Welcome to TSMC's Q2 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 dialing 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 Senior Vice President and CFO, Ms. Laura Ho, will summarize our operations in the Q2 2019, followed by our guidance for the Q3. Afterwards, Ms. Ho 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 a Q and A session where all our executives on stage, including TSMC's Deputy CFO, Mr. Wendell Huang, will entertain your questions.
For those participants on the call, if you do not yet have a copy of today's press release, you may download it from TSMC's website at www.tsmc.com. Please also download the summary slides in relation to today's conference presentation. As usual, I would like to remind everyone that today's discussions may contain forward looking statements, which are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward looking statements. Please refer to the Safe Harbor notice that appears on our press release. And now, I would like to turn the microphone to TSMC's CFO, Ms.
Laura Ho, for the summary of operations and quarter current quarter guidance. Thank you, Elizabeth. Good afternoon, everyone,
and thank you for joining us this afternoon. My presentation will start with financial highlights for the Q2 and followed by the guidance of the Q3. Our 2nd quarter revenue increased 10.2% quarter over quarter as we already passed the bottom of the cycle of our business and began to see demand increases. Gross margin increased by 1 point 7 percentage points sequentially to 43%, mainly due to the absence of photoresist defects material incident and a slightly more favorable foreign exchange rate. Total operating expenses represented 11.2% of net revenue, lower than 11.9% in the 1st quarter.
Operating margin increased by 2.3 percentage points sequentially to 31.7%. Overall, our 2nd quarter EPS was $2.57 and ROE was 16.2%. Now let's take a look at revenue by technology. 7 nanometer process technology accounted for 21% of wafer revenue in the 2nd quarter, 10 nanometer was 3% and 16 nanometer was 23%. Advanced technologies, which are defined as 60 nanometer and below, accounted for 47% of wafer revenue, up from 42% in the Q1.
Now let's talk about the revenue contribution by platform. Smartphone increased 5% quarter over quarter to accounted for 45% of our 2nd quarter revenue. HPC increased 23% to accounted for 32%. IoT increased 15% to accounted for 8% Automotive increased 3% to accounted for 5%. Digital consumer electronics and others went down slightly, accounted for 8% to 4% each of our wafer revenue.
Moving on to the balance sheet. We ended the 2nd quarter with cash and marketable securities of NT 765,000,000,000, an increase of NT4 billion dollars from the last quarter. On the liability side, current liabilities increased by TWD 244,000,000,000 as we accrued about TWD 259,000,000,000 for 2018 and for Q1 2019. 2018 cash dividends of NT8 dollars per share will be paid today, and the Q1 2019 dividend of NT2 dollars per share will be paid out in October. On financial ratios, accounts receivable turnover days decreased 7 days to 42 days.
Days of inventory decreased 3 days to 76 days, primarily due to lower days in working process inventories and finished goods, both of which resulted from higher shipments out of inventories built in Q1 2019. Now let me make a few comments on cash flow and CapEx. During the Q2, we generated about TWD118 billion cash from operations and spent TWD116 billion in capital expenditures. As a result, we generated free cash flow of TWD 1,400,000,000 and our overall cash balance increased TWD 4,000,000,000 to TWD 650,000,000,000 at the end of the quarter. In U.
S. Dollar terms, our 2nd quarter capital expenditure was RMB 3,750,000,000. I have finished my financial summary. Now let's turn to 3rd quarter guidance. Based on the current business outlook, we expect 3rd quarter revenue to be between US9.1 billion dollars US9.2 billion dollars which is an 18% sequential increase at the midpoint.
Based on exchange rate assumption of US1 dollars to NT31 dollars, Gross margin is expected to be between 46% 48%. Operating margin is expected to be between 35% 37%. This concludes my financial presentation. Let me follow by making a few comments about the profitability, CapEx and the cash dividend. First, about the profitability.
Let me make some comments on our second quarter and third quarter and the overall profitability outlook. Our Q2 2019 gross margin improved by 1.7 percentage points sequentially, mainly due to the absence of the photoresist material incident from 1st quarter and a slightly more favorable foreign exchange rate. The reason 2nd quarter revenue is slightly above the high end of our guidance, but gross margin is at the low end is because the pace of cost improvement at N7 did not meet our plan in Q2, but we expect cost to gradually improve towards the plan starting from the Q3. We have just guided Q3 2019 gross margin to improve by 4 percentage points sequentially at the midpoint, mainly as we expect a higher level of overall capacity utilization. Our gross margin in first half of twenty nineteen was primarily impacted by a lower capacity utilization rate.
But as our business and utilization rate improves in the second half of this year, we believe about 50% is still a good target for our gross margin going forward. Now regarding 2019 CapEx planning, at the beginning of this year, we have guided our 2019 CapEx budget to be between USD 10,000,000,000 and USD 11,000,000,000. However, over the last three months, we have seen an acceleration in the worldwide 5 gs development. We believe this will lead to an increase in demand for our 5 nanometer and 7 nanometer technologies beyond the level we forecasted 3 months ago. We are therefore working closely with our customers for the most effective capacity planning for our N5 and N7, we expect our 2019 CapEx is likely to exceed the high end of our guidance range.
We are currently evaluating our 2019 CapEx plans and expect to provide you a more detailed update during our October earnings conference. My last comment is about the cash dividend distribution. We have communicated our dividend policy earlier this year. We will have sustainable cash dividend per share on both an annual and quarterly basis. In addition, as our free cash flow increase, we will distribute about 70% of our free cash flow as cash dividend.
TSMC's AGM in June approved the Board's approval of NT dollars $8 cash dividend per share and full year for full year 2018 and the revision of the article of incorporation to adopt quarterly dividends. The Board then approved NT2 dollars per share dividend for the Q1 2019, which will be distributed in October 2019. Therefore, TSMC's shareholder will receive a total of NT-ten dollars cash dividend per share this year. That also means shareholder will receive at least NT10 dollars per share cash dividend for 2020. Going forward, TSMC has set the payment month for the quarterly dividend as January, April, July October of each year.
