Welcome to TSMC's Q3 2017 earnings conference and conference call. This is Jeff Su, TSMC's Deputy Director of Investor Relations and your host for today. Before we start, I'd like to inform everybody that TSMC will be celebrating its 30th anniversary with a forum that will start at 1:30 p. M. Taiwan time on next Monday, October 23, 2017.
The topic of this forum will be Semiconductors: The Next 10 Years. The forum will feature distinguished panelists from leading semiconductor companies and will be moderated by our Chairman, Doctor. Morris Chang. The event will be webcast live through TSMC's website at www.tsmc. Com, and we'd like to invite each and every one of you to watch this webcast.
Now coming back to today's event, TSMC's Q3 2017 earnings conference and conference call are webcast live through TSMC's website at www.tsmc.com. If you are joining us via 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: 1st, TSMC's Senior Vice President and CFO, Ms. Laura Ho, will summarize our operations in the Q3 of 2017, followed by our guidance for the Q4 of 2017 and her key messages.
Afterwards, TSMC's 2 Presidents and Co CEOs, Doctor. Mark Liu and Doctor. C. C. Wei, will jointly provide our key messages, and then we will open both the floor and the line for the question and answer session.
For those participants on the call, if you do not yet have a copy of the press release, you may download it from TSMC's website at www.tsmc.com. Please also download the summary slides in relation to today's earnings conference presentation. As usual, I'd like to remind everybody that today's discussions may contain forward looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward looking statements. Please refer to the Safe Harbor notice that appears in our press release. And now, I'd like to turn the podium to TSMC's CFO, Ms.
Laura Ho, for the summary of operations and the current quarter guidance.
Thank you, Jeff. Good afternoon, everyone. Thank you for joining us this afternoon. My presentation, as usual, we'll start with financial highlights for the Q3 and followed by the guidance for the Q4. 3rd quarter revenue increased 17.9 percent sequentially to TWD 252 1,000,000,000.
The strength of our 3rd quarter revenue was driven mainly by major mobile product launches and a healthy demand environment, including cryptocurrency mining. However, this strength was partially dampened by our customers' continued inventory management. Gross margin declined 0.9 percentage point sequentially to 49.9%, mainly reflecting the 10 nanometer margin dilution as I reported 3 months ago, but was somewhat balanced by an improved capacity utilization. Total operating expenses increased by TWD 2,200,000,000. The increase was mainly for 5 nanometer development.
However, thanks to operating leverages, total operating expense only represented 10.9% of revenue. So we were able to keep our operating margin flat sequentially at 38.9%. On tax expense, after a big jump in tax rate to 23% in the 2nd quarter due to the accrual of retained earnings tax, Our effective tax rate fell back to 10.6% in the 3rd quarter. Full year tax rate will remain between 13% 14%. Overall, our 3rd quarter EPS was $3.47 and ROE was 25.9%.
Now let's take a look at wafer revenue contribution by application. During the Q3, all 4 applications saw sequential growth: communication, computer, consumer and industrial standard increased 10%, 46%, 15% 13%, respectively. Now let's look at revenue by technology. 10 nanometer process technology contributed 10% of total wafer revenue during the 3rd quarter, up from only 1% in the 2nd quarter. The combined revenue from 16 20 nanometer accounted for 24%, and 28 nanometer was 23%.
Advanced Technologies, defined as 28 nanometer and more advanced, accounted for 57% of total wafer revenue, up from 54% in the 2nd quarter. Moving on to the balance sheet. Cash and marketable securities decreased TRY 159 sorry, TRY 157,000,000,000 to TWD 502,000,000,000, mainly as we distributed TWD 182,000,000,000 of cash dividend and repaid TWD 28,000,000,000 of corporate bonds. Correspondingly, current liability decreased by TWD 225,000,000,000 On financial ratios, accounts receivable turnover days decreased 5 days to 42 days, while days of inventory slightly increased one day to 53 days. Now let me make a few comments on cash flow and CapEx.
During the Q3, we generated about $117,000,000,000 cash from operations and spent NT62 1,000,000,000 in capital expenditures. As a result, free cash flow was an inflow of TWD 55,000,000,000. After we paid out cash dividend and repaid corporate bonds, cash balance decreased by about TWD 162,000,000,000 to reach TWD 408,000,000,000 at the end of the quarter. In U. S.
Dollar terms, our 3rd quarter capital expenditure was about US2.1 billion dollars Now let's turn to the 4th quarter guidance. Based on current business outlook, we expect 4th quarter revenue to be between $9,100,000,000 $9,200,000,000 representing 10% q over q growth. Based on exchange rate assumption of USD 1 to 30.30 NT dollars, our 4th quarter gross margin is expected to be between 48% 50%. Our 4th quarter operating margin is expected to be between 37% 39%. As we highlighted 3 months ago, we expect a 10 nanometer ramp will impact our second half 2017 gross margin by about 2 to 3 percentage point.
In the 3rd quarter, the 10 nanometer dilution was about 2 percentage point. We expect the dilution to be about 3 percentage point in the 4th quarter as the significant ramp up of our 10 nanometer production will continue. Now let me make some comments on our CapEx. On CapEx, we have spent USD 8,800,000,000 so far through the 1st 3 quarters of 2017. We now expect our 2017 budget to be USD 10,800,000,000 up from previously guided USD 10,000,000,000.
The increase of about USD 800,000,000 is mainly attributable to the accelerated buildup of 7 nanometer capacity. In order to support our 5% to 10% revenue growth target in the next few years, We anticipate that our CapEx in the next few years may be a few percentage points more than US10 $1,000,000,000 Let me make some comment on profitability. Over the past few years, we have been able to improve our structural profitability. We plan to maintain our structural profitability by continuing to create more value for our customers, increasing operating efficiencies and maintaining high utilization rate with careful planning of capacity. This is a challenge as every year, we face a different market environment.
