Welcome to TSMC's Q2 2017 earnings conference and conference call. This is Elizabeth Communications and your host for today. Today's event is webcast live through TSMC's website atwww.tsmc.com. If you are joining us via the conference call, your dialing lines are in listen only mode. As this conference is being viewed by investors around the world, we will conduct this event in English only.
The format for today's event will be as follows: 1st, TSMC's Senior Vice President and CFO, Ms. Laura Hou, will summarize our operations in the Q2 of 2017, followed by our guidance for the Q3 of 2017, along with 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, then we will open both the floor and the lines for questions and answers. 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 atwww.tsmc.com. Please also download the summary slides in relation to today's earnings and conference presentations. As usual, I would like to remind everybody that today's discussions may contain forward looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward looking statements.
Please refer to the Safe Harbor notice that appears on our press release. And now, I would like to turn the podium to TSMC's CFO, Ms. Laura Ho, for the summary of operations and current quarter guidance.
Thank you, Elizabeth. Good afternoon, everyone. Thank you for joining us today. My presentation will be stemming from the financial highlights for the Q2, followed by the guidance for the Q3. 2nd quarter revenue decreased 8.6% quarter over quarter and 3.6% year over year.
The sequential decline reflecting supply chain inventory management, mobile product personality and appreciation in NT dollar against the U. S. Dollar. In U. S.
Dollar terms, 2nd quarter revenue was US7.06 billion dollars about 5.9% decrease Q over Q, but 3.2% increase year over year. Gross margin was 50.8%, 1.1% lower than the 1st quarter, mainly due to the unfavorable foreign exchange rate. Operating expenses ratio rose to 11.9% as our revenue decreased more than the expense decrease. Operating margin decreased 1.9 percentage point sequentially to reach 38.9% in the 2nd quarter. Aside that, in my last quarterly conference, the 2nd quarter corporate tax rate would be 23% due to the accrual of 10% undistributed retained earnings tax.
The tax rate will fall back to 10% 11% level in the second half and the full year tax rate will remain at 13% to 14%. Overall, our 2nd quarter EPS was $2.56 and ROE was 19%. Now let's take a look at wafer revenue contribution by application. During the Q2, communication, computer and consumer decreased 10%, 14% and 7%, respectively, while industrial standard increased 9%. In terms of revenue by technology, 10 nanometer process technology contributed 1% of total wafer revenue during the Q2, while the combined revenue from 16 and 20 nanometer accounted for 26% of wafer revenue in the 2nd quarter and 28 nanometer represented 27% of total wafer revenue.
So advanced technologies defined as 28 nanometer and below accounted for 54% of our total wafer revenue in the Q2. Moving on to the balance sheet. We ended the 2nd quarter with cash and marketable securities of CLP659 1,000,000,000 essentially flat from the Q1. On the liability side, current liabilities increased by NT 202 billion dollars as we accrued about NT182 billion dollars for cash dividend,
which will
be paid out this month. On financial ratios, accounts receivable turnover days remain at 47 days, while days of inventory increased 8 days to 62 days, primarily due to the higher working process, imagery for the 10 nanometer to support the production ramp in 3rd quarter. Now let me make a few comments on cash flow and CapEx. During the Q2, we generated about $103,000,000,000 cash from operations. We spent $105,000,000,000 in capital expenditure.
So the free cash flow was an outflow of about $200,000,000 dollars We also disposed NT5 1,000,000,000 of fixed income investment. As a result, overall, our cash balance increased by about $6,000,000,000 to $570,000,000,000 dollars at the end of the Q2. In U. S. Dollar terms, our first half capital expenditure was $6,800,000,000 Full year capital budget remained at about US10 1,000,000,000 Before I conclude the financial summary, I would like to point out the impact of foreign exchange rates on our revenue.
As I mentioned to you last time, nearly all TSMC's revenue is in U. S. Dollar. The sensitivity of our revenue to U. S.
Dollar versus anti dollar exchange rate is nearly 100%. And the sensitivity of both our gross margin and operating margin to 100 basis points exchange rate fluctuations is about 40 basis points. In the Q1, NT dollars appreciated by 2% sequentially, followed by another 3% appreciation in the 2nd quarter. Year over year, NT dollars appreciated 6% in Q1 and 6.6 percent in Q2. Therefore, our first half twenty seventeen revenue in NT dollars only went up by 5.3% compared to first half twenty sixteen.
Whereas in U. S. Dollars, our revenue in the first half grew 12.2% from first half twenty sixteen. This is better than what we stated in the January investor conference that our first half twenty seventeen revenue would grow by about 10% from first half twenty sixteen in U. S.
Dollar terms. Now let me turn into Q3 guidance. 1st of all, starting from this quarter, our quarterly revenue guidance will be given in U. S. Dollar only.
We make these changes because nearly of our revenue all our revenue are in U. S. Dollars and giving revenue guidance in U. S. Dollar more truthfully reflects our business expectation.
So based on current business outlook, we expect 3rd quarter revenue to be between US8.12 billion dollars US8.22 billion dollars Based on the assumptions of NT30.30 dollars to 1 dollars our Q3 gross margin is expected to be between 48.5% 50.5%. Our 3rd quarter operating margin is expected to be between 37% 39%. Since we began a significant ramp of our 10 nanometer production in Q3, we expect the 10 nanometer ramp will impact our second half twenty seventeen gross margin by about 2 to 3 percentage points. The impact on 3rd quarter margins has already been reflected in our Q3 guidance, which I just provided. Thank you.
Now, I'd like to turn the microphone to Mark for his comments.
Good afternoon, ladies and gentlemen. Let me continue to deliver my key messages. First, I want to talk about our near term demand because, again, all our customer orders are in U. S. Dollar.
