Welcome to TSMC's Q1 2018 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 conference in English only.
The format for today's event will be as follows: 1st, TSMC's Senior Vice President and CFO, Ms. Laura Hou, will summarize our operations in the Q1 followed by our guidance for the Q2. Afterwards, Ms. Ho and TSMC's Co CEO, Doctor. C.
C. Wei, will jointly provide the key messages. Then TSMC's Co CEO, Doctor. Mark Liu, will host the Q and A session where all three executives will entertain your questions. For those participants on the call, if you do not yet have a copy of the press release, you may download it from TSMC's website at www.tsmc.com.
Please also download the summary slides in relation to today's conference presentation. As usual, I would like to remind everybody that today's discussions may contain forward looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward looking statements. Please refer to the Safe Harbor notice that appears on our press release. And now I would like to turn the podium to our CFO, Ms. Laura Ho for the summary of operations and current quarter guidance.
Good afternoon, everyone. Thank you for joining us today. My presentation will start with the Q1 highlights and followed by the Q2 guidance. In the Q1, due to seasonality, our Q1 revenue in U. S.
Dollars decreased 8.2% sequentially to US8.46 billion dollars which was at the middle of our guidance range. In NT dollars, revenue declined 10.6%, reflecting 2.7% appreciation in NT dollar against U. S. Dollar. Gross margin increased 0.3 percentage points sequentially to 50.3% as our cost improvement efforts and inventory valuation benefit offset the lower capacity utilization and unfavorable foreign exchange rate.
Total operating expense decreased by NT2.1 billion dollars and represented NT10.8 billion of revenue versus 10.4% in the prior quarter. Thus, operating margin slightly decreased 0.2 percentage points to 39.0%. Overall, our first quarter EPS reached $3.46 and ROE was 23% for the quarter. Now let's take a look at the wafer revenue contribution by application. During the Q1, communication and industrial standard decreased 19% and 4% from the prior quarter, respectively, while computer and consumer increased by 30% and 9%, respectively.
Now let's take a look at the revenue by technologies. 10 nanometer process technology contributed 19% of our total wafer revenue in the Q1. The combined 16/20 contribution was 22% of total wafer revenue. 28 nanometer and below advanced technologies accounted for 61% of total wafer revenue. Moving on to the balance sheet.
We ended the first quarter with cash and marketable securities of securities of NT 684,000,000,000, an increase of NT 35,000,000,000 from last quarter. On the liability side, current liabilities decreased by NT 16,000,000,000. On financial ratios, accounts receivable turnover days increased 2 days to 42 days. Days of inventory increased 11 days to 63 days due to an increase of raw wafer and a 10 nanometer wafer prebuild before the capacity is converted to 7 nanometer. Now let me make a few comments on cash flow and the CapEx.
During the Q1, we generated about TWD161,000,000,000 cash from operations and spent RMB 72,000,000,000 in capital expenditures. So our free cash flow was RMB 89,000,000,000. We also repaid TWD 17,000,000,000 of corporate bonds and the prepaid NT34 billion of corporate bonds and interest. As a result, our overall cash balance increased TWD24 billion to reach TWD578 billion at the end of the quarter. In U.
S. Dollar terms, our first quarter CapEx expenditure was 2,450,000,000. I have finished my financial summary. Now let me turn on to the 2nd quarter guidance. Based on current business outlook, we expect 2nd quarter revenue to be between US7.8 billion dollars and US7.9 billion dollars which is a 7% to 8% sequential decline, but 11.2% year over year increase at the midpoint of my revenue guidance.
Based on the exchange rate assumption of US1 dollars to NT29.20 dollars, our second quarter gross margin is expected to be between 47% 49%. Our 2nd quarter operating margin is expected to be between 35% 37%. Also, in the second quarter, we will again need to accrue the 10% tax on undistributed retained earnings. But due to higher accumulative translation loss as a result of anti appreciation against U. S.
Dollars, which will reduce our retained earning tax. Therefore, our 2nd quarter tax rate will be between 18% to 19%. The tax rate will then fall back to 10% to 11% level in the 3rd and the 4th quarter, and the full year tax rate will be about 12%. This concludes my remarks, and I will now make comments on capital capacity and profitability. I will start with CapEx and capacity.
At our last conference, we stated our 2018 CapEx budget to be between US10.5 dollars to US11 $1,000,000,000 We now see our CapEx to be between US11.5 and USD 12,000,000,000. The increase is due to: Number 1, we plan to spend about KRW 500,000,000 more to increase our mask making capacity to support our customers' higher takeout activities and to spend about TWD 300,000,000 as prepayment for our high NA EUV tools. Going forward, we expect our annual CapEx in the next few years will be ranging between USD 10,000,000,000 $12,000,000,000 Now let me explain how we are able to support a 5% to 10% long term growth with a similar level of annual CapEx as the follows. For the existing capacity, we are able to grow capacity through productivity improvement that is for the same tools. The output can increase every year through our engineering efforts and innovations.
This way, without spending fresh CapEx, we are able to grow capacity to support growth. On average, we are able to grow our overall capacity by the mid single digit each year through the productivity improvement. Our marketing strategy with respect to the existing capacities, which grow in productivity perpetually is to seek enough demand to fill this growing capacity at all times. As for the new capacity, which is mainly leading edge technologies, we are very careful in planning the right level of peak capacity, knowing that initial capacity we built will grow continuously to a larger size due to productivity improvement. To summarize, through productivity improvement and careful planning of new capacity, we are able to support revenue growth of 5% to 10% with annual CapEx at US10 dollars to US12 $1,000,000,000 level in the next few years.
Now let me make a comment on profitability. TSMC's profitability is determined by the following factors: leadership technology, development and ramp up pricing, capacity utilization, cost reduction, foreign exchange rate and technology mix. Now I will go through the changes for our 2nd quarter gross margin compared to Q2 2017 and Q1 2018, respectively. Compare Q2 2018 gross margin using the midpoint of the guidance I just mentioned, which will be 48%. Compare that with Q2 2017 gross margin, which was 50.8%.
