大 家 午 安 ， 我 是 台 积 电 法 人 关 系 处 的 苏 智 凯 ， 欢 迎 您 参 加 台 积 公 司 2022 年 第 四 季 的 法 人 说 明 会 。 由 于 本 法 说 会 是 向 全 球 投 资 人 同 时 连 线 转 播 ， 所 以 我 们 会 全 程 使 用 英 文 ， 请 您 见 谅 。Good afternoon, everyone, and welcome to TSMC's fourth quarter 2022 earnings conference call. This is Jeff Su, TSMC's Director of Investor Relations, and your host for today. TSMC is hosting our earnings conference call via live audio webcast through the company's website at www.tsmc.com, where you can also download the earnings release materials. If you're joining us through the conference call, your dial-in lines are in listen-only mode.
The format for today's event will be as follows. First, TSMC's Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the fourth quarter 2022, followed by our guidance for the first quarter 2023. Afterwards, Mr. Huang and TSMC's CEO, Dr. C.C. Wei, will jointly provide the company's key messages. TSMC's Chairman, Dr. Mark Liu, will host a Q&A session where all three executives will entertain your questions. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the safe harbor notice that appears in our press release. Now, I would like to turn the call over to TSMC's CFO, Mr.
Wendell Huang, for the summary of operations and the current quarter guidance.
Thank you, Jeff. Happy New Year, everyone. Thank you for joining us today. My presentation will start with financial highlights for the fourth quarter and a recap of full year 2022. After that, I will provide the guidance for the first quarter, 2023. First quarter revenue decreased 1.5% sequentially in US dollar terms as our business was dampened by the end market demand softness and customers' inventory adjustment despite the continued ramp up of our industry-leading 5 nm technologies. It is at the low end of our previous guidance. In NT dollar terms, revenue increased 2% in the fourth quarter due to a more favorable foreign exchange rate. Gross margin increased 1.8 percentage points sequentially to 62.2%, mainly due to a more favorable foreign exchange rate and cost improvement efforts, partially offset by lower capacity utilization.
Total operating expenses accounted for 10.3% of net revenue. Operating margin was 52%, up 1.4 percentage points from the previous quarter. Overall, our fourth quarter EPS was TWD 11.41, and ROE was 41.7%. Now let's move on to the revenue by technology. 5 nm process technology contributed 32% of wafer revenue in the fourth quarter, while 7 nm accounted for 22%. Advanced technologies, defined as 7 nr and below, accounted for 54% of wafer revenue. On a full year basis, 5 nm technology contributed 26% of 2022 wafer revenue. 7 nm was 27%. Advanced technologies accounted for 53% of total wafer revenue, up from 50% in 2021. Moving on to revenue contribution by platform. HPC increased 10% quarter-over-quarter to account for 42% of our fourth quarter revenue.
Smartphone decreased 4% to account for 38%. IoT decreased 11% to account for 8%. Automotive increased 10% to account for 6%. DCE decreased 23% to account for 2%. On a full year basis, all six platforms had year-on-year growth. HPC increased 59% year-on-year to account for 41% of our 2022 revenue. Smartphone increased 28% to account for 39%. IoT increased 47% to account for 9%. Automotive increased 74% to account for 5%. DCE increased 1% to account for 3%. Moving on to the balance sheet. We ended the fourth quarter with cash and marketable securities of NT 1.56 trillion, or $51 billion.
On the liability side, current liabilities increased by NT$137 billion, mainly due to the increase of NT$48 billion in accounts payable and increase of NT$93 billion in accrued liabilities and others. On financial ratios, accounts receivable turnover days remain at 36 days, while days of inventory increased 3 days to 93 days. Regarding cash flow and CapEx, during the fourth quarter, we generated about NT$487 billion in cash from operations, spent NT$337 billion in CapEx and distributed NT$71 billion for first quarter 2022 cash dividend. Overall, our cash balance increased NT$47 billion to NT$1.75 trillion at the end of the quarter. In US dollar terms, our fourth quarter capital expenditures total $10.82 billion.
To recap our performance in 2022, we had a strong growth in 2022 as our technology leadership position enabled us to capture the industry's megatrends of 5G and HPC. Our revenue increased 33.5% in US dollar terms to reach $76 billion, and 42.6% in NT terms to reach NT 2.26 trillion. Gross margin increased 8 percentage points to 59.6%, mainly reflecting a more favorable foreign exchange rate, value selling efforts, and cost improvement, partially offset by lower capacity utilization. Thanks to better operating leverage, operating margin increased 8.6 percentage points to 49.5%. Overall, full year EPS increased 70.4% to NT 39.2, and ROE was 39.8%.
On cash flow, we spent $36.3 billion or TWD 1.1 trillion in CapEx. We generated TWD 1.6 trillion in operating cash flow and TWD 528 billion in free cash flow. We also paid TWD 285 billion in cash dividends in 2022, up from TWD 266 billion in 2021. I have finished my financial summary. Let's turn to our current quarter guidance. As overall macroeconomic conditions remain weak, we expect our business to be further impacted by continued end market demand softness and customers' further inventory adjustment. Based on the current business outlook, we expect our first quarter revenue to be between $16.7 billion and $17.5 billion, representing a 14.2% sequential decline at the midpoint.
Based on the exchange rate assumption of 1 US dollar to 30.7 TWD, gross margin is expected to be between 53.5%-55.5%. Operating margin between 41.5%-43.5%. Starting in 2023, certain tax exemptions from the Taiwan government have expired. However, the government has recently passed the amendments to the Statute for Industrial Innovation. All things considered, we expect our effective tax rate in 2023 and beyond to be approximately 15%. This concludes my financial presentation. Now, let me turn to our key messages. I will start by making some comments on our fourth quarter 2022 and first quarter 2023 profitability.