This concludes my remarks. Now I would like to turn to C. C. Wei for his comments. C.
Wei:] Thank you, Laura. Good afternoon, ladies and gentlemen. Let me start with near term demand and inventory. We conclude our 2nd quarter with revenue of NT 241 billion or US7.75 billion dollars slightly above our guidance due to a higher demand from HPC and IoT applications as compared to the time when we gave guidance. Although our business continued to be impacted by the softer overall global economic condition, customer inventory management and high end mobile product seasonality, we have also passed the bottom of the cycle of our business and began to see demand increases.
Moving into Q3 this year, TSMC's business will be driven by new product launches of premium smartphones, the acceleration of 5 gs development and the increasing adoption of our industry leading 7 nanometer node by high performance computing applications. Now let's talk about inventory. Our fabless customers' overall inventory is being gradually digested throughout the Q2, we expect it to reduce to several days above seasonal level exceeding the Q2, leading to an improved inventory environment for the second half of this year. Although a softer global economic condition and trade uncertainties remain, we expect our business to be much stronger in the second half as compared with the first half of this year due to the strong demand for our industry leading 7 nanometer technology solutions. The progress of our advanced technology is well on track, and we are very confident in our technology dealership.
Over the last 3 months, we have seen an acceleration in the worldwide 5 gs development. This was speed up the introduction and deployment of 5 gs network and smartphone in several major market around the world. We expect this to lead to an increase in demand for our 5 nanometer and 7 nanometer technologies, and we are working closely with our customers to carefully plan our capacity to meet their demand, as our CFO just said. Now I will talk about our N5 status and N3 development. Our N5 technology has already entered risk production in Q4.
Customer tape out activity are underway and volume production is scheduled in first half of year twenty twenty with 80% logic density gain, 8 0% and 15% speed compared with 7 nanometer, we believe our N5 technology is the most advancing the foundry industry with the best density, performance, power and transistor technology. Our 5 nanometer technology solution will be the foundry industry's most advanced solution until our 3 nanometers arrives. We are confident that 5 nanometer will have a strong ramp and be a large and long lasting node for TSMC. On N3, the technology development progress is going well, and we are already engaging with early customers under technology definition. We expect our 3 nanometer technology to further extend our leadership position well into the future.
Now I will talk about the ramp up of N7, N7 plus and the progress of N6. We are seeing very strong demand at N7 across a wide spectrum of products for mobile, HPC and IoT applications. Meanwhile, our N7 plus which adopts EUV for a few critical areas, has already entered volume production. We expect our customers' end products using N7 plus will be in the market in high volume this quarter. We expect strong demand to continue into next year.
N6 provide a clear migration path for 2nd wave N7 products as its design rules are 100% compatible with N7 while providing 18% logic density gain and performance to cost advantage. N6 will use more UV layer than N7 plus N6 risk production is scheduled to begin in Q4 year 2020 with customer product takeouts in second half twenty twenty and volume production start before the end of year 2020. Reaffirm N7 and N7 plus will contribute more than 25% of our wafer revenue in this year, and we expect even higher percentage in next year from N7, N7 plus and N6 because development of 5 gs accelerates and demand from HPC, mobile and other application continue to grow. Now let me talk about TSMC's competitiveness. The foundry business model has proven to be the most efficient model in the semiconductor industry.
As a pure play dedicated foundry, we collaborate and work closely together with our customers to unleash their innovations to the market and enable their success. We do not have any internal products, and we do not compete with customers. Within foundry, TSMC competes on technology leadership, manufacturing excellence and customers of trust. Our trilogy of strength enables us to be everyone's foundries. We have the most useful and robust technology offering across both advanced and specialty technologies.
We work diligently to protect our customers' technology, extend our leadership and accelerate our technology differentiations. We are the world's we are the world's largest and trusted provider of large capacity with an excellent manufacturing track record. We will continue to unleash innovations for all our customers for years to come. Finally, I'll talk about our CFO transition. After serving very well as TSMC's CFO for the past 16 years, Laura Ho will take on a new challenge as Head of Europe and Asia Sales.
Subject to the Board of Directors' approval, Wendell Wang Hua becomes TSMC's new CFO effective September 1. Wendell has been with TSMC for 20 years and have served as TSMC's Deputy CFO and Head of Finance Division. He brings a wealth of experience and knowledge of TSMC, and I am confident he will continue the strong tradition of TSMC's finance organization. I'm excited about both appointments and look forward to continue to work closely with both LoRa and Wendell in their new roles. 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, so that all the participants have an opportunity to ask their questions. Questions will be taken both from the floor and from the call. Should you wish to raise your questions in Chinese, I will translate it to English before our management answers your question. For those of you on the call, if you would like to ask a question, please press the star then 1 on your keypad now.
Questions will be taken in the order in which they were received. We'll start the question first from Credit Suisse, Randy Abrams.
Thank you. And maybe since it's Laura's last time and we also have 2 CFOs, I'll start with the financial question. On the gross margin, if you could elaborate just a bit more on what were the triggers for the slower progress on gross margin as it seems uncharacteristic for TSMC at least recently to have a bit of an impact on process ramp up. And then looking forward on the 50%, if you still expect that target toward the end of this year And if looking into next year as you ramp up 5 and normally have a 2 to 3 point impact, if you still expect 50% reasonable for next year?
When we ramp up any new technologies, we have a series of productivity, cost improvement activities on the plan. 7 nanometer is the same. 7 nanometer now is very, very busy. It's a lot of new tape out. So in the Q2, we have set a goal, but we did not achieve the goal.
That is why, as I explained earlier, the margin fall into the low end of the guidance, okay? As I said earlier, we have back to the track to gradually improve productivity and with the volume continue to come in 3rd and fourth quarter, and we are still confident we can achieve our cost reduction and productivity target. As to the 50% gross margin, I think for the whole year, I think the main reason is the lower utilization, particularly the first half of the year. As I said, if we can maintain the high utilizations, which we believe we can, the 50% is still a good target going forward.