The decline of 2.8 percentage points gross margin rate is explained by 1.3 percentage point negatively due to exchange rate. NT dollars has appreciated 3.6% from Q2 2017 to Q7 2018. In addition to that, there is a negative 1.5 percentage point due to unfavorable product mix and inventory valuation, which is resulting from the utilization change. If I compare Q2 2018 with Q1 2018, where our margin was 50.3% last quarter, the decline of 2.3 percentage point gross margin is explained mainly by the favorable 2 percentage point of inventory valuation that was embedded in the Q1 2018 gross margin, which I have explained in the last quarterly conference. To conclude, our leadership in technology development and ramp up remains solid.
We continue to maintain our competitive price, and we are making good progress in cost reduction. We will continue to work on filling our capacity. I finished my remark. Now let me turn the microphone to C. C.
Wei for his comments. C.
Wei:] Thank you, Leroy. Good afternoon, ladies and gentlemen. Let me start with our near term outlook. We concluded our Q1 with revenue of NT448.1 billion or USD 8,460,000,000 in line with our guidance given 3 months ago. This result was mainly driven by a strong demand from high performance computing such as cryptocurrency mining and increases from both automotive and IoT, but offset by seasonal decline in smartphones.
Moving into Q2 this year, our business is expected to be affected by continued softer demand from smartphone segment. This decline is expected to be partially mitigated by the strength in HPC. Our revenue in U. S. Dollar is likely to grow by only about 10% over Q2 last year.
We forecast our fabless DOI to stay slightly above seasonal level, but we'll track seasonal pattern. For the whole year of 2018, we forecast the overall semiconductor market, excluding memory, will grow by 5%, while foundry, we expect to grow by about 8%. We forecast TSMC's 2018 revenue in U. S. Dollar will be about 10% rather than the previously indicated 10% to 15% due to the smartphone weakness and the uncertainty in cryptocurrency mining demand.
Now let me talk about the long term business growth driver. We are optimistic about the development of some of the industry's mega trends, particularly AI and 5 gs communication. We believe these 2 will help semiconductor to spread its pervasively seen to our daily lives. Both AI and 5 gs will create new usage models and spur new waves of demand for both of the existing and emerging applications with increasing silicon content. We expect TSMC to benefit from these industry megatrends in all four of our growth platforms.
In mobile, silicon content of the smartphones were increased due to increasing functionality such as our facial recognition and new usage such as ARVR and 3 d video. In HPC, we expect AI will boost the attach rate of accelerators using data center for today's mid to teens level to about 50% by 2020. In automotive, the use of the new safety related functionalities such as ADAS and eventually autonomous driving will drive the increase in silicon usage. In IoT, AI will proliferate into broad based client devices across many applications such as smart voice assistance or electronics appliance management, this again will increase silicon content. We believe our 4 growth platforms are well positioned to benefit from the longer term megatrend of AI and 5 gs.
Our leadership in advanced and specialty technologies as well as our advanced packaging solutions should enable us to capture the future growth opportunities well. Now let me talk about the N7 ramp up. TSMC's 7 nanometer technology in terms of performance, power and area density as well as its its schedule is leading the industry. So far, we have already fabled out more than 18 customer products with good yield and performance. More than 50 product takeout has been planned by end of this year from applications across mobile, server CPU, network processor, gaming, GPU, FPGA, cryptocurrency, automotive and AI.
Our 7 nanometer is already in volume production. Now I'll talk about N7 plus and the EUV. We believe we can extend the success of our 7 nanometer N7 to its enhanced version N7 plus which will have 20% better density and greater than 10% power reduction. In NTM plus, we'll use a few EUV layers to replace emerging desagloid process. As a result, fewer masking layer can be used.
As the N7 plus Y used more than 90% of the same tools with N7 and N10, where we have fine tuned all the advanced equipment to their optimum condition during the ramp up, we believe we can leverage our production learning to N7 plus and enjoy the industry's best defect density among competitors' comparable technologies. Our N7 plus silicon results today are very encouraging. Not only we have demonstrated equivalent or better performance and yield on both 2.56 megabiras ramp and on product like test vehicle when compared to N7 baseline, we have also demonstrated tighter distribution of electrical parameters in theirs where EUV is supplied. Since we maximize design rule compatibility between N7 and N7 plus our customer can minimize IP porting effect effort, I'm sorry. A few customers have already planned to take out N7 plus with us in second half this year and more in the first half next year.
Our N7 plus volume production is planned in 2019, which remain unchanged. We have made ready multiple EUV scanners to support not only N7 plus development but also N5 development. At N5, with more extensive use of EUV, we have obtained consistent double digit yield on 2.56 megabits ramp as well as a logic test chip. Our silicon data has proved all the benefits we expect from process simplification with EUV. Besides the silicon development, EUV technology continue to mature toward high volume production with improving source power toward the 2 50 watts goal, which we expect to achieve in a few quarters.
Good progress continue to be made in the EUV infrastructure in the last few months. They include photoresist, mask defect and yield, pedicle defects and transmission. We are confident that EUV can meet our goal of 2019 volume production for N7 plus and 2020 volume production for N5. Now let me move to 16 FinFET and 12 FinFET. We introduced our 16 FinFET in 2015 and then 12 FFC in 2017.
Compared with 16 nanometer, our 12 nanometer technology delivered better density, performance and more efficient power. With continued improvement in EU, customer are gradually moving from 16 nanometer to 12 nanometer. Among all the product takeouts we received for this year, on the 1612 loan, about 30% are for 12 FFC. The application of 1612 includes mobile, GPU, AI networking, FPGA, consumer application and automotive. Our capacity of 12 16 node is being fully loaded currently.
Now let me update Lanxing fab. We expect to expand our business in China. Our Nanjing fab will enhance our support to local customers. Because of high demand on 16 nanometer, we had advanced the startup of Nanjing production. The production of our Nanjing plant starts this month.
