[Foreign language] 各 位 投 资 界 跟 媒 体 的 朋 友 们 ， 大 家 午 安 。 我 是 台 积 电 企 业 讯 息 处 的 孙 又 文 。 欢 迎 您 今 天 来 参 加 我 们 2017 年 第 二 季 的 法 人 说 明 会 。 由 于 这 个 法 说 会 是 向 全 球 投 资 人 同 时 连 线 转 播 ， 所 以 我 们 全 程 会 使 用 英 文 ， 请 您 见 谅 。Welcome to TSMC second quarter 2017 earnings conference and conference call. This is Elizabeth Sun, TSMC Senior Director of Corporate Communications, and your host for today. Today's event is webcast live through TSMC's website at www.tsmc.com. If you are joining us via the conference call, your dialing lines are in listen-only mode.
This conference is being viewed by investors around the world, we will conduct the event in English only. The format for today's event will be as follows: First, TSMC Senior Vice President and CFO, Ms. Lora Ho, will summarize our operations in the second quarter of 2017, followed by our guidance for the third quarter of 2017, along with her key messages. Afterwards, TSMC's two Presidents and Co-CEOs, Dr. Mark Liu and Dr. C.C. Wei, will jointly provide our key messages. 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 at www.tsmc.com. Please also download the summary slides in relation to today's earnings and conference presentations.
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. Now, I would like to turn the podium to TSMC CFO, Ms. Lora 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 starting from the financial highlights for the second quarter, followed by the guidance for the third quarter. Second quarter revenue decreased 8.6% quarter-over-quarter, and 3.6% year-over-year. The sequential decline reflecting supply chain inventory management, mobile product seasonality, and appreciation in NT dollar against the US dollar. In US dollar terms, second quarter revenue was $7.06 billion, about 5.9% decrease Q-over-Q, but 3.2% increase year-over-year. Gross margin was 15.8%, 1.1% lower than the first quarter, mainly due to the unfavorable foreign exchange rate. Operating expenses ratio rose to 11.9% as our revenue decreased more than the expense decreased. Operating margin decreased 1.9 percentage point sequentially to reach 38.9% in the second quarter.
As I said in my last quarterly conference, the second quarter corporate tax rate would be 23% due to the accrual of 10% on distributed retained earnings tax. The tax rate will fall back to 10% and 11% level in the second half, and the full year tax rate will remain at 13%-14%. Overall, our second quarter EPS was $2.56, and ROE was 19%. Let's take a look at wafer revenue contribution by application. During the second quarter, communication, computer, and consumer decreased 10%, 14%, and 7% respectively, while industrial standard increased 9%. In terms of revenue by technology, 10nm process technology contributed 1% of total wafer revenue during the second quarter, while the combined revenue from 16nm and 20nm accounted for 26% of wafer revenue in the second quarter, and 28nm represented 27% of total wafer revenue.
Advanced technologies, defined as 28nm and below, accounted for 54% of our total wafer revenue in the second quarter. Moving on to the balance sheet. We ended the second quarter with cash and marketable securities of TWD 659 billion, essentially flat from the first quarter. On the liability side, current liabilities increased by TWD 202 billion as we accrued about TWD 182 billion for cash dividend, which will be paid out this month. On financial ratios, accounts receivable turnover days remained at 47 days, while days of inventory increased eight days to 52 days, primarily due to the higher work in process inventory for the 10nm to support the production ramp in the third quarter. Let me make a few comments on cash flow and CapEx. During the second quarter, we generated about TWD 103 billion cash from operations.
We spent TWD 105 billion in capital expenditure, the free cash flow was an outflow of about TWD 2 billion. We also disposed TWD 5 billion of fixed income investment. Overall, our cash balance increased by about TWD 6 billion to TWD 570 billion at the end of the second quarter. In US dollar terms, our first half capital expenditure was $6.8 billion. Full year capital budget remained at about $10 billion. Before I conclude the financial summary, I would like to point out the impact of foreign exchange rate on our revenue. As I mentioned to you last time, nearly all TSMC's revenue is in US dollar. The sensitivity of our revenue to US dollar versus NT dollar exchange rate is nearly 100%. The sensitivity of both our gross margin and operating margin to 100 basis points exchange rate fluctuations is about 40 basis points.