Compared to third quarter, our fourth quarter gross margin increased by 180 basis points sequentially to 62.2%, of which 140 basis points was contributed by a more favorable foreign exchange rate. Cost improvement efforts also helped offset the impact from a lower capacity utilization. Compared to our fourth quarter guidance, our actual gross margin exceeded the high end of the range provided three months ago, mainly due to cost improvement efforts. We have just guided our first quarter gross margin to be 54.5% at the midpoint, mainly due to a lower capacity utilization rate as customers further adjust their inventory levels and a less favorable foreign exchange rate. In 2023, our gross margin faces challenges from lower capacity utilization due to semiconductor cyclicality, the ramp-up of N3, overseas fab expansion, and inflationary costs.
In addition, R&D expenses accounted for 7.2% of our net revenue in 2022. In 2023, as we increase our focus on technology development and add more resources, we expect R&D expenses to increase by about 20% year-on-year and account for 8%-8.5% of our net revenue. To manage our profitability in 2023, we will work diligently on internal cost improvement efforts while continuing to strategically and consistently sell our value. Excluding the impact of foreign exchange rate, we continue to forecast a long-term growth margin of 53% and higher is achievable. Let me talk about our 2023 capital budget and depreciation. Every year, our CapEx is spent in anticipation of the growth that will follow in future years.
As I have stated before, given the near-term uncertainties, we continue to manage our business prudently and tighten up our capital spending where appropriate. That said, our commitment to support customers' structural growth remains unchanged, and our disciplined CapEx and capacity planning remains based on the long-term market demand profile. In 2022, we spent $36.3 billion to capture the structural demand and support our customers' growth. In 2023, our capital budget is expected to be between $32 billion and $36 billion . Out of the $32 billion-$36 billion CapEx for 2023, about 70% will be allocated for advanced process technologies, about 20% will be spent for specialty technologies, and about 10% will be spent for advanced packaging, mask making, and others.
Our depreciation expense is expected to increase by approximately 30% year-over-year in 2023, mainly as we ramp our 3 nm technologies. With this level of CapEx spending in 2023, we reiterate that TSMC remains committed to a sustainable cash dividends on both an annual and quarterly basis. We will continue to work closely with our customers to plan our long-term capacity and invest in leading-edge and specialty technologies to support their growth while delivering profitable growth to our shareholders. Now, let me turn the microphone over to C.C.
Thank you, Wendell. Good afternoon, everyone. First, let me start with our 2023 outlook. Concluding 2022, the semiconductor industry growth, excluding memory, was about 10%, while foundry industry increased about 27% year-over-year. TSMC's revenue grew 33.5% year-over-year in US dollar terms. Our business was supported by our strong technology leadership and differentiation, even as the semiconductor inventory correction began to dampen the momentum in second half 2022. Entering 2023, we continue to observe softness in consumer end market segment, where other end market segments, such as data center related, have softened as well. As customers and the supply chain continue to take action, we forecast the semiconductor supply chain inventory will reduce sharply through first half 2023 to rebalance to a healthier level.
In the first half of 2023, we expect our revenue to decline mid-to-high single digit % over the same period last year in US dollar terms. Having said that, we also start to observe some initial signs of demand stabilization, and we will watch closely for more signals. We forecast the semiconductor cycle to bottom sometimes in first half 2023, and to see a healthy recovery in second half this year. In the second half of 2023, we expect our revenue to increase over the same period last year in US dollar terms. For the full year of 2023, we forecast the semiconductor market, excluding memory, to decline approximately 4%, while foundry industry is forecast to decline 3%.
For TSMC, supported by our strong technology leadership and differentiation, we will continue to expand our customer product portfolio and increase our addressable market. We expect 2023 to be a slight growth year for TSMC in US dollar terms. Let me talk about the N7, N6 demand outlook. Three months ago, we said our N7, N6 capacity utilization in first half 2023 will not be as high as it has been in the past three years due to end market weakness in smartphone and PCs, and customers' product schedule delay. Since then, the end market demand for smartphone and PCs has further weakened, and the capacity utilization of N7, N6 is lower than our expectations three months ago.
We expect this to persist through first half 2023. A semiconductor supply chain inventory takes a few quarter to rebalance to a healthier level, then we expect a milder pickup in our N7, N6 demand in second half 2023 than our prior expectation. We continue to believe N7, N6 demand is more a cyclical issue rather than structural. We are working closely with our customer to develop specialty and differentiated technologies to drive additional wave of structural demand from consumer, RF, connectivity, and other applications to backfill our N7, N6 capacity over the next several years. We are confident our 7 nm family will continue to be a large and long-lasting node for TSMC. I will talk about our N3 and N3E status. Our N3 has successfully entered volume production in late fourth quarter last year as planned with good yield.
We expect a smooth ramp in 2023, driven by both HPC and smartphone applications. As our customers' demand for N3 exceed our ability to supply, we expect N3 to be fully utilized in 2023. Sizeable N3 revenue contribution, we expect to start in 3rd quarter 2023, and N3 will contribute mid-single digit % of our total wafer revenue in 2023. We expect N3 revenue in 2023 to be higher than N5 revenue in its first year in 2020. N3E will further extend our N3 family with enhanced performance, power, and yield, and offer complete platform support for both smartphone and HPC applications. Volume production is scheduled for 2nd half 2023.
Despite the ongoing inventory correction, we continue to observe a high level of customer engagement at both N3 and N3E, with a number of tape-outs more than 2x that of N5 in its first and second year. Our 3 nm technology is the most advanced semiconductor technology in both PPA and transistor technology. Thus, we expect customers a strong demand in 2023, 2024, 2025, and beyond for our 3 nm technologies, and are confident that our N3 family will be another large and long-lasting node for TSMC. Finally, let me talk about our plans to expand TSMC's global manufacturing footprinting to increase customers' trust and expand our future growth potential. TSMC's mission is to be trusted technology and capacity provider for the global IC, logical IC industry for years to come. Our job is to provide the optimal solutions for our customers to enable their success.
This including technology leadership, manufacturing, cost, trust, and recently, also including more geographic manufacturing flexibility. Based on customers' request, we are increasing our capacity outside of Taiwan to continue to provide our customer the ultimate solution they need to be successful. TSMC's decision are based on our customers' need and a necessary level of government support. This is to maximize the value for our shareholders. Our decision are also based on the talent pool, land, electricity, and water needs for TSMC's long-term growth. In the U.S., we are in the process of building two advanced semiconductor fabs in Arizona. Our U.S. customer welcome us to build capacity in the U.S. to support their need and have pledged their strong commitment and support. We held an opening ceremony on December sixth last year to celebrate the arrival of the first batch of state-of-the-art semiconductor manufacturing equipment.