However, with continuous innovations, our target is to maintain our gross margin at close to the 50% level. This is my remark. Now I'd like to turn the microphone to Mark.
Good afternoon. I want to deliver the following messages. The title is showing on the screen. And the first is the near term demand and inventory. Again, I will talk about demand in U.
S. Dollars because almost all our shipment is paid by U. S. Dollar. We had a good 3rd quarter.
We concluded our 3rd quarter revenue with 18% quarter to quarter growth in U. S. Dollar. This growth is strong, mainly driven by major mobile product launches using our 10 nanometer technology and info, advanced packaging. Even though demand was slightly dampened by the supply chain inventory reduction, Our customers' 3rd quarter growth were largely healthy.
We saw continued strength from automotive, IoT and high performance computing, which includes a surge demand from cryptocurrency mining. As for fabless inventory, days of inventory stay high, exiting 2Q 2017, largely due to the deferred annual product launch of Android smartphones, mainly from April from March, April to June, July. Moving into Q3, we estimated fabless DOI continues to reduce, but still to be higher than seasonal. We expected decreases to close to seasonal level exiting 4q 2017. For the Q4, we now forecast to have another strong revenue growth of 10% quarter to quarter.
It is driven by the ramp up of our 10 nanometer technology. We forecast world semiconductor growth of 16% year to year in 2017. In it, memory segment will grow 51%, we estimate. The world semiconductor, excluding memory growth, is about 6% year to year. It is mainly supported by the increased silicon content and a richer product mix, especially in high end smartphone, AI and automotive related market.
For the foundry market, we forecast revenue growth to be 7% in 2017. It is an increase from our previously 6% forecast last quarter. For TSMC, we forecast to have a revenue growth of 8.8% in U. S. Dollar, near the high end of 5% to 10% target of 2017.
Now I will talk about some major projects that are still in R and D. Later, C. C. Will talk about projects that are either in production or in near to production. For the project in R and D, first, I will talk about N5 progress.
TSMC N5 technology is scheduled for first half twenty nineteen risk production and 2020 volume production. Its development progress is well on track. Development of both device performance and yield improvement are on schedule. Our N5 technology will provide the best power efficiency for mobile application in 2020. This N5 technology will also support high speed standard cells featuring extreme low VT transistor, low RC interconnect, high density capacitor and high performance computing interconnect design scheme.
Those features are designed for applications in server, CPU, GPU, network processor and FPGA. TSMC N5 will use EUV extensively to get the full benefit on EUV. I'll talk more about EUV readiness. Our EUV technology development are progressing well for N7 plus and N5 technologies. We have consistently produced equal or better yield on our N7 baseline using several EUV layers.
The world's first NXE-three thousand four hundred EUV scanner has been released to production in RFAB and has produced the best CD control, overlay and SRAM yield on our N5 technology. We have run over 1,000 back end EU tile lots of N5 with EUV. And its EU is better than N7 at the same stage of our development. At TSMC, our EUV infrastructure development on high sensitivity EUV photoresist, low defect mask blank, pedicle quality and method of mask defect inspection are all on track for 2019 N7 plus volume production and 2020 N5 volume production. The following, I will provide our outlook of smartphone and high performance computing.
Firstly, on smartphone. We forecast world smartphone long term unit growth to be 6% compound annual growth rate from 2016 to 2021. On top of this unit growth, the insatiable needs for higher display quality and camera performance on new smartphones will continue. New advanced technologies such as voice recognition, on device AI, ARVR, 4 gs to 5 gs, etcetera, are driving silicon content per smartphone to continue to increase. We also see those high end features continuously proliferate to mid low end smartphones.
On HPC, high performance computing, We continue to believe AI and ubiquitous computing will be important drivers for long term world semiconductor growth. The fast expansion of deep learning in data centers is driving performance requirement for our GPU, CPU, FPGA and ASIC customers. Meanwhile, AI will continue to proliferate from the cloud to broad based client devices, such as smartphones and ADAS in cars, DTVs, set top box, gaming, surveillance, robot and drone already started from voice AI. Future AI will be much more sophisticated and intelligent, capable of real time complex inferencing and local learning. All these requires intensive localized parallel computation.
In addition to AI, the emerging blockchain applications seen in cryptocurrency mining recently may also fuel the future growth of high performance computing. So we are more optimistic on the high performance computing opportunity today versus last year. With our advanced wafer processing technologies and advanced packaging technologies, We will enable our customers to capture this trend. High performance computing wafer-ten in 2017 is about $11,500,000,000 and we expect it to have a double digit CAGR compound annual growth rate in the next 5 years. We expect high performance computing will become our major growth engine starting 2020.
Good afternoon, ladies and gentlemen. Let me start with our outlook for IoT and Automotive. IoT will be one of the high growth segment for TSMC in next 5 years. We expect the annual growth rate better than 20%. In 2017, we estimate the business contribution from IoT will be more than US1 $1,000,000,000 We believe the growth of IoT market is mainly driven by the readiness of ubiquitous connectivity such as Wi Fi, Bluetooth, narrowband and 5 gs.
TSMC has been working with customers to develop technologies required for IoT products such as sensors and various many low power devices. In sensor technology, we have offered the foundries the first step CMOS image sensor process down to 40 nanometer. We have also offered the first NIR product and the smallest footprint main sensor, which has been widely used in smartphones and other applications. In low power, TSMC has developed a comprehensive and complete set of low power technologies currently include 35 nanometer EORP, 40 EORP, 22 EORP and EUR 12 FFC. Now let me move to automotive.
