Happy New Year, everyone. Welcome to TSMC's 4th quarter 2017 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 through TSMC's website at www.tsmc.com. If you are joining us through the conference call, your dialing lines are in listen only mode.
As this conference is being viewed by investors around the world, we will conduct this event in English only. The format for today's event will be as follows: First, TSMC Senior Vice President and Chief Financial Officer, Ms. Laura Ho, will summarize our operations in the Q4 2017 followed by our guidance in the Q1 of 2018. Afterwards, TSMC's 2 co CEOs, Doctor. Mark Liu and Doctor.
C. C. Wei CFO, Ms. Laura Hall and TSMC's Chairman, Doctor. Morris Chang, will jointly provide our key messages.
After that, Chairman Chang will host the Q and A. For those participants in the call, if you do not yet have a copy of the press release, you may download it from TSMC's website at www.tsnc.com. Please also download the summary slides in relation to today's earnings conference presentation. As usual, I would like to remind everyone that today's discussions may contain forward looking statements that are subject to significant risks and uncertainties, which could cause the actual results to differ materially from those contained in the forward looking statements. Please refer to the Safe Harbor notice that appears on our press release.
And now I would like to turn the podium to TSMC's CFO, Ms. Laura Ho, for the summary operations and current quarter guidance.
Thank you, Elizabeth. First of all, Happy New Year. Good afternoon. Thank you for joining us today. My presentation will start with financial highlights for the Q4 and a recap of 2017 for the whole year.
And after that, I will provide the guidance for the Q1. 4th quarter revenue increased 10.1% sequentially to TWD 278,000,000,000 mainly driven by major mobile product launches and continuing demand for cryptocurrency mining. Gross margin increased 0.1 percentage points sequentially to 50.0 percent as the benefit from higher capacity utilization and the inventory valuation adjustment helped offset the impact from continued 10 nanometer margin dilution and NT dollar appreciation. Total operating expenses increased by TWD 1,300,000,000, but thanks to operating leverage, only represented 10.4% of revenue versus 10.9% in the prior quarter. And operating margin increased by 0.3 percentage points sequentially to reach 39.2%.
Overall, our 4th quarter EPS reached $3.83 and ROE was 26.9 percent for the quarter. Now let's take a look at wafer revenue contribution by application. During the Q4, Communication and Computer increased 20% 8% from the prior quarter, respectively, while Consumer and Industrial Standard decreased by 38% and 4%, respectively. On a full year basis, computer and industrial standard increased 25% 14% year over year, respectively, while Communication and Consumer decreased 2% and 10%, respectively. Now let's take a look at the revenue by technology.
10 nanometer process technology continued to ramp strongly and accounted for 25% of total wafer revenue in the 4th quarter. The combined sixteen 20 contribution was 20% of total wafer revenue. Advanced Technologies, meaning 28 nanometer and below, accounted for 63% of total wafer revenue, up from 57% in the 3rd quarter. On a full year basis, 10 nanometer contribution reached 10% of total wafer revenue in 2017. The combined 16/20 contribution was 25% of total wafer revenue.
Advanced Technology, 28 nanometer and below, accounted for 58% total wafer revenue, up from 54% in 2016. Moving on to balance sheet. We ended the 4th quarter with cash and marketable security of TWD 649,000,000,000, an increase of TWD 148,000,000,000. On the liability side, current liabilities increased by TWD 60,000,000,000. On financial ratios, accounts receivable turnover days decreased 2 days to 40 days, while days of inventory decreased 1 day to 52 day.
Now let me make a few comments on cash flow and CapEx. During the Q4, we generated about JPY 80,204,000,000,000 cash from operations and spent $61,000,000,000 in capital expenditure. As a result, we generated free cash flow of RMB143 1,000,000,000, and our overall cash balance increased RMB 145 1,000,000,000 to reach RMB 553,000,000,000 at the end of the 4th quarter. In the U. S.
Dollar term, our 4th quarter capital expenditure reached $2,100,000,000 and the total CapEx for the whole year was $10,900,000,000 Now I would like to give you a recap of our performance in 2017. 2017 was another strong year of for TSMC as once again, we set a new record in terms of both revenue and earnings despite a 5.5% depreciation in the NT dollars. Our revenue grew 9.1% year over year in U. S. Dollar terms and 3.1 percent in NT dollars to reach NT 977,000,000,000 as we saw wafer shipments increase across nearly all technology nodes.
Gross margin increased 0.5 percentage point to reach 50.6% in 2017 as continued operating efficiency improvement and better capacity utilization more than offset the headwinds from the unfavorable exchange rate and the 10 nanometer margin dilution. Our operating margin declined 0.5 percentage point to 39.4 percent as we increased our R and D spending ratio to 8.2% of revenue, reflecting a higher level of 7 nanometer and 5 nanometer development activities. Our effective tax rate for 2017 was 13.5%, same as in 2016. And full year earnings per share was TWD 13.23 On cash flow, we spent TWD 331,000,000,000 in capital expenditure or TWD 10,900,000,000 in U. S.
Dollar term, while we generated TWD 585,000,000,000 in operating cash flow and TWD 255,000,000,000 in free cash flow. We also paid TWD 182,000,000,000 in cash dividend and an increase of 17% from 2016. Now I have finished my financial summary. Now let's turn to the Q1 guidance. Based on the current business outlook, we expect 1st quarter revenue to be between $8,400,000,000 $8,500,000,000 which is an 8.3% sequential decline but a 12.6% year over year increase at the midpoint and represent a new record high in terms of 1st quarter revenue.
Based on the exchange rate assumptions of 1 to NT29.60, our first quarter gross margin is expected to between 49.5% 50 51.5%. Our first quarter operating margin is expected to be between 38% 40%. This concludes my remarks. Now I would like to turn it over to Mark for his comment.
Thank you, Laura. Good afternoon. Firstly, I would like to talk about our everyone's foundry strategy. Being everyone's foundry is the strategy TSMC takes by heart. Through our technology and services, we built an open innovation platform where all innovators in the semiconductor industry can come to realize their innovation and bring their products to life.