In the first quarter, NT dollars appreciated by 2% sequentially, followed by another 3% appreciation in the second quarter. Year-over-year, NT dollars appreciated 6% in the first quarter, and 6.6% in the second quarter. Our first half 2017 revenue in NT dollars only went up by 5.3% compared to first half 2016. Whereas in US dollars, our revenue in the first half grew 12.2% from first half 2016. This is better than what we stated in the January investor conference, that our first half 2017 revenue would grow by about 10% from first half 2016 in US dollar terms. Let me turn into third quarter guidance. First of all, starting from this quarter, our quarterly revenue guidance will be given in US dollar only.
We make these changes because nearly all our revenue are in US dollars, and giving revenue guidance in US dollar more truthfully reflects our business expectation. Based on current business outlook, we expect third quarter revenue to be between US$8.12 billion and US$8.22 billion. Based on assumptions of 30.30 TWD to $1, our third quarter growth margin is expected to be between 48.5%-50.5%. Our third quarter operating margin is expected to be between 37%-39%. Since we began a significant ramp of our 10 nanometer production in the third quarter, we expect the 10 nanometer ramp will impact our second half 2017 growth margin by about 2 to 3 percentage points. The impact on third quarter margins has already been reflected in our third quarter guidance, which I just provided. Thank you.
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. Again, all our customer orders are in US dollar, I will here describe our near-term demand in terms of our revenue in US dollar. We now concluded our second quarter with revenue of -6% quarter-over-quarter, and +3% year-over-year in US dollar. As we forecasted in our previous conference, the second quarter was impacted by a quite severe inventory adjustment from fabless customers. We saw fabless customer inventory quickly digesting during this period. Combining the first and second quarters, our first half 2017 revenue will grow 12% year-over-year in US dollar, higher than our guidance of 10% year-over-year growth we estimated in our January conference.
On the fabless inventory, with fabless companies' revenue going through recovery and the above-mentioned inventory management, fabless 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 the third quarter. Coming to the third quarter, we forecast our third quarter revenue will grow 15.7% quarter-over-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's smartphone market, after a slow demand period in the first half, will start to recover with new models to launch in the third quarter 2017. Other than smartphone, we continue to see good momentum in industrial and the automotive sectors. We raised this year's worldwide non-memory semiconductor growth rate from 4%-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 USD. My second key message is about 7nm, that include our N7 and N7+ 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 tapeouts 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 16nm. Our N7+ technology is under development based on this robust N7 technology.
We inserted several EUV layers in N7+ to take the most benefit from EUV technology with minimum risk. Our N7+ technology will be, again, the most advanced technology in the foundry industry in 2018 in terms of density, performance, and power. This N7+ will ride on N7 learning to have a very steep yield learning curve. We also have enabled the design porting from N7 to N7+ to be very easy by carefully design rule arrangement and our strong EDA utility and IP support. We expect our 7nm node, N7 and N7+, 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. 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 six 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 wafer with the same yield level as non-EUV process. Lastly, our 5nm. Our 5nm technology development is well on track. Already with SRAM functional yield, we will offer 5nm in 1Q 2019. Thank you for your attention. I turn the microphone to C.C.
Thank you, Mark. Good afternoon, ladies and gentlemen. Let me start with our 10nm ramp status. We are ramping up our 10nm at full speed since last month. Currently, all the products are for mobile applications. The yield progress continue to be slightly ahead of schedule. We continue to expect 10nm will contribute about 10% of our wafer revenue this year. Let me talk about the 28nm, 16nm and derivative. Our 28nm business remains strong. In order to meet customers' demand, we have increased our 28nm capacity this year, as I reported last time. In addition to the capacity increase, we further expanded and improved 28nm technologies from 28 HPC to 28 HPC+ and now to 22nm. Let me state again what I mentioned the last time about our 22nm.
TSMC's 22ULP offers a 15% performance gain or 35% power reduction as compared with 28HPC+. This technology is suitable for applications in IoT, ISP, GPS, Wi-Fi, RF, and 5G millimeter wave. We already have many 22ULP tape-outs ongoing and expect volume production to begin next year. With this extension of 28nm, we are confident that we will continue to enjoy a high market segment share at this node. For 16nm, we also extend this technology into 12nm, which will have about a 10% better performance or 25% lower power consumption as compared with 16FFC. In addition to these benefits, our 12nm customers can use almost the same IP ecosystem as 16nm to design better products. This result in much lower development costs for our customers.
Let me make a few comments on our competitive position, especially on those 16nm, 28nm, and older 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 customers. 3, our manufacturing cost is very competitive. In fact, we believe we are the lowest cost producer. We can still thrive 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.