Fab one is on track to begin production of N4 process technology in 2024. We also announced the construction of a second fab, which is scheduled to begin production of 3 nm process technology in 2026. TSMC Arizona will continue to provide the most advanced semiconductor technology commercially available in the U.S., enabling next-generation high-performance and low-power computing products in the future years. Each of our fab will have a clean room area that approximately double the size of a typical logical fab. We are also consider building additional mature node for capacity outside of Taiwan. In Japan, we are building a specialty technology fab, which will utilize 12 and 16 nm and 22, 28 process technologies. Volume production is scheduled for late 2024.
We are also considering building a second fab in Japan as long as the demand from customers and the level of government support makes sense. In Europe, we are engaging with customers and partners to evaluate the possibility of building a specialty fab focusing on automotive specific technologies based on the demand from customers and level of government support. In China, we expand 28 nm in Nanjing as planned to support local customers. We continue to follow all the rules and regulations fully. At the same time, we continue to invest in Taiwan and expand our capacity to support our customers' growth. Our N3 has just entered volume production in Tainan Science Park. We are also preparing for N2 volume production starting in 2025, which will be located in Hsinchu and Taichung Science Park.
While capacity is not born overnight and takes time to build, we are committed to expanding our global manufacturing footprint to increase customer trust and expand our future growth potential. Depending on the demand from customers and level of government support, our 28 nm and below oversea capacity could be 20% or more of our total 28 and below capacity in five years or more time. While initial costs of oversea fab are higher than TSMC's fab in Taiwan, our goal is manage and minimize the cost gap. Our pricing will remain strategic to reflect our value, which also including the value of geographic flexibility. At the same time, we are leveraging our competitive advantage of large volume, economies of scale, and manufacturing technology leadership to continuously drive costs down. We will also continue to work closely with all government to secure their support.
By taking such actions, TSMC will have the ability to absorb the higher cost of oversea fabs while remaining the most efficient and cost-effective manufacturer, no matter where we operate. Even we increase our capacity outside of Taiwan, we believe long-term gross margin of 53% and higher continue to be achievable, and we can earn a sustainable and healthy ROE of greater than 25% while delivering profitable growth for our shareholders. This concluding our key message. Thank you for your attention.
Thank you, C.C. This concludes our prepared remarks. Before we begin the Q&A session, I'd like to remind everybody to please limit your questions to two at a time to allow all the participants an opportunity to ask their questions. 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'd like to ask a question, please press the star, then one on your telephone keypad now. If at any time you'd like to remove yourself from the questioning queue, please press star two. Now we will begin the Q&A session. Our chairman, Dr. Mark Liu, will be the host.
Hello, everyone. It's good to meet every one of you online again. At the beginning of the year, I wish you all stay healthy and have a happy new year. Now, let's have answer your question starting.
Thank-
Thank you.
Thank you, Chairman. Operator, let's begin. Please proceed with the first caller on the line.
Thank you. The first question is come from Randy Abrams with Credit Suisse. Randy, please go ahead.
Okay. Yes, thank you. I wanna ask the first question just about the rising investment costs and also the cost differential with the U.S. Just based on the two press releases, the Taiwan fab, you cited Fab 18, about $60 billion investment for eight phases, which would be I estimate about 200,000 capacity. That's about $300 million per 1,000 wafers. The Arizona fab was $40 billion for about 50,000, $800 million per 1,000 wafers. Just two questions on it. If you could maybe discuss a bit more if there's differences in those releases on the investment and calculation, and a bit more color on the relative costs as you do the U.S. expansion.
The second part of the question is the cost seeing a significant acceleration? It's been rising with each new node, but are you seeing an accelerating pace as you move through 3 nm and N2?
Okay. Randy, thank you. Please allow me to summarize your question. Randy's first question is he wants to understand, he's referring, I think, to our press release about N3 in Tainan and the total investment there, and how does that compare to our announcement of the investment in Arizona for 2 phases? Randy, if I got you correctly, basically what Randy is asking is, you know, the costs in the U.S. seem much higher in terms of the investment, so what is driving this big difference or gap, so to speak?
Yeah.
part of your question, right, Randy? Okay. That's the first part.
Yeah, that's right. That's the first part. Yeah.
Okay. Hi, Randy. This is Wendell. Let me share with you this. The Arizona fab, we made the decision based on customer's request. We're planning on building the two fabs, one and five. Actually, N4, and the other one, N3. We're not able to share with you a specific cost gap number between Taiwan and U.S. We can share with you that the major reason for the cost gap is the construction cost of building and facilities, which can be four to five times greater for a U.S. fab versus a fab in Taiwan. The high cost of construction includes labor costs, cost of permits, cost of occupational safety and health regulations, inflationary costs in recent years, and people and learning curve costs.
The initial cost of overseas fabs are higher than our fabs in Taiwan.
I think the second part of Randy's question was about the how do we see the CapEx per K as we go from... I guess, Randy, you're asking N5, N3, N2.
If it's seeing a faster pace of expansion through these next couple nodes.
Right. Randy, we're not able to disclose the specific CapEx per K for each node. Certainly the CapEx is, per K is, more expensive for a new node as the process capacity increases.
Okay.
Okay. The second question, just wanted to ask actually two areas that came up in the remarks. The R&D, the over 20% increase, if you could give a feel like what's mainly driving that additional step up. Is it the development cost for the new nodes, the packaging, or is it some now expanding R&D into new geographic areas? If I can fit in a second part, just the tax rate. Taiwan was hyping a pretty big program of CapEx and R&D, but tax breaks. Your tax rate is going up from 11%-15%. Is that alternative minimum tax or global tax? Just wanna understand why not any benefit from that.
Randy's second question, I guess it is sort of two parts financially related. First, our CFO said our R&D spending will increase about 20% year-on-year. Randy wants to know what is driving behind that. Is it 'cause we're going overseas? Is it, you know, more technology development as a technology leader, etc. ? The second part, he wants to understand the guidance of effective tax rate of 15%. Given the recent legislation passed in Taiwan, why is it not lower?