As our customers continue to innovate, they bring new requirements to us, and we need to continuously develop new capabilities to answer them. In the meantime, they utilize those shared capabilities such as yield improvement, design utilities, foundation IPs and our large scale and flexible capacities. In this way, this open innovation ecosystem expands its scale and its value. We do not compete with our customers. We are everyone's foundry.
Now on cryptocurrency demand. In the past, TSMC's open innovation ecosystem incubates numerous growth drivers for the semiconductor industry. In the 1990s, it was the PC chipsets. Then in the early 2020s, the graphic processors. In the mid to late 2020s, it was chipset for cellular phone.
Recently, start 2010, it was for smartphones. Those waves of innovation continuously sprout in our ecosystem and drive the growth of TSMC. Lately, we observed the demand from cryptocurrency mining surged. Cryptocurrency mining requires massive high performance and low power computing. TSMC's advanced technology and productization serves services suits it well.
We have sized 2018 cryptocurrency mining demand carefully. Since it is still in its early stage of development, it is difficult for us to forecast its demand too far into the future with accuracy. However, as long as the cryptocurrency miners can derive positive returns, demand for TSMC wafers will continue. Furthermore, we are quite certain that deep learning and blockchain technologies, which are the core technology of cryptocurrency mining, will lead to new waves of semiconductor innovation and demand for years to come. Now on N5 progress and EUV readiness.
Our N5 technology development is well on track for 1Q 2019 risk production. We already achieved good SRAM yield. Device development is also well on plan. Progress on both are similar to our N7 at the same development stage. N5 customer test chips are already running in our fab.
We also made significant progress in improving EUV capability and the manufacturability. We have been consistently demonstrating high yield on N7 plus and N5 development lots. EUV source power is now operating at 160 watt to support our N7 and N5 development activities. EUV scanner with source power of 2 50 watt will has been installed has been installed in our fabs. Capability of in house EUV pedicle making has also been established with low defect level and good transmission properties.
So we are confident that our EUV technology will be ready for high volume production for N7 plus in 2019 and N5 in 2020. On the growth platform of our mobile high performance computing, IoT and automotive. In 2017, last year, all our growth platforms, mobile, high performance computing, IoT and Automotive, registered double digit growth revenue growth, growth in U. S. Dollars.
Moving into 2018, growth of these platforms continue. We estimate that the high performance computing platform will register the strongest growth in U. S. Dollars. For smartphone, smartphones will continue to include new features such as 3 d authentication, 3 d sensing, AI for face and voice recognition and 18:nine display.
Our smartphone customers are taping out 7 nanometer for premium phone and 12 nanometer for mainstream phones, both are on track to ramp in 2018. In 2018, high performance computing business will enjoy the most growth from GPU and cryptocurrency ASICs. The key technologies for high performance computing are 16 and 12 nanometer and 7 nanometer together with our COOS technology. IoT business growth in 2018 mainly comes from SmartVoice Assistant Devices, application processor for wearables and wireless MCU for smart homes. Our 22 ULP ULL, ultra low power, ultra low leakage technology will be key to all these applications.
Automotive business in 2018 will come mostly from increased IDM outsourcing to TSMC in new technologies. We have built automotive specific design ecosystem on 16 FFC in 2017, and we'll complete that on N7 in 2018. TSMC's superior manufacturer manufacturing quality, sufficient capacity support and our long and our long term automotive supply commitment are the key enabling elements to expand this business. Thank you. I'll turn the microphone to C.
C. Wei.
C. Wei:] Thank you, Mark. Let me talk about the near term demand and inventory. We concluded our Q4 with 10% Q over Q growth in U. S.
Dollar, which was slightly above the guidance we gave 3 months ago. Despite the continued inventory reduction by our customer, 4th quarter's strong result was mainly driven by a major smartphone release, which is based on our 10 nanometer process with InFO and the strong demand in cryptocurrency mining. Concluding 2017, semiconductor excluding memory growth was 9%, while Fuanzhi grew 8%. TSMC's revenue grew 9% in U. S.
Dollar and accounted for 56% of the total foundry market segment share. Moving into Q1 2018, our revenue in U. S. Data is likely to decline by about 8% as lower just guided. This is mainly due to smartphone seasonality, offset partially by continued demand for cryptocurrency mining.
Fabry's DOI exceeding 2017 was a few days above seasonal level. Moving into 2018, we forecast fabless DOI to trend up, but we'll track seasonal pattern. Now let me talk about N7 and N7 plus So far, we have already taped out 10 customers' product in 7 nanometer, and we are currently qualifying these products in 2 different fabs in preparation for volume production starting in Q2 this year. During Q1 2018, we expect to tape out another 10 products. In total, we expect to have tape out more than 50 customer products in 7 nanometer by the end of 2018.
Major application covered by these tape outs are in mobile, game, GPU, FPGA, networking and AI. In essence, almost every area that requires high performance and lower power consumption will benefit from TSMC's 7 nanometer solution. In terms of performance, power, area density and schedule, we believe our 7 nanometer solution is leading in the foundry industry. We will introduce our N7 plus technology later this year. Here, we plan to replace some emerging layers by deploying a few layers of EUV processes.
Currently, we have already demonstrated the same level of 256 megabit SRAM yield at N7 plus as compared to N7. Let me move to N10 status. We successfully ramp up 10 nanometer in 2017. 10 nanometer contributed 25% wafer revenue in 4Q 2017, up from 10% in 3rd quarter. Full year 10 nanometer accounted for 10% of our total wafer revenue.
Both defect density and device performance are meeting our targets. Despite that most of our current 10 nanometer mobile customer will start to migrate into 7 nanometer this year. We continue to expect a year to year growth of our N10 business in 2018, driven by application processor, cellular baseband and ASIC CPU. Now let me touch about N16 12 nanometer demand outlook and competitive position. TSMC continues to enhance technology performance for every node and 16 nanometer is no exception.
