[Foreign language] Happy New Year, everyone. Welcome to TSMC's fourth quarter 2017 earnings conference and conference call. This is Elizabeth Sun, TSMC Senior Director of Corporate Communications and your host for today. Today's event is webcast through tsmc.com. If you are joining us through the conference call, your dial-in 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. Lora Ho will summarize our operations in the fourth quarter 2017, followed by our guidance in the first quarter of 2018. Afterwards, TSMC's two co-CEOs, Dr. Mark Liu and Dr. C.C.
Wei, CFO Ms. Lora Ho, and TSMC's chairman, Dr. Morris Chang, will jointly provide our key messages. Chairman Chang will host the Q&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.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. I would like to turn the podium to TSMC CFO, Ms. Lora 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 fourth quarter and a recap of 2017 for the whole year. After that, I will provide the guidance for the first quarter. Fourth quarter revenue increased 10.1% sequentially to NT$ 278 billion, mainly driven by major mobile product launches and continuing demand for cryptocurrency mining. Gross margin increased 0.1 percentage points sequentially to 50.0%. 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 NT$ 1.3 billion. 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 fourth quarter EPS reached NT$ 3.83, and ROE was 26.9% for the quarter. Let's take a look at wafer revenue contribution by application. During the fourth quarter, communication and computer increased 20% and 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% and 14% year-over-year respectively, while communication and consumer decreased 2% and 10% respectively. 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 fourth quarter. The combined 16/20 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 third quarter. On a full year basis, 10 nanometer contribution reached 10% of total wafer revenue in 2017. The combined 16 and 20 contribution was 25% of total wafer revenue. Advanced technology, 28 nanometer and below, accounted for 58% of total wafer revenue, up from 54% in 2016.
Moving on to balance sheet. We ended the fourth quarter with cash and marketable security of NT$ 649 billion, an increase of NT$ 148 billion. On the liability side, current liabilities increased by NT$ 60 billion. On financial ratios, accounts receivable turnover days decreased two days to 40 days, while days of inventory decreased one day to 52 days. Let me make a few comments on cash flow and CapEx. During the fourth quarter, we generated about NT$ 204 billion cash from operations and spent NT$ 61 billion in capital expenditure. As a result, we generated free cash flow of NT$ 143 billion, and our overall cash balance increased NT$ 145 billion to reach NT$ 553 billion at the end of the fourth quarter. In the U.S. dollar term, our fourth quarter capital expenditure reached $2.1 billion, and the total CapEx for the whole year was $10.9 billion.
Now I would like to give you a recap of our performance in 2017. 2017 was another strong year for TSMC, as once again, we set a new record in terms of both revenue and earnings, despite a 5.5% depreciation in the NTD. Our revenue grew 9.1% year-over-year in U.S. dollar terms and 3.1% in NTD to reach TWD 977 billion. As we saw, wafer shipments increased 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% as we increased our R&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 billion in capital expenditure, or $10.9 billion in U.S. dollar term. We generated TWD 585 billion in operating cash flow and TWD 255 billion in free cash flow. We also paid TWD 182 billion in cash dividend, an increase of 17% from 2016. I have finished my financial summary. Let's turn to the first quarter guidance. Based on the current business outlook, we expect first quarter revenue to be between $8.4 billion and $8.5 billion U.S. dollars, 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 first quarter revenue. Based on the exchange rate assumptions of one U.S.
dollar to TWD 29.60, our first quarter gross margin is expected to be between 49.5% and 51.5%. Our first quarter operating margin is expected to be between 38% and 40%. This concludes my remark. I would like to turn it over to Mark for his comment.
Thank you, Lora. Good afternoon. 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 build 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. On cryptocurrency demand. In the past, TSMC's open innovation ecosystem incubates numerous growth drivers for the semiconductor industry.
In the '90s, it was the PC chipsets. In the early '20s, the graphic processors. In the mid to late '20s, 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 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. 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+ and N5 development lots. EUV source power is now operating at 160 W to support our N7 and N5 development activities. EUV scanner with source power of 250 W has been installed in our fabs.