In the automotive industry, we believe there are 3 megatrends that will lead to higher semiconductor contents in future vehicles. They are the trend toward better safety, such as ADAS the trend toward smart vehicles, which is demonstrated in faster and wider connectivity and infotainment and the trend toward greener vehicles such as electrical vehicle and hybrid electrical vehicles. TSMC has developed advanced CMOS technologies with a complete automotive IC design ecosystem, both in 16 FFC and by next year at 7. We are also working with all top 5 auto MCU companies to develop multiple embedded flash technologies for applications in many areas such as engine control, braking system, infotainment and etcetera. TSMC's superior auto grade manufacturing quality, sufficient capacity and long term supply commitment are additional critical elements to fulfill the automotive supply chain requirement.
We expect to double our automotive business in the next 5 years from about RMB1.4 billion this year. Now let me move to N7 and N7 plus N7 has been transferred from R and D to manufacturing in early Q3 this year. Right now, our efforts focus on defect reduction and fine tuning device performance to prepare for mass production in the first half of twenty eighteen. We expect the year learning in N7 to benefit greatly from N10, and our progress so far has been on schedule. The initial application for N7 are high end application processors and high performance computing.
We are working with major customers for their products to be introduced in 2018. We expect more than 50 tap outs by the end of 2018. We will also introduce N7 plus in risk production in 2018. Compared to N7, N7 plus will have 20% area reduction in logic density and about 10% speed improvement. We will start to use EUV in production at N7 plus node.
We have been working with ASMEO in developing EUV process for many years. Right now, as Mark just mentioned, we are using our own N7 test vehicle to practice EUV and have achieved same yield in SRAM circuit as without EUV. Now N10. TSMC N10 offer 2x logic density and 15% speed improvement as compared to our 16 FFC. We are already in mass production with the major application being the high end smartphones.
The N10 yield has been better than our original plan, and N10 has also set a new record in TSMC history in terms of ramping rate. We have achieved the planned peak output in a period less than 2 months as compared to 3 months for N20 and N16. The cycle time is also better than planned and again sets another new record for ramping up a new technology. We expect N10 to contribute about 10% of our full year 2017 wafer revenue. Now in N16 and N12.
This year, we have introduced a 12 FFC technology to further improve upon our 16 FFC with a faster speed by about 6% to 10% or reduction of power consumption by about 15% to 20%. In addition, 12 FFC also has about 20% monologic area as compared to 16 FFC. As a result, we expect most of our customers will start to adopt 12 FFC for their products in 2018 and after. The major application for this 1612 FFC node are mobile application processors, graphic chips, FPGA, RF and low power devices. Due to strong demand from the high performance segment, we have reached a very high utilization rate in 16 nanometer recently, and we expect this momentum will continue into 2018.
Let me now comment on 28 nanometer. As we reported in our last investor conference, our 22 nanometer will offer a 10% chip areas direct shrink and 13.5% speed improvement or 25% power reduction as compared to 28 HPC plus This technology is suitable for applications such as image signal processor, 5 gs millimeter wave transceiver, low cost application processor and others. Through continuous technology improvement, we are confident that TSMC's 28, 22 nanometer node will remain very competitive in the market. In 2017, we have observed the highest number of new tape outs in 28 nanometer as compared to previous years. After 6 years of high volume production and millions of 12 inches wafer shift, we have achieved a lowest defect density and very competitive cost structure for 28 nanometer.
We believe we are very well positioned to continue to maintain our high market segment share at this node. Thank you for your attention.
Okay. Thank you. 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 an opportunity to ask questions. Questions will be taken from both 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. Our first question comes from the floor of Deutsche Bank's Michael Cheung.
Chow.
You mentioned 7 nanometer Taibao number more than 50 by year end. So are half of that for HPC?
How many of 50 TEBOs are for HPC? Yes. Probably more than half. More than half.
So does that means the progress for HPC is stronger than your observation 6 months ago? Because in the past, you say it should be more than half a table for HPC for your 30 table 3 months ago, right? So this is a pattern, is it same or
did we say that
6 weeks
ago? 3 months ago, you mentioned that.
[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Well, we talked about last time also, about 50 more than 50% HPC tape ons, but that doesn't mean the volume is more than 50% because many of the high performance computing in FPGA and in other ASICs, there are smaller volumes. It's just the activity showing the design activity is pretty strong. But I think the performance the volume doesn't proportional to the tapered numbers.
One follow-up question for 7 millimeter. Do you think AI will use 7 millimeter in 2018 or 2019 AI product?
C. Wei:] Okay, boss. But I don't want to comment on customer product schedule.
Sure. Okay. Second question is regarding your 20 nanometer market share next year. So what is your view for your 20 nanometer market share in 2018, 2019? 28 nanometer?
Yes, Combined with 22 nanometer. We want
to maintain our high market share.
Okay. Let's move on to the next question also from the floor. Credit Suisse's Randy Abrams, please.
Okay. Thank you. Yes, I want to first congratulate you on the 30 years and also your appointments. The first question, back to the data center, as you look at pricing that node, because you're targeting higher performance applications, Is there a potential you could have different pricing or better pricing and better profitability rather than the or relative to the mobile tier? And just a second small part, the cryptocurrency, you mentioned it as a long term driver, but I'm curious in the short term, if you're seeing sustainability of that strength over the next couple of quarters?
It has first of all, the high performance computing definitely have potential if we provide high values. But so far, we look we work with our customer. They are in the entry stage. We don't see much different differences. As for the second question
is The crypto
Cryptocurrency, okay. As you know, the cryptocurrency price is vastly is very volatile. And but in the recent year, it has been quite tenacity keeping at high level even with some of the government because of the monitor issues. They have some constraints, but it doesn't seems to be a roadblock at this point. So but we look at the cryptocurrency as an initial application for the blockchains.