Both yield and performance are comparable to our 16 nanometer Taiwan fabs. Our advanced packaging now let me talk about the last item. Our advanced packaging technology, info and co words are becoming more important for our customer to reduce their product footprint, packaging sickness while enhancing the performance. TSMC's InFO is in its 3rd year of volume production. We have expanded its capability to cover large die size so that we can integrate 2 or more chips together into one package.
This is particularly useful for HPC products to obtain asthma cost performance benefit. On cohorts, we have observed a growing number of tape outs from HPC customers in graphic and networking segment. As a result, we are increasing our capacity now to support the demand. And thank you for your attention.
All right. This concludes our prepared statements. Before we begin our Q and A session, I would like to remind everyone to limit your questions to 2 at a time to allow all participants an opportunity to ask their questions. Questions will be taken both from the floor and from the call. Should you wish to raise your questions in Chinese, I will translate it to English before our management answer your question.
For those of you on the call, if you would like to ask a question, please press the So Mark will host the Q and A session. The first question will be coming from Credit Suisse, Randy Abrams.
Yes. Thank you. I want to ask the first question about the demand and pricing environment. Just first on pricing. In Q1, the shipments were down just 1% and revenue was down 8%.
I'm curious if that's mainly the mix factor because 10 fell off or if there's any change in pricing maybe on some of the more mature nodes. And then if you could talk a bit more on the demand change versus you say in January, how much from smartphone? And then from the crypto, you talked about uncertainty. How much is coming from that market? And what are the uncertainty factors you're seeing on the crypto market?
Laura, please.
And your question is about the Q1 versus Q4, quantity versus pricing, okay? It is true that the Q1 pricing was affected by the product mix because we have very high utilization on the 16 and 10 nanometer, and that's the case.
I think Wendy also has a part of the
product mix? C.
Wei:] So product mix actually, the Q1 we just mentioned, weakness of seasonality actually, let me say that, smartphones and all other segments actually continue to grow in the HPC, automotive, IoT. However, that's our revenue, a lot of portion is around smartphone. So that's why we have a mixed effect. And in the technology, our smartphone use most leading edge technology And that's why a few percentage drop, that's a big drop in
the revenue.
The second part of that question, and I have the second question, was just about the crypto. If you could talk a bit more about the uncertainties And if you've seen that sustain or you're seeing more uncertainty? So just the factors you're seeing in that market? And then the second question I'll have is on 7 nanometer plus, if you could discuss how you're seeing that ramp in terms of steepness at this stage relative to we've seen steep ramps of 10 2016 before. If you're seeing steep ramp going into 7 plus and also just how important it is to have a steep ramp?
So in terms of how important it is to have that steep ramp just in terms of the learning as you try to bring customers on to EUV? So how important is it to have a big volume ramp on 7 plus for your EUV development?
Okay. Let me answer the cryptocurrency. We see still very strong demand in the Q1 from cryptocurrency and in the Q1. So during the Q2, this is start of the Q2, we see some weakness on 28 nanometer, but the rest of the technology is still very strong on cryptocurrency. Your second question is on the 7 plus ramp?
Yes. It's yes, 2 part. It's how steep you're seeing or how much demand inflection are you seeing for 7 plus And how important is it to TSMC to have a wide adoption in terms of the learning, like to move customers to 7 plus in terms of learning as you look ahead to 5 and even against your competitors?
[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:]
The 7 plus we I mentioned we are using a few layers of EUV and the EUV's progress is very well. So our customers start to adapt it. And how important? It's important. And we expect that the N7 plus will start to ramp up in the second half of next year quickly.
Actually, it's ramping up quickly because of smartphone business.
I think 7 plus, we have EUV development, as C. C. Just addressed, progressed smoothly. And we have demonstrated 7 plus yield equivalent to 7. So the rest is volume.
But I think the volume is we don't need a huge volume to prove EUV because all the development is in place. And the biggest volume ramp will be in N5, which in 2020, already in 2019 have some small volume. And N7 plus will slightly preclude that, but we don't need as big a volume to enable the N5. No, we just need some volume to improve that. N7 plus provide better density, better performance for our N7 customer following their N7 products.
Either they stay on N7, go to N7 plus or they can from N7 go to N5 depending on their product needs.
Next question will be coming from Deutsche Bank, Michael Zhou.
First question is regarding your revised guidance for 2018. So can we say you will still have the same 7 nanometer sales ratio target this year, 10%?
C. Wei:]
Close. So it's around 10%.
Around 10%. So it's still the same outlook as we as you expected 3 months ago? C.
Wei:] It's as I said, smartphone, it will be weak. So continue to be soft that we predicted today. So it's the loading, the 7 nanometers, it's a little bit one point of.
Okay. So is that fair to say 7 nanometer sales portion may be slightly below your previous target Or you still think it should be close to 10%? Very close. Okay. Second question is regarding your structural profitability.
Do you think this year, your structural profitability will improve or be the same as last year?
[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:]
I have said several points that associate with the structure profitability, technology, pricing cost, capacity utilization, exchange rate and product mix. On this one, there are certain things we can control, number 1, Foreign exchange, we cannot control. Problem is always go with the customers' demand. So while we have seen some weakness in the first half for the mobile and the certain technology of our existing capacity maybe not so full for the whole year and that would be one factor to our overall structure profitability. But I think our objective to maintain or improve structure probability remain unchanged, but the market situation and some uncertainty we have to be mindful.
So is that fair to say your biggest uncertainty will be FX rather than the other factors?
FX at least explain half of the deviation of profitability. The other half, I think it's mainly utilization, product mix and other factors.
So is it fair to say your 28 nanometer UTR slightly below your expectation? So that could lead to some margin downside?
It could.
Okay. Thanks. Next question will be coming from Sinolinks, Andrew
Lu.
Last time I came back, year 2010, most the Chairman, gave me 3 questions to ask. Can I give this exception?