Let me talk about MRAM and RM. We have been developing emerging memories such as MRAM, RM, and others. The purpose is to further reduce power consumption and processing cost as compared with conventional embedded flash memory, which has been widely used in applications such as MPU and PMIC. Both MRAM and RM can be used in derivative specialty technologies such as 22ULP, as well as in more advanced technologies such as 16FFC and 12FFC. In addition to wafer processing technology, we have been developing advanced packaging technologies to enhance customers' product performance. We started in 1999 with eutectic bumping then move on to copper bumping, 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 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 next 2 years. Thank you.
This concludes our prepared statements. Before we begin the Q&A session, I would like to remind everybody to limit your questions to two at a time to allow all participants 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. For those of you on the call, if you would like to ask a question, please press the star, then one on your telephone keypad now. Questions will be taken in the order in which they were received. If at any time you would like to remove yourself from the questioning queue, please press the pound or the hash key. Let's begin the Q&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. I'm 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%-10% target?
Yeah. We still maintain our long-term growth is between 5%-10%. Indeed, there are many exciting development in the high performance computing as well as artificial intelligence. This growth is really in the beginning stage, and very difficult to forecast three or five years down the road. At this point, we maintain our long-term forecast.
Thank you. 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 fourth quarter, first quarter, at least how it looks at this stage, maybe for Q4 and Q1, the initial view.
Randy, 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, fourth quarter, first quarter might be better than in the past.
Next year, you mean?
Fourth quarter next year, or first quarter next year.
Fourth quarter. Yeah. We just forecasted that third quarter is very high quarter-to-quarter growth. We didn't do forecast. We expect it's a pretty strong quarter. Lora just estimate that year-over-year, we should grow by 5%?
Second half to second half.
Second half to second half. That is showing the growth momentum of the second half this year.
Okay. Just to follow up on that, the margin, you mentioned about 2-3 point impact on margin in third quarter. If there's a steeper ramp into fourth quarter, do you expect similar impact, given you'll start to get scale and learning? Will the impact start to come down?
For second half, we will be affected by the 10nm ramp I was just talking about. Also, we are seeing a strong third and fourth quarter, which would be utilization will be higher, that's a positive. We have negative and positive.
Okay.
The next question will be coming from Deutsche Bank's Michael Zhou.
Thank you. Actually, the HPC, the mark that gave the expectation before is TWD 15 billion for foundry TAM in 2020. TWD 15 billion foundry TAM for HPC in 2020. Do you have any update for that number?
You're asking me the TAM of HPC in 2020? Again, HPC, as Randy asked earlier, it's really in the initial growth period. It's very difficult to forecast the TAM in 2020. I can see what today the HPC sector, I include server, networking, storage, and gaming. We recently added into AR/VR, which has just started. This sector, we estimate total TAM is about TWD 10 billion-TWD 11 billion today, this year. We estimate its growth, industry TAM growth, will be about 10% a year. We strive to grow several percent point above that.
Second question is regarding the outlook for each segment.
What?
The outlook for each segment in terms of.
Segments. Okay. I can tell you the segments for third quarter, which we just gave the guidance. You can see from the guidance, we are guiding at around roughly 16% quarter-over-quarter growth. We expect all major segments will grow across the board. Every segment will grow.
Okay. Each segment will have similar growth?
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. Yeah.
Can we say between wireless and wireline? You don't really comment on that, but can you highlight, is there demand from wireless picking up strongly or it's weaker than wireline?
I will not comment sub-segment, sorry.
Thank you.
Next, the question will be coming from Citigroup's Roland Shu.
Good afternoon. First question is, look at your Q2 revenue guidance. Actually, if I use the exchange rate, 30.3 says what you are guided for the gross margin. In EBITDA terms, actually, it is smaller than if we multiply June monthly sales by three. Means, for the revenue, single month revenue point in 3Q, probably will be lower than the monthly sales in June. For me, actually, I'm thinking, now we are ramping up 10nm shipment sharply. That is the 10nm, like C.C. said, is going to contribute about 10% of total revenue in this year. But in first half, we only have 1% in second quarter. That means that we are going to have very strong 10nm revenue in 3Q and 4Q. However, in 3Q, our revenue guidance is still smaller than I just times June monthly sales by three.
What is the weakness from 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 the monthly number times three. It does fluctuate among month to month. For third quarter, as Mark has been mentioning, the inventory correction will continue through the third quarter, which is a little bit longer than we already expected. That is why the third quarter doesn't look as strong as people would expect.
Do you see any customer, they just change a bit earlier with the shipment in 3Q? A bit early shipment in 4Q.