We have moved from 16 TwinFET to 16FF plus and then to 16FFC. Now we are moving into 12FFC. With 12FFC, FFC, we can improve the device by about 10% from 16 FFC or reduce the power consumption by about 20%. All the while we expect to reduce the die cost as well. It is the 4th year today that our N16, N12 enter into high volume production, and we still expect to see very strong demand for this node, cryptocurrency, AI, GPU and RF products.
Although other countries may have planned to enter into 12 nanometer node, TSMC achieved lowest defect density and enjoys a very competitive cost structure. As a result, we expect our market segment share in this node will be increased. Now let me move into 28 nanometer. Similar to 16 12 nanometer node, TSMC continues to improve the N28, N22 performance from 28 LP to 28 HP to 28 HPC and 28 HPC plus and now to 22 UERL and UERP, which stands for outward low leakage and outward low power. The newly introduced 22 EURP EURO while enhanced performance by increasing speed by about 15% or reduce the power consumption by about 25% with an overall die area shrink of 5% to 10% as compared with 28 HPC plus Both 22 EOP and 22 EOER are ideally suited for IoT and RF related applications.
Beyond continued performance enhancement, our excellent manufacturing capabilities and our significant investment in capacity foundry. Last year, we saw about 240 product tape outs using our 2,00822 node, which was a record high since 28 nanometer N2 volume production in 2011. We expect this tape out activity to continue in this year, and we are confident that our high market segment share in the 20 8, 2022 technology node will be maintained. Now we will talk I will talk about advanced packaging. I will update 2 of our advanced packaging technologies, chip and wafer and substrate or CoWoS and integrated fan out or InFO.
We have developed CoWoS to support the requirements of HPC applications, particularly in the area of AI, data server and networking. This is the 6th year that our CoWoS technology has been in production. We see more customers engaging with us on this technology, and we expect to receive more than 30 tape outs in the next 3 years. Most of the products today are using 16 nanometer technology. We are actively developing cohorts for 7 nanometer starting from this year.
TSMCG InFO has entered into high volume production for the 3rd year with majority of the adoption by mobile products. Beyond mobile, we are working to expand InFO to automotive and HPC related applications. For example, we developed the InFO on substrate or InFO OS for HPC products and will qualify this technology in first half of this year and expect to enter production later this year. Today, we are working with various customers using InFO technology to cover their products ranging from N28, N16, N7 and N5 technologies. Last, let me talk about the 19 fab update.
We expect to expand our business in China and to enhance our support to local customer with the Nanjing fab. Planned capacity for this phase is 20,000 wafer per month 12 inches using 16 nanometer and 12 nanometer. We broke ground for this fab in July 2016 and have now almost completed moving all production tools. We have already started initial engineering wafer. More than 1,000 engineers are working in this fab today.
Customers at Nanjing fab come from both China and other regions with a variety of products in the initial ramp. Due to the strong demand our 16, 12 nanometer technology node, we have poured in the output schedule by a few months to May of 2018. We are confident that we will be able to produce a good result of our 16 12 nanometer node in Nanjing. That's all I have. Thank you for your attention.
Now turn
Let me make the comment on CapEx and outlook for future capital intensity. Now let me start with CapEx. Our 2018 CapEx is expected to be between $10,500,000,000 to $11,000,000,000 which is essentially flat without 2017 CapEx. About 73% of the capital budget will be used for capacity buildup for the advanced technologies, mainly 7 nanometer, followed by 5 nanometer. Another 17% of the capital budget will be used for R and D, back end and mask.
As I stated in our last investor conference 3 months ago, in order to support our 5% to 10% growth in the next few years, we expect our CapEx in the next few years to stay a few percentage point more than USD 10,000,000,000 This implies that our CapEx in the next few years will remain at a similar level to what we have spent last year and what we expect to spend this year. Although our leading nodes capital costs continue to increase due to increasing process complexity, we are able to offset its impact to our CapEx by further optimizing our capital planning and productivity improvements. With a flattish CapEx going forward and the revenue CAGR of 5% to 10%, we expect capital intensity, which is the ratio between CapEx and revenue, to gradually decline from the current 30% to 35% level to 20% to 30% level in the next few years. However, if any special revenue growth opportunities comes along, we will certainly respond to it with appropriate CapEx. The Chairman may comment now.
I will now make some comments on TSMC 2018 outlook. First, some comments on the semiconductor market. We estimate the supply chain inventory at the end of 2017 to be still a few days above the seasonal normal level. We estimate that the total semiconductor market will grow 6% to 8% in 2018, 6% to 8% this year. The semiconductor market, excluding memory, will grow by 5% to 7% this year.
And total foundry revenue will grow by 9% to 10% this year. Now for TSMC. We expect 2018 TSMC revenue in U. S. Dollars will grow by 10% to 15% over 2017 10% to 15% in U.
S. Dollars over 2017. Our revenue seasonality will be similar to 2017, stronger in the second half than in the first half. Our revenue, Y o Y year over year growth rate now, however, we'll be stronger in the first half than in the second half. Basically, we expect the first half twenty eighteen revenue growth rate in U.
S. Dollars will be slightly above 15% over the first half of twenty seventeen. And the second half twenty eighteen growth rate to be slightly under 10% over the second half of twenty seventeen. All these are in U. S.
Dollars. So the slightly above 15% growth rate in the first half and the slightly under 10% growth rate in the second half make up the 10% to 15% total year growth that I spoke about. Is that clear?
Good.
No raised hand means everybody understands, okay? Our strong growth in 2018 is fueled by the growth of 3 of our growth platforms. Those 3 growth platforms that fuel our strong growth this year are the high performance computing, HPC, IoT and Automotive. HPC will grow strongly due to continuing expansion of AI applications in all electronic devices and the continuing demand for cryptocurrency mining, GPU, etcetera. Mobile platform will be flat.
And then for the IoT and automotive platforms, there is considerable strength. You might describe the situation as the acceleration being enormous, but the velocity is still small. For the last 2 years, we have been planning 5% to 10% compounded annual growth rate in U. S. Dollar revenue growth in the 2017 to 2021 period.