You have 2.
Okay. The Q2 guidance, the full year guidance is factored in the ZTE recently being banned by U. S. To sell the chip to ZTE? Is this factoring into your model?
That's my first question.
The second half this year? Almost Q2. 2nd quarter.
2nd half also as well?
No, we haven't. The news just we got this news just yesterday. But we think the effect is very, very minimal. Currently, we are still under study what is the impact of ZTE's suppliers. But for the first glance that we look at we have a very wide customer portfolio.
So ZTE depends what they're supplied from and we have being in everyone's foundry, we have very widespread. So I think the impact will be softened much, much more, much. So we think that minimal minimal impact on the Q2. You won't see the number change. Sorry.
2nd quarter you're talking about.
Okay. Okay. Thank you. The second question I have. Okay.
In terms of cash dividend, I estimate every year, we got additional JPY 2,000,000,000 to JPY 3,000,000,000 additional cash even though we pay a lot of cash dividend. And are we going to give a much higher payout ratio compared to in the past few years? Because even this year, by factoring the new cash dividend, we still generate additional cash. So right now, I think it's over TWD 20,000,000,000 on hand cash already. So we are keep going up every year RMB 2,000,000,000 to RMB 3,000,000,000.
So that's my question. Thank you.
We have said many times our dividend policy to be sustainable and gradually increase dividend. We haven't really tied to a payout ratio per se, but we do look at free cash flow generation next 12 months, next 24 months. We use that as a basis to decide how much more dividend we are going to gradually increase. So it's TWD 20,000,000,000 to date, and I've said the CapEx will be RMB 10,000,000,000 to RMB 12,000,000,000. We do have a capability in the future to increase a little bit more than we have been increasing in the past.
Next question will be coming from Citigroup's Roland
Xu. First question is, C. C, do you still hold a view that 10 nanometer top of this 10% year on year revenue growth and 7 nanometer, around 10% grow from scratch. So both 7 nanometer and 10 nanometer probably total contribute more than 10% of the total growth this year. So does that means that for 20 nanometer and 40 nanometer and above technology, the total revenue is not going to grow.
Is that right?
You are doing very good base metric calculation. I don't comment on that.
Okay. What's the reason for this 20 nanometer and the 40 nanometer above the SNOWCO? Is that because the end demand is soft? Or is this due to the capacity constraint? Or we are losing market share
to others?
I would say that a lot of 28 nanometers usage has been advanced into the more advanced node. They move to more advanced node. So the utilization definitely is not what we expected last year. But all I can say is we remember it competitive and we are developing some derivative technology to serve all the customer. We move into the 22 nanometers to hear how our customer can get a very good cost performance benefit, and we are maintaining our market segment share.
Okay. But last year, actually, we also expanded about 15% to 20% of the capacity for 20 nanometer. So is there any problem to fulfill the capacity this year? C.
Wei:] Last year, we increased the capacity because of a very high demand and a lot of customer did not have enough wafer. That continue into this year's Q1 and probably half of this quarter. But then they move forward faster than we thought. So that's why that we see a little bit of weakness in the second half.
Okay. So are we going to how are we going to utilize this new added capacity for this?
C. Wei:] We have a lot of new application being developed. And trust me, that one day, you will be fully loaded again. I hope it's as quickly as possible, but technology product development takes time.
Okay. Thank you. For second question is for 19 fab. Now we are already the mass production and we have 20,000 wafer per month capacity. So is there any plan to further expand the capacity in Nanjing fab?
[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] 20,000 wafer per month is still our plan. We plan for this year all the way to next year, But we ramp up so quickly, actually, it surprises.
Okay. For the third capacity expansion in Nanjing, are we going to buy the new equipment or are we going to continue allocating from Taiwan?
We probably still at the first phase is still moving the equipment from Taiwan.
First phase means the 20,000.
Yes, majority of 20,000.
So that is ongoing or that is already done? Is 20,000 capacity move there? C.
Wei:] Okay. Let me give you an idea. We are fully loaded, so I cannot move any equipment right now. Anything we move, what are those capacity?
Okay. Thank you.
Next question will be coming from UBS, Bill Lu.
Hi, thank you very much. First question is for Laura. Laura talked about productivity improvements leading to mid single digit capacity increases. So 2 part question. One is, is that capacity increase put even across all the mature nodes?
Or is it certain nodes, how you're seeing bigger increase? 2nd part of the question is that mid single digit going forward, what was that number in the past?
I didn't hear your second question, sorry.
If you look at productivity improvements in the past, what has that number been?
Okay. Let me elaborate about productivity. As you can imagine, when the new technology just launched, in the 1st few years, you have very significant productivity improvement. And then when it gets matured, we have stable productivity improvement. But when it gets very, very old, you can have limited productivity improvement.
So the 5% I was just referring to is an average for the company. But it's not the same for every technology. Your second question is compared with?
Yes, that
mid single digits per year, what has it been in the past?
Very similar. We have been doing the mid single digit. Maybe some year is 1% more, some years 1% less. But more or less is in the mid single digit range.
So I guess I'm not really sure why that impacts your CapEx plans then because it's always been like that,
right? It does because another factor other than the productivity is we also very carefully plan to peak capacity and watch very carefully for the capacity migration. C. C. Was talking about the technology will use 90% commonality of tools.
If you remember what I said couple of years ago, the number was 70%, 80%. So by doing that, it actually enhanced the productivity improvement, especially for the leading edge technology. That's one contribution to that.
Second question is on cryptocurrency. This is pretty new to many of us. And I feel like TSMC has been pretty conservative in terms of looking at it in the short term, that's the right thing to do. But if you look at it for the next couple of years, 2019, 2020, as you think about your capacity planning, as you think about what customers to support, this is a market that is changing so fast. How do you think about it strategically?
Okay.