And as you know, the service company today, they offer many blockchain application platforms. So it's the technology that is very interesting, and it's it will transform many of the contracts or payment methodology today. So that's the reason. I would not comment on the cryptocurrency sustainability, but we don't see a drop either.
Okay. Thank you. The second question, back to the profitability, we're 10 nanometer ramping, it's about 300 basis point impact in 4th quarter. If you could talk next year, I think two questions. In first half, if mix shifts back, could it be like we saw this year first half where gross margins went, say, to 52%, but saw some improvement in first half?
And then if you could talk about the view next year, how much dilution from 10 and if you expect 7 to have certain amount of dilution?
Okay. The 10 nanometer dilution is highest this year as we are ramping very, very fast. So the dilution will reduce to about 1 percentage point next year, and there will be no dilution after 2018. So for 7 nanometer, we believe it will follow the similar trend. Actually, I have probably I said a couple of times, it takes 8 quarters 7 to 8 quarters for any particular new load to dilute corporate margin, but after 8 quarters, we will be similar to corporate level.
So 7 nanometer will be at the same trend.
Okay. And I guess, do you think the seasonality of margin, if say, mix shifts back, you also have seasonality in first half, but could we see the same scenario where margin, say, starts being higher in first half?
I think margin has several factors. Number 1 is structural profitability. I just made my remark, and we are working very hard to maintain close to 50% level. Another factor, of course, as you just mentioned, there is a seasonality, and that affects utilization. And we'll have to look at the demand on the next year to decide whether the profitability will be different from now.
Thank you.
Okay. Let's move on to the next question, Citigroup's Roland Hsu.
Good afternoon. For your 10 nanometer to reach 10% of your total revenue this year, that means 4Q, 10 nanometer probably will be about 25% of your total revenue. So with this high contribution for 10 nanometer in 4Q, are you worrying for Q1 next year that will be revenue will be sub seasonal once our major customer finished their shipment in 4Q?
C. Wei:] Your calculation is quite close to the number that we have. As for next year, actually, we did not comment, but there is a similarity on the smartphone market. So we are probably, we will follow that seasonality as you just mentioned about. And the impact, don't go yet, But we our customer are working on migration to the next node that will ramp it up in the second half of next year.
Okay. Second question is now Mark also talked about there are more and more smartphone application process integrating this neural engine for machine learning or AI on the smartphone. So going forward, will you include this smartphone application process with AI function into HPC sector?
No, no. We still capitalize whatever happened inside smartphone, yes. Okay.
So with this fast AI adoption for the smartphone, will it change your earning contribution forecast for smartphone and or HPC. Previously, you talked about from 2016 to 2020, TSMC revenue grew about 5% to 10%. Out of this 5% to 10%, 50% will come from smartphone and 25% from HPC. Now with this fast AI adoption on smartphone, what has changed your view on that?
C. Wei:] We forecast at AI, I think, 2 years ago, yes. So we have been observing this market very early on. And with time, we always incorporate into our forecast already. Today, I just raised issue that this year's outlook appears to be better than last year's.
1 of you asked me this question.
Okay. Understood.
For this HP or for this application processor for AI on smartphone, is info a must to package this kind of chip? Thank you. C. Wei:] I cannot comment whether InFO is a must, but InFO definitely improve the performance and enhanced the competitiveness of that device in the market.
Thank you.
All right. Let's take the next question from the floor, UBS' Bill
Hi there. Thank you very much for taking my question. And also, Doctor. Liu and Doctor. Wei, congrats on the new appointments.
First question is for Doctor. Liu. You talked about a wafer temp opportunity for HPC of $11,500,000,000 Can you talk about how that is defined? And also, I've spoken to a few of your customers recently. It sounds like machine learning and parallel compute, high bandwidth memory and putting that all together and very close is going to be pretty key.
Can you give us an update on your outlook on COBOS?
C. Wei:] Our definition of high performance computing, including the CPU, GPU, FPGA, gaming and some ASIC Processors, we call XPU, they are different company produce process units, and that's the definition. So wafer 10, meaning wafer 10, meaning, if those parts being produced by foundry, what will be the foundry value for that market.
Okay, got it. Thank you. And the part 2 of the first question is on COOS?
[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Yes, we are truly excited about our COOS. The growth seems higher than we earlier forecasted. It is essential for the chip to chip bringing the chip closer, be it memory or other communication chips. And I think year to year growth, if not double, it will be close.
Can you give us an outlook on what that might look like next year? And also what kind of CapEx is required for COCOOS?
As just Mark said, cobots, although it's small now, but its growth momentum is pretty high, we expect very strong growth on cobalt's business next year. In terms of the capital expenditure, I think in the recent few years, as InFO still accounts for majority part of the back end investment, COVID is not that high.
Second question is for Doctor. Wei. If you look at the auto market, you talked about 3 megatrends, safety, smarter cars and greener cars. If you look at specifically on the greener cars, right, the EVs, power management, it seems like a lot of these are more niche applications. People are talking about silicon carbide.
I think a lot of it is going to
be trialing edge. What's your plan for addressing the EV market? Well, I think the EV market is there's a lot of electronics component inside. The first part of my mind is power management, right? You have a huge amount of battery.
You need the power management to make sure that everything is coordinated and deliver the power out. And then you have a lot of control as compared with previous our concept inside a car engine control infotainment to receive the Wi Fi connectivity. So in the EVs field, I would think that semiconductor content were greatly increased, right, because you need a lot of connectivity. You need a lot of computation also because you correct your environmental information and you need a lot of high speed computing to make a decision, go no go, turn right or something like that. So a lot of applications.