I will here describe our near term demand in terms of our revenue in U. S. Dollar. We now concluded our 2nd quarter with revenue of minus 6% quarter to quarter and plus 3% year to year in U. S.
Dollar. As we forecasted in our previous conference, the Q2 was impacted by a quite severe inventory adjustment from fabless customers. And we saw fabless customer inventory quickly digesting during this period. Combining the first and the second quarters, our first half twenty seventeen revenue will grow 12% year to year in U. S.
Dollar, higher than our guidance of 10% year to year growth we estimated in our January conference. On the fabless inventory, with fabless company's revenue going through recovery and the above mentioned inventory management, Fabulous DOI has substantially decreased, but still slightly above seasonal exiting Q2. We estimate the fabless inventory will continuously reduce and will come to about seasonal level by the end of Q3. Coming to the Q3, we forecast our 3rd quarter revenue will grow 15.7% quarter to quarter. This growth is driven by a fast ramp up of 10 nanometer mobile customer products, but moderated by the continuous inventory adjustment.
We expect China smartphone market after a slow demand period in the first half, will start to recover with new models to launch in the Q3 2017. Other than smartphone, we continue to see good momentum in industrial and the automotive sectors. So we raised this year's worldwide non memory semiconductor growth rate from 4% to 6%. This is primarily due to a richer product mix in several markets, including computing, communication and automotive. We also increased this year's foundry growth forecast from 5% to 6%.
For TSMC, we reiterate our full year 2017 growth will be in the range of 5% to 10% in U. S. Dollar. Now my second key message is about 7 nanometer that include our N7 and N7 plus and its outlook. TSMC's N7 has passed technology qualification in April, right on our schedule.
N7 is widely adopted by our customers. We expect to have 13 new N7 product tape outs this year. So far, N7 yield is ahead of our plan. We expect to have a very fast and smooth N7 ramp up in 2018 with its yield learning even better than our 16 nanometer. Our N7 plus technology is under development based on this robust N7 technology.
We inserted several EUV layers in N7 plus to take the most benefit from EUV technology with minimum risk. Our N7 plus technology will be, again, the most advanced technology in the foundry industry in 2018 in terms of density, performance and power. This N7 plus will ride on N7 learning to have a very steep yield learning curve. We also have enabled the design porting from N7 to N7 plus to be very easy by carefully design rule arrangement and our strong EDA utility and IP support. We expect our 7 nanometer node, N7 and N7 plus to be a major and long life technology node.
It will be used in mobile, high performance computing and automotive markets. It will cover premium, mainstream as well as low cost products in all those markets. Then I will briefly talk about our advanced technology progress. I would like to update our EUV progress. Both our EUV tool development and the lithography process development have progressed very well in the past 6 months.
We have worked closely with our tool partner, ASML, who has demonstrated 250 watt EUV source power in their labs. In TSMC, EUV lithography process development also went on very smoothly. We run several EUV layers with our N7 SRAM vehicle with the same EU level as non EUV process. Lastly, our 5 nanometer. Our 5 nanometer technology development is well on track.
Already with SRAM functional yield, we will offer 5 nanometer in 1Q 2019.
Now let me start with our 10 nanometer ramp status. We are ramping up our 10 nanometer at full speed since last month. Currently, all the products are for mobile applications. The yield progress continued to be slightly ahead of schedule. We continue to expect 10 nanometer will contribute about 10% of our wafer revenue this year.
Now let me talk about 28 nanometer 16 and derivative. Our 28 nanometer business remains strong. In order to meet customers' demand, we have increased our 28 nanometer capacity this year, as I reported last time. In addition to the capacity increase, we further expanded and improved 28 nanometer technologies from 28 HPC to 28 HPC plus and now to 22 nanometer. Let me state again what I mentioned the last time about our 22 nanometer.
TSMC's 22 offers a 15% performance gain or 35% power reduction as compared with 28 HPC plus This technology is suitable for applications in IoT, ISP, GPS, WiFi, RF and 5 gs millimeter wave. We already have many 22 EOP kebabs ongoing and expect volume production to begin next year. With this extension of 28 nanometer, we are confident that we will continue to enjoy a high market segment share at this node. For 16 nanometer, we also extend this technology into 12 nanometer, which will have about a 10% better performance or 25% lower power consumption as compared with 16 FFC. In addition to these benefits, our 12 nanometer customers can use almost the same IP ecosystem as 16 nanometer to design better products.
This result in much lower development cost for our customers. Now let me make a few comments on our competitive position, especially on those 16 nanometer, 28 nanometer and all the technology nodes. First of all, I want to point out that TSMC's policy is to achieve full utilization of our capacity in all nodes. We believe we can achieve this objective because we compete from a position of strength. Our strength include: 1, we develop many derivative technology to satisfy all customers' requirements 2, we are a trusted foundry by our customer and 3, our manufacturing cost is very competitive.
In fact, we believe we are the lowest cost producer. We can still strive when competitors start to lose money. To summarize, we work closely with our customers to satisfy their technology and capacity requirement on both performance and cost. As a result, we are able to achieve full utilization and high market segment share. Now let me talk about the MRAM and RRAM.
We have been developing emerging memories such as MRAM, RRAM and others. The purpose is to further reduce power consumption and processing costs as compared with conventional embedded flash memory, which has been widely used in applications such as MPU and PMIC. Both the MRAM and MRAM can be used in derivative specialty technologies such as JPY 22 as well as in more advanced technologies such as 16 FFC and 12 FFC. In addition to wafer processing technology, we have been developing advanced packaging technologies to enhance customers' product performance. We started in 1999 with eutectical bumping and then move on to copper bumping, and now we have wafer level packaging such as InFO and CoWoS that deliver more integrated value to our customers.