Okay. And that implies also Q4 of this year?
That is certainly my hope.
Okay, great. Okay. 2nd question, actually wanted to ask a bit more on the sales growth outlook you put out. And maybe the first starting point is you originally guided the full year would be growing back in April. And so I was wondering if you could update that expectation.
And then to dig into the growth, if you could talk a bit about in that guidance for high teens growth for the different segments, the HPC, auto, IoT smartphones, how you're seeing each of those segments for Q3 and second half and if you're also seeing cryptocurrency come back?
Well, for the first part, I think C. C. Can answer.
Okay. What is the first part?
One question. First part was if you still think you can grow for this year.
For the whole year?
For the whole year.
Let me give you some kind of a taste. Right now, the uncertainties really become in these days is really hard to say. So I cannot give you a kind of, again, a very firm number of what kind of growth we are going to get. But I can assure you that the Q1 will be better than the Q3. That's all I can say.
Okay. How much? I don't know yet. So you can calculate. All right.
The key is 4th quarter, we think, will be better than 3rd quarter. So I think the second part, maybe Laura can answer.
Randy, did you ask about the bifurcation growth for Q3?
Yes. Actually, if you could give the Q3 and then an update on the full year for the platforms.
Okay. 3rd quarter, as I just guided, there is a sequential 18% growth. We are seeing very strong growth on smartphone. And also actually, all set all platform are going to grow in 3rd quarter across the board with smartphone growing the most. And also HPC is growing very nicely.
IoT is very strong, although it's very small as a basis. And we also see automotive coming up to grow. It was kind of low in the first half of the year. In terms of the whole year, we expect smartphone will grow single digit year over year. HPC, if exclude cryptocurrency, we will also see single digit growth, but with the cryptocurrency is a decline number.
IoT will grow more than double digit very nicely. Automotive will be a down platform for the year. So that is segment analysis.
Just the final clarification. For cryptocurrency, if you're seeing like how much of that activity is coming back? And do you expect to target that in any of the new capacity on 7 tied to that?
C. C, will you answer that? C. C.
C. Wei:] Yes. The cryptocurrency, recently, the pricing is up. And so we start to see the demand improving. We support the cryptocurrencies by available capacities.
Next question will be also coming from the floor from Morgan Stanley's Charlie
Chan. Thanks. My first question is about your full year outlook. I think there is still uncertainty about the U. S.
China tension. Huawei is still in the interlities, right? So when you plan the full year or even Q4, do you discount that risk? How much do you discount that risk from Huawei? And also, I think that is driven to the intuition.
I mean, the biggest impact to the industry could be the 5 gs infrastructure from the U. S.-China tension. You are seeing that infrastructure team is accelerating, right? So can you give us some sense that what you see differently about the infrastructure markets?
C. Wei:] All right. The effect of Huawei being in the entity leased and impact to TSMC, we do see some impact, but not direct business between Huawei and TSMC, actually HiSilicon and TSMC because we are we already announced that we continue our shipping practice because we follow the law. So we continue to ship. The infrastructure, actually, the 5 gs development actually accelerate and we see a very strong demand from that.
And as I said in my statement in the many countries that they speed up the 5 gs deployment and we see the increase of the demand on our leading edge 7 nanometer.
Yes. So the thing is that, for example, being in the entities, Huawei still has some restriction to update, for example, Google's mobile service, and that has impacted overseas smartphone demand, right? And according to your breakdown, the smartphone business still can see single digit Y on Y growth, right? So I'm wondering, have you discount the potential downside risk if that entity and the release issue is going to last longer?
Actually, I don't want to specifically pinpoint one customer only. All I can say is the second half, the new smartphone launches, especially the premium grade, has been the seasonality phenomena for us, always a second half. And acceleration of the 5 gs actually enhance this kind of increase. That's all I can say. [SPEAKER UNIDENTIFIED
COMPANY REPRESENTATIVE:] Let me add a little bit. Of course, the second half, there are still a lot of uncertainties, right? The geopolitical trade policy changes still go with the time. But I think the second half, the biggest growth momentum come from the new smartphone launches. On Huawei's factors, yes, we think we did the discount.
But Huawei since Huawei's ban, many things happened too. The downside is generally the smartphone market becoming uncertain in addition to Huawei themselves. So the whole Huawei whole smartphone market is suppressed, I think. And secondly is the trade barrier trade uncertainties still prevail all sectors. So from all sectors, particularly the industrial and the consumer, I think the we still see the momentum still not coming back.
And but of course, the 5 gs momentum picking up, that is also new for the world globally in U. S, in China, in Korea and Japan and so forth. So those all factors combined, we think we try to make the best judgment and think that's the conclusion C. C. Just delivered.
C.
Wei:] That's very helpful. And my next question is to Laura. It's going to be a tough question before you transfer to another role. So follow-up in this Randy's question, right? So compare your Q3 revenue scale versus the revenue scale in the Q1 2018.
That quarter, you made 50% gross margin, right? So that means you have a higher scale, but the gross margin, I think, is 3 percentage point or 4 percentage points than that quarter, right? So I'm asking whether there's any structural issue. And also, more specifically, your 7 nanometer is in the 2nd year, right? So supposedly, it shouldn't cause the any margin dilution anymore, especially you are saying that 7 nanometer fab is quite busy, right?
So can you explain why revenue scale is higher, fab is busy, 2nd year of the new nodes, but gross margin is below few quarters ago? [SPEAKER
UNIDENTIFIED COMPANY REPRESENTATIVE:]
Actually, utilization is still the manufacturer, if you compare on year over year basis. Of course, there is still some dilution for N7, but this dilution will start to diminish it as we have much strong demand in the second half, okay? Another thing is there's a little bit of product mix issue. You have we have portfolio of product mix. We have talked about this.