Capability of in-house EUV particle making has also been established with low defect level and good transmission properties. We are confident that our EUV technology will be ready for high volume production for N7+ 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 revenue growth in US dollars. Moving into 2018, growth of these platforms continue. We estimate that the high performance computing platform will register the strongest growth in US dollars. For smartphones will continue to include new features such as 3D authentication, 3D sensing, AI for face and voice recognition, and 18:9 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 nanometer and 12 nanometer and 7 nanometer, together with our CoWoS technology. IoT business growth in 2018 mainly comes from smart voice assistant devices, application processor for wearables, and wireless MCU for smart homes. Our 22ULP 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 manufacturing quality, sufficient capacity support, 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.
Thank you, Mark. Let me talk about the near-term demand and inventory. We concluded our first quarter with 10% quarter-over-quarter growth in U.S. dollars, which was slightly above the guidance we gave three months ago, despite continued inventory reduction by our customer. First quarter's strong result was mainly driven by a major smartphone release, which is based on our 10 nanometer process with InFO, and a strong demand in cryptocurrency mining. Concluding 2017, semiconductor excluding memory growth was 9%, while foundry grew 8%. TSMC's revenue grew 9% in U.S. dollars and accounted for 56% of the total foundry market segment share. Moving into first quarter 2018, our revenue in U.S. dollars is likely to decline by about 8%, as lower just as guided. This is mainly due to smartphone seasonality, offset partially by continued demand for cryptocurrency mining.
Fabless DOI exceeding 2017 was a few days above seasonal level. Moving into 2018, we forecast fabless DOI to trend up, but will 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 this product in two different fabs in preparation for volume production starting in second quarter this year. During first quarter 2018, we expect to tape out another 10 products. In total, we expect to have taped 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 low 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 immersion 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. Now 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 third 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-over-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 16nm FinFET to 16 FF+ and then to 16 FFC. Now we are moving into 12 FFC. With a 12 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 fourth year today that our N16 and 12 enter into high volume production. We still expect to see very strong demand for this node, which is supported by current plan of 120 tape outs this year, covering a variety of mainstream smartphones, cryptocurrency, AI, GPU, and RF products. Although other factories may have planned to enter into 12 nanometer node, TSMC achieved the lowest defect density. It enjoys a very competitive cost structure. We expect our market segment share in this node will be increased. 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+, and now to 22 ULL and ULP, which stands for ultra-low leakage and ultra-low power.
The newly introduced 22 ULP/ULL will enhance performance by increasing speed by about 15%, or reduce the power consumption by about 25%, with an overall die area shrink of 5%-10%, as compared with the 28 HPC+. Both 22 ULP and 22 ULL are ideally suited for IoT and RF related applications. Beyond continued performance enhancement, our excellent manufacturing capabilities and our significant investment in capacity are also important contributing factors for customers to choose TSMC as their primary foundry. Last year, we saw about 240 product tape outs using our 28/22 node, which was a record high since 28 nanometer entered volume production in 2011. We expect this tape out activity to continue in this year. We are confident that our high market segment share in the 28/22 technology node will be maintained. I will talk about advanced packaging.
I will update two of our advanced packaging technologies, chip on 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 sixth year that our CoWoS technology has been in production. We see more customers engaging with us on this technology. We expect to receive more than 30 tape outs in the next three years. Most of the products today are using 16 nanometer technology. We are actively developing CoWoS for seven nanometers starting from this year. TSMC's InFO has entered into high volume production for the third 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. We 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 product ranging from N28, N16, N7, and N5 technologies. Let me talk about the Nanjing 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-inch, using 16 nanometer and 12 nanometer. We broke ground for this fab in July 2016. We 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 a Nanjing Fab come from both China and other regions with a variety of products in the initial ramp. Due to the strong demand for our 16/12 nanometer technology node, we have pulled 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 and 12 nanometer node in Nanjing. That's all I have. Thank you for your attention.
I would like to make-
Okay.
Hello.
Hello.
now.
How about this one?
Let me make the comment on CapEx and outlook for future capital intensity. Let me start with CapEx. Our 2018 CapEx is expected to be between $10.5 billion-$11 billion, which is essentially flat with our 2017 CapEx. About 73% of the capital budget will be used for capacity build-up for the advanced technologies, mainly 7 nanometer followed by 5 nanometer. Another 17% of the capital budget will be used for R&D, back end, and mask. As I stated in our last investor conference three months ago, in order to support our 5%-10% growth in the next few years, we expect our CapEx in the next few years to stay a few percentage point more than $10 billion.