Both InFO and CoWoS has been in mass production, and their applications include mobile and high speed computing. We think our advanced packaging technology are a clear differentiator for TSMC and will find many ways into artificial intelligence related applications. We continue to work with many customers for their new product, which are planned for the next 2 years. 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 both from the floor and from the call. Should you wish to raise your questions in Chinese, I will translate it to English before our management answers your question. Now let's begin the Q and A session.
First, the question will be coming from Credit Suisse, Randy Abrams.
Thank you. First question
on some of the graphics companies have seen a lot of design win traction both in the data center and automotive space. Curious based on that success from some of your customers, do you see potential for better growth from high performance computing relative to what you outlined and potential this could take your growth above that 5% to 10% target?
Yes. We still maintain our long term growth is between 5% to 10%. This is indeed, there are many exciting development in the high performance computing as well as artificial intelligence. However, these growth are really in the beginning stage and very difficult to forecast 3 or 5 years down the road. So at this point, we maintain our long term forecast.
Thank you. And second question more on the near term. Factoring we had a lower first half from the inventory correction and you're heading into a steep product ramp for smartphone. Could you give an initial view if seasonality shifts and you expect, say, better than seasonal Q4, Q1, at least how it looks at this stage, maybe for Q4 and Q1, the initial view?
Are you asking smartphone market?
Asking for the overall company, just factoring first half was slower and you also have a steep ramp that looks a little bit later this year, if it could push seasonality out that say Q4, Q1 might be better than in the past?
Next year, you mean?
Q4, Q1 next year. Yes.
We just forecasted this Q3 is very high quarter to quarter growth, And we expect Q4 will be we didn't do forecast. We expect it's a pretty strong quarter. Laura just estimate that year to year, we should be grow by 5%.
2nd half to second half.
2nd half to second half. So that is showing the growth momentum of the second half this year.
And just to follow-up on that, the margin you mentioned about 2 to 3 point impact on margin in Q3. If there's a steeper ramp into Q4, do you expect similar impact given you'll start to get scale and learning? Or will the impact start to come down?
For second half, we will be affected by the 10 nanometer ramp I was just talking about. But also, we are seeing a strong 3rd and 4th quarter, which would be utilization will be higher. So that's a positive. So we have negative and positive.
Okay. Then the next question will be coming from Deutsche Bank's Michael Zhou.
Thank you. Actually, the HPC market gave the expectation before this $15,000,000,000 for foundry10 in 2020, dollars 15,000,000,000 for HBEV in 2020. So do you have any update for that number?
You're asking me the TEM of HPC in 2020. Again, it's HPC, as Randy asked earlier, is really in the initial growth period. It's very difficult to forecast the 10% in 2020. But I can see what today, the HPC sector, I include a server, networking, storage and gaming, which recently added into ARVR, which has just started. This sector, we estimate total $10,000,000,000 is about $10,000,000,000 to $11,000,000,000 today this year.
And we estimate its growth industry TAM growth will be about 10% a year. And we strive to grow several percentage percent point above that.
2nd question is regarding the outlook for each segment. The outlook for each segment in terms of the
I can tell you the segment for Q3, which we just gave the guidance. You can see from the guidance, we're guiding around roughly 16% Q over Q growth. So we expect all major segments will grow across the board, Every segment will grow.
Each segment will have similar growth?
No, no, no. Computer and consumer will grow better, but those two segments account for smaller revenue of TSMC and the biggest is the communication. We do expect the communication continue to grow.
Can we say between wireless and wireline, the growth rate between wireless, you don't really comment on that, but can you highlight is there demand from wireless picking up strongly or is weaker than YY?
I will not comment subsegment, sorry.
Next question will be coming from Citigroup's Roland Xu.
Good afternoon. First question, Look at your full Q revenue guidance. Actually, if I use the statutory, 30.3 cents what you guided for the gross margin. And then in MDDAR terms, actually, it is smaller than the if we multiply June multi sales by 3. So it means for the revenue single month revenue kind of in 3Q probably will be the only multi sales in June.
So for me, actually, I'm thinking now we are ramping up 10 nanometer shipment sharply. So that is a 10 nanometer like Sisi said, it's going to contribute about 10% of the total revenue in this year. But in Ferntech, we only have 1% in Q2. So that means that we are going to have very strong 10 nanometer revenue in 3Q and 4Q. However, in 3Q, our revenue guidance is still smaller than I think the time that June brought this by 3.
So what is the weakness for the technology point of view for the revenue contribution in 3Q? Thank you.
I will not recommend you look at the monthly number and use a monthly number times 3 because it does fluctuate amount to month. So Q3, as Mark has been mentioning, the inventory correction will continue through the Q3, which is a little bit longer than we already expected. That is why the Q3 doesn't look as strong as people would expect.
Do you see any customer, they just change a bit further wave machine in 3Q?
No, no, we don't see that. I think what's behind this is the OEM and channel of smartphone actually inventory is back to normal at the end of the second quarter. And come to the Q3, the smartphone, particularly in China, will start pulling shipment. However, our fabless customers still have a higher than season inventory. So it takes a little bit longer for us to ride synchronously with the end market.
Okay. Thanks. For the gross margin point of view, can you remind us if everything is equal for every one percentage point of the utilization change how much impact on the gross margin? I think, Laura used to give us this number previously, right?
Yes, I did say about 0.4 percentage points, just coincidentally same as the 1% of the foreign exchange rate. But it does fluctuate depending on which technology, but in general,
I would still say about 0.4 percentage point. Okay. Thank you. And we know you're putting some production in 2nd quarter. So the actual utilization in 2nd quarter probably would be higher than if we just divided the shipment to the total capacity.
