roland Xu?
Thank you. I would like to follow-up on the inventory question. However, it depends on your inventory. I look at in 3Q, your inventory label action has been decreased to R97 1,000,000,000 even though we had a very strong revenue in 3Q and a very upbeat guidance in 4Q. So the wafer in process has been shipped increased.
However, overall inventory decreased a lot. So that means our finished goods and also even for our materials like wafer, in the system decreased a lot.
And you're right. Actually, let me it's suppose that the process actually enlarge the sort of inventory should be increased, but it's decreasing. It's because of some of the wafer work with our customer at the beginning of this year. We produce it in early stage to make sure that we don't have a wafer coated at the end of this year and then we ship it out. And so the inventory actually decreased quite a lot because of that.
Means finished goods? Yes. Okay. How about for the wafers? I mean for the raw wafer inventory?
The raw wafer almost stayed the same because we prepare our KSMT business is increasing. So actually, the raw wafer, we require a lot of amount in preparation for the core business. So it stays the same in terms of percentage in terms of days, I'm sorry.
Okay. And for the very upbeat outlook next year for the 7 nanometer and 5 nanometer, Are we securing all of these wafers for our production next year?
You bet.
Okay. Thank you.
And the second question is, you announced that your EUV tours have been reached at the actual maturity. But how about the infrastructure means about other component like the photo resist, pedicle, photo mask, even for this inspection to chemical and materials. So yes, we are going to have very best brand on by no means because of very strong demand from customers. But are there any gating items for this EUV infrastructure for the potential to be a risk?
So far, we did not see any gating item. All the infrastructure, actually, TSMC is well prepared. We have we have produced our own pedicle. We have a large number of marketing capacity and everything. So even for those kind of things, we have been taking into account.
So we are ready for the actually, we are in a high volume production for the EUV recovery technology. For next year, you are given higher volume, and I can assure you that we are all prepared.
Next coming next question will be coming from Credit Suisse, Randy Abrams.
Okay. Yes, thank you. I want
to ask because you kind of handed the growth, the utilization still below 90%. So to get to 50, you need to get utilization up. Could you talk about the 28 node prospects, how you see that? And then also, 16 and 12, some of
the applications likely
move on, some of the mobile and graphics. So your view on utilization and backfill to hold up that technology node?
Let me answer that question. On 28 nanometers, this technology node right now, I believe, in the industry, it's overcapacity. And so the inflation is very low, not to TSMC's expectation. So we prepare a lot of the reverse technology, specialty technology, then we say that. And we expect 2 leaders later from now, it will be again in the high utilization, but not today.
It takes time to work with the customer and to utilize the capacity. For 16 and 12 node, today, we are still in a very healthy utilization, but we are prepared. And if our competitor is continuing to increase the capacity just like 28 nanometer load, we expect a couple of years later something that you will be over capacity again. So right now, we are prepared all the specialty technology like RF, like even some of the ISP or something like that. So it won't happen to TSMC.
Okay. The second question, just to ask about the segment revenue. I think into Q3, mobile and HPC were both going to be strong. The HPC was good, but it wasn't quite as strong. So I'm curious, just in that mix, maybe factors for HPC.
And then IoT was quite strong, so maybe some of the things you're seeing in that. And then if you could give an outlook for Q4 by segment?
In the Q1,
of course, every segment is an increase. The HPT itself consists a lot of different market segments that including network processing, including the TPU, including accelerator and including all the cryptocurrency mining. And we expect that HPC will grow significantly in the 4th quarter.
Could you give the other segment? I guess you or other segment, any lagging and any picking up from the segment?
Let me give you okay. The IoT this quarter or the Q3 of the IoT increased quite a bit. So in the Q1, probably, your fee level off was slightly decreased, while our all other segment continued to grow. Great.
Thank you.
Next question will be coming from UBS, Bodo.
Yes. Hi. Thank you. If you look at the foundry industry historically, what we typically see is a big mill followed by a smaller mill, right? And now essentially what you're saying is a big 7 and a big 5.
Can you maybe just discuss what you're seeing that is different now versus before? Clearly, TSMC is addressing new markets. I think the demand drivers are different now versus before. But I'm curious as to what you're seeing that is different now.
You mentioned there's big and then followed by a small loan. I don't really catch what you mean, but let me say that TSMC introduced 16 nanometer and then 12 and then 10 and then 7 and then 5. Now let's talk about the 7 and 5. We are looking at the new market in the 5 gs because the 5 gs requirement on the speed and the power consumption reduction is quite a lot. It's not the same experience that we had before.