There are certain technology is not capacity here is low. For example, 28 nanometer, That has some impact on our overall corporate margin. So those are the things I can think of that are related to the margin changes.
All right. We will go to the line now. Operator, please have the first caller on the line.
The first question comes from the line of Gokul Hariharan from JPMorgan. Please ask your question.
Yes. Thanks for taking my question and apologies for the voice. First question, there's been a lot of discussion recently about core competition from one of your foundry competitors. Could you please talk a little bit about a road map on 5 nanometer and especially on 3 nanometer, where one of your competitors is looking to introduce a dual transistor structure like gate all around? Is this possible to stick with FinFET at 3 nanometer as well?
Or even if you also like to move to a nanosheet or gate on round structure? That's my first question. Secondly, could we talk a little bit about what is the activity level you're seeing at 5 nanometer capacity? I think previously, you mentioned that 5 nanometer is seeing or you're building lesser China capacity for next year. And could we also talk a little bit about how our customers thinking in terms of choosing for 6 nanometer versus 5 nanometer, especially the customers who are on 7 nanometer today?
Thank you.
All right. Gokul, since I guess because you have a flu, so we didn't we can't really hear you quite well. But let me try to see if I understand your question. First, your question is with regard to the competition within Foundry. You asked whether we can compare our technology roadmap of 5 nanometer and 3 nanometer versus that of the competitors.
And your second question is with respect to 5 nanometer, where you asked that we seem to be a little bit more conservative about 5 nanometer capacity build plan some time ago, and now we are a bit more aggressive. And so you are asking us if we have seen any differences in customers' demand for 5 nanometer?
C. C, would you answer the question? C. C.
Wei:] Yes, that's right.
The first question is 5 nanometer and 3 nanometer. We think our 5 nanometer is very competitive than the first one in the industry in that geometry. And what is the risk production right now and the volume production, the first half in the next year. This continue to be the same situation. And about the 3 nanometer, let me clarify a little bit.
We have evaluated all the possible options and come with a very good solution for our customer. We continue to work with our customer to define the spec, to define the approaches and to meet their requirement. And I will update you that our choices next time.
Let me add that Actually, our 5 nanometer is a full node stride from our 7 nanometer. And our 3 nanometer is another full node stride from our 5 nanometer. This is very different than our competitors' roadmap. So if you compare their numerical 3, it's probably closer to the 5. Secondly, on the 5 nanometer capacity build.
The second question is
5 nanometer. C. Wei:] Okay. The 5 nanometer, in the last quarter, when we communicated with you, we said that we are going to be a little bit conservative and to work with customer to plan the capacity that necessary to support it. Now in these 3 months, because of speed up of the 5 gs's development, we are working with the customer again.
We have to up our probably we change our conservative attitude to become a little bit more aggressive. And so to meet our customers' demand, right now, this is a new development, all because of YGE AI's progress.
All right. Let's come back to the floor. Next question will be coming from Goldman Sachs, Bruce Lu.
Good afternoon. So last couple of months has been pretty exciting in terms of the microenvironment. So I think there are some changes in terms of customer behavior. Typically, we somehow synchronize their production together with their sales. So if they have some problem in terms of their sales, they somehow changed their production plan.
There may be some time left. But last couple of months, we started to see that customers are willing to piling up more inventory, is willing to there are some disruption in terms of their sell through plan. But in terms of production plan, you don't really see a lot of like meaningful changes at least for TSMC. So how do we forecast this kind of thing moving forward? It seems to me that the macro environment is so dynamic, but we have as analysts, we have a lot of difficulties, right?
We can't just follow the tweet, right? So can you help us how to do the how do you predict that kind of customer behavior in terms of the production planning moving forward?
[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] That's an interesting question. You asked us how we estimate or forecast the customers' inventory or how they pile up their component, let me tell you that TSMC only received the PO we put into production, okay? And we did not see that strange customers' behavior, say that they are piling up of the product in expectation of something happen. No, we did not see that. That's in our daily life, but the end demonstrates at one point, we receive the PO, we do the production, and we did not see a very strange kind of phenomena.
[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] So don't follow the tweet.
As the fabless inventory, I think, Laura just reported, is coming down.
Yes. But one of the important customer, they don't provide the public information.
That's
right. That becomes the biggest swing factor, right?
C. Wei:] Most system companies, we have the inside look. But the company you just mentioned, yes, indeed, we do not know their inventories. But from their order stream, we don't see any abnormal flow.
The second thing is management keep on mentioning about like 5 gs's acceleration. Can you give us some like granularity about like what kind of revenue contribution coming from 5 gs in the second half twenty nineteen or twenty twenty, either from smartphone side or from infrastructure side? What is the revenue exposure to TSMC at this moment?
Laura, do we have 5 gs specific pointed out?
We don't. It's difficult to kind of differentiate how much demand is coming from 5 gs. We track the demand on node basis, also on platform basis. 5 gs maybe related to HPC, some of the smartphone as well. We do see those 2 segments are growing very strongly.
Yes. Let me add some color to it. Actually, the networking processor, FPGA product, even some CPUs and also base station, smartphone that all are in 5 gs. And we see a very, very strong demand in the second half of this year.
I think the question you're asking about exposure of 5 gs, can you elaborate what that means?
Well, basically, it's because that is the strongest demand as management just mentioned, right? So basically, we try to get some granularity or try to quantify how much growth we can expect moving forward, right? So as I said, it can be any kind of product. So but the bigger revenue contribution is still coming from the base station and the smartphone side, right? So that's the key area we are trying to focus on.
Yes. And the smartphone adopt implementation of 5 gs on smartphone, we see actually stronger than when we were at 4 gs's ramp. Okay. That's the information you get. And that is the opportunity for us as we consider.
Lastly, can
I squeeze in that? Can we still maintain that 5 years revenue CAGR's guidance?
Sure.