Probably, today, we still underestimate this market.
Maybe just specifically, would TSMC consider silicon carbide?
We do something better than that.
Okay, great.
Okay. We have a few callers on the line. So operator, can we proceed to take the next call from the line, please?
Yes. We have a question from the line of Brett Stinson of Arete Research. Please ask your question.
Yes. Thanks very much. Can you perhaps talk a bit about the ASIC business at TSMC? I mean, we're seeing significant ASIC activity, particularly system OEMs or hyperscalers. And I can see the global unit chip business is growing a lot.
So maybe if you can just talk more broadly about ASIC business. And I guess traditionally it's been Huawei or Cisco or Apple. But how big is this ASIC business for TSMC? And how would you categorize the growth outlook for ASICs at TSM?
Okay. Brett, please allow me to repeat your question. Basically, you want to ask about the outlook for the ASIC business at TSMC. You pointed out that many system OEMs and hyperscalers are designing ASICs. From your view, GUC is growing a lot.
So you want to understand how does the ASIC business outlook for TSMC look?
[SPEAKER UNIDENTIFIED
COMPANY REPRESENTATIVE:] That's right. Thank you.
Okay. Yes. A lot of process unit earlier mentioned is in the form of ASICs because the computation ecosystem is no longer fixed into a one platform such as personal computer before. Each company have their own platform. Therefore, they tailor their chip design accordingly to get the maximum computation power.
We currently, ASIC, we support our customers for those projects. Therefore, our direct customer will still be the design service company. Some of the fabulous ASICs and some of the regular fabulous company that part of their business is designing using ASIC capability to expand their business. So all these funnel into our loading, which we do not categorize as ASIC, but it is a all forms of ASIC coming to our foundry services. And it is growing.
I don't therefore, I don't have a specific number for you.
Okay. Brett, do you want do
you have one follow-up?
Just a follow-up. Sure.
Yes. On 16 nanometer, you've reported 16 nanometer sales down year on year for the first time, down over 20% year on year. And I know you referenced a lot of growth in cryptocurrency, which is using 60 nanometer. Can you maybe just talk a bit about what's happened at 50 nanometer at TSMC? And when you look ahead, I think you talked about the tape activity for 28 and 7 nanometer being very strong.
But how would you categorize the 16 and 12 nanometer tape out activity for TSMC going forward? Thank you.
Okay. Brett, please also let me just make sure that we understood your question right. So Brett, you're saying that our 16 nanometer sales were down about 20% year on year in Q3, but we had also highlighted the growth in cryptocurrencies. So you want us to talk about what has happened or in 16 nanometer in the past? And then we've also talked about we have very strong tape outs at 28 and 7 nanometer.
But then how does the outlook for 16twelve look going forward? Is that correct?
Yes. Thank you. That's great.
Well, let me comment on the 16 FinFET first. 16 FinFET has been a very successful node for TSMC, but we continue to improve the performance with the introduction of 12 FFC. Now recently, I just reported that we have a very high utilization because of a high performance computing demand. And we look at forward into 2018, 16, 12 nanometer node will continue this high utilization momentum for next year and probably going to the other year also, all right? So what is the other questions?
Brett, does that answer your question?
Yes. That's great. Thank you.
Okay. Thank you. We will take the next question also from the line. Operator, please.
The next question comes from Mehdi Hosseini of SIG. Please ask your question.
Yes. Thank you for taking my question. A couple of follow ups. Regarding your CapEx statement, how much of the next year CapEx are you going to attribute to new facility? Because I'm on the impression that you're going to build a new fab in the for 3 nanometer application and it will be great if we could give a color on the mix of CapEx for next year.
And I have a follow-up.
Okay. Sorry, Madi. Let me repeat your to make sure we got it right. So your first question is, we've talked about CapEx. How much of next year's CapEx is related to 3 nanometer?
Is that correct?
And also the associated new facility construction.
So facilities associated with 3 nanometer, okay.
No CapEx will be associated with 3 nanometer next year. It's still too far away from.
Right. But will you be building a new fab next year?
I'm sorry, can you repeat that?
Next year CapEx include construction of the new fab?
Will next year's CapEx include construction of a new fab?
Yes. Next year CapEx will include construction for 5 nanometer and a little bit for 7 nanometer as well.
Okay. Very helpful. Thank you. And I have a follow-up regarding the transition from 7 nanometer plus, assuming that the EUV insertion will happen at 7 nanometer plus, how will your customers be planning for the mask set? I'm under impression that 7 nanometer plus will require new mask and layout.
And would EUV essentially cannibalize demand for 7 nanometer?
Okay. Mandeep, let me repeat your question. Again, you're asking about the N7 to N7 plus transition and the use of EUV at N7 plus How does this impact or how will your customers impact the maskets and layout? And will EUV cannibalize the demand for 7 nanometer? So two parts to your question.
All right. Let me answer
Yes. Thank you.
Let me answer the N7 to N7 plus Yes, we are going to use a few layer of EUV in N7 plus And as a result, the chip area will be shrinked will be shrunk and customer has to retake out. If they are using talking about the same product, they have to retake out to get the benefit. That's for sure, all right? And is that going to penalize the N7 now because of a lot of design rule has been utilized in the N7 plus also. So in fact, from N7 to N7 plus we expect customer don't have to spend 100% of their resources again to design a new node.
Actually, it's not.
Does
that answer the question?
Yes. Okay. Let's come back to the floor for further questions. Morgan Stanley's Charlie Chan, please.