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 a revenue CAGR of 5%-10%, we expect capital intensity, which is the ratio between CapEx and revenue, to gradually decline from the current 30%-35% level to 20%-30% level in the next few years. 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 levels. We estimate that the total semiconductor market will grow 6%-8% in 2018. 6%-8% this year. The semiconductor market, excluding memory, will grow by 5%-7% this year, and total foundry revenue will grow by 9%-10% this year. For TSMC, we expect 2018 TSMC revenue in US dollars will grow by 10%-15% over 2017. 10%-15% in US 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, will be stronger in the first half than in the second half.
We expect the first half 2018 revenue growth rate in US dollars will be slightly above 15% over the first half of 2017. The second half 2018 growth rate to be slightly under 10% over the second half of 2017. All these are in US dollars. 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%-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 three of our growth platforms. Those three 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, et cetera. Mobile platform will be flat. 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 two years, we have been planning 5%-10% compounded annual growth rate in US dollar revenue growth in the 2017-2021 period. We reaffirm that plan. In 2017, our revenue grew 9%. In 2018, we expect to grow our revenue 10%-15%.
2015 will be an above average year.
All right. This concludes our prepared statements. Before we begin the Q&A session, I would like to remind everybody to limit your questions to two 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. For those of you on the call, if you would like to ask a question, please press the star and one on your telephone keypad now. Questions will be taken in the order in which they were received. If at any time you would like to remove yourself from the questioning queue, please press the pound or the hash key. Now, let's begin the Q&A session. All right. First question will be from Goldman Sachs, Daniel Lu.
My first question is to the chairman, really nice to see you here. What is your view in cryptocurrency, which have a surging growth in recent months? That's my first question. The second question is on N7+. I think if I hear correctly, the performance of N7+ is similar to N7. Is that correct, on speed, performance, and power? I just want to clarify that. Thank you.
Well, let me answer the first. I think you ought to come along here, repeat. 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. The price of cryptocurrency is very volatile. The demand right now or for the last year has been very strong. We expect it to continue to be strong. However, we have, in Mark's words, sized the demand carefully. We have sized demand carefully. I believe that we will both satisfy our customers and will not be too optimistic. You can ask the second question of Mark. Oh, CC. Okay.
Well, let me repeat your question, the N7+ as a performance versus a N7, right?
N7+ actually is about 10% better performance than N7. In terms of area, it will be also about 10% smaller. If you put all together, like critical layer, that by using EUV, you reduce the critical layer number. We expect per wafer, you are getting more than 10% more dies from N7+ as compared with N7.
Can you explain the last point? About the critical layer, you have less layer with N7+?
Yeah, because we're using the EUV to replace some of the immersion layer. Give you one example, one EUV layer can replace a 3P 3E, replace the three layers of immersion. In calculation of the defect density, you get more dies.
All right. The next question will be coming from Credit Suisse, Randy Abrams.
Yeah. Thanks, Chairman. Glad to have you back, 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. The higher number, is it due to structural or due to cyclical factors?
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 has always been our intention to be fully competitive. Therefore, the least we want to do is to maintain our market share. Now, as I said a little earlier, the total foundry, all the foundries in the world, total foundry revenue will grow 9%-10% this year. I expect TSMC to grow revenue 10%-15%. That means perhaps a small gain in market share. What do we do to earn that? I have to go back to the offset strengths we have. We lead in technology, we lead in manufacturing capability, and I believe we lead in customers' trust.
The second question I wanted to ask was, this year you already generated excess cash flow after paying the dividend, and you're talking about lower capital intensity the next few years. 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 the past couple of years.
Lora will.
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. 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 Zhou.
Hi. Regarding the 2018 US dollar sales guidance. Did you have any color for what area actually exceeded your expectations six months ago in terms of demand? In the past, you mentioned that long-term sales CAGR could be 5%-10%, right? Is any area demand actually stronger than you expected before or really exceed your internal planning in terms of demand outlook for 2018?
So-
All right. Question from Michael really is that since we have stated our CAGR to be 5%-10%, and this year, the 10%-15% is higher than the CAGR of 5%-10%. He wants to understand where the extra strength is coming from.
Where in what?
The extra strength, which area we're doing stronger than normal.