We reaffirm the plan. In 2017, our revenue grew 9%. In 2018, we expect to grow our revenue 10% to 15%. 2015% will be an above average year.
All right. This concludes our prepared statements. Before we begin the Q and A session, I would like to remind everybody to limit your questions to 2 at a time to allow all participants the opportunity to ask their questions. Questions will be taken both from the floor and from the call. Should you wish to raise your question in Chinese, I will translate it to English before our management answers your question.
Now let's begin the Q and A session. All right. First question will be from Goldman Sachs, Donald Lu.
My first question is to the Chairman and really nice to see you here. What is your view on in cryptocurrency, which is very have a surging growth in recent months? So that's my first question. The second question is on N7 plus I think if I hear correctly, the performance of N7 plus is similar to N7. Is that correct on speed, performance and power?
I just want to clarify that. Thank you.
Let me answer the first. I think you ought to come along here and repeat. And I heard that he was asking about cryptocurrency. The urge to mine cryptocurrency is very strong. The incentive, of course, depends on the price of cryptocurrency, and the price of cryptocurrency is very volatile.
But the demand right now for the last year has been very strong, and we expect it to continue to be strong. However, we have, in Mark's words, sized the demand carefully. We have sized demand carefully. So I believe that we will both satisfy our customers and we'll not be too optimistic. So you asked the second question of Mark.
C. C, okay.
Well, let me repeat your question, the N7 plus is a performance versus N7, right? Okay. N7 plus actually is about 10% better performance than N7. And in terms of area, it will be also about 10% smaller. But if you put all together like a critical layer that by using EUV, you reduce that critical layer number.
So we expect per wafer, you are getting more than 10% more dies from N7 as compared with N7 plus as compared with N7.
Can you explain the last point? You have about the critical layer, you have less layer with M7 plus C.
Wei:] Yes. Because we're using the EUV to replace some of the emerging layer. So give you one example, one EUV layer can replace the 3P, 3E, replace the 3 layers of immersion. So in calculation of the d pad density, you get more dyes.
All right. The next question will be coming from Credit Suisse and Randy Abrams.
Yes. Thanks, Chairman. Glad to have you back and hope this isn't the last time that we see you here. The first question, I wanted to ask your growth both for the industry and TSMC is above trend. The prior few years were only low single digit for the industry.
I'm curious how much you think is from the structural factors, meaning the new growth platforms and how much you see is coming from cyclical factors we sometimes see in an upturn?
All right. Randy, your question is with respect to our projected growth of this year, both the semiconductor and TSMC are above the industry average trend. And so the higher number, is it due to structural or due to cyclical factors?
C. Wei:]
By structural, you mean permanent?
I'd say a new trend based on the growth platforms, a new trend to higher growth.
Say it again.
By structural, a new trend to higher growth, say from these drivers like IoT, high performance computing?
Well, it's it has always been our intention to be fully competitive. Therefore, the least we want to do is to maintain our market share. And now as I said a little earlier, the total foundry all the foundries in the world, total foundry revenue will grow 9% to 10% this year, and I expect TSMC to grow revenue 10% to 15%. So that means perhaps a small gain in market share. Now what do we do to earn that?
Now, then I have to go back to the offset strengths we have. We're leading technology. We lead in manufacturing capability. And I believe we lead in customers' trust.
Okay. The second question I wanted to ask was this year you already generated excess cash. Excess cash flow after paying the dividend and you're talking about lower capital intensity the next few years. So if you could give a view now on outlook for dividend or broader payout just with this cash generation, if you could start to accelerate what we've seen in the past couple of years?
Laura?
Randy, we had a very good free cash flow last year, and we also believe the free cash flow is going to be good in the future years with what you just said. So we will stick on our plan to gradually increase our cash dividend every year. For next year, I think announcement will be made in February after the Board meeting.
All right. Next question will be coming from Deutsche Bank, Michael
Regarding the 2018 U. S. Dollar sales guidance, so did you have any color for what area actually exceeded your expectations 6 months ago in terms of demand order? Because in the past, you mentioned that long term sales CAGR could be 5% to 10%, right? So is any area demand usually stronger than you expected before or really exceed your internal planning in terms of demand outlook for 2018?
All right. Question from Michael really is that since we have stated our CAGR to be 5% to 10%, and this year, the 10% to 15% is higher than the CAGR of 5% to 10%. So he wants to understand where the extra strength is coming from.
Where it was?
The extra strength, which area we're doing stronger than normal?
Well,
mainly, it's in the high performance computing platform. And as I said a little earlier, that is due to the expanding usage of AI devices in all devices. And I also said it's the continuing strong demand of cryptocurrency mining.
For a follow-up question, so for AI, if HAI, do you put the category smartphone AI into the HPC or you're still putting the smartphone segment?
The AI in
The AI related application, if it is used in smartphone, do we categorize it in HPC or in smartphone? I believe we put it in smartphones.
Okay. Thank you. My second question is regarding 7.0 millimeters
Okay. Is that that one that's what you're asking a second question now or what?
Just a follow-up second question.
Are you asking a second question now?
Yes, second question.
This is your second question actually, right? Well, anyway, let's answer that question. Let's answer that question. I think either Mark or C. C.
Can take it.
My second question is regarding your 7 nanometer sales portion in Q4 this year in 2018, 7 nanometer sales portion in Q4 and the 2018 Q4 this year and the whole year, do you have any forecast? Well, I can say probably the whole year is what will be the 10% revenue. Okay.
All right. We have to move to the next analyst, which is Morgan Stanley's Charlie Chang.
Thanks, Chairman. TSMC is really phenomenal. So my first question is kind of long. It's again on cryptocurrency. First of all, can you quantify the cryptocurrency contribution as you did last quarter?
I remember it was like USD 350,000,000 to USD 400,000,000 in 3Q. Can you give that data for Q4 and 1Q? So given the strength, can TSMC's 60 nanometer fulfill the demand? And will TSMC expand capacity for this cryptocurrency mining? This is the first question.