Thank you. So my first question is to follow-up Bill's question on foundry 10. Do you include that X86 CPU in your foundry 10, for example, Intel 100% in house, right, AMD outsourced to foundry? So how do you count this S86 CPU in your foundry tenant?
Charlie, you're asking about the HPC wafer 10, right?
[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] Well, this is a little bit sensitive. There are only 2 customer doing X86. So I wouldn't want to comment on specific customers.
Right. Okay. And my next question is regarding the management transition. Again, congrats for your new role. So my question is more general.
What's going to be the key change in operational strategy that both co CEOs want to make in the coming 3 years? And also, what's the challenge you can foresee without Doctor. Chen's guidance for the company?
[SPEAKER UNIDENTIFIED
COMPANY REPRESENTATIVE:] Well, there is a challenge because of Doctor. Morris Chen's achievement. You just cannot go better beyond that. For the philosophy, strategy, operation, I believe will be continuous. And I believe I worked with Mark for many years, and we will cooperate each other for sure, no problem.
Mark? Well, next June will be the time, not yet today. And I think C. C. Wei has many strengths.
He can be an excellent CEO. So the challenge will be not that big. And I was, of course, tune myself to serve up to my best to the new role of the new role of the Chairmanship, and I should be able to deal with it. And Chairman today is working closely with me and C. C.
And we are constantly work together how to go through this transition. So by June next year, I think the role will be already pretty much defined in place. So it will still take 8 months for us to make this transition. I think I'm confident that we can make that transition, yes.
We wish transition will be very smooth. And my next question is to Laura on some financial numbers implication. So I would assume next year CapEx should be flat, right, because this is a RMB 10,800,000,000. Next year is a few percentage above 10,000,000,000, right? So given the CapEx is flat and you are targeting for like 5%, 10% premium CAGR.
You said fair to assume you already think your capital intensity will decline in the coming years?
I think I have said when I talk about this 10,000,000,000, I also said in the few next few years, I believe our capital intensity will be in the range of 30% to 35%. So right now, the CapEx looks like will be slightly higher than RMB 10,000,000,000, but I still believe the capital intensity will still be in the range of 30% to 35%.
Okay. And also on that margin guidance, right? So I guess people ask about gross margin for 7 nanometer versus 10 HPC versus other application. But how about the EBITDA margin you are making from 7 nanometer versus 10 nanometer? Because I think for 10 nanometer, I guess, the year over year ramp was a little bit slow early this year.
I would assume for 7 nanometer, the year over year ramp should be better. And also you are converting some tools from 10 nanometer, right? So I just want to get a sense about EBITDA margin level for 7 versus 10.
I will talk about the corporate level EBITDA margin first. I think in the past few years, our corporate level EBITDA margin has been ranging from 60% to 65%. You can calculate by yourself. This number is going to maintain as far as I can see in next few years. In terms of who contributed that EBITDA margin, you're asking particularly about the 7 nanometer, okay?
I think you can understand the 1st few years for any new node, the EBITDA margin should be negative. But after it reached to the mass production, it will ramp up very fast. So for a period of time, it will be higher than corporate average EBITDA margin and then fall back to corporate level. So that's I think you can understand that. Yes.
7 nanometer, we also follow that trend.
Okay. Yes. This is that will be
the case, right? Because your margin guidance is 50%, and this quarter, your guidance is 48% to 50%. Right? So lastly, if I remember very quick, right? So one of your big smartphone customer, their new chip is 30% smaller than previous die size, right?
So I understand your comment about more smartphone semi contents, but your customers are shrinking in die size, right? What does it mean to your wafer revenue for next generation, for example, 7 nanometer?
[SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] You are asking that my customer's product die size, 30% smaller? C.
Wei:] Yes. So two trends, right? Semi contents per smartphone is growing, but your customers' die size is shrinking, right? So what does that mean to the wafer demand for your smartphone business?
C. Wei:] First, I don't comment on my customer's size. You know that. We build the capacity according to what the customer's demand is. That's what I can say.
And then the 10 nanometer for this year, you will contribute 10% of the total wafer revenue. That's it. Okay.
Okay. Yes. I think we need
to move on. Next question from the 4 CLSA's, Sebastian Ho.
Thanks, Jeff. So my first question is regarding the growth outlook for CPU within your high performance computing segment. Do you see or are you more confident in the ARM based CPU or X86 CPU if we just look at next 2 years for your growth?
Mostly ARM based CPU, what we are working on with our customers.
So you don't see X86 CPU to be a popular driver for the next 2 years?
Then that is too specific to comment because there's only one customer.
Okay. And my second question is on the 7 nanometers and your 7 nanometer plus. If you look at next 2 years together, do you have sense or estimate regarding how much market share you have on this node 7 and 7 plus together?
Certainly, I might see our hope that is as high as possible, but today, I don't have a number to give it to you. But we work with many, many customers. And as I said, at the end of 2018, we expect to have 50 tape outs and it's a very kind of vigorous activities.
Okay. But what if we just compare that with the 16 nanometer share you have in 2015? Would that be higher? I mean, 7 will be higher than the 60 nanometer that time?
That will be too specific now. I mean, you are talking about it. So I don't want to comment, but we are going to have very high market share.
Okay. So just a follow-up on that 77 plus is that do you see your major most of your customers will migrate to 7 plus after using 7?
After 7, we certainly work with our customer to migrate into 7 plus if that is in the product roadmap because of or somehow the same products offer a 20% large area densities improvement. But we are working with customers, but I cannot come and say that everyone will go to the same class.
Okay. Let's move on. We have let's take, operator, the next question from the line as well, please.
We have a question from Stephen Kallayo of HSBC. Please ask your question.