We look at the cryptocurrency's market price, it can drop from 20,000 U. S. Dollar to down to right now 8,000, but it increased from 1,000 to 20,000. This kind of uncertainty that is what we are talking about. In terms of capacity support, unless it is sustainable demand, we will not increase the capacity because of this kind of uncertainty demand coming out unless it's sustainable, in which I know that our customer is developing a lot of things on blockchain technology, AI, they are doing very well.
And we expect that those cryptocurrencies mining those things will slowly move to AI area.
So do you have an estimate for and if you look at the crypto plus blockchain, how fast is that demand going to grow next several years?
First, I always say uncertainty of cryptocurrency mining. So how can I put them together to give you a very good forecast? No, we don't.
[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Let
me add. We increased our capacity in lieu of the invest capital ROIC, returning capital. So if a demand is a spike demand, we'll be very careful. But we support we try to support the our customer in every way. What cryptocurrency developing is because of price sliding, their demand of high end technologies increases.
So the tail end becoming not that productive for them. So this is the changing. And in one way, we try to support them with more advanced technology as we quickly as time goes. And secondly, we support them on our available capacity.
Thank you very much.
Next question will be coming from Morgan Stanley's Charlie Chan.
Thanks, CEO, CFO. So I actually want to follow-up Bill's question on your productivity and CapEx. So first of all, can you comment on recent shares about the EUV throughput issue? And is that related to your more volatile CapEx range? This is my first question.
Thanks.
I think Charlie is asking whether or not we can give additional color about the rumored EUV throughput problems and if that's the problem that causes our CapEx to be more volatile?
The EUV progress, as we said, we move smoothly and we got encouraging result. So that's why I say we have confidence to support the NCM plus volume production and the Gen5 volume production in 2020. Now you're asking about why we increase the CapEx because we want to buy a very advanced EUV tool called high NA tools and that required that we put some deposit to book the machine slot. That's what we did. And we are happy that the high end machine will be greatly for us to use in the future.
That way, further improve the efficiency and hopefully that increase the productivity, lower down the
cost. C. Wei:] Just
to make sure, it's a high numerical aperture again, EUV. It's not the same EUV while doing that. It is the next generation EUV tools. We work with SML to book the tool early, and those tool currently is targeting at technology beyond 3 nanometer.
Yes. Thanks for clarification because investors in general are a little bit nervous about this EUV progress because it's associated with so called more slow progress, right? So the rumor is that the daily throughput is now around 1,000 workers per day, right? So it's not that economical. And my worry is that whether they can affect your 7 nanometer plus cost structure because you still need to use EUV, but the layer of the EUV usage could be fewer than your previous station.
So anyway, that is what market is changing about. And my second part of the question is about the end markets, okay? So it's very difficult market to predict. We understand, but can you clarify the your comment on the weak smartphone demand? Because I think now China smartphone, at least you see some seasonality, right?
So why that is not a reflect to your revenue guidance upside? And according to our analysis, we think some of your customer shrink their die size significantly this year. Is that affect the wafer demand for you at 60 nanometer? That's my second question.
The question is quite long, but let me give you some explanation. Yes, we do see China's market start to pick up on the smartphone. But in TSMC, we in our smartphone market segment, there's some very high end the smartphone is a little bit soft. So that's why we projected that it's going to be continuous softening. Okay.
It's not because of China market. That start to pick up slowly.
Okay. Thank you.
Now we would like to go to the lines for questions. Operator, could you please get to the first caller on the line? Thank you.
Our first question today comes from Brett Timpson from Allied Research. Please go ahead. Thanks very much. I just had a follow-up question on crypto for CC Way. You mentioned it was strong crypto was strong in Q1.
Can you confirm if this is double digit percent of sales or not? And then just looking at your revised outlook for 2018, can you help us how we should think about crypto in second half? Do you expect crypto to be flat or up or down versus the first half in your revised outlook? Thank you.
All right. Brett, let me just repeat your question again. You were asking about the cryptocurrency and where C. C. Said the demand was growing in the Q1.
So you are asking if 1st quarter demand accounted for 10% of the total first quarter revenue? And then second half cryptocurrency demand, will that be larger or smaller than the first half cryptocurrency demand? That's your question, right? C.
Wei:] Thank you. C.
Wei:]
All right. C.
Wei:] Okay.
Let me answer the question carefully because I already said the uncertainty of cryptocurrencies are mining as we forecast in the future. But so far, we still think that cryptocurrency in the second half still have a higher demand than the first half. And they are using more advanced technologies. They will move into the 7 nanometer that I can share with you.
And can you confirm whether it was double digit, 10% of sales or not in Q1 for crypto?
I won't give a specific number of how much of a percentage you are in terms of the revenue, but our sales is increasing.
Okay. Okay. Thank you very much. And just a follow-up on 22 nanometer ULP and 12 nanometer ULP. Can you give us an update on timing and whether there's been any change in how you're thinking about the ramp of 22 and 12 nanometer ULP?
Thank you.
Doctor. Sun, repeat the question.
Well, Brett wants us to give him an update on the development of 22 nanometer ULP and 12 nanometer ULP and ask if we have any changes in the plan such as timing, schedule, market?
C. Wei:]
No, we don't change the plan. It continue to be a very important technology to TSMC. And if we change the engine, we speed up the progress. That's what we are doing. And because of where our customers are moving from 28 to 22 and from 16 to 12, so we have to speed it up of all the progress.
Okay. Thank you very much.
Operator, we can go to the next caller on the line. Thank you.
Our next question today comes from the line of Mehdi Hosseini from SIG. Please ask your question.
Thank you. One more follow-up clarification, one question. Just going back to your comment regarding days of inventory that were not during Q1. And I think Laura mentioned that it had to do with 10 nanometer products, especially with the smartphone. Just want to make sure the weakness that you've seen in the smartphone market, especially the premium products in the Q2.
That has to do with inventory digestion and perhaps as the new products ramp in the second half, would the premium smartphone show a rebound in the second half? So in other words, is Q2 kind of a digestion energy digestion period? And I have a follow-up.