I love that.
Okay. So that's the confirmation. Next question will be coming from Citigroup's Roland
Xu. With the 7 nanometer reach 25% of total revenue this year, and 7 nanometer will be the biggest norm ever in revenue to TSMC this year. And next year, CCU expect 7 nanometer will be growing even more, more than 25% of total revenue next year. So it means that 7 nanometer will be even bigger. And then C.
C, you also said 5 nanometer going forward will be a big and long lasting node and also will be growing bigger than 7 nanometer. So are you still maintain this view with this 7 nanometer is going to be very big next year?
First, let me say again, it will be very big next year, all right? And why we are so upbeat on the 5 nanometer because we see the we forecast the ramp up will be faster than in terms of revenue, faster than 7 nanometer. And we expect that our 5 nanometer solution to all the customer is very competitive And the 5 gs AI, again, that will be benefited to 5 gs, the 5 megabits, of course, and the 7 nanometer? C.
Wei:] Yes. So for next year, first, you are going to ramp 5 nanometer very fastly and then you still have a very big 7 nanometer. So for next year, I think, so what is the overall growth outlook for you for next year?
Let's wait for next year that I give you the answer. But all your statement are true. Okay.
Thank you. Second question actually is also related to this 7 nanometer and the 5 nanometer. So now you are your 7 plus is entering a mass production. So how is the EUV availability and productivity for your 7 plus so far? Has it reached the mass production need now?
The EUV, we don't see any problem in production. So it's going very well on schedule, and we are very happy about it.
How does this EUV productivity or reliability compare to emerging in the same stage?
Same stage?
Same stage. That's a long time ago. So far, it's on our schedule, everything according to the plan. So that's all I can say.
Okay. So just an outlook view. So for next year, with your very fast 7 nanometer and the 5 nanometer ramp, So is this EUV going to be a big dilution to the gross margin next year?
C. Wei:] That's a tough question. All I can say is that you will perform as we scheduled, all right? And you will be very important in our cost reduction path.
Okay. Thank you.
All right. Let's go back to the line. Operator, please have the next caller on the line.
Next question comes from Mehdi Hosseini from SIG. Please ask your question.
Yes. Thanks for taking my question. A couple of follow ups. On the CapEx item, how should I think about a higher than expected CapEx in 2019? Is that more of a pull in from 2020 Or your capital intensity is going to remain at a higher level looking forward?
We are still working on the CapEx number. We're going to report to you next quarter. I think in terms of direction, we are seeing more CapEx requirement, both for 7 nanometer, also for 5 nanometer. For 5 nanometer, we need to pull in the tool to meet customers' request, okay? So in terms of capital intensity, you will probably see in the short term period, you will go higher than what I have guided at a 30% level.
But in the longer term, we still believe 30% level is the right level of CapEx intensity.
Thank you. And just a quick follow-up on your view on Q4.
I get
a sense that there are still uncertain environment. What is the one end market that is the most variable when you think about the trend into Q4.
Maggie, you are asking what is the one end market that is most vulnerable or valuable? I did
Is that makes it more challenging to
Most challenging, for Q4. Yes.
Well, I think the most recent Japan and Korea dispute probably is the most uncertain one For the Q4?
Sure, sure. So how should I think about its impact by the specific end market? Is that more of a broad based unknown fact? Is the unknown more of a broad based macroeconomic trends? Or is it specific to one particular end market?
[SPEAKER UNIDENTIFIED
COMPANY REPRESENTATIVE:] It is so uncertain that we don't cannot pin down specific product that will be impacted. People talk about smartphone itself could be impacted. But it breaking down many supply chains. So it is including display or other electronic components. So that is the difficult part for us to make estimation.
Okay, great. May I ask you one more question?
Okay. All right.
I'll make it quick. I think there's no doubt that 5 gs opportunities are enormous. But I just want to better understand how TSMC is planning. Carriers refer to a commercial end market or commercial asset of 5 gs as more meaningful than consumer on handset. On the other hand, your customers, semiconductor companies highlight the opportunities in the smartphone.
So as you plan for your capacity, VZNX capacity plans, it's very long lead time. How do you think about 5 gs and its impact on consumer, which is more of a handset, a smartphone versus commercial aspect, which could have an impact on your HPC or other segment?
C. Wei:] Well, actually, let me answer the question because the 5 gs, what we expect is not only on the consumer product like smartphone per se. I do think the 5 gs will affect every area in our platform. For example, without 5 gs, the autonomous driving will not be possible. So it's very important for automotive also.
It's very important for the high performance computing also because that's one of that networking process, everything connected. It's also important for the IoT because of that where you collect all the data and with the 5 gs, it's a multichannel with a very small latency, with very high speed and with and all the data collection need to be analyzed. So I think in terms of 5 gs's effect on the business and also on TSMC's capacity plan is enormous. So we are what TSMC is doing is right now working with all the customers to plan for their business and plan our own capacity. That's all I can say.
Let me add some color for this. 5 gs, I think the if you look at next year, the biggest business influencers should be in the smartphone. And secondly, will be the high performance computing, which compose of the networking and other infrastructures. As far as automotive and IoT, consumer, we have a high expectation for that. But I think it will take some time before the usage model get implemented in the market.
That will come back come to us later.
Your next question comes from the line of Bao Lu from UBS. Please ask your question.
Yes. Hi. Thanks for taking my question. First of all, I just want to say thank you to Laura for all the help over the years and patience in answering all of the questions. So thanks a lot and best of luck.
My first question is again on 7 nanometers. If I go back and look at TSMC for 28 nanometers, that was TSMC's most successful node of all time and that coincided with the big smartphone ramp. If I now look at 7, you've got the move from 4 gs to 5 gs, but you're also adding HPC. How do I think about the if I look at capacity for 7, is it reasonable to assume that it could be bigger than 28?
7 at this same stage, is this bigger than 28? Are we? Okay. So my number is yes, but I think I don't think so.