Thank you.
All right. Charlie's question is, can we disclose the proportion of revenue we get from cryptocurrency mining in the 4th quarter last year and the Q1 this year? And also, since this requires our 16 nanometer capacity, are we able to fulfill the demand? Or do we plan to expand capacity?
Stop there. I heard the first part. What's the second part?
2nd part is, will we be adding capacity to satisfy the demand?
To satisfy crypto demand?
C. Wei:] Right.
C. Wei:] I don't think we want to disclose the revenue amount for Qifu. Do we? No, we don't. Now, as to the second question, no, because of the volatility as I said several times, because of the volatility of the cryptocurrency demand, the possible volatility, I should say.
We do not we are not going to add capacity specifically for crypto, but we look at cryptocurrency demand as a part of our high performance computing platform demand. There are other parts of the high performance computing that are also fairly volatile though not as volatile as the maybe as the crypto companies. So, we look at the whole thing as a whole and we are definitely adding capacity for the high performance computing platform.
Thank you. So my second question is going to be very brief. It's about your antitrust investigation given TSMC's strong industry position. So how company is going to deal with this antitrust issue? And will that impact your 2018 operation?
Thank you.
I think Charlie is referring to recently the EU Commission is investigating whether or not TSMC has violated any antitrust.
Well, we do not think that we have any problem. However, we will cooperate with whatever government agency that investigates it. We'll cooperate fully.
Thank you.
Next question will be coming from Daiwa's Rick
Thank you for taking my questions. Happy New Year, Doctor. Chan and our CDA Management. My first question is, could you give us some maybe some ballpark number about the revenue breakdown of your 2018 revenue outlook in terms of the application HPC, IoT, Automotive and Mobile?
Well, those 4 are our growth platforms. We do have other platforms, which happen to be declining actually. So, giving you the percentage actually doesn't tell you anything, but can we Laura or C. C, do we yes. He wants to know the percentage of revenue in HPC, in mobile, in IoT and I think maybe you can give them some approximate numbers.
All right. Approximately, actually, the mobile smartphone, it will be half of it.
Mobile, mobile.
Mobile will be about half. And then followed by the HPC, that will be about 25% and another probably around 10% from automotive and IoT and then rest of that. Does that answer your question?
Yes, yes, that's very clear. Thank you so much. It's pretty good direction. Then the second question is about your inventory. I know Doctor.
Chen was talking about your end Q4 inventory was a few days above seasonal. And not sure if you also commented about your inventory view for the Q1 this year. It's going to be coming down and tracking the seasonal average? Or am I missing something?
C. Wei:] We exit 4Q 2017 with a few days above the seasonality. And then we expect it start to increase again because of our customers start to build for the New Year's. And so the inventory increased a little bit, but it's still the seasonal pattern. Outside, it's nothing surprise as compared with the previous years.
All right. Thank you so much.
Next question will be coming from Credit Lyonnais, Sebastian Ho.
Thank you. So my first question is on the what's your expectation for the growth from your Chinese customers? If I calculate it correctly, it seems like your revenue from China has doubled for the in the past 3 years. And do you expect such doubling pattern to persist in the next few years?
So Chinese customer has been growing quite fast. Do we continue to expect the percentage to our revenue will double in the next few years as it has done?
Do
we continue to what?
Expect the customers' revenue to double in the next few years?
C. Wei:] Well, first, the Chinese customers have grown very fast. I guess, you want to answer it? I was going to say, I think the cryptocurrency thing, which is the volatile one, is the part of Chinese customers. Yes, it has been born in France.
Yes, you go ahead and answer the rest, okay?
Well, if you ask me whether China customer will grow, will double in the next few years, certainly, I think it has full potential to achieve that. Cryptocurrency is part of it, but even with after cryptocurrency coal and other application will continue to sprout in China, I think.
C. Wei:] You said cool, don't say cool. May not
cool.
Just a follow-up on that. How do you see besides cryptocurrency, how do you see the also there is a rising numbers of the Unicorn startup in China that want to design their ASIC or a lot of them are working on AI. And do you also expect that to be an important growth driver for your Chinese revenue in the next few years for that doubling pattern?
So Sebastian is wondering if beyond the cryptocurrency mining, there are other IC designers in China that focuses on AI, whether or not these type of applications will drive the doubling growth of the customers?
Look, we are everyone's foundry. We are everyone's foundry. And being the technology, capacity, manufacturing leader, We are really in a very good position. So all right. So, if they grow, great.
We will grow with them. And we don't particularly care customers in which region grow. So, we are kind of region blind, okay, as far as where the growth comes from, where everyone is foundry, everyone in the world where everyone is foundry. And usually, the customer that has innovations, has innovative designs that grow the fastest. And so I'm sure that the Chinese innovations will grow very fast.
But then, the rest of the world is not just staying put. They are growing too. I don't know does that answer your question or
Yes. Yes. Yes. 2nd question is on the wonder what's the TSMC expectation and your estimate or evaluation on the roll wafer supply shortage. And remember the same time last year, CFO gave an estimate about how that will the price hike will impact the margin and profit.
I wonder if you have similar numbers you can give this year.
Do you want to answer the question?
The roll wafer has been in short supply in 2017. We expect the short supply will continue through this year as well. Unfortunately, because we are big purchaser, so we were able to engage some of the vendor in the long term contract. So we should be safe in terms of supply.
And how about the price increase impacts on the profitability?
Yes. The price has indeed increased and has been affecting our margin as well. I think maybe 6 months ago, we have indicated the margin impact for 2017 will be around 0.2 percentage point something. With the continued hike in price and impact in 2018 will be bigger. So we expect the impact will be maybe 0.5 point 0.5 to 1 percentage point impact to our gross margin.
Well, anyway, we'll try to offset that with some of the productivity improvement and other cost reductions. C.
Wei:] Is it possible to pass the cost increase to your customer?
No, I don't think so.
Thank you, Chairman.