All right. Maybe let me try to repeat your question and see if it's correct. You are asking about the increase in our days of inventory. And then you are asking if the demand of the premium smartphone picks up in the second half of the year, does that mean that we will begin to digest inventory in the second quarter?
Yes.
Thank you.
The days of inventory for TSMC in 2nd quarter was 63% 1st quarter 63 days. I explained it because we are ramping down 10 nanometer capacity and we will massively ramp up 7 nanometer capacity. So we are in a migration period. So we purposely build more inventory on 10 nanometer, so we can move the equipment to 7 nanometer, so we can save the CapEx, That's the thing. You're asking whether our days of inventory will go down?
Not necessarily, because we are ramping up 7 nanometer, which has much longer cycle time. So I do not expect our days of inventory will go down or will change much in second half of the year.
Okay. Very clear. Thank you. And one question I have regarding EUV and migration. I understand that 7 nanometer and EUV insertion doesn't really have much of a change to the design rule like a place to route.
But there would be a material change at 5 nanometer. In that context, when would you be able to provide those design libraries developed for 5 to the design community so that they could better evaluate cost and benefit of EUV and PHY?
Well, maybe you are asking us if because we are using EUV, there will be some material changes at 7 plus nanometer and therefore, do we provide design library or all these other design ecosystem support for to incorporate those changes.
And just to clarify, I think some of those changes will impact 5 nanometer more so than 7 nanometer plus.
Please repeat your question again.
Sure. Okay. I think as we migrate from 7 to 7 plus and with the inclusion of EUV, there may not be much change to design, especially with the back end of the design place and route. But I do expect material change at 5 nanometer. In that context, I think those design libraries developed for 5 would be very critical.
It helps design community to better evaluate cost and benefit. And I want to understand, when I hear from management, when will those design libraries be provided so that we can better evaluate demand for 5 nanometer with increased EUV insertion?
So in
the design library with respect to N5, 5 nanometer, given 7 plus and 7 are pretty much stuck. So N5?
Yes. N5 technology development is well on track. And some of our customers' function block already designed in. So we let me comment on let me I captured the first question is N7 to N7 plus the design porting we have demonstrated with several customers showing that the porting is that work is relatively easy. The only major difference is if you want to increase the density, you just change the standard cells, which have a tighter density.
The rest is we have an algorithm porting algorithm to support our N7 customers. N5 is a new design. So we thus provide the design ecosystem start from early. And today is well on track and we do support our customers' N5 design when they call upon.
Okay. So does that mean that you have already finalized the number of layers that EUV is going to be inserted for?
Your question is, is EUV insertable on N7?
No, no. My question is, if you already have provided cell libraries, does that imply that you have already finalized the load count for 5 nanometer that would include EUV?
So you are asking us if we have finalized the number of layers that we will be using EUV at N5. Have we finalized that number? Yes.
Yes. It's already finalized.
Is that closer to 10?
We do not disclose that. Thank you. And we are coming back to the floor. Okay. Thanks, Maggie.
Coming back to the floor, the next question will be coming from CL Securities, Sebastian Ho.
Thank you. My first question is to follow on the CapEx raise for this year. Laurel already mentioned about the CapEx rates, half of that is driven by the what's that called, mass making, mass making because of the higher demand from customer design activities. So can you elaborate on that?
Okay. Actually, we have seen increasingly a lot big increase in customer tape out requirement. And we found out our e beam capacity is insufficient. And those tape out in business is very good business for TSMC. So in order to facilitate customer for their product launch, so we need to add Yiping capacity immediately.
That's the 500,000,000 I was referring to.
Sebastian, let me add some color on this. Okay. We do see an increase of tape outs and we do see the increase a lot from AI, networking areas. And some are from the fabless company, but some are from the system start ups and some from the even the cloud service providers. So some in this area, in the AI area, we think we are casting a bigger net in our common being accommodating more customers today.
How would that into faying into volume? We're yet to be seen, but we are very happy to see the increase of tape out and participation of new product designs in more companies.
I see. Just a follow-up on that because last quarter, you offered the expected 7 nanometer Taibao by the end of this year will be 50. And this quarter, C. C. Earlier mentioned again, it will going to be 50.
So if we just judging from the number, it doesn't increase. And but now you're raising the MAX making CapEx. So does that mean that actually the actual numbers internally you look at is actually increasing? Real tape outs.
Yes. Other notes.
Okay. Second question is that if I just do some calculation on the guidance revision for this year, Earlier, it was 10% to 15%, and now it's about 10%. So that probably if we use a midpoint, probably about close to USD 1,000,000,000 dollars of revenue decline. And remember, the last quarter, Chairman talked about the first half year over year is about slightly above 15%. And now if we bake in the new guidance for Q2 plus the Q1, we already know, is about 12%.
So that's about like USD600 1,000,000 full in first half. So does that mean and earlier you mentioned about the smartphone going to be weak and but which means that there will probably another USD 400,000,000 revision a downward revision in the second half this year. So would that be mainly driven by smartphone again or the other applications? [SPEAKER
UNIDENTIFIED COMPANY REPRESENTATIVE:]
I think I just described it is a continued weakness of the smartphone demand and uncertainty in the cryptocurrencies mining, so we judge it down.
So just of all, on the uncertainty of cryptocurrency mining, so can I assume that even though it's hard to predict, can I assume that you're baking in a more conservative assumption right now for second half compared to Q? Yes. Okay. Thank you.
Next question will be coming from Goldman Sachs, Donald Lu.
First
question is what is the new guidance now for 7 nanometer and the 10 nanometer as a percent of revenues by Q4 this year? That's my first question. The second question is going back to this more tapered activities. I think previously, when you move on to a new node, the tape out activities has been decreasing, meaning more markets consolidation, etcetera, if I'm correct. But why suddenly you see there's more activities from different customers?
Is there a reason for that? Or is there going to be a new trend for the industry?