Mainly, it's in the high-performance computing platform. As I said a little earlier, that is due to the expanding usage of AI devices in all devices. I also said, it's the continuing strong demand of cryptocurrency mining.
For a follow-up question. For AI, if edge AI, do you put the category smartphone AI into the HPC, or you still put in the smartphone segment? Smartphone.
The AI in the.
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 nanometer.
Okay. You are 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? Anyway, let's answer that question. I think, either Mark or C.C. can take it. Okay, C.C., you want to take it?
The AI in the smartphone will category into the mobile smartphone.
Thank you. My second question is regarding your 7 nanometer sales portion in Q4 this year in 2018. 7 nanometer sales portion in Q4 2018. Q4 this year and the whole year. Do you have any forecast?
Well, I can say probably the whole year will be the 10% revenue.
Okay.
All right. We have to move to the next analyst, which is Morgan Stanley's Charlie Chan.
Thanks, Chairman. TSMC is really phenomenal. My first question is kind of long. It's again on cryptocurrency. First of all, can you quantify the cryptocurrency contribution as you did the last quarter? I remember it was like $350 million to $400 million in 3Q. Can you give that data for fourth quarter and 1Q? Given the strength, can TSMC's 60 nanometer fulfill the demand? Will TSMC expand capacity for this cryptocurrency mining? This is first question. Thank you.
All right. Charlie Chan's question is, can we disclose the proportion of revenue we get from cryptocurrency mining in the fourth quarter last year and the first quarter this year. Also, since this requires our 60 nanometer capacity, are we able to fulfill the demand, or do we plan to expand capacity?
Stop there.
Okay.
I heard the first part. What's the second part?
Second part is, will we be adding capacity to satisfy the demand?
To satisfy crypto demand?
Right.
I don't think we want to disclose the revenue amount for crypto. Do we? No, we don't. As to the second question, no, because of the volatility, as I said several times, because the volatility of the cryptocurrency demand, the possible volatility, I should say, we are not going to add capacity specifically for crypto. 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 maybe as the cryptocurrency. We look at the whole thing as a whole, and we are definitely adding capacity for the high-performance computing platform.
Thank you. My second question is going to be very brief. It's about your antitrust investigation, given TSMC's strong industry position. How company is going to deal with this antitrust issue, and will they impact your 2018 operation? Thank you.
I think Charlie's referring to recently, the European Commission is investigating whether or not TSMC has violated any antitrust.
Well, we do not think that we have any problem. However, we'll cooperate with whatever government agency that investigates it. We'll cooperate fully.
Thank you.
Next question will be coming from Daiwa's Rick Hsu.
Yeah. Thank you for taking my questions. Happy New Year, Morris Chang and all the senior management. My first question is, could you give us 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 four are our growth platforms. We do have other platforms, which happen to be declining, actually. Giving you the percentage actually doesn't tell you anything, but can we, Lora or C.C., do it? Yeah. 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. Yeah.
All right.
Approximately, actually, the mobile smartphone, it will be half of this-
Mobile.
Mobile.
Will be about half. Followed by the HPC, that will be about 25%. Another probably around 10% from automotive and IoT. Rest of that.
All right.
Does that answer your question?
Yeah. That's very clear. Thank you so much. That's pretty good direction. The second question is about your inventory. I know Morris Chang was talking about your end-Q4 inventory was a few days above seasonal. I'm not sure if you also commented about your inventory view for the first quarter this year. It's going to be coming down and tracking the seasonal average, or am I missing something?
We actually, 4Q 2017 was a few days above the seasonality.
Yeah.
We expect it start to increase again because of our customers start to build for the new year. The inventory increased a little bit, but it's still the seasonal pattern. I'll say it's nothing surprising as compared with the previous years.
All right. Thank you so much.
Next question will be coming from CLSA, Sebastian Hou.
Thank you. My first question is what's your expectation for the growth from your Chinese customers? If I calculate correctly, it seems like your revenue from China has doubled in the past three years. Do you expect such doubling pattern to persist in the next few years?
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 customer's revenue to double in the next few years.
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. Yeah, has been growing fast. Yeah, you go ahead and answer the rest. Okay.
No, no.
Well, if you ask me whether China customer 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 cool and other application will continue to sprout in China, I think.
You said cool. Don't say cool. May not cool.