And so that after the 7 nanometer, all the customer asked us to develop the technology to meet their requirement. We got a higher speed, lower power consumption. So it was the full node kind of improvement. It's not, say, that's a 10% improvement will be good enough. Now look at our 7 nanometer.
We have a 7 nanometer, we have 5, and then we have 6 nanometer. The 6 nanometer being introduced as kind of a second wave product. But the DG waves product always at full node and marching ahead with about 2 years of cadence that we expect.
Next question will be coming from JPMorgan's
Thank you. So if we compare the change in expectations in the last 6 months, Would you characterize almost all of this as market growth, faster market growth of 5 gs in HPC? Or is there any meaningful change that in your market share expectations for some of your future growth as well?
Well, compared with 6 months ago, we are really kind of conservative at that time because of our 7 nanometer utilization is quite low. So we become conservative. But then in this segment, a lot of things changed. Let me say that, first, the 5 gs momentum is larger than we expected. The second one is we also, at the same time, because our technology offer to the customer, we expand our customers' portfolio.
And because of the performance, again, we also expand to new product portfolio. And so now we look at the future, we are more optimistic than 6 months ago, much more. Any increase in market share
that you expect compared to the Q1?
I can comment on that, but you are being increased, right, if you expect. Okay.
Simply on the breadth of customers on N5, I think around this time, 1 year or 9 months before N7 ramp up, you were talking about roughly, I think, 50 to 100 tape hours on N7. Could we talk about what is the breadth of number of customers or number of pay powers on N5? And how do you expect that to progress? And I know that number of payoffs is not equal to number of revenue or labor volume, but just want to understand the breadth of the customer base.
Well, let me say that tape out is one thing that see that how popular it is, but the more important is high volume products at tape out. And right now, we have many high volume products that came out. And that is the main reason why we increased our CapEx, high volume. And also, in addition to smartphone, we have more market segment that we entered at the end.
Okay. Just one quick follow-up. If you think about N7 family, N7, N7 plus, N6, Is this your expectation that pretty much most of the N7 current customers will eventually end up using N6, and parent plus Will most of your capacity eventually be EUV enabled for N7 as well? Or it will still be some EUV, some still using the current N7?
We still expect some using the EUV and some will still stay in the N7 because for those customers in the N7, once they in the 2 year schedule, they move to N5 already. So they have no reason to go back to use and ship. However, as I said, for the 2nd wave of the product, they're using M6 with the benefit of lower die cost and better performance.
We should expect eventually majority will be N6. Yes.
Next follow-up question will be coming from Morgan Stanley's Charlie Chan.
Thank you. So first of all, I want to follow-up on Bill's question on the future technology. You, Citi, you mentioned that there are lots of benefits from power consumption, from performers, from 5 nanometer, etcetera. So how about the transistor cost? I remember some of the customers talking about they don't see the benefit from the transistor cost saving going forward.
Do you think that is true statement? I still believe the pro transceivers cost is decreasing because of what right now, geometry is smaller and smaller. Although for TSMC, we more pay attention to what customer need, right? Because of when they need the speed, we give them speed. They need the power lower power consumption, we give them the lower power consumption.
But higher density is always the one that
we
are moving into the next generation technology. So for transistor wise, I did not do the very detailed calculation, but I still think that per transistor, the cost is lower. Okay. Thanks. And you also mentioned that for those new PayPal, SG and A volume is quite big.
Can I separate in other way, meaning those smaller customers, they cannot really afford those future technology unless they have a very big volume? Is that right thinking? Not really. I mean that's depend on their product. Your last question about the transistors, of course, let me give you some kind of a taste.
We improved the large intensity by 80%, but I did not charge my customer 80% more. So you know that the percentage is lower. And again, in the market, I would say that a product to be successful is more important than you really calculate this improvement, this cost, that cost. Product has to be competitive in the market and so that people want the price that they deserve, okay? So now the small customer cannot afford it.
Actually, some of the small customer, they are working on the CPU kind of a performance. They need a very high performance technology that they are working with TSMC. TSMC. Next is on EUV. So over the past 3 years, there were some kind of challenge in terms of power, throughput, pedicle, etcetera.
So now do you see any kind of new issues, new challenge for UV or from now on, is it like a blue sky? Okay. In PSMC, UV, the cell COVID technology is now in the production stage. But are we happy with it? Not yet.
We are still improving the availability. We have output power of 2 50 watt as we expected. Now we can operate the tool with 2 50 watt consistently. However, it's still something that we need to improve so that we can improve the throughput, we can improve the availability, so we can reduce the cost to continue to improve.
So in the interest of time, we'll just have the last question that will be coming from CLSA's Sebastian Ho.