Great. First question, just a clarification of your answer, I think it was to Roland's question on 10 nanometer in the Q1. Your response was you expect normal seasonality. The Q4 is actually quite a bit above historical seasonality. So could you speak a little bit more on what happens to 10 nanometer in the Q1?
Does it still sustain the same dollar level? Help me understand the trend of 10 nanometer.
So your first question, Stephen, is about the 10 nanometer. You want to know in the Q1 of 2018 if the 10 nanometer revenue will sustain the same level?
We will give you the guidance
for next time in the Q4 next year.
Okay, fair enough on that. And then maybe a longer term question, both kind of leading edge as well as mainstream. It seems there's a lot of Chinese capacity that's going or capacity in China that's going in with 4 or 5 different fabs that are going on. I'm curious, what do you think about the competitive landscape with the Chinese supply? Do you think that presents a risk out there of excess supply at some point?
That's I think more in the mainstream type nodes. And then it also seems like on the leading edge nodes, all three of your competitors Intel, Samsung and GlobalFoundries have made a lot of noise in the last 90 days or so trying to pitch their foundry offerings and claiming their execution has gotten better on. Any thoughts on leading edge competitive landscape?
Okay. Stephen, let me just to repeat your question. It seems to be a long term question on the competitive landscape, 2 parts. The first is to address the China capacity. You're saying that you're seeing many different much sorry, capacity being added in China, 4 to 5 different fabs.
So what does this mean for the competitive landscape? Will this result in excess supply risk in the mainstream? This is the first part of your question. And then the second part is to address the competition at leading edge with Intel and Samsung. And you're saying you're talking about better execution, etcetera.
How do we view the competition at leading edge? So two parts to your question, correct?
Fair enough, yes.
Okay. Regarding to a lot of new fabs in mainland China, and the question is whether that's
Whether the additional capacity being built in China, what does this mean for the competitive landscape? Will it result in excess supply risk at mainstream nodes?
C. Wei:] Okay. We believe that if you build a fab, you should come with technology and most important with customer. So a lot of fabs, but we previously, we talk about effective capacity. That means you got to have a technology, you got to have a customer.
So in terms of a lot of fabs in Mainland China, we don't like it, but we are very competitive. So we will continue to compete, of course, and maintain our market share.
Okay. And then the second part, Stephen's question, competition at the leading edge with Intel and Samsung.
Well, we always in the leading edge, we always live with fierce competition in the past. In today's, I think but those are foundries competitions. Now these 2 IBM is getting into foundry business, too. But one of our advantage is we do not compete with our customers. And that plays a major role in us to earn the trust from our customers.
But we don't take any competition lightly. We will just compete with them.
Okay. Thank you. Let's come back to
the floor.
First, Goldman Sachs, Donald So okay, please allow me to translate Donald's question. First, he said congratulations to Doctor. Lu and Doctor. Wei on the smooth transition. And then your first question is that you said our Computing segment revenue showed displayed strong growth in the Q3, and you want to know how much of this is coming from the cryptocurrency segment, correct?
Okay. Well, in the Q3, the cryptocurrency revenue is about USD 350,000,000 to USD 400,000,000. So it's pretty big and it's a pickup from the Q3 and stay on for the Q4.
Okay. And the second part of your second question, Donald? Okay. Sorry, please allow me to translate Dao Leung's follow-up is that if cryptocurrency is bigger, will this result in exponential growth and also into 2018?
[SPEAKER UNIDENTIFIED COMPANY
REPRESENTATIVE:] We of course, our customer always very bullish on their demand for the next year, but we counted cautiously. So we currently are trying to work out with the customer, anticipate possible volatility and but try to still support that. Hopefully, next year will be higher, but we do not comp on
Okay. So did you have a second question?
Yes. The second question is on the 28 nanometer. I think SMIC recently has hired a new CEO, which both of you probably are familiar with. And also, there's Huawei and the UMC also building capacity on 28. But I checked the 28 nanometer demand at least in the first half this year among all the foundries increased about 10% only.
And you said C. C. Said there's more takeout activities. But in terms of growth on demand and also in terms of supply, if those guys build up capacity and build up technology, do you think there will be a real price bloodbath next year?
First, the technology TSMC continue to improve the technology. Now we improved from 28 HPC plus to 22 nanometer now. So it's very competitive. And our cost structure also very competitive. So we have all the weapon to defend our high market segment share in this node, and we will.
Did that answer your question? Because you want me to nail down that how many percentage?
More for next year, do you think 28 nanometer overall demand for all the foundries will increase, let's say, more than the first half this year, which is 10%. And also for next year, if they build capacity more than 10%, then could we have a real price problem? C.
Wei:] Well, I don't comment on competitors' buildup of their capacity. All we can do is we develop the technology. We have a customer working with us, and we believe we maintain the market segment share and the demand will increase. Okay? Are you satisfied?
Okay.
Thank you. Yes. Let's move on. I think we have one question from Gokul Hariharan from JPMorgan in the front.
Yes. Thank you. So on 7 nanometer, Doctor. Wei, first question is, it looks like there is a lot of a confluence of positive factors in terms of HPC coming in, and I think there is a lot of AI related demand also coming. Could you take an initial stab at where you think 7 nanometer, maybe 7 Immersion and 7 so N7 and N7 plus combined could be in terms of revenue opportunity for the industry compared to, say, the last peak was 28 nanometer?
That was my first question. C.
Wei:] We believe 77 plus will be a long lasting node. And that will be very useful for our customer to utilize it.
So could you comment a little bit more specifics in terms of is it going to be much bigger than 28? Because it looks like 16 is a little bit shorter.
We certainly hope they were much bigger than 28 node, yes.