So the question is on what's the difference between the 2Q actual utilization versus 3Q actual utilization?
I probably cannot comment the utilization on the 2nd quarter and third quarter. But what you said earlier that in preparation for the 10 nanometer shipping in Q3, which will be accounts for 10% of our revenue, we did start to prepare work in process in Q2. So that helps a little bit on Q2 utilization as well.
Okay. Thank you. Yes. And for the 4Q, now we're expecting very strong growth for 4Q means also the utilization probably be higher. So means we can use the 2 to 3 percentage points dilution from 10 nanometer ramp.
And then if we have higher utilization, then we can just use with the multiple 0.4 to calculate the gross margin. Am I right?
Theoretically, okay. We have to see what will be the actual utilization in Q4. Okay. Thank you.
Okay. Following questions will be coming from Daiwa's Rick
Xu. This question is on your 10 nanometer ramp. Could you give us a little bit more color about your revenue contribution in Q3 and Q4? Is it possible?
C. C. Just mentioning the 10 nanometer wafer revenue contribution from 10 nanometer will be 10%. And for the whole year, we expect that 10 nanometer will account for 10% of total company's whole year wafer revenue.
So can you break it down
in Q3 and Q4? No.
I will not break down to Q4, okay?
Okay.
Thank you. Then one follow-up question is also on your 10 nanometer. What's the manufacturing cycle time for 10 nanometer as compared with 16? Like how much percentage increase?
The manufacturing cycle time you're talking about is total cycle time?
Right. Like how many days for total cycle time?
Let me say that the cycle time actually we calculate in the how many days per day and it's very comparable. Actually, 10 nanometer is a little bit better than 16.
But your layer count for 10 nanometer should be
Much larger. Much larger. The layer count is about something 20% more than 16%.
All right. Good. Thank you so much.
All right. Following questions will be coming from UBS, Bill Lu.
Hi, thank you very much. Doctor. Lu talked about the leadership at 7 nanometers in terms of technology and also TSMC's overall cost leadership. We're now, I guess, a little bit more than a year away from EUV. Can you talk a little bit about the cost advantages of EUV?
Can you do we have a little more clarity on the on quantifying the cost advantages? I'm asking that because your competitor is doing a non EUV 8 nanometer. So I'm wondering if we look out into the next 1 to 2 years, does your technology leadership and your cost leadership widen?
EUV is progressing rapidly and we started the 7 plus very early. And this EUV technology insertion in N7 is not only meant to do the cost reduction, wafer cost reduction, but also to increase the density and increase the performance transistor performance. So this technology is just not just the cost reduction, it has the performance investment increases. As far as the EUV, I think we can reduce the cost by adopting the EUV on 7 nanometer.
So you don't want to quantify that right now?
It's right. I think our people always do better than we I quantified. So
as of
right now, it's really early to give you a number.
And then second question is for Doctor. Wei. It's pretty unusual for TSMC to see this kind of revenue from 28 this far after the initial introduction. Can you tell us the outlook for 28 over the next several years in terms of volume demand?
We have increased the capacity due to the strong demand, as I stated. So we have confidence in the next few years because we extend the technology to 'twenty two and that can be applied to a lot of area like ISP, like 5 gs millimeter wave RF. So we are confident that we get prepared and outlook looks good.
Maybe I'll
add to that in a different way. So you're increasing capacity by 15% this year. Are there plans to add more in the subsequent years?
We will continue to improve the productivity, but the capacity, I cannot tell you that how much we are going to continue to increase.
If I can make some comments in addition to CZ. The capacity increase for 28 nanometer, as you mentioned, it was 15%. But all of this 15%, we did increase some newly added capacity. But in the same time, we are also driving the productivity improvement. So on that 15%, about 5% contributed from the newly added capacity for this year and the big portion coming from the productivity improvement.
All right. Next questions will be coming from Morgan Stanley's Charlie Chan.
Thanks for taking my question. So my first question is regarding your bake and service. So C. C, can you please give us some guidance about your COWAS, 2.5PE COWAS learning contribution last year and this year? And going forward, do you think that a big end service overall, InfoPlus CoWoS and bumping business can outgrow the Witcher business in the coming, let's say, 5 years.
Your first question on the cohort contribution in revenue, it's still small, almost double from last year to this year or more than double. But that has been widely used in very high performance product. So it continued to be very popular, but I think the strong growth will continue for many years. Combining the InFO and the CoWoS and the packaging technology revenue is better than the wafer revenue in CAGR. I mean that every year, we grow much faster than the wafer revenue.
Okay.
Thanks. Yes. And my next question is regarding your 7 nanometer versus 10 nanometer gross margin comparison because we all know that 7 nanometer, you can use common tools for with 10 nanometer. And also, I think for 7 nanometer, you will have some more applications in HPC. I would assume the margin from the HPC customer is higher.
So is that what the right way to think about the 10 nanometer sorry, 7 nanometer margin going forward?
That's true. The 7 nanometer is on the basis of 10 nanometer. So 7 nanometer has a better margin on the same period, peer to peer comparison versus 10.
Can you please quantify for sample of CAT?
Probably not.
Okay. So quick follow-up Bill's question regarding 28 nanometer because this year your first half 28 nanometer quarterly revenue see a sequential decline in 1Q and 2Q. So for full year, do you expect your 28 nanometer revenue can grow? Because you're adding capacity by 15%, right, but your revenue seems to decline.
The first half, as Mark just pointed out, is because of inventory correction. So it's a little bit soft. But then we increased the capacity because we see the demand coming. I can tell you that the tape out this year is better than last year. Last year is better than previous year.