Okay. Randy, for the first question, we're the technology leader, we intend to continue maintain that leadership. We are devoting more and more resource in R&D, including people and other kind of resources. That's the reason why our R&D expense will increase in 2023 and probably beyond. The other thing about tax in 2023, part of the tax exemptions or incentives in Taiwan have expired. Without the new amendments to this industrial innovation, the Statute of Industrial Innovation, our tax rate would have become between 18%-19%. With this new amendment, our tax rates will drop to about 15%.
Okay.
Okay.
Does that answer your question, Randy?
Okay, great. Yeah, that does. I mean.
Okay.
Just midterm R&D, do you think the rate stays at this level or could it go up one more? That's my final one. Thank you.
From what we are seeing at this moment, we expect the R&D to revenue ratio to be between 8% - 8.5% in the next several years.
Okay.
Okay. Great. Thank you, Wendell.
Thank you, Randy. Operator, can we move on to the next participant, please?
Sure. Our next question is come from Bruce Lu with Goldman Sachs. Bruce, please go ahead.
Okay, thank you for taking my question. The first question is focused on the overseas capacity expansions. I think you just mentioned that even though we cannot disclose it, but the cost is definitely higher for the overseas capacity, but the management believes that the margin will stay the same. I mean, I think I asked this question back to 2019, you know, the manager was talking about like the pricing will be the same, across the board, regardless the geographical locations. What has changed now? With the different pricing, can we say the overseas capacity will generate a similar return on profitability throughout the cycle? Or what is the benchmark you are looking for when you set up the different pricing schemes?
Bruce Lu from Goldman Sachs, actually, his question is regarding, first question regarding overseas expansion. His question is, we said overseas costs are higher, yet.
His question is in regards to our pricing, are we a higher price overseas or if it's overall, and what is the benchmark that we use when we go overseas in terms of financial returns, and price? Is that roughly correct, Bruce?
Yes, that's correct.
Okay, Bruce, this is Wendell. We're not able to comment on pricing details, but our pricing is always strategic and consistent to reflect our value. Now, value to our customers, as C.C. said in his statement, includes technology leadership, manufacturing efficiency and quality, cost, trust, and recently also includes more geographic manufacturing flexibilities. Therefore, our overall pricing will remain strategic to reflect our value, which includes the value of geographic flexibilities. Does that answer your question?
To some extent, I... Let me ask the question in different ways is that, you know, we do understand it will reflect TSMC's value, i.e., geographical location is a value. At the end of day, it's a cost plus for everybody across the board. I mean, how confident that, you know, TSMC feel that, you know, the customers can swallow the cost, and the end customer will swallow the cost, i.e., without triggering the potential, you know, wafer price inflation or semiconductor inflation at the end of the day with more and more global capacity for TSMC?
Yeah. Okay. Bruce, let me add that in C.C.'s statement, he also mentioned that we will, aside from selling our value, we will continue to drive down our costs, but also to leverage our competitive advantages of large volume, economy of scale, and manufacturing technology leadership. With all these actions, plus the government support, we're able to absorb the higher costs of overseas fabs, and maintain our long-term financial goals, gross margin of 53% and higher.
I see. Understood.
maybe C.C.
Well, Bruce Lu.
Yeah.
Let me add some color. This is C.C. Wei. Actually, in our view, the semiconductor become more essential and more pervasive in people's life. The semiconductor industry value in the supply chain is increasing. If we look at our customers' performance, their rising structural gross margin over the past five to six years, it continue to improve. That reflects what I just said, the semiconductors of value has been recognized and also very important in our daily life. We set up our pricing strategy to reflect all the values we sell to customer, and customer also earn their value from the end market.
Thank you, C.C. Bruce-
Thank you.
Do you have a second question?
Yes, please. The second question is for the N7. I think we spent some time for 7 nm, which is more cyclical. I think after three months, I think the correction is even bigger. You know, can you share the full year outlook for 7 nm? You know, when we can expect the customer or the 7 nm capacity utilization to back to normal or back to, like, fully utilized? Can we avoid the same cyclical symptom in 5 nm and 3 nm in two, three years from now?
Okay. Bruce's second question was on 7 nm. His question is 7 nm seems to have deteriorated versus three months ago. You know, what is our view? Can it fully recover in this year? I think, Bruce, the second part of your question is also how can we avoid the same cyclical symptoms at other nodes in the future? Is that correct?
Yes.
Okay.
I will answer this one.
Sure.
First, it, you know, N7, most of the business for TSMC in the last two years is from the PC and the smartphone. That happened to correct or let me say that inventory correct, it happened to be the most severe one. The end market drop more severely than we thought. In fact, the unit were not increased, but the content will be increased. Its demand be more softened than we thought three months ago. Why it be repeated at a five or three? You know, cyclicality of the semiconductor always exist, but it's unlikely this time the scenario were to be repeated because of current downturn actually is a kind of being enhanced or being degraded by the pandemic.
Due to the pandemic, the digital transformation progress have been enhanced. The demand being increased dramatically.
Due to the pandemic, the supply chain disruption happened, and people during this time probably changed their strategy or their thought on the inventory build-up. Artificially, the inventory had been built up quickly and dramatically. The response to the each industry are different. They managed that inventory correction also differently. This kind of phenomena, all because of largely because of a pandemic, and we don't think that it will happen again. In the next 5 nm, 3 nm, I believe TSMC and TSMC's customer will be more prudent on planning that, what is the demand and also the supply.
Okay. Bruce, does that answer your second question?
Yes. Let me follow up a little bit. Since he just mentioned it's more the external factors, right? What did TSMC do to avoid the same thing for five and three in the future? For example, like if you are, you know, cutting your capacity plan into a more conservative way or something like that, is that something which we should expect in the future node?
Bruce is asking sort of a follow-on. With 7 nm, how do we avoid the same thing happening at five or three in the future? Will we, you know, cut our capacity? How do we change our capacity planning and build to avoid a similar situation?