Okay. I think it's about time that we go to the call first because there are quite a few analysts queuing on the line. So operator, could you please go to the 1st caller on the line?
We spent several 100,000,000 in EUVs since last year. And going forward, this year and next year, the EUV investment will continue to go up. However, the number has been included in our overall CapEx budget, which I was just mentioning, dollars 10,000,000,000 to $11,000,000,000 While it is true that the CapEx per 1,000 wafer investment will be higher if you move into the more leading edge technology, particularly 5 nanometer. But also the purpose of introduction of EUV to simplify the process. So with the process simplification, therefore, the overall patterning cost will not increase compared to the multilevel patterning or the emerging merging.
So that was the simple answer to your questions.
So Mehdi's question is regarding Advanced Packaging in terms of its revenue contribution to TSMC in 2018 all the way to 2020. The advanced packaging such as info and COWAS, the contribution to TSMC's revenue in percentage.
Laura?
I will talk about the whole assembly and packaging service in TSMC instead of just single aisle info or COVAX, okay. The back end service accounts for about 7% of TSMC revenue in 2017. With the continued growth in particularly info and COAS going forward, we expect the percentage will go up slightly in all years.
Okay. We should go to the next caller on the line. Operator, please. Roland, I think you are asking if TSMC will continue to see the IDM outsourcing as a trend. And then are you asking some proportion or percentage?
No? Revenue contribution. IBM
outsourcing. Do we even have a number on that, Laura? To answer the first question, whether the IBM outsourcing will continue. Yes, I think it will. But the second part of the question is a number that indicate well
We don't have a number.
Actually, frankly, I would say that almost without exception, every IBM has become fab light, almost without exception. There are exceptions. And all I'm saying is that those that are already fab light will become fab lighter and lighter. Yes,
IDM has not been building new fabs for quite some time. But as technology progressing and when it reached to below 90 nanometer and they almost solely depend on the foundry support, and that's what we see the continued trend. And all those are specialty technologies.
Right. The technologies, are these new to TSMC or new to IDM?
Both, both for new to the IDM and also new for TSMC.
Applications?
Well, mostly in the automotive and IoT, in those two categories.
Thank you. Operator, can we continue to the next caller, please? All right. Cryptocurrency proportion to TSMC's revenue, can we disclose what's the impact, what's the proportion in 2017 and what's the direction quarter over quarter during this year, whether it is increasing every quarter or increasing in some quarter, decreasing in some quarter?
C. Wei:] Well, C. Wei:] Mark, you want to answer that question?
C. Wei:]
Well, the cryptocurrency mining, the demand to TSMC actually last year, of course, we saw a strong increase in the second half of last year. But after that, I think it's keep a little bit flat for this year, throughout this year.
Okay. Fair enough. And then I guess I want to ask you a little bit about the
So Steven's curiosity is about our Q4. Since 10 nanometer accounted for 25% of our 4th quarter revenue, If we take that out, the non-ten nanometer business is a decline of 8% quarter over quarter in a seasonally supposedly seasonally strong quarter. Is that normal?
Well, to answer that question, actually, if you take out the 10 nanometer that representing a big portion of the smartphone business. So I don't know, if you take out the smartphone, which is about 50% of TSMC's revenue, cannot be say others is continue strong Q4 or something like that. So it's not very appropriate just take out one node by talking the whole market segment. I'm talking about smartphone HPC. In fact, really the HPC increased.
But entering into the Q1, the smartphone seasonality dropped and HPC continue to be strong.
He is asking us to give a guidance on the Q1 this year 10 nanometer contribution. C.
Wei:] The Q1 10 nanometer is decreasing because of, as I said, the seasonality of the smartphone business.
Okay. I think we have answered Stephen's questions. Thank you. And now we are coming back to the floor. First, we are going to ask JPMorgan's Gokul to ask his question.
Thank you. I had a couple of questions on 7 nanometer. Could you talk a little bit about what is your expected market share if we think about N7 and N7 plus over the next couple of years? The second part is, I think Mark mentioned in the last call, more than 50% of the tape outs for 7 are HPC related. Could you talk about what could be the size of HPC related production revenues because not every tape out is equal in volume now that you are getting closer to production, if you could give some color
on that? [SPEAKER UNIDENTIFIED COMPANY
REPRESENTATIVE:] Can
you repeat the question?
Right. Gokul's question is, 1st, asking us to quantify over our market share at the 7 and 7 plus nanometer. This is his first question for the next few years, market share.
Market share on 7 and 7 plus. Well, we haven't even started producing 7 yet. Is that a question or
Yes. That's your question, right?
We intend I can only say, we intend to have a very high market share at least on 7, which we will start producing June. It means June, the end of first half, okay, which we will start producing in June and we intend to have a very high market share. In fact, I would say, 1 100% close, close anyway. Now 7 plus comes even what about a year later? Yes.
A year later. So once you ask the question about 7 plus a year from now, okay?
And Gokul's second part of the question is since we have said that more than 50% of the tape out is for HPC. So he wants to know whether or not it is also revenue percentage. Number of tape outs, HPC is more than 50%, whether or not the revenue contribution will also be more than 50%.
Well, I
would say initially actually, smartphone business still occupies the majority of 7 nanometers of business, followed by the HPC. But that will be a few quarters away.
So HPC will be more 2019 kind of okay.
All right. Then there will be a follow-up
Thank you. Actually wanted to go back to mobile. I think in the remarks earlier, you mentioned it would be flat for the mobile platform this year. Could you talk is that your view on the market, say, for volume or content, maybe a change in that? Or is it a view temporarily there's some market share swings on that front?
[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] You want to answer, C. C? C.
Wei:] Yes. Let me comment on the mobile the smartphone unit first. This year, we expect smartphone unit growth will be in the low single digit. However, the high end smartphone was decreasing for this year and middle yen and low yen will be increasing a few percentage point. So in total, it will be a low single digit growth.
And for TSMC that we saw that we combine all the smartphone together and wafer revenue will be flat as compared with the last year.