No, we don't see that. I think what's behind it is the OEM and channel of smartphone, actually, inventory is back to normal at the end of second quarter. Come to the third quarter, 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 rise synchronously with the end market.
Okay, thanks. From the gross margin point of view, I think, can you remind us if everything is equal, for every one percentage point of the utilization change, how much impact on the gross margin? Thank you. I think Lora used to give us this number previous, right?
Yeah, I did say about 0.4 percentage points, just coincidentally same as the 1% of foreign exchange rate. It does fluctuate depending on which technology. In general, I would still say about 0.4 percentage point.
Okay, thank you. We know you pull in some production in second quarter. The actual utilization in second quarter probably will be higher than if we just divided the shipment to the total capacity. Question is, what's the difference between the 2Q actual utilization versus 3Q actual utilization?
I probably cannot comment the utilization on second quarter and third quarter. What you said earlier that in preparation for the 10-nanometer shipping in third quarter, which will be account for 10% of our revenue, we did start to prepare working process in second quarter. That helps a little bit on second quarter utilization as well.
Okay, thank you. For the 4Q, now we're expecting very strong growth for 4Q, means also the utilization probably be higher. That means we can use the 2 to 3 percentage point dilution from 10-nanometer ramp, and then if we have higher utilization, then we can just use this multiple of 0.4 to calculate the growth margin. Am I right?
Theoretically.
Okay.
We have to see what will be the actual utilization at first quarter.
Okay. Thank you.
Okay. Following questions will be coming from Daiwa's Rick Hsu.
Yeah, hi. Good afternoon. Thank you for taking my questions. This question is on your 10-nanometer ramp up. 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%. For the whole year, we expect the 10-nanometer will account for 10% of total company's whole year wafer revenue.
Can you break it down in Q3 and Q4? No?
I will not break down to Q4, okay?
Okay. Thank you. One follow-up question is, also on your 10 nanometer. What's the manufacturing cycle time for 10 nanometer as compared with the 16? How much % increase?
The manufacturing cycle time you are talking about is total cycle time?
Right.
How many days for total cycle time?
Let me say that the cycle time actually we calculate in the how many days per layer, and it's very comparable. Actually, 10 Nanometer is a little bit better than 16 Nanometer.
Your layer count for 10 Nanometer should be lower than 16 Nanometer.
Much larger. It's the layer count is about something 20% more than 16 Nanometer.
All right, good. Thank you so much.
All right. Following questions will be coming from UBS, Bill Lu.
All right, thank you very much. Dr. Liu 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? Do we have a little more clarity on quantifying the cost advantages? I'm asking that because your competitor is doing a non-EUV 8 nanometer. I'm wondering if we look out into the next one to two years, does your technology leadership and your cost leadership widen?
EUV is progressing rapidly. We started the N7+ very early. 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 transistor performance. This technology is not just the cost reduction, it has the performance and density increases. As far as the EUV, I think we can reduce the cost by adopting the EUV on 7 nanometer.
You don't want to quantify that right now?
Right. I think our people always do better than we identified. As right now, it's a little bit early to give you a number, yeah.
The second question is for Dr. 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. We have a confidence in the next few years because we extend the technology to 22, and that can be applied to a lot of area like ISP, like 5G millimeter wave RF. We are confident that we get prepared and the outlook could look good.
Maybe I'll ask it a different way. 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 Mark, Cissy.
Go ahead.
The capacity increase for 28nm, as you mentioned, it was 15%. Out of the 15%, we did increase some newly added capacity. In the same time, we are also driving the productivity improvement. Of that 15%, there is about 5% contributed from the newly added capacity for this year, and a big portion coming from the productivity improvement. Okay.
All right. Next questions will be coming from Morgan Stanley's Charlie Chan.
Thanks for taking my question. My first question is regarding your back-end service. Cissy, can you please give us some guidance about your CoWoS, 2.5D CoWoS recurring contribution last year and this year? Going forward, do you think that back-end service overall, InFO plus CoWoS and bumping business can outgrow the wafer business in the coming, let's say, five years?
Your first question on the CoWoS contribution in revenue. It's still small. Almost double from last year to this year, or more than double. That had been widely used in a very high performance product. It continued to be very popular, but I think the strong growth will continue for many years. Combining the InFO and the CoWoS on the packaging technology revenue is better than the wafer revenue in CAGR. I mean that every year we grow much faster than that wafer revenue.
Okay, thanks. My next question is regarding your 7nm versus 10nm gross margin comparison, because we all know that 7nm, you can use common tools with the 10nm. Also, I think for 7nm you will have some more applications in HPC. I would assume the margin from the HPC customer is higher. Is that the right way to think about the 10nm, sorry, 7nm margin going forward?