Bruce, this is a very good question. Actually, let me share with you how we deal with it. Between the N5, N3, the technology node, our capacity build-up and with a lot of tools can be commonly used by these two node. In fact, for TSMC to build capacity, we put the N5, N3, and maybe in the future N2 as a total picture to look at it. We will keep our flexibility to increase or to adjust for the future. We will be better prepared. That's all I can tell you.
Okay. That's good to hear. Thank you.
Thank you, Bruce. Operator, can we move on to the next participant, please?
Sure. Our next question is come from Gokul Hariharan with JP Morgan. Gokul, please go ahead.
Thanks, having you. Let me take my first question on the near term 2023. You mentioned first half we have seen a worse kind of environment compared to three months back. Is it mainly HPC data center that has seen further reduction, or are we seeing it across the board, including smartphone for first half? Also, on second half, just putting in rough numbers on your guidance, looks like we are looking for a pretty sharp rebound in second half of 2023, something like 25%-30% second half versus first half of this year.
Could we have some more color on what are the areas that gives you the confidence for that such a strong rebound in second half of the year to get us back to like a flattish revenue growth for the year?
Okay. Gokul's first question is on the near term outlook. He wants to understand first half. We said the inventory correction is sharper. He wants to understand what are we seeing in different end market segments. Is the sharper correction driven by data center? Is it smartphone, PC? What are we seeing across the different segments first?
Well, let me answer the question. The inventory correction actually began last year. At the peak of the third quarter, and we think, the inventory had been peaked in third quarter last year, and gradually reduce in the fourth quarter. We did see some inventory reduce sharply, you know, recently. It will continue to be so to first half of this year. That's why we say we have confidence that in the second half the business will rebound. Is that a very strong V shape? We didn't know yet, but certainly it's not a U shape for the business to recover in the second half.
Okay. I think N3 is clearly one part of that ramp, but is there anything else that is, that you are already seeing that strong confidence for the second half rebound in addition to the N3 ramp-up?
So Go-
Uh-
Sorry. Gokul was asking, so in terms of second half, why can TSMC's business be better than the overall industry, besides N3? Are there any other factors when you think about technology leadership?
Gokul, you are right. N3's ramp-up helped the business to rebound. Also actually, let me share with you that some of the HPC's customer also have a new product launch in the second half, especially in the AI area or in, you know, computing area. Did that answer your question?
Understood. Okay. Thank you. That's my first question. Jeff, can I move on to the second one?
Yes, please.
Yeah. Thank you. My second question is on CapEx and capital intensity. CapEx, we are taking it down a notch for this year, given the downturn, I guess, and some conservatism. Are we already seeing the peak in CapEx intensity in this cycle? Or given the plans in Europe, plans to expand more capacity in U.S., are we likely to see higher CapEx intensity in the out years as well?
Okay. Sorry. Okay, Gokul. I think I got the gist of your question. Gokul's second question is on CapEx and capital intensity. He notes this year we have guided $32 - $36 given sort of some tightening up and such. His question is, does this represent, have we already seen or passed the peak in terms of our capital intensity this cycle? As we may continue to, you know, evaluate and expand overseas and such, will there be another step up in our capital intensity?
Okay, Gokul, this is Wendell. As we said before, we invest the CapEx this year for the growth in the future years. We also said earlier that we're tightening up the spending where appropriate. As long as we believe the growth opportunities is there, we will continue to invest. We've given the guidance for this year, you can calculate the capital intensity. It will be over 40%. From what we are able to see at this moment, several years down the road, we're seeing the CapEx intensity to be between mid to high 30s. That's the current view.
Thanks, Wendell. Is that several years, like five years out? Or is it like?
Yeah.
Closer to that?
Something like that. Something like that.
Okay, understood. Thank you very much.
All right. Thank you, Gokul. Operator, can we move on to the next participant?
Thank you. Our next question is come from Charlie Chan with Morgan Stanley. Charlie, please go ahead.
Thanks for taking my question, gentlemen. First of all, a question to C.C. Thanks for your sharing during the Mountain Jet Association. The presentation on semiconductor challenge was very insightful. My question is that you mentioned during your pitch by saying that the biggest challenge for semiconductor is the cost is getting higher let alone the so-called disrupted supply chains. I wanted to ask C.C. what's the true value add of Moore's Law going forward since it becomes much more expensive? And whether you really see that customers can continue to expand their gross margin and create value to this work? This is my first question. Thank you.
Okay. Charlie's first question is around technology. He notes that, you know, the cost, I guess, and cost per transistor is getting higher, and overall global costs are increasing as well. His question is what is the value or is there still value in the so-called Moore's Law going forward? How does TSMC view this issue?
Well, Charlie, let me share with you nowadays, we look at our technology's value, not only the geometries are shrinking actually. More importantly actually is the power consumption efficiency. Also we try to help our customer with our advanced 3D IC fabricate technology to improve the system performance. That's where it's important. In the future, we want the world to be more greener, more safer, better, power consumption it become very important while we still improve the system performance. That's where our customer can get their value. That's what we view in the future.
Thank you. Thanks for the explanation. A follow-up to that is that we noticed that for your major smartphone SoC customers, they tend to slow down the migration to the newer nodes, right, or so-called a fabrication for their new SoC adoption? Do you think for mobile computing, particularly, do you think value add is diminishing, you know, based on what you just said? Also another structural trend we are seeing is about those custom chip or ASIC, you know, HPC segments. Can management talk about that part of business, meaning the ASIC design in terms of the total revenue contribution in HPC and the growth rate of that ASIC business? Thank you.
Okay. Charlie, I'm going to interpret. He has a follow-up to his first question and then his second question. The follow-up to his first question is then in terms of going back to costs again, do we see any sign of a slowdown in smartphone SoC migration at the leading node? That's his follow-up for. His second question is then do we see more companies designing ASICs, and can we disclose the revenue contribution from such customers? Correct, Charlie?
Yes. Yes, correct. Please.