Okay. Thank you. Second question, Doctor. Li, you mentioned about the AI demand starting to move from the data center to the edge in terms of devices, ADAS, etcetera. Could you talk about how this evolution happens in terms of the foundry TAM itself, the wafer TAM for HPC?
Do you feel in the next 3 to 4 years, the wafer TAM from the edge could start surpassing the AI related wafer TAM could start surpassing the wafer TAM that you see in the data center? Or some kind of quantitative idea in terms of how you think that evolves?
I cannot. I cannot. I think I raised that trend to show that AI will be a fast growth because in the data center, it is a closed ecosystem. Once you go to the client edge, it's an open system. So innovators will come in easily.
So it has higher growth potential. I haven't calculated the how it will crossover. Maybe I should take a look.
Okay. All right. Let's take the next question from the line, please, operator.
We have a question question from Patrick Liao of Macquarie Securities. You may ask your
My first question is about the mobile from C content per box. In the next few years? Can I have an idea about this?
Okay. Let me repeat your question. Patrick, you want to know the mobile phone silicon content per box. What is the outlook for the silicon content per box in mobile phones for the next few years?
C. Wei:] Yes, correct.
We expect the silicon content for high end smartphone will continue to grow. And for the mid end to low end, we'll maintain at the current level.
Okay. Do you have a follow-up second question, Patrick?
Okay. Yes. Yes. Do you expect us the annuity for next few years to be similar with this year, that is weaker second quarter and stronger second half? Thank you.
Okay. So Patrick, your question is you want to know that in the next few years, do we expect the seasonality pattern to be similar to this year, which is a weaker second quarter and a stronger second half?
Yes. Thank you.
We don't know. Each year seems to have their own characteristics. It has to do with the year end inventory. It has to do with product launches and just many factors. So I cannot forecast to be the same.
Okay. Thank you, Patrick.
Let's take the
next question, operator, also from the line, a follow-up question, I believe.
Yes. From Adi Hosseini of SIG. Please go ahead.
Yes. Thanks for opportunity for a follow-up. When you talk about cryptocurrency, what are some of the applications that are driving your loading? Is that specifically GPU? Or are there other applications?
And if you could help me better understand, that would be great.
Okay. Mehdi's question is that in regards to cryptocurrency, he wants to know that what are some of the applications specifically driving the strong demand. Is it GPU? What is it specifically?
[SPEAKER UNIDENTIFIED
COMPANY REPRESENTATIVE:] The customer in the cryptocurrency mining really designed their own chip. So we can we categorize that as a ASIC processor units. So those are very different. It's they don't it is a very high power, very, very high speed. And so the design is totally customized.
Okay. Does that answer your question,
Would you actually break this out if it becomes significant in the future? Like an ASIC category or other?
Did you question is that will we break out like the ASIC segment specifically if it becomes significantly bigger? You mean In our revenue You mean cryptocurrency? Crypto ASICs.
Crypto ASICs. We'll see. Currently, the volume is not big enough to put a separate characterization. But there are many innovators in this field. People used to use GPUs also.
People use standard CPU also and FPGA also. So it is the combinations of all the product we're producing today.
Okay. Thank you, Mehdi. In the interest of time, we'll probably take 2 last questions, one from the line, please, operator, first, and then we'll take one from before. So operator, please We have a
follow-up question from Stephen Pelayo. Yes, we have from Steven Pelaez of HSBC. Please go ahead.
Just one question for Laura. Congratulations on the good free cash flow in the Q3. I want to think about it a little bit going into next year. It looks like this year you guys are going to generate maybe $40,000,000 $50,000,000 more in free cash flow relative to the dividends you pay. So you're still growing your cash balance.
And if next year you have kind of flattish CapEx and revenues growing 5%, 10%, looks like you're going to probably generate even more free cash flow. Can you talk a little bit about what's the optimal cash balance and what your thoughts are on maybe dividends going forward?
You are right. And we have been able to grow our free cash flow faster than before since 2014. So therefore, we were able to increase our dividend payout starting from 2015 from $3 to $4.5 to $6 to $7 this year. So with the capital intensity and the EBITDA margin we're talking about, we are very confident about our ability to continue to generate free cash flow in the next few years. Therefore, we plan to gradually increase the cash dividend payout going forward.
Okay. Thank you. All right. Final question, Citigroup, Roland
Thank you. I think the first question is you're talking about the new fab construction. I know in your in Taiwan, all of your 12 inches fab is based on this Gigafab design. And now you are building the 12 inches fab in 2019. So is 2019 also based on this Gigafab design?
We build the 19 fab to expand or to increase our opportunity in mainland China so we can serve the customer more closely. Whether that it will be a giga fab leading our plan, but right now, the first phase is 20,000 wafers per month in 16 nanometer.
Okay. So do you have the plan for to kick off this second phase construction?
We're not ready to answer this question yet.
Okay. Thank you. Yes, Adena, if I may, last question is for your 16 nanometer. Can we have a ballpark number of how much revenue is coming from 12 nanometer? And I think the same question as the 28 nanometer, how much revenue is coming from 22?
For the 12 nanometer will be next year, so I cannot give you an estimated number. The same as the 22 nanometer, but customer right now is designed for their product and to be early introduced in the 2018. So probably at that time, we can give you a more clear picture for that.
Okay. Thank you.
Okay. Thank you, everyone. This concludes our Q and A session. Before we conclude today's conference, please be advised that the replay of the conference will be within 3 hours from now and the transcript will become available 24 hours of now, both of which will be available through TSMC's website at www.tsmc.com. So thank you for joining us today.
We hope you will join us again next quarter. Goodbye and have a good day. Thank you.