Just to follow on that, besides cryptocurrency, how do you see Also there is a rising numbers of the unicorn, the startup in China, they want to design their ASIC, or a lot of them are working on AI. Do you also expect that to be a important growth driver for your Chinese revenue in the next few years for that doubling pattern?
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. Being the technology capacity manufacturing leader, we are really in a very good position. All right.
If they grow, great. We will grow with them. We don't particularly care, customers in which region grow. We are region blind, okay?
As far as where the growth comes from. Where everyone's from, everyone in the world, where everyone's from. Usually, the customer that has innovations, has innovative designs, they grow the fastest. I'm sure that the Chinese innovations will grow very fast. The rest of the world is not just staying put. They are growing, too. I don't know. Does that answer your question?
Yes. Thank you, Chairman.
Yeah. Mm-hmm.
Second question is, I wonder, what's the TSMC expectation and your estimate or evaluation on the raw wafer supply shortage? Remember the same time last year, CFO gave an estimate about how the price hike will impact the margin profit. I wonder if you have.
Do you want to answer the question?
similar numbers you can give this year.
Oh, do you want to answer the question?
Yeah. The raw wafer has been in short supply in 2017. We expect the short supply will continue through this year as well. Fortunately, because we are big purchaser, we were able to engage some of the vendor in the long-term contract, we should be safe in terms of supply.
How about the price increase impacts on the profitability?
Yeah. 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. With the continued hike in price and the impact in 2018 will be bigger. We expect impact will be maybe half point, 0.5-one 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.
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. Operator, could you please go to the first caller on the line?
Sure. First question comes from the line of Mehdi Ali from MITC. Your question.
Thank you. Thanks for taking my question. My question has to do with the impact of EUV on your capital intensity. As we look into 2019, 2020, is EUV actually helping you with lower capital intensity? Is it helping you with lower capital spend? If not, when should we expect to see that? I have a follow-up.
We spent several hundred million in EUVs since last year. 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, $10 billion-$11 billion. While it is true that the CapEx per thousand wafer investment will be higher if you move into the more leading-edge technology, particularly 5 nanometer. Also, the purpose of introduction of EUV to simplify the process. With the process simplification, therefore the overall patterning costs will not increase compared to the multilevel patterning or the emerging version. That was the simple answer to your questions.
Thank you. Moving on to advanced packaging, non-wafer revenues in 2018, 2019, 2020. How should we think about the diversification and scaling of InFO and also CoWoS? Is there any number you can provide us? Perhaps qualitatively you can help us? Again, the question has to do with revenue contribution from system in package, InFO, CoWoS in 2018, 2019, and 2020.
Mehdi's question is regarding advanced packaging in terms of its revenue contribution to TSMC in 2018 all the way to 2020.
Say it again.
The advanced packaging, such as InFO and CoWoS, the contribution to TSMC's revenue in percentage.
Lora? Yeah.
I will talk about the whole assembly and packaging service in TSMC, instead of just single InFO or CoWoS. The packaging service accounts for about 7% of TSMC revenue.
Seven.
7. 7%.
Seven.
Of TSMC revenue in 2017. With the continued growth, particularly InFO and CoWoS going forward, we expect the percentage will go up slightly in out years.
Great. Thank you so much.
Okay, we should go to the next caller on the line. Operator, please.
Thank you. Your next question comes from the line of Roland Shu from UBS.
UBS.
Operator, your line is open.
Hi, good afternoon. Thank you for taking my question. Mark, we've mentioned the survey increasing IDM and also the change in the new technology. We suspect a lot of your IDM customers is in-process based on your other media. For this year, do you think the total IDM outflow picture will be increased more than with the IDM inflow picture?
Roland, I think you are asking if TSMC will continue to see the IDM outsourcing as a trend.
Yes.
Are you asking some proportion or percentage? No?
No, I think the proportion and also maybe your total revenue contribution.
Okay. Revenue contribution and proportion.
Of IDM-
Of IDM.
-outsourcing. Do we even have a number on that, Lora? To answer the first question, whether the IDM outsourcing will continue. Yes, I think it will. On the second part of the question, is a number that indicate.
We don't have number. Okay.
Yeah. Actually, frankly, I would say that almost without exception, every IDM has become fab-light, almost without exception. There are exceptions.
Understood.
Yeah.
Okay.
All I'm saying- Excuse me. All I'm saying is that those that are already fab-light will become fab lighter and lighter.