Okay. Charlie, let me answer your question. In fact, we do not see any slowdown on our customer to adopt the TSMC's leading-edge technology, actually. They might have a different kind of a product schedule, and they might have a different kind of a product plan, and etc . The technology adoption, actually, it did not slow down. That's my answer to your first follow-up question. Whether that some kind of customer, some of the hyperscale customers are wanting to develop their own chip? Yes, but I cannot give you more information than that. However, I can tell you that they also look at the compute for their own business. The positioning for their opportunity actually increase their opportunity. That require TSMC's leading-edge technology. We do have quite a few hyperscale customers working with TSMC to develop their own chips.
Okay. Thank you.
Would that cannibalize their, your merchant business, for example, does the merchant CPU, GPU, are they going to be replaced or impacted by those custom design growth?
So-
If I may.
Okay. Last question Charlie Chan's asking then. His concern is.
Thank you.
If hyperscalers are developing, will that cannibalize business for other types of companies?
I cannot comment, but I don't think so. you know, they also develop the specific purpose for their own. I mean, it's not a kind of to replace the generalized as a purpose of CPU, GPU, or those kind of thing. Yeah.
I think also.
Okay.
TSMC, we're happy to work with all the types of customers, whatever type they may be. Okay? Thank you, Charlie. Let's move on to the next participant.
Thank you.
Thank you. Our next question is come from Sunny Lin with UBS. Sunny, please go ahead.
Sure. Thank you. Good afternoon. Thank you for taking my questions. My first question is on the N3 ramp-up. If we look at the share, revenue could be higher than 5 nm for the first year. If we look at the sales contribution as a % of total sales, it's actually a bit lower. I wonder, for this year, perhaps there's some market demand issue. Looking into 2024 and 2025 based on your current customer engagement, should we model a faster ramp-up into 2024 or 2025? If overall ramp-up could be slightly slower because of maybe customer schedule issues or planning.
If we think about the peak revenue contribution for 3 nm over time, do you think you will be able to reach 30% range at N5 and N7? That's my first question. Thank you.
Sunny Lin's first question is on 3 nm. She notes 3 nm revenue is greater than for 5 nm in its first year, but the revenue percentage contribution of mid-single digit is smaller or lower. She's wondering why is that? Is it because the market slowed down? Is it you know, less customer adoption and interest? What is the reason behind that? Does that mean what is our expectation for that ramp to continue? For the N3 and N3E, the number of tape-outs more than double that of N5 in its first and the second year. As a result, we expect the strong demand will continue in 2023, 2024, 2025, and beyond for our N3 technologies, driven by both the HPC and smartphone applications.
Got it.
Yes.
Yeah, partially. Any thought on the potential peak revenue contribution in next couple of years?
Too early to talk about that, Sunny. We continue to believe that it will be a large and long-lasting node for us.
It will be a important contributor to our 15%-20% revenue CAGR the next several years. Okay.
Got it. Thank you. My second question, is a quick one. For you to grow slightly, for this year, just wonder what kind of industry growth are you assuming, for the major end markets, including smartphone, PC, server, and automotive?
Okay. Sunny's second question is, you know, TSMC, we have said we will grow, have slight growth, year-on-year in US dollar terms this year. Her question is what are we assuming for the end market growth in areas like smartphone, PCs, automotive and others?
Well, let me answer the question, Sunny. What we look at in 23, actually, we look at the smartphone and PCs by unit. We think it's a little bit drop in terms of unit. The content will continue to increase. For TSMC, actually, we increase our product portfolio. We also extend our market segment, available market segment to TSMC. That's why we expect the whole industry to drop, you know, slightly and TSMC still grow slightly.
Got it.
Yeah.
Sorry. Yeah, so just a quick follow-up on server and automotive. Any expectations on server units for this year? For auto, I think, October earnings call you mentioned there could be some slowdown going to first of the year. Have you started to see the deceleration? That's all my questions. Thank you very much.
Sunny also wants to know what is our forecast for server units, automotive units. We said in October, three months ago, we said automotive demand was holding steady. What is the case now? Well, the automotive demand continue to be very tight. I mean, demand continue to increase, actually. Today, we still probably not 100% supply enough wafers to them. You know, it's improving. It's improving. We expect the automotive to the shortage to be relaxed quickly. The units-
Got it.
For the units to grow, we expect the automotive to grow this year. You know, that's OEM's stuff. Okay.
Thank you, Sunny. Operator, can we move on to the next participant?
Thank you very much.
Thank you. Operator, can we move on to the next participant?
Sure. Our next question is come from Laura Chen with Citigroup. Laura, please go ahead.
Hello. Hi. Hi, thank you very much for taking my question. My first question is also about the overseas expansion. Like C.C. mentioned that the overseas, more advanced than 20 nm will account for 20% in the longer term perspective. Also we are expanding more in the advancement with the U.S. I'm just wondering that will you also expand more like a backend or advanced packaging along with your advanced node, say, like, five or three nm in Arizona as well?
Laura's first question, is, actually CC said, the 20 nm below capacity, could be 20% more, in a several years' time, depending on customer demand and, government support. Her question is, would we consider expanding advanced packaging, overseas as well? Today we, actually don't have plan, but we do not rule out the possibility because our backend is a part of the total wafer service, for our customer.
Okay, got it. Because we see that a lot of advanced node used for the high computing PC, along with that kind of application, we see now TSMC is very good at those 3D IC or the advanced packaging. I'm just wondering that longer term perspective, whether that is also the direction in the U.S.
I think, what Laura is saying, because, you know, of course that, TSMC 3D IC solution is leading and HPC adoption is strong. With advanced technologies, will there be a need to build or have packaging in the U.S. as we move advanced technology portion to the U.S.?
Well, Laura, I just answer say that we don't rule out the possibility. Today, we don't have a plan yet.
Sure. Sure. Thank you very much. My second question is about the Gate-All-Around roadmap. Can you give us more colors on the current progress? We know that we have the schedule to ramp it up in 2025. As the NA EUV, the high voltage equipment will probably only ready then, do you think that could be any, like, a potential pushback to, like, 2026 onward?
Laura's second question is on the nanosheet transistor structure. She wants to know what is the progress for TSMC as we're adopting nanosheet structure at our N2. Will this be impacted or pushed out by the availability of things such as, I think you're asking High NA, Laura, and things like that, correct?