Donald, your question regarding the revenue contribution from 7% and 10% in the 4th quarter, is that right?
Q4 this year, Dada.
Q4 this year.
Yes, forecast.
Q4 this year, okay. 7 nanometer, as Qiqi mentioned, for the whole year, will be about 10%. But since we are ramping heavily from 3rd quarter through 4th quarter, and we expect the 7 nanometer will contribute more than 20% in 4th quarter revenue. Meanwhile, we are ramping down 10 nanometer. 10 nanometer contribution in Q1 was 19%, and we expect that number to be single digit in the Q4 this year.
Well, Don, I think it's a new trend. I think we earlier, we see the customers consolidating, but now we see even smaller company doing the design and tape outs. And that I think particularly in the AI and networking area. So I think the system architecture today is much freer, much more customized for each new application than before. And therefore, the each system company, even service provider are willing to participate to for the silicon design in order to optimize their system performance or service quality.
Sorry, just to follow-up, is that because the barrier to entry are lower? Or is that those system companies and startups are getting have too much money?
I think both. The barrier is definitely lower because all the EDA tools and is much more matured today. And also, the venture capital supply of money is definitely in certain segments is increasing. And but mostly, I think the system spec, the chip specification currently is up to the ingenuity of the system designer, not just an off the shelf product, existing products.
Thank you.
All right. Next question will be coming from HSBC's Stephen Puleo.
Just a couple of quick ones here. On 28 nanometer softness, you mentioned it was a lot of the crypto guys looking to accelerate to more advanced nodes. I'm curious beyond crypto at 28 nanometer, is it also broader based weakness at 28 nanometer beyond crypto?
Yes, we still have you are talking about 20 nanometer? 28 nanometer.
28 nanometer. You mentioned that
being relatively softer for us. C. Wei:] 28 nanometer.
C. Wei:] Let me give you some example. Actually, this year, we see the highest tape out number from 28 in 20 8's history. This year's tape out is still higher, okay. So that give you some color on as I said, some of the product moved to high volume product, most of them are mobile, But then all others, like they move into this area.
So the Taobao number is still as high as last year and last year is the highest number. That's a 28%. So other than cryptocurrency, yes, a lot of things we're talking about automotive, IoT and some of the ISP, those kind of things, moving. Understood. I just want
to make sure the breath was still there. The other question I have is if you could talk a little bit about manufacturing cycle times, going from 16 to 12 to 10 to 7. How long is this? When do you need to be starting wafers now? And I especially want you to talk about a relative to I know Elizabeth says we shouldn't pay attention to monthly sales, but you just did a 60% month on month, and that's unprecedented in my model.
So how are we to look at kind of the monthly volatilities as well as the lengthening manufacturing cycle times? [SPEAKER UNIDENTIFIED COMPANY
REPRESENTATIVE:] We are improving our manufacturing cycle time from node to node. We continue to improve. So but there are more layers on each technology node. They increase dramatically like from 60 some to 70 some to 80 layers. And for the cycle time, we are our fab improved quite a bit, but I won't give you the actual number.
Steven, you're asking the month to month revenue?
I was just surprised at
the volatility in the March monthly sales. Okay.
I am like Elizabeth. Don't pay too much attention to it. It's a shipment is based on customer requirements. So there is a seasonality and there is no to no requirement, different customer may be different. So it's very hard to predict monthly revenue.
The next question will be coming from Nomura's Aaron
Chen. After these initial discussions, I got one question, which I didn't expect at the beginning of the call. Can I say that the blended ROIC per tap out of TSMC will be coming down in the future because of the new trend that more evolves from the small SSD size and system companies, but they are they might not be able to generate big revenue per project? So but this trend is new on my understanding. It seems to be kind of a downtrend versus what TSMC was seeing in the past cycle.
But don't get me wrong, TSMC is still outstanding. But just compared with Huayu's flow in the past, the new trend seems to be unfavorable to probably anyone in the market.
Well, if you look at our EVO's margin, and that's we welcome more tape outs just for the mask making. But of course, I think the trend, we see it as more designer getting into the new product designs, okay. They are early entrepreneurs. That's where how we grow our customer base back beginning. If you look at the cryptocurrency designer, they are very smart people.
And the mining machine, they have very integrated system designs. They are break all the barriers, pushing to the pushing the envelopes. And those designer will come into later on in today, in cryptocurrency, later on in the AI or blockchain and so forth. That is our ecosystem part of our ecosystem. And we are we are very happy to see our ecosystem grows to pave with the future product innovation.
Thanks.
Well, we understood. One follow-up. Another angle to support my judgment is that you are increasing the high end of your CapEx per year to RMB 12,000,000,000 versus in the past, which was RMB 11,000,000,000. But your revenue target is still to grow by 5% to 10%, which means you are spending more for the same target. So that's also another angle to support my judgment from Nicole.
So that's why I got this thought.
The investment is for the yes, we the investment the EUV investment is for the future. Next technology beyond 3 nanometer. And mask making is for the purpose of what I said. It's possible that the we don't see immediate return, but that is our long term investment target
purposes.
Thank you very much.
Next question will be coming from JPMorgan Skokul.
Thank you very much.
I have one question on AI, HPC, etcetera and the growth going forward. I think C. C. Mentioned that you're expecting 50% attach rate for accelerators in data centers going forward. That's a pretty high number compared to probably single digit today or probably low double digit.
So a couple of years back, you had given a guidance of 5% to 10% with half of the growth coming from mobile and half of the growth coming from HPC and other areas. Could you update the component of that guidance? Does it mean that now smartphone is probably not going to grow from here? Is that how you think about it? And almost all of the growth comes from new areas like HPC, IoT, Automotive.
And given the very aggressive numbers that you have put out, some of your customers like NVIDIA have put out as well a couple of weeks back, what is the tipping point that you need to see to be more confident on areas like HPC? [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:]
Okay. Mobile is still the most important segment that we are in. However, as I mentioned, the AI and 5 gs communications are in the future that this megatrend that makes the HPCs very, very important. And so we see a strong demand that what contributed to THMC's revenue. Exactly what we can expect that in the future, I would say that they are getting more and more important and higher than we thought last year actually.