So the tape outs using the TEPAS activity, I can tell you that they still have a very bright future for 28 nanometer. Okay. Thanks. That's very helpful.
All right. I think this is about time that we will go to the line for the question. Analysts have been queuing up on the line. So operator, please go to the first caller on the line.
Sure. The first question today comes from the line of Donald Lu from Goldman Sachs. Please ask your question.
Hey, good afternoon. First, I would like to just to verify a point. I think the currency assumption for gross margin for Q3 is $30 And also, Laura, can you repeat on the guidance for the second half revenue? Thank you.
I didn't give the guidance for second half. We're talking about the guidance for the 3rd quarter. So your question is on the currency impact. I think I was saying nearly 100% of TSMC revenue are in U. S.
Dollars. So every 1% foreign exchange fluctuations will impact our gross margin by 0.4 percentage points. That's what I said. Did I answer your questions?
I thought we commented on the TSMC's revenue in the second half this year on a year over year growth basis, there's a number. I remember at least, I think in the last conference call, there was a 5% guidance in U. S. Dollar terms?
Yes. I think the Q1, Chairman mentioned that second half of twenty seventeen over second half of twenty sixteen, we expect the U. S. Dollar revenue to grow about 5%. Mark wants to reiterate our view.
So we feel with that opinion.
Okay, great. And in Q3, the gross margin guidance is based on 30 exchange rate between USD and Taiwan? 30.30,
30.3, that was the assumption.
Okay. Thank you. Yes, my second question is more on the 7 nanometer. I think Mark mentioned that the N7 plus would be the most advanced foundry process next year. Could you give more color in terms of more specific, like the more advanced in terms of performance or cost, yes, etcetera, compared to other foundry suppliers?
Okay. First of all, yes, we have we plan to offer our N7 plus in the middle of next year, 2018. And that technology is with EUV, volume production, effect offset production. The reason I mentioned N7 plus such emphasis is our customer who using our N7 today can migrate to N7 plus very easily. Therefore, the current we establish our N7 plus custom base on this N7 customer.
We have already more than 30 customers on N7 today. Secondly, the yield learning, we by then, we should have volume production on N7. And N7 plus is just right on the same year learning curve. We don't it won't start from a brand new technology. And thus including the fact I mentioned earlier, this N7 plus have I think we in technology symposium, we mentioned about the density and performance improvement.
Definitely put this technology in the forefront of any foundry technology at a time.
Right. But if your customers, I mean competitors use EUV on more layers than TSMC, would that potentially make their product less expensive?
Well, at this point, I don't want to answer hypothetical questions, okay? And we'll see. I think we'll be post very competitive and we'll be very, very agile in responding to competition all the time.
Great. Thank you.
Well, let's move on to the next caller on the line. Operator, please.
Our next caller on the line comes from Mehdi Hosseini from SIG. Please ask your question.
Yes. Thank you for taking my question. Just a follow-up on EUV. You said that 7 you will offer EUV in the second half of twenty eighteen on 7 nanometer plus and then full insertion in Q1 of 2019. It will be great if you could help us with the level of insertion.
I imagine when you talk about 7 nanometer plus, the insertion is for a couple of critical layers. And then with the full insertion, it would increase to maybe 10 to 12 critical layers. And I was wondering if you could elaborate on it. And I have a follow-up.
So maybe question is how many layers do we intend to input on our 7 plus and how many layers we will use on Nuvi for N5?
I really don't want to
tell you how many layers we inserted in N7 plus at this time because everybody is hearing that and positioning. So allow me to tell you that there will be cost reduction, there will be very easy to adopt, you don't start from a new technology and it will be minimum risk for our customer to ramp.
Sure. Because okay, let me rephrase my question. I think Laura mentioned that the margin profile for Saturn is going to be better than 10 nanometer. And EUV will cost more. So does that mean that the non EUV layer will benefit from some equipment reuse?
Well, other than the EUV, I think there's more than 90% of the 7 nanometers equivalent from 10 nanometer. Okay. Is that answer your question? Yes, yes,
yes. I have one quick follow-up question on the 16 nanometer. How should we think about the 16 nanometer revenues in the second half of twenty seventeen versus second half of twenty sixteen?
I think our 60 nanometer revenue for this year should be higher than last year.
Okay. So you should see a rebound in the second half, correct? Because it has been declining on a Q over Q in the first half.
Sorry, I was referring to year over year. You're actually asking for second half versus first half. Is that your question?
Yes, yes, yes. Because I'm just trying yes, in the first half, it has been declining. Your customers your smartphone customer is going to migrate to 10 nanometer. And I'm just trying to better understand how you're going to be able to refill 16 nanometer.
We have 12 nanometer, as you may know, and the 60 nanometer has the same equipment for 12 nanometer. So as we start to ramp 12 nanometer later this year through the 2018, 12 nanometer can very well backfill our 16 nanometer capacity next year.
Okay. Thank you very much.
All right. Let's move to the next caller on the line. Operator, please.
Our next question today comes from the line of Patrick Liao from Macquarie. Please ask your question.
Yes. TSMC focused on second that is in full process that we can anticipate some clients would demand for their needs, except for April.
Patrick, please repeat your question again. Thank you.
Hello. Can you hear me?
Yes. We can hear you, but please repeat your question. Thank you.
Yes. TSMC focus on back end and its in full process that we can anticipate some clients would demand for their needs, except for April.
Well, I cannot
comment on this one for a specific customer.
So Patrick, you are asking if we have other customers on info other than Apple. Is that your question?
Yes.
We have
that's my question.
We are working with many customers. So again, the high volume production for other customers for a lot of our customers will begin next year.