Right. Right. Thank you.
Okay. Actually, our N2 technology development is on track. Actually, it's better than what we thought. We have very good progress recently. You know, our risk production will be in 2024, and the volume production in 2025. The schedule is not changed if we don't pull it in. So far so good, let me assure you that. Okay?
Okay. Thank you very much.
Thank you, Laura. Operator, can we move on to the next participant, please?
Thank you. Our next question is come from Rolf Bulk with New Street Research. Please go ahead.
Yes, thank you for taking my question. I had a question on your 2023 CapEx budget and your fab build-out plans. You earlier on in the conference call, you talked about build-out cost of fabs in the U.S. being five times higher versus Taiwan. In that context, I was wondering if you could talk about the share of CapEx spending that you expect to go towards fab build-out versus equipment this year versus last year. Will the largest share of CapEx go to those fab build-outs, and if so, how much more? Thank you.
Okay. Sorry, Rolf. Let me try to summarize your first question. His first question is on our CapEx in 2023 and our fab build-out plans. I believe, Rolf, you're referring to fab build-out plans overseas, correct?
Yes, exactly.
Okay.
What I'm trying to understand is if I think about your CapEx budget for this year versus last year, what share will go towards infrastructure so fab build-outs, and what percentage will go to equipment roughly?
Okay. Rolf wants to know for our CapEx, how much is going to building and facilities, how much is to tools. Rolf, I want to make one correction. When our CFO said that the, when you refer to five times greater, I think our CFO was saying the construction costs are four to five times higher, not the CapEx costs. Nonetheless, Rolf is asking for a breakout of the CapEx.
Well, Rolf, we provide the breakdown on CapEx per year, advance versus specialty technology, but we do not provide the breakdown between tools and constructions. Yeah, but as I said, in the U.S., the construction of building and facilities is probably five times that of Taiwan. It lasts for a few years, right?
Okay. Rolf, do you have a second question?
Okay.
Sorry.
Thank you very much.
Yeah.
Yes. As the second question, could you talk about the growth that you achieved in your advanced packaging segment in 2022, and what growth you are expecting in 2023? In particular, could you talk about your SOIC products and whether interest in those products is accelerating? Thank you.
Thank you, Rolf. Rolf's second question is on the advanced packaging business. What was the growth in advanced packaging last year, and what do we expect the growth to be this year? Also, more specifically in terms of our SOIC technology, what is the outlook or the momentum there?
Okay, Rolf, this is Wendell again. In 2022, our advanced packaging grew at a similar rate to our corporate rate. It accounted for about 7% of our total revenue in 2022. We think that in this year, the growth will be also similar, pretty, well, slightly lower than the corporate. It will be probably flattish for the back end.
Okay. Thank you, Rolf. All right.
Great. Thank you very much.
Thank you. In the interest of time, maybe we'll take questions from the last three participants. Operator, can we move on to the next participant, please?
Sure. The next question is come from Charles Shi with Needham & Company. Charles, please go ahead.
Thank you for taking my question. I wanna ask a little bit about the 20% R&D expense step-up in this year. Can you provide a little bit more details what the incremental R&D expense are going to be directed at? Well, for one thing, I, if I understand correctly, your N3 R&D team are gonna move on to the M+2 node, if we assume 3 nm is the current N node. Is there any other incremental R&D spending this year you are expecting to be around design enablement, advanced packaging, specialty technology? Can you kind of give us a sense where the big step-up is coming from? Thank you.
Okay. Charles's first question is on R&D. He wants to understand or actually more details in terms of the 20% approximately year-on-year increase. What is driving or the R&D spending going to be focused on? Is it N3? Is it N2? Is it design enablement? You know, by specific breakdown.
Charles, let me answer your question. All your comment are correct. I mean that it's because of a newer technology like a N2, A14, and also, a lot of, new things are more expensive than before. Actually, the technology complexity continue to increase exponentially. That's why we spend much more R&D budget. We want to continue to be number one in the world, so we continue to invest, you know, including the geometry shrinkage, including the new transistor architecture, including the design enablement, and, including buying the new equipment. That all adds up.
Okay. Charles, do you have a second question?
Yes. Yes, I do. Maybe a second question. want to ask about specialty technology. obviously, you expect the specialty technology to backfill your 7 nm fabs. I think this may be a more common knowledge inside the industry, but I recently spoke to some of your customers who are more on the analog mixed signal side. A lot of them are, I mean, driving volumes more from 28 nm and above, and they tell me that the benefit of going to 14 nm or 16 nm for you, 7 nm , but it's not large enough as in the past, moving node to node. At the same time, the cost is much higher.
I look at your technology roadmap, the specialty technology roadmap, it does seems to me that the specialty technology platforms are not as broad at the 7 nm if I compare with the 28 nm and above. I just want to get some insights from you on how do you think about the progression of specialty technology going forward, as it seems to me that the it's kind of slowing down a little bit, slowing a little bit down faster for the analog mixed signal customers. Thank you.
Charles, second question is on specialty technology. His observation is that, you know, the technology, specialty technology portfolio at 7 nm seems not as broad as prior nodes. His question is, do we see this slowing scaling of analog and mixed signal areas, you know, in terms of the specialty technology development, and moving down to, you know, lower nodes or more advanced nodes?
Charles, your observation is quite good. Actually, you are right. Let me share with you a little bit more detail inside. Actually, you know, you are right. For the analog portion or mixed signal portion, we do not need to really move into a 7 nm or more advanced node. As time goes by, now is more and more computing functionality needed to be added into that product. Let me share with you that one thing, like Wi-Fi, you need a, you need a really very high speed to move to the next generation, and also the RF. For those kind of thing, you need a very high performance of the computing together with the low power consumption. It is important.
If you want to get the low power consumption, the only the leading edge node can give you that kind of opportunities. You know, all the footprint stay the same. If you want to have a higher functionality with a low power consumption, that's where you have to move into the 7 nm or more advanced node, even with the analog product. Does that answer your question?