Okay. Understood.
Yeah.
I think another question to Mark is, Mark, you said see this outflow picture in new technology. Mark, can you add more color on what type of the new technology this IDM is looking for? If what type of applications are there also need to be found instead?
Yeah. Mark.
Yes. IDM has not been building new fabs for quite some time. As technology progressing, when it reach to below 90-nanometer, they almost solely depend on the foundry support. That's what we see the continued trend. All those are specialty technologies.
Is the technology new to TSMC? This actually is new to the IDM?
What was the question?
Yeah.
The new technology.
Right. The technologies, are these new to TSMC or new to IDM?
Both. Both for new to the IDM, and also new for TSMC.
Okay. These technologies, what kind of applications of these technologies will be?
Applications.
Well, mostly in the automotive and IoT. Yeah. In those two categories.
Okay. Thank you. These are all my questions. Thank you.
Thank you. Operator, can we continue to the next caller, please?
Yes. Our next question comes from the line of Steven Pelayo from HSBC Tech Research.
Yes. Just one quick follow-up on crypto. I know you don't want to disclose what it was in the fourth quarter, but I'm wondering if you could at least disclose what it was for the full year 2017? Maybe just directionally, is it increasing every quarter for you?
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.
Well, C.C. or Mark, you want to answer that question?
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. After that, I think it keep a little bit flat for this year, throughout this year.
Okay, fair enough. Then I guess I want to ask a little bit about above 10 nanometer. If you look on the fourth quarter, it looks like if you excluded 10 nanometer, the rest of the company, roughly 75% of revenue growth, was down about 8% quarter-on-quarter. Things like consumer were off pretty significantly. Even 20 nanometer was off 15%. I guess I'm trying to understand, is that normal seasonality? I would have thought we were seeing broader strength on an overall semi cycle when we look beyond just 10 nanometer.
Steven's curiosity is about our fourth quarter. Since 10 nanometer accounted for 25% of our fourth quarter revenue, if we take that out, the non-10 nanometer business is a decline of 8% quarter-over-quarter in a supposedly seasonally strong quarter. Is that normal?
To answer that question, actually, if you take out the 10 nanometer that representing a big portion of the smartphone business. I don't know. If you take out the smartphone, which is about 50% of TSMC's revenue, cannot be, say others is a continuous strong fourth quarter or something like that. 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 increase. Entering into the first quarter, the smartphone seasonality drop, the HPC continue to be strong.
If I could just follow up quickly to that, what do you think 10 nanometer will then be in the first quarter? How does that do with the seasonal decline that you seem to see in the first quarter? That's it for me.
He's asking us to give a guidance on the first quarter this year, 10 nanometer contribution.
The first quarter 10 nanometer is decreasing because of, as I said, the seasonality of the smartphone business.
Okay. I think we have answered Steven's questions. Thank you. Now we are coming back to the floor. First, we are going to ask J.P. Morgan'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+ 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.
Can you repeat the question?
Right. Gokul's question is first asking us to quantify over our market share at the 7 nanometer and seven plus nanometer. That is his first question for the next few years, market share.
Market share on seven
7 and N7+
The seven plus.
Right.
We haven't even started producing seven yet. Okay. Is that a question or have you?
Yeah. That's your question, right?
Yeah.
I can only say we intend to have a very high market share, at least on seven, which we will start.
This year, in the end of first half.
June. He 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 100%. Close. Close anyway. Close, yeah. 7 Plus comes even, what, about a year later?
Yeah.
A year later. Well, why don't you ask the question about 7 Plus a year from now? Okay.
Gokul's second part of the question is, since we have said that more than 50% of the tape-out is for HPC. 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%.
Yeah.
I would say initially, actually, smartphone business still occupy the majority of seven nanometers of business, followed by the HPC. That will be a few quarter away.
HPC will be more 2019.
Yes.
There will be a follow-up question from the floor coming from Credit Suisse and Randy Abrams.
Yep. Thank you. I 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?
You want to answer, C.C.?
Yeah. Let me comment on the mobile, the smartphone unit first. This year, we expect the smartphone unit growth will be in the low single digit. However, the high-end smartphone was decreasing for this year, and middle-end and low-end will be increasing a few percentage point. In total, it will be a low single digits growth. For TSMC, that we saw that we combined all the smartphone together, wafer revenue will be flat as compared with last year.