I think revenue wise, 7 nanometer would definitely be much bigger than 28 nanometer, but not necessarily the capacity.
Not necessary, yes, not the capacity.
Okay. Can you give me a sense for ultimately how big 7 capacity could be relative to 28?
The smaller part is closed at the same stage.
Okay. Great. Maybe I could ask that a different way, which is if you look at 7 nanometer demand, let's say, a year from now, what do you think is the split between HPC, smartphones and maybe the other platforms?
Bill is asking,
Bill is asking a year from
today, if we look back and look at the 7 nanometer revenue, what will be the split between HPC, smartphone and other platforms? [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:]
We don't have the specific number. But if
you look at
today's HPC and smartphone percentage ratio, I think it will be probably similar, although a fraction of the smartphone may not be the leading edge. But for those 2 sectors, most of 2 both sectors are closer to the leading edge. So both of the factor both of those segment will go to 7 nanometer. So probably smartphone will still be bigger than HPC. It's similar ratio, I think, as the business we have today.
Great. My second question is on 5 nanometers. So a quarter ago, I asked Doctor. Wei about the cost per transistor at 5 nanometers, and I heard some of the feedback from customers is that maybe it's not coming down as fast as expected. And I think Doctor.
Wake's answer was that TSMC is working at it is working on it. I'm just wondering if you can give me an update on that, whether costs have seen improvements or what's the status there?
Excuse me, you're asking the device improvement or is it demand improvement?
No, sorry. I think if you look at cost per transistor for 5 nanometers, it's not coming down as fast as previous nodes. I'm wondering if you have an update there.
No, I don't have any update, except right now, we see a much more stronger demand.
Okay, great. Thank you very much.
Great. Thank you, Bill. Let's come back to the floor. Next question will be coming from Daiwa's Rick
Just one question from me.
I think, Laura, just talking about your this year's revenue growth by different platform, so like smartphone up a single digit, high performance single digit up and IoT up double digit. So if I recall my memory, this set of guidance looks the same as that you provided early this year. So can I fairly assume by your total revenue, can you are you guys still keep the same guidance of the revenue for the whole year will be up slightly year on year?
There is still uncertainty on 4th quarter. What I can say now is 4th quarter revenue will be higher than Q3.
Okay. Fair enough. Just one quick follow-up. Can you also update us this year's global semi outlook and also global foundries?
Next, you mean 2020?
This year. This
year's This year's foundry actually is a little bit negative.
Semi exclude memory, negative 3%. Foundry, negative 1% this year.
Okay. Thank you so much.
So we have implicitly answered your question.
Thanks. All
right. Next question will be coming from Credit Suisse, Randy.
I just wanted to follow-up, there's been a lot of press and maybe it's noise about customers evaluating other foundries. So you are talking about strong 5 gs HPC. Are you I'm just curious if you're factoring in any offsets. Like in the past, you've had a couple of major customers like go back and forth between foundries. So as you look at the next couple of years, do you see that much like how do you see your market share?
And do you see any offsets to that strength over the next couple of years?
Well, we did see the strong competition, but let me assure you that our technologies dealership and also that our manufacturing is excellent. With our customers' trust, I believe we are going to maintain our market share and increase the market share. Did that answer your question?
Yes. Well, within that, because we know about some projects like customers like AMD that have shut down or switched from GlobalFoundries. So it's more if you also see any offsetting drags that we should factor in, just so we don't get too far ahead of ourselves. If there's anything like we saw a few years ago, we have a mobile customer shift foundries. Like if you see any offsets or from a market share still looks like I think in the past you've said you have pretty much all the customers, but if you still view that on the Yes,
we factor in what the possible competitors' sales approach. We factor it in.
Okay. And then if I could ask on the nodes, actually 2 of them. 1 on as the 7 matures in the next couple of years, how you now see the variation of 7 plus and 6? Because I think in the past you saw that as becoming mainstream. If you still think the 7 evolves that way or most of the customers move to the EUV version, 7 plus or 6?
And then for 5 for next year, how concentrated do you see that both in terms of customers and then also if it's concentrated smartphone or you see a lot of HPC?
Let me answer that. A little bit ask about the 7 plus or 6, right, for the to continue the 7 nanometer node. Actually, we will believe that both of the customer, especially the 2nd wave customer was adopted 6, okay, because you're 100% compatible with the 7 that reduce their burden and redesign all the IPs. So the 6 will be a very sweet spot for them to continue with the 7 route. That's 1, okay?
7 plus this year actually is we provide a better performance and better density for some of the customers that have been adopted and you are continuing to grow. But the majority, as I said, will be going to 6. As for 5, 5 will be adopted by a lot of platform that's including the smartphone, the mobile, including the high performance computing and let me see what else, IoT, no, we did not see IoT yet. At the beginning, it will be mobile and HPC.
Next question will be coming from CL Securities, Sebastian Ho.
Thank you. My first question is a little bit follow-up on Randy's questions. So if we narrow down Randy's questions to a very leading edge technology, the market share, let's say, sub-ten nanometers market share in the next 3 years, what's TSMC's expectation on that? Are we going to maintain or further increase market share here?
I believe we want to maintain well. Why have a very high market share? Very high.
So the but in terms of the very high like, 95% is high, 90% is high. So from that point, I want to know the direction.
I think direction probably our 16 is higher than our 28, and R7 will be higher than our 16 and on.
And what's your expectation on 5 versus 7?
5 is too early to say, but we target to be higher than 7.
Okay. The second question is can you just simply talk about the possibility of building the fab or acquire a fab company in the United States? And would this be out of the pure geopolitical concerns or any other consideration?
Of course, geopolitical concern is everybody's concerns. However, if you want to answer how can we solve the concern, It's not that simple. It's not building a fab outside Taiwan or any other country can solve that problem. However, we are always open to build a fab in overseas, provided we can provide the same cost structure to our customers and to our investors. So far, in the U.