Okay. I have a minor question. Is 28 nanometer breakthrough node that clients since children high k metal gate or polystyrene gate mostly?
So you are saying 28 nanometer has polysilon and high k metal gate and then what about them?
Yes. Which these 2 gave which one would be children mostly from TSMC's experience right
now? Well, the high teen middle care version probably is the one we expanded into the next node, 22 nanometer. Did that answer your question?
A little bit because that some of your competitor is right now, they are major focused on polysilicon gate. So, I want to get an idea about HiKM Inouquet, how about usage in TSMC's experience?
So which one do we focus more? Are we focusing more on Heikai Metal Gale or we are focusing more on Polycyon?
Yes. We are okay.
We continue to improve the technology from 28 LME to 2022. I can tell you that 22 is all on high ks metal gate. Does that answer the question?
Okay. That will answer my question. Thank you very much.
Thank you. And now let's come back to the floor. The question will be coming from JPMorgan Scoucou.
Yes, thank you. First question on 7 nanometer. I just wanted to get the numbers right. I think last time, Doctor. Liu, you mentioned 15 tape outs.
Right now, I think it's 30, 3 0, in terms of 7 nanometer tape outs that you're seeing. Could you talk about what proportion of that is HPC? Last time you mentioned almost half of those are HPC related products.
It's right now, you mean that among the takeouts?
Yes, among the 30 takeouts that you have.
Still more than half. More than half is all HPC.
And when we think about 7 and 7 plus do you feel that when you talk to and engage with the customers, are most customers basically looking at it as very easy migration or is it like there are customers who wait for 7 plus or some customers who basically stay on 7 for a longer period of time? Do you expect like most of the customers to eventually go to 7 plus from 7?
Yes. Most of the customer after we work with them, actually, they send us the tape. We put it for them for certain function blocks and prove to them it's very easy. And each customer, we plan to do that, and we've done several already.
Okay. Thank you.
Just one other question on customer concentration. I think the customer concentration has been rising, I think, in the last 3, 4 years. I think it looks like this year also it will move up given your biggest customer has a very strong product cycle. How should we think about customer concentration when we get to 7 nanometer and 7 nanometer plus given that the number of tape outs seems to be much higher. Do you anticipate the customer concentration to fall or is it still going to be relatively high?
And maybe also try to weave in maybe what is the importance of system customers within this especially the larger leading edge kind of process modes. Our system customers becoming a bigger and bigger part of the customer base, especially for leading edge.
Our top 10 customers account for 64% in 2015 and that number went up to 69%, as you can see from our annual report. This is mainly because of the consolidation among customer base. For this year, we expect the concentration will come down a little bit. But I want to say that people may feel customer concentration is not a good thing. But we feel the other way.
It's not really a bad thing because when you have a bigger customer, that means the dependency for them to Jason as a customer and for us to then as a supplier needs to be stronger. The relationship collaboration needs to be stronger, which is in favor of foundry business model. So we view that as a positive thing.
Could you also talk about system customers, How important are system customers becoming as we go from, let's say, 20sixteen to 7 nanometer given the number of tape outs that you've got?
Well, there are different system company system customers. Some customer design on their own. Some customer ask our customer to design for them. And some customer ask our support to design mostly using through third party design service companies. So there are different forms of the assistant company getting into this own design in semiconductor.
We work on that too because that will speed up the innovation of the chip, connecting the chip design directly with the system application. And I think that our customer also share a part of those business to grow. And indeed, that's a big portion of the future growth.
All right. Next question will be coming from Credit Suisse. It's Randy's follow-up.
Thank you. The first question,
I wanted to clarify on the 7 plus and the 5. Last quarter, I think you talked about those dates such risk production and then the volume 1 year later. Has the schedule changed and it's now you expect the revenue ramp up in that earlier time? Or is it still about 1 year from availability to the volume ramp up?
Yes. We estimate it's still about a year, not really the technology outside, it's really on their design, product qualification and the system verification get to the market. It typically takes that long. Although for the mobile, it's about 1 year. Some of the high performance computing or PC application will be shorter.
So but that 7 and 7 plus I don't see much different in the lead time up to the volume. Okay.
A follow-up to that, are you seeing most customers waiting then for 7 plus with UV, given the enhancements and staying, say, with 12 nanometer? Or do you see actually still the same fast migration from 10 to 7 next year?
Because 7 and 7 plus they share the same design ecosystem and the protein. So no, I don't see that.
Just one quick follow-up. Do you see potential we could actually have a bit of a lower CapEx budget, just given the 90% reuse. We're in top of the 90% because of the layers. There should be still pretty meaningful similar spend next year.
The EUV itself will not necessarily reduce the CapEx per 1,000 wafer investment because the complexity of 5 nanometer especially. However, as we continue to drive the productivity, so the CapEx per 1,000 wafer go down because of that reason. So if the 2 things offset each other, it's not necessarily the EOB adoption will affect the CapEx per k too much.
Okay. Just to clarify, I was talking next year where you're migrating from 10 nanometer to 7 nanometer. If you expect that tool reuse given the common tools that could allow, say, a lower year for CapEx from 10% to 7%, given the tool reuse?
In addition to the transition from 10 to 7, we also will increase the total capacity next year. So that will post the total CapEx.
Okay. There are still quite a few callers on the line. So let's move back to the line. Operator, please have the next caller.
Our next question on the line comes from Brett Simpson from Artech Research. Please ask your question.
Yes, thanks very much. I just wanted to get your perspective on a couple of trends in smartphones that seem quite fundamental to your business. First of all, a lot of chip makers are saying that we're going to start to see AI being processed on the phone. So we're going to see new class of accelerators dedicated for AI in the smartphone. Can you maybe just talk about this in more detail?