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. The second part is there a new seasonality for margin? It seems like the last year or two, you've had better margin in the first half, but then you have the new technology ramp in the second half. If you expect that same type of seasonality again.
There are several things that will affect our 2018 margin. Number 1 is wafer price. We were just talking about that. The other one is the ramping of 7 nanometer. We expect the ramping profile for 7 nanometer will be very similar to 10 nanometer at the same time. 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, 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.
Having said so, as we have said, TSMC's financial goal for revenue on the next few years will be 5%-10%, and the gross margin will be about 50%. Of course, every quarter can be different. For example, the first quarter, as I just guided, actually included about two percentage point inventory variations, which is a positive to first quarter. As utilization move every quarter, that could be a factors.
Depreciation.
Depreciation with TWD 10.5 billion-TWD 11 billion, we expect the depreciation grow year-over-year by mid-teens.
Thank you.
All right, a follow-up question from Morgan Stanley's Charlie Chan.
Thanks for taking my question again. Actually, two small follow-ups. First of all, on the AI semiconductors. Now those ASIC design customized chip are taking place to replace the GPU, right? If that trend continue to happen, do you think they will impact your GPU foundry business? This is the first question. Second question is regarding the IDM outsourcing. I think the logic chip outsourcing is already very clear, right? For those specialty semiconductor outsourcing, like power management IC, does that need some technology or process transfer from your IDM 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. 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, of course, as more customers get 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. I see in the future, different design occupy different part of the market. That is the situation.
Is the second question.
Second question is the outsourcing from IDM beyond logic, such as specialty technology. How do we work with IDMs on those specialty technology when we faced in their technology to TSMC?
I think you answered that question earlier. You brought up the point earlier. Somebody Yeah.
Okay. Both. I think we have a very deep, especially technology development. Some of the IDM just use our own technology, particularly moving into the finer nodes. They are in the older nodes, definitely. As their demand increases, we are also doing this phase-in, not transfer, phase-in. That means using our technology base to simulate their technology to do the foundry services for them.
Yeah.
Okay. Follow-up question from the floor, that will be coming from Deutsche Bank, Michael Zhou.
Thanks for taking my question again. First question is regarding your 16 nanometer growth. Is that right, your 16 nanometer revenue could be up year-on-year in 2018, or do you have any color for that?
16 nanometer?
Yes.
It's a little bit increasing.
One follow-up question is, you mentioned cryptocurrency, right? Do you think that in 2019, most of the cryptocurrency demand will shift to seven nanometer, or do you think that people will still try to use like six nano in the future?
Yes, a lot of applications from these cryptocurrencies mining, Bitcoin, Litecoin, they are all different kind of applications. They're using a lot of technologies. Most of them are advanced technology, from seven, 10, 16, 12. It's all.
Okay. Second question is, do you think your 28 nanometer sales will be up year-over-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. 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.
Yeah, hi. Good afternoon. Thanks for taking my question. I got a chance to visit a few of 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. Your guidance for the full year is obviously pretty good. That 10%-15%, is that constrained by supply or demand right now?
Bill, your background noise is actually quite strong. Let me see if I understand your question. You are asking whether or not 2018's 10%-15% growth, are we constrained by capacity? Is that your question on the leading edge?
Yes. Does that reflect the demand environment, or is that 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.
Oh, the question is our 10%-15% growth being limited by our capacity? No, it's not. Is it?
A little bit.
A little bit? Yeah. A little bit, yeah.
Yeah.
A little bit.
Yeah.
But-
Sorry, the follow-up is there a situation where you may raise capacity, increase CapEx a little bit, and what 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?
Whether or not we will increase CapEx this year.
No, we have already given our guidance. Lora has already given her guidance on CapEx. That is what we think we will spend.
It's what? You said 10
10.5.
10 point
TWD 10 billion to TWD 10.5 billion to TWD 11 billion.
TWD 10 billion to TWD 10.5 billion to TWD 11 billion. Yeah.
Bill, we have answered your questions, right?
My second. Yeah, 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 28 demand is going to be long-lasting. I'm wondering if you still feel that. Any changes to the long-term outlook for 28?
As we said that we expect 28 nanometer to decrease a little bit this year. At the same time, we also said the demand for 28 nanometer is long-term, it's lasting. Is this decline a temporary situation?