Lee, you
want to add something?
Yes. The your question, yes, we earlier the crystal ball we saw before, the smartphone is going to give us in 5 years, it's going to give us 50% gross dollar. Now it looks smaller, like 40 a little bit more than 40%. But HPC used to be 25%, but it looks like it's going to be close to 40%. So HPC, as we look forward, it seems stronger than we saw before and smartphone, a little bit weaker than we before.
And IoT and Automotive, it's about the same. But to be honest, this goal is a time. And even in smartphone, we look at the 5 gs transition. That will be another industry transition. If you look at the 4 gs transition, the demand has changed the whole landscape.
So but that's what we look at today, and we'll go along with the industry doing the migration and update for you.
If I could
just add ask for some more perspective on this. A lot of new tape outs, increasing mass capacity, feels like the beginning of another new product cycle typically. I mean, could you compare how this looks like compared to, say, 10 years back at the beginning of a smartphone product cycle? Probably a lot of your current big customers were much smaller at that point in time asking for more tape outs as well than mass capacity. Could you compare how it feels like today versus, say, 10 years back in the beginning of the smartphone cycle?
We don't know. We don't know. It's just like smartphone. When smartphone came, we did not know. So really depend on the usage model and application of those products.
But we just cast a wide net and make sure we support all the innovators. Thanks.
All right. Questions will be coming from Credit Suisse, Randy Abrams.
Yes. Thank you. One follow-up question on the gross margin with the midpoint at 48% in the second quarter. How should we think about second half where you normally have the peak season, you're also implying at least half on half growth. Is it still the target?
I think in the past you said close to 50%. Is that still kind of the range we'd get some leverage first half to second half?
I think the foreign exchange rate, if you compare with last year, will be a hit for the whole year. It's number 1. And the second half, we are expecting more 7 nanometer coming on the line, which will have 2 to 3 percentage point dilution to corporate margin. So these two factors are negative. So I think we you should not assume anything will be same as 2017.
And then one question on the tool reuse. 7 plus has a lot of reuse. For 5 nanometer, where it's a bigger change with EUV, does that change the equation that it's different? Or do you think you can keep that same conversion down to 5?
We are seeing the every generation new migration will be utilized more than 90% of the previous generation tools. So the convertibility is pretty high even for 5 nanometer.
CEO Securities, Sebastian has a follow-up.
Thank you. Just one. On the inventory turnover days increased, if you compare it on the YY perspective, increased almost 20 days. Laura already mentioned about this, some roll wafer inventory prebuilt for 7 nanometer. So I wondered how much of that is just a prebuilt for the 7 nanometer ramp?
Or how much of it is because the roll wafer is more expensive today, so we want to buy more now?
Preview has higher weighting than the roll wafer. Roll wafer will be a few days. The remaining are the preview and complexity in technologies. You're comparing to a long time ago, right? See 20 days difference, right?
So does that mean that you don't need to buy them as many wafers in following quarters?
I don't quite get your question.
Because you already prepared some of the raw wafer right now for second half ramp. And does that mean that you don't need to buy as many as roll wafers in the second half this year compared to Q1? Thank you.
Follow-up question from Sinolinks Andrew.
My follow-up question, first one is regarding CapEx to sales ratio. I remember last time, Doctor. Chen mentioned the long term will stay at 20% to 30%. But for this year, we raised a little bit. So it's about 32%, 33%.
And are we still staying this assumption for the next few years, 20% to 30% capacity to sales ratio?
Yes, that's still true at 30% level, around 30%.
So we change from 20%, 30% to 30%?
That's within 25% to 30% anyway. This year, it will be higher. For the reason I was just mentioning, slightly above 30%. And if you look at a couple of years down the road, it will be around 30%. Some year, maybe lower, slightly lower than 30%, some year at 30%.
So more like 25% to 30% range. Yes.
That's still true.
Understood. Thank you.
All right.
My last question is, are we really gaining back the customer we are losing on 14 nanometer and 10 nanometer for 7? I did not mention any customer name.
We are the only 7 nanowire providers, so you can imagine that the answer of your questions.
Thank you.
Well, I'm just going to for the interest of time, only going to limit 2 questions. So one person each, okay? Citi's Roland first and then Deutsche Bank's Michael.
Thank you. For Citi, now you are ramping up 15 nanometer per tonne in China. So what are you going to do if customer needs to do the info or coax packaging there? Are you going to build the info or COOS capacity layer? Or are you going to logistically to ship back to Taiwan?
So this is the info in the callouts. C.
Wei:] That will depend on customers' demand and customers' need. We always support them as much as possible if we can support locally, what do we?
I mean
today is not in our plan yet.
Okay. So when are you going to build COOS or C.
Wei:] It depends on customers' demand.
C. Wei:]
Mitchell mentioned 7 nanometer will be very massive, but will most of customers shift to 5 nanometer or they will skip 5 nanometer and shift to 3 nanometer directly?
Your question is about those 7 nanometer customer. Customer will
shift to 5 nanometer or some customers skipped
5 nanometer? We developed the technology working with the customer to meet their product design, their product's back end, their product's performance. So whether they move to 5 or not, it depends on their products nature. And so some of them, they definitely will move. Some of them probably will stay in 7, 7 plus.
So in the
past year, 2020 or 2010 seems to be a sure no, right? So will be will we see the 5 nanometer shown no or?
No, 5 nanometer will be a very long node and useful and very cost effective.
And we'll start in 2020. Okay. With that, we will conclude our today's conference. Please be advised that the replay of the conference will be accessible within 3 hours from now. Transcript will become available 24 hours from now, both of which will be available through our website at www.tsnc.com.
So thank you for joining us today. We hope you will join us again next quarter. Goodbye, and have a good day.