And is this something you see being produced at like 60 nanometer? Is it part of the reason why you're adding 28 nanometer capacity? Or is it going to be 7 nanometer? So that's the first question. And the second one is ARM are talking about material challenges with thermals in smartphone chips and application processors, a lot of dark silicon issues, which is leading to bigger die sizes or certainly new architectures.
Can you maybe just give us your perspective on leading edge die sizes for smartphones? Are we going to see rise in silicon content as a result in smartphones? Thank you.
So Brett's question, first part is with respect to artificial intelligence used on phone. And he's asking what is our perspective on the direction of having new accelerators used in AI to be put on the phone? And are they going to use 16 nanometer or 28 nanometer type of process? And the second part is ARM commenting on material challenges, particularly with respect to thermal issues on chips. And he's asking if we can comment on solutions like new architectures and other aspects to solve this problem.
Well, I think many of those information is really our customers' confidential. So I wouldn't want to I cannot talk about it. But AI is indeed getting to smartphone, that's for sure. And that is actually, AI is going to every segment in our growth sectors. AI is getting to mobile.
AI is getting to high performance computing, like deep learning. AI will go into automotive, which is ADAS and so forth. And AI will go to simple IoT MCU also. So this AI is a general application driver momentum for this, but one of the driver driving momentum, and it is ubiquitous. And I wouldn't comment on this.
I think our customers will adopt to the AI whenever possible and doesn't limited certain technology.
Greg, do you have a follow-up question? Or this is good enough?
Well, I mean, just one follow-up. I understand that AI is a ubiquitous trend, but specifically, Google has talked about their next old release. There's going to be accelerators coming out later this year. I think we hear about Apple Neural Engine. There's a significant shift happening, which would suggest smartphone content is going to rise for semiconductor content is going to rise for smartphones because of AI.
And I don't know whether you see this accelerating the smartphone growth rates that you see over the next couple of years.
Yes, I think it will, just for the reason you just stated.
Okay.
Thank you. And operator, let's have the next caller on the line, please.
Our next question today comes from the line of Peter Chan from CIMB. Please ask your question. Hi. I have a question regarding the storage cost memory. C.
C. Mentioned about the M RAN and RAN earlier. Just wondering, is this TSMC's answer to MinQiao's 3 d Crosspoint? And how would these 2 help the customer to develop the future applications? And is there any difference between the MRAM and the RAN?
For example, is RAN more suitable for, say, for example, automotive, MRAM is more suitable for consumer. What would be the strategy in terms of application for those 2? Thank you.
Well, we developed the emerging memories. We cooperate with the customer and due to their requirement. Now specifically, we are going to talk about the cross point memory that's proposed by another company. So and applications, actually, yes, you are right, it's mostly in automotive and also in MPU in a lot of area. Which one that customer like to adopt?
That depends on their products requirement because of different product has a different kind of retention time, different kind of insurance requirement. So sometimes you use RRAM, sometimes you use MRAM, and I will not comment on that.
Okay. As a follow-up to that, for M and A, I'm assuming that this will be offered to customer as embedded solution. And are this going to be do you consider this sort of essential element to address the feature applications in AI?
So the question is, since MRAM, RM are embedded solutions, are they critical to address future needs of AI?
Probably the answer is that they are very critical to every area that whenever you need embedded memory inside to replace or not just to get the lower cost and lower power consumption for IoT, for automotive. And Mark just mentioned the AI is everywhere. So to answer your question, yes, and in a lot of applications.
Okay. Okay. Let's come back
to the floor. The next question will be coming from HSBC's Stephen Peleo.
Thank you. Just a couple
of quick follow ups. First on Mehdi's question was a little 16 nanometer focus, but I guess combination 20 and 2016 is about 25%, 26 percent of revenues. It looks like it's down the last few quarters versus 28 nanometer being relatively steady for the last 4 to 6 quarters or so. So could you quantify a little bit looking into the Q3 and the Q4, do you expect growth in that 25% of revenues that 20 16 nanometer node?
No, we think the 20 plus 16 revenue in the following 2 quarters will come down somewhat. It will not be as high as second quarter.
Okay, fair enough. Thank you. And then on another 25% of revenues is in your industrial and standard. And so
I'm wondering if you could just
help us think a little bit more about that. How much is industrial? How much is auto? How much is how do you break down that quarter of the company?
I would like to mention the 3 big subsegments on that industrial standard. I think the top 3 are MCU, power IC and data converter. They are accounts for majority part of the industrial and standard.
Okay. And then just quickly, depreciation was down a little bit quarter on quarter, but obviously you've got a ramp of a lot of expensive capacity coming. Could you talk a little bit about 3rd quarter depreciation? Will it grow faster than your revenue guidance and outlook for depreciation for the full year?
The depreciation for the whole year was about CNY10 1,000,000,000, will be high teens, I would say 17% to 18%. So you can expect the second half depreciation will come up faster growth than the earlier quarter.
Okay. And then maybe a last question for Mark or C. C. We're seeing the first 10 nanometer chips being or down that you're producing and massive die size shrinks on an apples that well maybe I should say like for like basis instead of saying apples, upwards of 40%, 50% type shrink. So I'm curious what does that mean from a capacity planning perspective for you?
Do you need to build as much physical wafer capacity because your customers are taking advantage of much more stronger shrinks at 10 nanometer?
I don't comment on customers' size per se. Whether that's going to reduce other requirement under wafer, we ramp up quickly. And with, again, 10% revenue wafer revenue for the whole year. So you can calculate it.
Okay. The next questions will be coming from Citigroup's Roland. Roland,
Xu? Yes, we know AI is for everything. How about I think we would like to know how about AI at TSMC? Because in your annual report, you said you already built a team to dedicate doing this machine learning and AI development. So can you share with us what's your progress with machine learning and AI development?