S, we have talked to the industry and to see whether that is a viable approach, is a good approach to our customers given the cost differences and if given by the in addition to the local subsidies. But still, it's current supply from Taiwan is still the best solution for our customers. So we are open to that, but we are not in a hurry to make the decision. Of course, we also see some unproductive facility overseas. We don't want to increase the excess capacity for the industry.
Therefore, the possible in addition, the approach of building a greenfield fab acquisition is probably is better for the industry. That's our current consideration. But we don't have a definitive plan today that we are going to have that in the U. S. So at this point.
Okay. Can I just conclude that so TSMC preference is to if you're going to do this and your option will preferred option would be buy rather than build?
At this point, yes. Okay.
Thank you. Doctor. Song, can I add more one more question? Okay. I'll comment later.
Yes.
Next will be coming from Citigroup's Roland Xu.
I would like to switch gear to 8 inches So you load your 8 inches at utilization, I think probably below corporate average in first half. So how do you see your 8 inches demand on utilization in second half?
C. Wei:] The second half will be better. Actually, it's because of SmartFocus seasonality. So the 8 inches utilization rate will be much higher again of first
How do you compare with your corporate average?
C. Wei:] Let me give you some taste that some of the segment actually is fully loaded. C.
Wei:] Okay. Yes. So this is the demand across the board. So it's not just for certain customers' rush order? C.
Wei:] Oh, it's a demand across the board because of I'm talking about product segment.
C. Wei:] Okay. And second question is how about your 'nineteen fab? So can you give us a color update for your 2019 fab?
2019 fab progressed very well. Is the loading is very healthy, and we continue our plan. We are going to build 20,000 wafers per vessel capacity over there.
Any plan to above this 20,000?
Right now, 20,000 is our plan.
Okay. Thank you.
Now let's go back to the line. Operator, please have the caller on the line, the next one.
Next question comes from the line of Shushi Zhu from Standard Import. Please ask your question.
Hi. Thank you for the presentation. Just have very 2 brief questions. The first one is about your drop year over year drop of your net profit net income. Could you please give us a specific reason for the drop, the 7.6% drop in the income?
And the second question is about your outlook on the mobile sales in year 2. So you said it will be the main driver of your revenue growth. I was wondering, will that be overall increase of the shipment of the mobile that you're thinking about? Or is there any other reasons such as the technology upgrades over there?
First question, of course, is to explain what was the reason behind the year over year drop of our net income in this year, I guess, or Q2? The second question is the outlook for mobile. The growth that we indicated, was it because it was driven by a quantity increase? Or it is because of technology migration, so leading to a revenue increase?
Let me answer the first question. On year over year basis, if we look at the Q2 this year and the Q2 last year, the margin difference is mainly there is about 5 percentage point margin difference, mainly from the lower utilization this year. This first half of this year has to be very weak, including the Q2. So utilization is the main reason. And a little bit of product mix as well.
The second question is smartphone. Revenue increase.
The second half's revenue increased due to the smartphone, firstly, because of seasonality, of course. So that's as compared with the first half, second half, the smartphone is much better. Although we say that the whole year in the smartphone unit, we forecast a drop, But TSMC's revenue still grow because of 1, is because of silicon content increase The second one is because we gain the market share through our customer. So we still forecast the whole year the smartphone will increase in revenue, especially the second half will be much stronger than the first half. Did I answer the question?
Yes. Great. Thanks.
Thank you.
All right. Operator, let's have the next caller on the line, please.
Next question is from Yuval Wang from Tencent
Yes, we can. Hello? Yes, we can hear you.
Okay. Can I speak Chinese, please?
Yes, you can speak Chinese.
Okay. Thank you.
Let me translate to English first. Youbao had observed our June revenue, which is a strong growth, and he want us to comment on the second half business
outlook.
I have just gave the guidance for the 3rd quarter, where our revenue in Q3 will be USD 9,100,000,000 to USD 9,200,000,000 That is 18% sequential growth. As to the 4th quarter, we have said, we believe our 4th quarter revenue will be higher than 3rd quarter, although there are still some uncertainties. We did not provide a clear guidance on the 4th quarter yet.
So your first question is he likes to know the breakdown among our smartphones, HPC and IoT among our growth platforms, the revenue breakdown.
Well, Bui Gaming revenue breakdown, that's I will not provide a revenue breakdown by platform for the whole year, but I have just said that our smartphone will grow single digit. It still accounts for the biggest part of our revenue for the whole year, followed by an HPC. And then the rest of them are much smaller like IoT Automotive and DCE and others.
Okay. Thank you.
Thank you. We still have a caller on the line. So operator, let's go to the next caller on the line. Thank you.
We have another question from Mehdi Hosseini from SIG. Please ask your question.
Yes, sir. Thank you. Just one quick follow-up. But before I just I also want to express my gratitude to Laura Ho and wish her best of luck in her new endeavor. Going back to a question that came up last earnings conference call, how to do with SOI And I just want to revisit the topic and better understand how you're planning for some of the challenges that 5 gs brings, such as the lower, I think, the first power consumption and whether SOI is going to be included in your roadmap?
Well, we did develop some of the technology for the RF circuit, RF technology using the SOI wafers, but we don't do the logic technology on FBSOI. So let me make sure that everybody understand what I'm going to deliver. We don't do FD SOI for logic for conventional logic technology, But we do use SOI wafer to develop RF technologies for the RF front end, for example, that we are doing. Does that answer the question?
Got it. Yes. Thank you.
All right. Let's come back to the floor. Next question will be coming from Morgan Stanley's Charlie Chan.
I have 2 follow-up questions. And if I may, I may have some industry cross checks. So first of all, it's about the smartphone semi content increase. Can you give us some color how much is that for this year? And also, when 5 gs comes next year because Mark was just very bullish about the 5 gs smartphone contribution next year.
How would 5 gs smartphone to help on your SIM content growth in the smartphone?