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 as the tape-out showed.
Judging by the tape-out activities, when do you think the 28 nano will inflect?
28 will be flat? You mean Oh.
No. When is the inflection point for 28-
Inflection
nanometer demand where it starts 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.
Well, look, there is the 22, you know.
Yes.
22 is made on the same capacity as 28, 22 is growing.
Yes. In the next few years, the 22 will play the more important role.
To answer to the question, when will 28 go up again? My answer is that when the 22 grows sufficiently.
Yeah.
We expect that it will.
Okay. I think we have answered Bill's question.
Right.
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. Will 7 nanometer yield rate start from a higher base since more than 90% of equipment is compatible with 10 nanometer? Thank you.
Did you hear the question?
Would you please repeat?
Yes. 7 nanometer yield rate. Patrick is asking whether 7 nanometer yield rate will start from a higher base because there's 90% equipment in common with the 10 nanometer.
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. 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.
Yeah. My first question is on Moore's Law. I think 5 nanometer is around the corner and in the bag, so to speak. How about 3 nanometer? How about 2.5? If it 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 a huge customer?
Will you repeat the whole thing?
Right. First question is with respect to Moore's Law.
Moore's Law?
Moore's Law.
Yeah. Mm-hmm.
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?
Let's answer that question first. Mark, you.
I think C.C. mentioned, 7 nanometer already in the fab. The original 7 nanometer team, most of them are starting work on 3 nanometer already. The company has a pipeline of technology development. We also have a big team of pathfinding. Pathfinding, that is, develop technology to see 3 and possibly beyond. We also have a small research team that are exploring further out technologies. Our R&D is organizing in full spectrum, exploring to the future technologies also.
Can you comment on the progress at the 3? Is this feasible and
Progress on the 3
3
3 nanometer pathfind. Well, go ahead.
Okay.
It's positive.
It's possible. I think from our program lead, we have a monthly review including Chairman also. It is real.
Look, I review it every month.
I review all the advanced technologies, 7 and 3 and EUV and the CoWoS, InFO every month.
Specifically on 3 nanometer, the program manager has become increasingly positive. It is still pathfinding. 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.
In fact, he is now working on concrete ways. Well, that's the pathfinding. He is defining the path now.
That's a fair assessment, isn't it?
Yeah.
Yeah.
Second 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
Customer
pair. Both of them are very good customers of ours. We stay neutral. Yeah. Okay.
Follow-up question. Yes. Follow-up question from CLSA, Sebastian Hou.
Thank you. My first follow-up is on the 8-inch revenue. It was growing year-over-year in 2017. I remember a year ago, initial last year, the company was guiding my decline. 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-inch?
Okay. Sebastian's question is, a year ago, we were guiding 8-inch revenue to decline, in reality, that revenue actually went up. What happened, and what's the outlook for us this year?
Do you or does Lora want to answer? No, CC, you can answer it. You have picked up the microphone already.
I pick up the microphone to give it to Lora.
Okay, yeah.
It is indeed that our eight-inch demand is very strong, and I think it's mainly from these IoT and automotive stuff. In this year, we still believe the eight-inch revenue will continue to grow.
Thank you. Second part of my follow-up is a little bit different questions, not on the silicon. I wonder what's the TSMC strategy on compound semiconductors. It seems like there are more applications down the road, like power device, VCSEL, and RF, MicroLED, et cetera. I wonder what's the TSMC strategy on this, because we haven't heard about this before.
We did not specify so many compound semiconductors that development, but we did say that gallium nitride is the one that we are developing, for the power management IC, and for power devices also. That we are developing it, working with the customer. Today, the business is still very small, but we saw a high potential out of that.
When do you expect this potential to be realized in the revenue?
It's starting from this year, probably in the 2019, 2020, you will see a reasonable amount coming out. It's in 6-inch wafer right now.
Thank you.
Due to the consideration of time, I think we will stop taking analyst questions, 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 5th this year. This is the last time that I plan in this conference. For the last 2 years now, I have appeared only once a year in January. In 2016, I appeared once in January, 2017, again, I appeared only once in January. This year, this will be the last time. 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. I've been here almost 30 years, I think.
Yeah.
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.
Yeah.
I will miss you. Thank you very much. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
All right. Thank you, Chairman. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within three 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.