And what can we expect once you implement your AI in your production line? What kind of a change it will be? Thank you.
Well, we utilize the AI technology in our own manufacturing area most. So we use that one to improve the deeper density, to improve the productivity and also at the same time to improve the quality. And how we did it? The company confidential.
So you already implemented on your production line?
Yes, we did.
Okay. So when you talk about that you have this efficient improvement actually that partly have been achieved by this AI adoption? Yes. Okay, thank you. The second question is for C.
C. Last year you spent RMB1 1,000,000,000 in CapEx in info and you ramp up info revenue to CNY500 1,000,000 this year. And this year again you are going to spend RMB1 1,000,000,000 CapEx in that year. So can we expect next year we can generate another RMB500 1,000,000 revenue on info and then they'll go back go up to RMB 1,000,000,000 in total revenue next year? Thank you.
We put the KPIs for the back end area, not 100% for info, okay? We still have a cohort. We still have a lot of testing. So I cannot comment in the next year what is the revenue will be, okay? But this year, dollars 500,000,000
So are we spending the similar amount of the CapEx in for this year? Okay. Thank you.
Next question will be coming from Morgan Stanley's Charlie Chan.
Thank you for taking my follow-up question. So for the Q2, your industrial segment, outgrowing other segments. So can the company elaborate a little bit what kind of semiconductors or application in that industrial and other segments?
Well, Q2 industrial and Standard mostly come from MCU Power and Data Converter, in particular application, automotive and factory automation, those applications.
Okay. Understood. And second question is regarding your business strategy in TrelloNet. I guess this question is to C. C.
So you mentioned that you want to fully utilize your fab space. So I'm asking whether you would reduce your price regardless to get your fab to have 100% utilization because no one can compete with your cost structure. And I guess most of your churn edge tools already fully depreciated. So what is the right way to maximize your company's profits and shareholders' return?
Technology. Technology is the weapon that we are using most. So we develop a lot of derivative technology to meet customers' requirement. That reduce their die cost, at the same time improve the performance. And that's where we get the business.
So can I assume that you will fulfill your trailing measure capacity to 100%, regardless whatever That's our goal? That's our goal. That's your goal. Yes. Okay.
Thanks.
Next question will be coming from Deutsche Bank's Mike
If I remember correctly, it's about 10% year over year.
Okay. Second question is, management seem to mention that last year, 20% reduction in cycle time. So would you reduce the cycle time further this year to improve the cost structure? I cannot give you the specific number because of confidentiality, but we continue to improve. That I can say.
So as a follow-up question, do you think when you enter 7 nanometer, you will continue to reduce the cycle time further? Because you mentioned 10 nanometer, per layer cycle time seems to be lower. Reduced. Yes. Do you think that that will continue to 7 nanometer?
We definitely it's our goal. We have a lot of weapons.
Next question will be coming from CL Sebastian Ho.
Thank you. My first question is for Mark that do you have any committed customers or any tape outs confirmed on N7 plus right now? And what type of application is that? Is it for mobile or for HPC?
So that will happen in 2018.
So it's not so no one is confirmed right now?
Well, there are customer are committed to use it, but they don't have a specific date for that. Most of them are working on N7 today.
Okay. So for those customers who are committed we show their initial commitment to use it. Are they coming from both mobile and HPC?
I think both, just like N7, particularly those leading users. Yes.
Okay. Thank you. Second question is on your high performance computing in terms of the margin and profit impact to TSMC as a whole that theoretically, we would think that is for data center for servers. So it's higher margin or difficult to do than consumer type of the products from that perspective. But at the same time, it's also harder to make.
Size larger, so process control become more important. So what's the net net impact in terms of the margin profitability for TSMC from operating margin perspective?
At this point, the net debt impact net net impact is no impact to our gross margin as we estimate today. Okay. Thank you.
Okay. We still have 2 callers on the line. Operator, let's move to the next caller on the line.
Next question on the line comes from Douglas Smith from Agency Partners. Please ask your question.
Yes. Just to clarify on the N7 plus am I correct in assuming that you're going to target 2 50 watt source and mask with fully working pellicle. And do you see any potential bottlenecks in terms of either the masks or the resists for EUV for N7 plus?
The 2.50 watts still happen in the laboratory, and we don't count on that high number to do the cost reduction. Currently, we estimate if we do well on 125, for example, will be sufficient enough for us to make the cost reduction.
Okay. And in terms of public health, do you think that's necessary or it's not necessary for N7 plus
We have very active technical development today, and we will prepare for both. If we have to use it, we have no problem by then.
Okay. Thank you.
Next caller on the line, operator, please.
Our next question today comes from the line of Mehdi Hosseini from SIG. Please ask your question.
Yes, thank you. Just a couple of
follow ups. Laura, can you please tell me how should we think about depreciation this year? Did you say it will be up 17% to 18%?
Yes. This year's depreciation will be 17% higher than last year.
Okay. All right. And then how should we think about the capacity that is going to move to China? When is the timing? And how would it impact the depreciation schedule as that capacity is in transit?
We start to move the equipment in the second half of this year and then we expect the production depreciation, I don't think there's any impact at all.
Okay. And is it I think in the past, you've talked about like 20000 to 30000 liter per month, and it's going to be mostly 12, 16 nanometer. Is this still the case?
We talk about 20,000 wafer per month and 16 nanometers technology, that's what we said. It's continue to be the same situation.
Thank you, Mickey. And I think we have exhausted all the questions from our audience, and we're happy to draw a conclusion of our conference call now. Thank you, everybody, for attending, and we'll look forward to see you next quarter.