Thank you. I want to follow-up first point, I want to follow-up on EUV. It's oversized S and L. Since you talked about some supply constraints on the EUV pool, the EUV pool. So it looks like guidance, there is no need expectation for next year's EUV unit growth.
This seems to be like amazing either. So I wonder what would that impact be since you've and Tianjin has recently secured what you need for this $14,000,000,000 to $15,000,000,000 CapEx this year and next year?
The answer is yes. We secure whatever we need. We work with the ASM upgrade closely. And we we are ordering all the tools that we need.
So which means the supply constraints could affect someone else and not us more.
I don't want to comment on that.
My second question is on the
28 nanometer, we also saw very strong demand with competitive building capacity. But then a couple of years later, it turns into the underutilization, overcapacity. Although there's some factors that's because of the competition, airlines are catching up. But how do you see this risk going forward for 7 and 5? And have you considered that whether it will be strong enough second wave or third wave of the dementia backfill capacity when your current customers migrate into 3 or 2, or whatever it is 3 years are down.
To answer your second question first, we do have confidence that a lot of products will fill up THMP's capacity. Now few years later, if you compare with 28 nanometer to 7 to 5, it's not a good comparison. So the 75 with a UV, that technology barrier is much, much, much higher than you can expect from the high T Metal Gate. And so there was anyway, I don't want to comment on my competitor.
Just last one. Last one, I promise the last one. When we look at the CapEx setup, it looks like the company has been around like RMB10 1,000,000,000 or RMB10 1,000,000,000 of CapEx, plusminus RMB22 1,000,000,000 for a few years right now. And if we go back and look at 2010, when we walk out of the downturn in 2,009 and also there's a huge step up of their CapEx from 2010 to 2010, and then we know what happened to TSMC, it's a golden year for TSMC for a couple of years. So now we have another step out of the semi downturn in the past 12 months.
Do you
think it's similar similarities now as we speak? And will you
make this both CapEx decision for us?
I know what you asked, but let me say that definitely getting smarter, definitely. And by the way, the technology barrier is much higher than, if I say, much higher than 28 nanometer. So we have a confidence that the capacity we build is a result we closely work with our customer. And so we decided to increase the capacity at this time with a lot of detailed analysis. And I certainly I have a confidence that we won't repeat the same kind of error that we did.
So I mean, I would say that,
that was a very rise in both depletion capital in 2010. Oh, thank you.
In 2010, yes. I'm sorry. I'm sorry. Yes. Those are the 28 nanometers in the golden years.
Very good. Yes.
So I was asking whether we could see another few golden years after Oh,
you say that before? Of course. What do you expect?
Yes. Thank you.
Yes. Well, before we conclude our conference, ladies and gentlemen, I would like to announce that important news that the beautiful lady, Zebra, beside me, Elizabeth, had decided to retire from the company at the end of this year. As you all know, Elizabeth has been with TSMC THMC as a Head of Investor Relations for 17 years. 17, that's a long time, isn't it? She's also the head of our public relations for 10 years.
And well, the beautiful lady has been called in the public sector, the face of TSMC. TSMC is beautiful also. In her IR role, it is what has won numerous award and recognition all over the world, not in as IR the best IR officer that's in Taiwan, in Asia and in the world. So many of you have been in frequent contact with her, I believe. So you know that she is a brilliant and enthusiastic and energetic lady.
And you can definitely sense how much she loves TSMC. In the last many years, she has built a world class IR team and developed successfully a competent successor, who is sitting right there. On behalf of TSMC, I would like to thank her for all her dedication and her contribution to the company's success and wish her the best for her retirement. Now ladies and gentlemen, let's ask Elizabeth to give us a few words.
Thank you, and thank you very much, C. C. I'm very privileged to have been able to work for GSMC in the last almost 17 years. Under the leadership of our founder, Doctor. Morris Chang and the current management team, I have witnessed how this company is able to move from strength to strength and still remains true to its mission and its value.
I have been blessed with the opportunity to represent this company that I deeply admire in front of the investment community and the press. I have enjoyed every minute of it and I hope I have served the company well. With all my heart to the investors, to the analysts and to the press, I want to thank you for your friendship and trust. I very much enjoyed our interactions, communications and discussions in the past. And I do hope that you will extend your goodwill to my IR successor, Jeff Su, who has been working closely with me in the last 4 years.
And many of you are already familiar with Jeff. I have had the most wonderful, exciting and rewarding time in my career at TSMC. I'm leading the company at a time when its future is brighter than ever. And I'm confident that you will continue to derive handsome returns from owning our shares. So with that, let me wish you good fortune and good health and we will conclude today's conference here.
Thank you.