Yes. I think this is about the reason that you feel so quite comfortable about the 7 nm utilization will come back. You said it will mildly come back a little bit in 2023, but you're still confident 2024 and forward, that the 7 nm will still be a very long-lasting node for you.
You are right.
Okay.
All right. Thank you.
Thank you, Charles. Operator, let's move on to the last two participants.
Thank you. The next question is come from Brad Lin with Bank of America. Brad, please go ahead.
Hi, Happy New Year. Thank you for taking my question. I have two questions. One is on the globalization challenge and the other on the mature node. First of all, we know TSMC is excellent in managing the supply chain and the cluster in Taiwan. However, when we now expand Japan and U.S. footprint, with the lack of the cluster there, would management please share with us what are the strategies to maintain the strong efficiency and the excellence that TSMC has been delivering? Thank you.
Okay. Brad's first question is on our global footprint. He notes that TSMC has done a good job in terms of supply chain and cluster management. As we go overseas to U.S. and Japan, how will we continue to ensure that we do a good job?
Well, Okay, let me answer. I think Wendell has answered this question earlier. Let me summarize a little bit. TSMC is in a service business, not in just pure production. The service depend on the trust from the customers. In the past, our trust and service depends on our technology leadership, manufacturing excellence, and the lowest cost and quality. Recently, the geopolitical development is evolving just in front of us, that we 100% in one place cannot suffice our customers' needs. Therefore, we started the overall global footprint planning. Now, of course, the cost will be higher, and I think our team has been focused on how do we do this, at the same time, keep our minimum gross margin to be 53% and above.
That is the standard that we decide how the pace of our global expansion going to be. There are other segments in terms of the space, of course. The global expansion increase the value to our customers under the new geopolitical environment, and therefore, the pricing, how the customer can shoulder the increased cost in terms of pricing. Of course, geopolitically, the semiconductor in the U.S. And Japan are all new. I believe us, we are working hard on how to reduce the cost by building up the semiconductor supply ecosystem in U.S. and in Japan. I think indeed, both governments echo our. Not just us, it also rally other major companies to build a similar capacity in this place to reduce the costs.
That is the general arrangement we are planning. There's no fixed rate. Of course, the government support will be another factor. That is, we are cautiously step-by-step to make sure our shareholders' value still be kept.
Thank you, Chairman. Brad, do you have a second question?
Yes. Thank you very much for the answer. My second question is on the mature node. Though we know mature node is non-lasting and generates pretty good profits with TSMC's technology leadership. While we are expanding overseas, what is the strategy for our mature node in the long run, especially on China expansion take by, also by the government subsidies? Also, R&D is quite valuable for TSMC, and should we continue to allocate the R&D to mature node when maintain good pace in the leading edge and advanced packaging? Thank you.
Okay. Brad, second question, I think maybe to summarize, is more on the mature node. He wants to better understand our strategy on the mature nodes. As we expand our manufacturing footprint and increase capacity outside of Taiwan, what is our strategy for mature nodes? You know, will we bring mature nodes overseas? What is the status in China? How are we allocating R&D resources to mature nodes or really specialty technology strategies, et c.?
Well, actually, our mature node capacity strategy is very simple. We develop differentiated specialty technology for our customer. In fact, we are working with customer and to define what they need and then what kind of a technology that we need to develop. We don't, we don't add any commonly used logical technology per se, but we develop specialty and differentiate it. For the long term, the structural market demand. That's our current strategy. Because of that, of course, we put R&D's effort and resources to cooperate with our customer. We can generate profitability with a reasonable utilization.
Okay. Thank you, C.C.
Got it.
Thank you, Brad.
Thank you very much. Thank you very much, Chairman.
Yes. Okay. Thank you. Operator, can we move on to the last participant, please?
Sure. Our last question is come from Mehdi Hosseini with Susquehanna International Group. Please go ahead.
Yes. Thanks for letting me ask a question. I wanna go back to gross margin. I'm a little bit confused, if you could clarify something. Your wafer shipment in Q4 declined, and also FX, actually, it strengthened by a little bit, which should be negative for gross margin. Your cost-cutting efforts must have been greatly exceeding these trends. I wanna get a better feel for it. I have a follow-up.
Okay. Mehdi's first question is on gross margin. He notes wafer shipments declined sequentially in the fourth quarter. With the foreign exchange movement, he notes it's a negative for gross margin. He wants to understand what is, you know, the magnitude or rate of cost improvement. Maybe our CFO can clarify some of these, particularly the FX.
Right. Our fourth quarter gross margin is 180 basis points higher than that in the third quarter. Foreign exchange rate actually went towards our favor. The NT depreciated in the fourth quarter from 32 in the third quarter to 31.39. That gave us about 140 basis points of gross margin expansion. The remaining one, there are cost improvement, but offset by, as we said, lower wafer utilization.
The volume helped. Now, if I just take your comment about the first half-declining 5%-10% on a year-over-year basis, that implies that there is a chance that revenues in Q2 would decline on a sequential basis. Would that also drive gross margin down on a sequential basis?
Medley's second question is then, we have noted we did not say 5%-10%, but our first half revenue will decline mid to high single digit year-on-year. He wants to know, does this mean that second quarter revenue will be down sequentially? Does that mean that the gross margin will go below 53% or-
Okay.
Decline into it?
Right.
Yeah.
Right. We've give you the guidance, so, you can really calculate yourself on the revenue growth, on the second quarter. It's too early to talk about the gross margin in second quarter and beyond. However, we can tell you that we work very diligently, to make sure our long-term gross margins of 53% and higher is achievable, even in this year.
Understood. Sure. Understood. Could it go below 53 and then rebound so it would average to 53?
It's too early to talk about that, but as I said, we work very diligently to make sure this long-term gross margin target of 53% and above, can be achievable, including this year.
We will give you the second quarter gross margin outlook in April, Medley, in three months. Okay? All right.
Thank you.
Thank you. Okay, this concludes our Q&A session. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within 30 minutes from now. The transcript will be available 24 hours from now, both of which you can find and is available through TSMC's website at www.tsmc.com. Thank you again for joining us today. We wish everyone a happy Lunar New Year, and we hope you will join us again next quarter. Goodbye and have a good day.