And the second follow-up, it's more broadly on the margins. You mentioned the wafer price impact. If you could give a broader picture on the other swing factors, a comment on depreciation, the 7 nanometer ramp and FX, a view on that? And the second part is, is there a new seasonality for margin? It seems like the last year or 2, you've had better margin in first half, but then you have the new technology ramp in second half.
So if you expect that same type of seasonality again?
There are several things that will affect our 2018 margins. Number 1 is wafer price. We were just talking about that. The other one is the ramping of 7 nanometer. We expect ramping profile for 7 nanometer will be very similar to 10 nanometer at the same time.
And we expect the margin dilution for second half of this year will be 2 to 3 percentage point, which is also similar to 10 nanometer. Other than that, the foreign exchange is it can move positively or negatively. It's totally out of our control. I don't know what to say about that. Other than that, we have been doing all our effort trying to plan the capacity better, reduce the cost, improve the productivity and that would hopefully, we can offset some of the potential negative factors.
But having said so, as we have said, TSMC's financial goal for revenue on the next few years will be 5% to 10%, and gross margin will be about 50%. Of course, every quarter can be different. For example, the Q1, as I just guided, actually included a about 2 percentage point inventory variations, which is a positive to Q1. As utilization move every quarter, that could be a factor. Depreciation.
Our depreciation was JPY 10,500,000,000 to JPY 11,000,000,000, we expect the depreciation grow year over year by mid teens.
Thank you.
All right. Then a follow-up question from Morgan Stanley's Charlie
Thanks for taking my question again. So actually, two small follow ups. So first of all, on the AI Semiconductors, so now those ASIC design customized chip are taking place and to replace the GPU, right? So if that trend continue to happen, do you think that will impact your GPU foundry business? That is the first question.
And second question is regarding the IDN Outsourcing. I think the logic chip outsourcing, I think, is already very clear, right? But for those specialty semiconductor outsourcing like power measurement, AC, does that need some technology or process transfer from your ideal customers to TSMC? How does that work? Thank you.
First question is with respect to the growth of the ASIC customers. Whether or not ASIC will gain more popularity over GPU? And if that is the case, what's going to impact TSMC because we have GPU business?
Why don't you answer that Mark will answer the first question.
On the ASIC, AI ASIC, right? I think it of course, more as more customers getting into the AI ASIC, that part of the business will grow. However, it's also very clear that GPU in some part of the market segment, for example, at least the data center is very solid. So I see in the future different design occupy different part of the market, and that is the situation. So
And this is the second question.
The second question is the outsourcing from IDM beyond logic, such as specialty technology. Do we see how do we work with IDMs on those specialty technology when we faced in their technology
to I think you answered that question earlier, I think, while you brought up the point earlier or somebody? Yes, yes.
Okay. Both. I think we have a very deep specialty technology development. Some of the IDM just use our own technology, particularly moving into the finer nodes. But they are in the older or older nodes definitely, as their demand increases, we are also doing this phasing, not transfer, phasing.
That means using our technology base to simulate their technology to do the foundry services for them.
Okay. Follow-up question from the floor and that will be coming from Deutsche Bank, Michael Zhou.
Zhou. Thanks for taking my question again. First question is regarding your 16 millimeter Gau Shao. Is that right your 16 millimeter revenue could be up year on year in 20 18 or do you have any color for that? 16 nanometer?
Yes. It's a little bit increasing. Okay. One follow-up question is you mentioned cryptocurrency, right? So do you think in 2019, most of the cryptocurrency demand will shift to 7 nanometer?
Or do you think that people will still try to use Blix Eno in the future? C. Wei:] Yes, a lot of applications from this cryptocurrency mining, Bitcoin, Litecoin, they are all different kind of applications. So they're using a lot of technologies, but most of them are advanced technology from 7, 10, 16, 12. Okay.
Second question is, do you think your 28 nanometer sales will be up year on year this year or be flat? 28 nanometer? This year will be a little bit decreasing. Thank you.
Okay. We still have quite a few analysts waiting on the queue on the call. So I think we really need to go back to the call. Operator, could you please get to the next caller on the line? Yes, ma'am.
Next question comes from the line of Bill Lu from UBS. Please ask your question.
Yes, hi. Good afternoon and thanks for taking my question. I've had a chance to visit a few of our TSMC's customers recently, especially in the areas of HPC and cryptocurrency. What I seem to be hearing is that foundry supply, especially at the leading edge is getting quite tight. Now your guidance for the full year is obviously very good.
That 10% to 15%, is that constrained by supply will be there?
Phil, your background noise is So let me see if I understand your question. You are asking whether or not 20 eighteen's 10% to 15% growth. Are we constrained by capacity? Is that your question on the leading edge?
Yes. Does that reflect the demand environment or constrained by capacity? Thank you.
What was the question again?
Whether or not our growth this year is constrained by capacity.
Is what?
Constrained, limited by capacity.
The question is we have is our 10% to 15% growth being limited by our capacity? No, no, it's not. Is it? A little bit. A little bit.
Sorry. So the follow-up is, is there a situation where you may raise capacity, increase CapEx a little bit, how would that be?
Please repeat your question again.
I'm sorry about the background noise. I'm just wondering, given that it is somewhat capacity constrained, what do you have to see to increase your capacity and CapEx?
C. Wei:] Whether or not we will increase CapEx this year? No.
We have already given our guidance. Laura has already given her guidance on CapEx. And that is what we think we will spend. It's what you said 10
10.5000000000 to $11,000,000,000
$10,500,000,000 to $11,000,000,000
Bill, so we have answered your questions, right?
Yes. My second question is on 28 nanometers. Now it looks like it's a little bit weaker in the short term. TSMC, I think, has been saying pretty consistently that the 'twenty eight demand is going to be long lasting. I'm wondering if you still feel that any changes to the long term outlook for 20 8?
So as we said that we expect 28 nanometer to decrease a little bit this year. But at the same time, we also said the demand for 28 nanometer is long term, is lasting. So is this decline a temporary situation?