[SPEAKER UNIDENTIFIED
COMPANY REPRESENTATIVE:] Okay. That's a good question, but it's very hard to identify what is the percentage of the silicon content increase. But let me give you some color of it, all right. The first one is, look at your smartphone today, it's 3 camera or 2 camera or even 4 camera, look at that. And look at the pixel size, right?
You might hear some of the pixel is 48 megapixel. Those kind of thing come with silicon with it. So that's the silicon content, the first one. Actually, there are some other minor things, so for example, power management IC. Now the power consumption is very important.
So now every major component inside need a power management IC come with it. One is screen driver, you need power management the application processor, you need power management, just a lot of things. And furthermore, let me give you some of the 5 gs, you have a lot of different channel. So now even the RF transceiver or RF front end, the die size is bigger. That's all I say.
That's why silicon content is increasing. Did I answer your question? But how many percentage? Actually I cannot identify it?
But how significant is for those modern chip or application process because of that related to your business models? Can you give us some percentage of increase like 10%, 20% increase? Yes, yes.
Yes. Yes. Yes. Yes. Yes.
Yes. Yes. Yes. Yes. Yes.
Yes. Yes. Yes. So I cannot because we are working on it. And we know all the minor details, so I cannot give you that some of the information.
Okay. That's fine. So next question, switch gear back to the gross margin. So we so my question is that for your leading edge investment, do you feel like the payback period of those leading edge investments are getting longer or shorter, right? Because I still want to find out some explanation why gross margin kind of decline year over year.
So could be leading edge investments getting heavier or there's a true price competition from your competitors. So I just want to get some thoughts from you on this topic.
So Laura, can you give an idea on the payback years?
Okay. I look actually, personally, I don't think a payback year means much. If you look at the various technologies, actually I checked this question, they look very much the same. Of all know, the payback year are very much the same. However, I think the rent profile is very different.
And the sensitivity of utilization to margin is different. The more leading edge is more sensitive to margin. So leading edge needs to have very high utilization to secure the margin. That's the key, and we are working on it. Thanks.
And 2 things I want to crosscheck, if I may. First of all, you mentioned that you're pulling in some 5 nanometer CapEx to this year, right? So next year, do you think the CapEx level would be at a range of your kind of annual guidance? And secondly, about the raw wafer price, do you think that you can get a good bargain on the raw wafer price for next year?
I think next is CapEx, we have to depend on a lot of things, depend on overall market conditions, the customers' requirements, so on and so forth. So it's probably too early to say whether it's going back to this old range of target. As we get more clear, we will communicate with you. The roll wafer price, I think we have done a good job to lock in the price. And that's at least also a continued effort.
I think make sure you understand. Laura just mentioned, you will exceed the top range what we gave you today.
All right. Follow-up question will be coming from CL Securities, Sebastian Ho.
Thank you. I have two follow ups. The first one is for the past several earnings call, I always feel like TSMC 5 nanometer Taibao activity or interest level from clients isn't as large as 7 nanometer at the same stage, if I well, if I'm right. Now you mentioned stronger 5 nanometer demand. And is it driven more driven by the X Series 5 gs deployment or also driven by the EUV cost or EUV economy improvements?
It's actually driven by the 5 gs's accelerations,
okay? And the in terms of the 5 gs acceleration, do you see them more from HPC or smartphone?
C. Wei:] Both, actually, because of 5 gs infrastructure is in the FPCs area.
Right.
On the smartphone, almost all the premium phone is with TSMC. TSMC.
Okay. But if I understand that correctly, I think so far, most of the infrastructure baseband, 5 gs baseband is still on 12 or 60 nanometers, the mainstream right now. And so you see the accelerated 5 nanometer demand. So basically, we will assume that the next uptick will be 7 and I'll also see 5.
C. Wei:] Oh, I see. I see. You are talking about that. Some of the networking process are probably going to the 5 nanometer, but some of stay in 7 and some of them the baseband actually, most of the baseband is going to the most leading edge technology.
I think if it's of course, in terms of revenue, smartphone is bigger than the base station, okay? And in the 5 nanometer, the big players get into 5 gs smartphone very aggressively. It doesn't take many tape outs, just a few tape outs is demand us a much bigger capacity than any other products.
Thank you. The second follow-up is I'd like to hear TSMT's views on the next generation architecture of transistor. So how do you see the FinFET and get around? How do you compare that to see the pros and cons of these two architecture in 5 nanometer and 3 nanometer because it seems like one of your competitor is promote GAA aggressively?
Yes, we noticed that. And actually, we also have evaluated all the options inside the test side, just as what I said. And we look at the pro and cons and we work with our customer and we choose at the most competitive in terms of performance and cost wise. So we choose the most competitive approaches. So we work with our customer actually closely.
Okay. But would it make sense to assume that because so far on the since 16 nanometer to 10 nanometer to 7 nanometer, the industry standard has been FinFET. So customers will be easier to dual source if they want to or if they can. But going forward, if there is going to be different route, one doing GAA, one doing feedback, would it be make customers' door sourcing more difficult?
Actually, let me say that even the FinFET structure, it's very hard to switch the foundry. It's very hard because our design rule, the architecture, the design flow are all different. At the 5 nanometers geometry, TSMC still seeing the film flare is the best one, although we have evaluated all other options. But so far, we still in 5 nanometer geometry. Please notice that 5 nanometer geometries, TwinFET is still the most efficient one and most competitive one.
For the 4 node transition to the next one, 3 nanometer, we are evaluating everything. We talk with our customer when we will define what are the approaches that we are using.
So I think we can conclude our Q and A session now knowing that we had evaluated all available options and picked the optimal one. Okay. Before we end today's conference, please be advised that the replay of the conference will be accessible within 4 hours from now. Transcript will be available 24 hours from now, both of which will be available through our website at www. Tsmc.com.
Thank you for joining us today. We hope you will join us again next quarter. Goodbye, and have a good day.