C. Wei:] Judging from the table of the activities, yes, we expect this decreasing is just a short term phenomenon. In the long term, we hope that the business will grow us, the tape out showed.
So judging by the payback activities, when do you think the 28% net will inflect?
28% will be flat? You mean
No, when is the inflection point for 28 nanometer demand will start going up again?
When will it go up again? When will 28 nanometer business to go up again?
We certainly hope as soon as possible.
Look, there is the 2022 and 'twenty two is made on the same capacity as 'twenty eight and 2022 is growing.
C. Wei:] Yes. In the next few years, 2022 will play the more important role.
So the question to answer to the question when will 'twenty eight go up again, my answer is that when the 2022 grows sufficiently and we expect that it will.
Okay. I think we have answered Bill's question. Let's move on to the next caller on the line. Operator, please. Yes.
Next question comes from the line of Patrick Liao from Macquarie. Please ask your question.
Hi. I have only one question. With 7 nanometer year rate start from a higher base since more than 90% of equipment is compatible with 10 nanometer? Thank you.
Did you hear the question?
Yes. 7 nanometer yield rate, Patrick is asking whether 7 nanometer yield rate will start from a higher base because there is 90% equipment in common with the 10 nanometer.
C. Wei:] Our progress in the 7 nanometer yield definitely is a little bit better than 10 nanometer at the same period of time.
Better. Okay. Thank you. It's better.
Okay. Now I know there are still quite a few hands on the floor, so we are coming back to the floor. That will be Goldman Sachs, Donald Lu.
Yes. My first question is on Moore's Law. I think 5 nanometer is around the corner and in the back, so to speak. How about the 3 nanometer? And how about 2.5?
If stops at some point, what would TSMC do? You have such a technology lead on scaling, how you build the next technology barrier? The second question is on Industry Consolidation. I think Chairman has commented before, but just want to hear it again, I guess. If just assuming Broadcom and Qualcomm merge, at some
point, you are going to have
a huge customer. How you deal with this kind of huge customer?
Will you repeat the whole thing because
Right. First question is with respect to Moore's Law. Donald is asking us
Moore's Law?
Moore's Law. And that what is the status of 3 nanometer and what will happen to TSMC if Moore's Law stops at some point in the future?
C. Wei:] Let's answer that question first. Mark, here.
I think C. C. Mentioned, 7 nanometer already in the fab. So the original 7 nanometer team, most of them are starting work on 3 nanometer already. So but the company has a pipeline of technology development.
We also have a big team of path finding, path finding that is develop technology to see 3 and possibly beyond. And we also have a small research team that are exploring further out technologies. So our R and D is organizing in full spectrum exploring to the future technologies also.
Can you comment on the progress at 3? Is this feasible and
Progress on the 3 nanometer pad line. Well, go ahead. It's positive.
It's possible. I think the from our program lead, it's so we have a monthly review and including Chairman also. So it is real.
Look, I review it every month. I review all the advanced technologies, 7 and 3 and EUV and the COOS info every month. And on specifically on 3 nanometer, The program manager has become increasingly positive. It is still pathfinding. So when it first started, what about more than a year ago, there was a question of whether it was even feasible.
Now, he has become increasingly positive that it is feasible. And in fact, he is now working on concrete ways. Well, that's the path binding. I mean, he is defining the path. That's a fair assessment, isn't it?
Yes.
And 2nd part of the question is industry consolidation. How would TSMC deal with big customer?
I just refuse to comment on that because I think you mentioned a pair and both of them are very good customers of ours. So and we stay neutral.
Sebastian Ho.
Thank you. My first follow-up is on the 8 inches revenue. It was growing year over year in 2017, But I remember a year ago, initially last year, it was guiding the company was guiding my decline. So I was wondering what has changed? What's the change that lead to the upside?
And what's your outlook for 2018 on the 8 inches?
Okay. Sebastian's question is a year ago, we were guiding 8 inches revenue to decline. But then in reality, that revenue actually went up. So what happened? And what's the outlook for us this year?
Do you or does Laura want to ask? No, C. C, you can answer it. You have picked up the microphone already.
I've picked out the microphone to give it to Laura.
Okay.
It is indeed that our 8 inches demand is very strong, and I think it's mainly from these IoT and automotive stuff, right? So in this year, we still believe the 8 inches revenue will continue to grow.
Thank you. 2nd part of my follow-up is the it's a little bit different questions, not on the silicon, but I wonder if TSM what's the TSM strategy on compound semiconductors? It seems like there are more applications down the road like power device, VCSEL and RF, microLED, etcetera. So wonder what's the TSMC strategy on this because we haven't heard about this before. [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:]
We did not specify so many compound semiconductors development, but we did say that gallium nitride is one that we are developing. And for the power management IC and for power devices also that we are developing it for the working with the customer. And today, the business is still very small, but we saw high potential out of that.
So when do you expect this potential to be realized in the revenue? [SPEAKER UNIDENTIFIED
COMPANY REPRESENTATIVE:]
It's starting from this year, but probably in the 2019, 2020, you will see kind of reasonable amount coming out is in 6 inches wafer right now.
Thank you.
All right. Due to the consideration of time, I think we will stop taking analyst questions, but Chairman still have a few remarks to make.
I just want to say that even though I will continue to be the Chairman until June 5 this year, June 5 this year, but this is the last time that I plan in this conference. And for the last 2 years now, I have appeared only once a year in January. In 2016, appeared once in January. And 2017, again, appeared only once in January. And so, this year, this will be the last time.
And I've been I really have spent many years with some of you, many years, more than 20 years, although I think most of you probably haven't attended this particular conference that long, but I've been here almost 30 years, I think, here. And I enjoyed it. And I think that we all at least I hope that I had a good time. I hope that you had a good time too. And I will miss you.
And thank you very, very much.
Thank you.
All right. Thank you, Chairman. And before we conclude 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 TSMC's website at www.tsmc.com. Thank you for joining us today.
We hope you will join us again next quarter. Goodbye and have a good day.