That's true. The 7nm is on the basis of 10nm. 7nm has a better margin on the same period-to-compare comparison versus 10.
Okay. Can you please quantify for example, Lora?
Probably not.
Okay. Quick follow-up Bill's question regarding 28 nanometer, this year your first half, 28 nanometer quarterly revenue sees a potential decline in 1Q and 2Q. For a full year do you expect your 28 nanometer revenue can grow? You are adding capacity by 15%, right? Your revenue seems to decline.
The first half, as Mark just pointed out, is because of inventory correction, it's already been solved. Again, we increase 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 years. Using the tape-out 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. 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 just to verify a point. I think the currency assumption for gross margin for Q3 is at TWD 30. Lora, 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 third quarter. Your question is on the currency impact.
Yes.
I think I was saying nearly 100% of TSMC revenue are in US dollars. Every 1% foreign exchange fluctuation will impact our gross margin by 0.4 percentage point. 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 is a number. I remember at least, I think in the last conference call, there was a 5% guidance in US dollar terms.
Yeah. I think the first quarter chairman mentioned that the second half of 2017 over second half of 2016, we expect the US dollar revenue to grow about 5%. Mark will reiterate our view, we still with that opinion.
Okay, great. In Q3, the gross margin guidance is based on 30 exchange rate between USD and.
30.30. 30.3.
30.3.
That was the assumption.
Okay.
Yeah.
Thank you. My second question is more on the 7nm. I think Mark mentioned the N7+ 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, et cetera, compared to other foundry suppliers?
Okay. First of all, we plan to offer our N7+ in the middle of next year, 2018. That technology is with EUV volume production, impact offset production. The reason I mentioned N7+ in such emphasis is our customer who using our N7 today can migrate to N7+ very easily. Therefore, the current we established our N7+ customer base on this N7 customer. We have already more than 30 customers on N7 today. Secondly, the yield learning. By then, we should have volume production on N7. N7+ is just right on the same yield learning curve. We won't start from a brand-new technology. That's including the fact I mentioned earlier, this N7+ have, I think in technology symposium, we mentioned about the density and the performance improvement.
Definitely put this technology in the forefront of any foundry technology at the time.
Right. 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? We'll see. I think we'll be posed very competitive, and we'll be 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, sir. Thank you for taking my question. Just a follow-up on EUV. You said that you will offer EUV in the second half of 2018 on 7nm plus. Full insertion in Q1 of 2019. It would be great if you could help us with the level of insertion. I imagine when you talk about 7nm plus, the insertion is for a couple of critical layers. With the full insertion, it would increase to maybe 10 to 12 critical layers. I was wondering if you could elaborate on it. I have a follow-up.
Mehdi's question is how many layers do we intend to input on our 7nm plus, and how many layers we will use on EUV for N5?
I really don't want to tell you how many layers we inserted in N7+ at this time because everybody's hearing that and positioning. Allow me to tell you that there will be cost reduction, there will be very easy to adopt it. You don't start from a new technology. It will be minimum risk for our customer to ramp.
Sure. Okay, let me rephrase my question. I think Lora mentioned that the margin profile for 7nm is going to be better than 10nm, and EUV will cost more. 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 7nm equipment from a 10nm.
Okay.
Does that answer your question?
May I ask one more. Yes. I have one quick follow-up question on the 16nm. How should we think about the 16nm revenues in the second half of 2017 versus second half of 2016?
Lora, can you take that?
I think our 16 nanometer revenue for this year should be higher than last year.
Okay. You should see a rebound in the second half, correct? Because it has been declining on a quarter-over-quarter 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. In the first half, it has been declining. 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 16 nanometer have the same equipment for 12 nanometer. As we start to ramp 12 nanometer later this year through to 2018, the 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 on the line of Patrick Liao from Macquarie. Please ask your question.
Yes. Does TSMC focus on backend that is InFO process that we can anticipate some client would demand for their needs except for Apple?
Patrick, please repeat your question again. Thank you.
Hello, can you hear me?
Yeah, we can hear you, please repeat your question. Thank you.
Yeah. Does TSMC focus on backend, that is InFO process that we can anticipate some clients would demand for their needs except for Apple?
Well, I cannot comment on this one for a specific customer.
Patrick, you are asking if we have other customers on InFO other than Apple. Is that your question?
Yes.
we have-
Yes.
Okay.
That's my question.
We are working with many customers. Again, the high volume production for other customers, for a lot of our customers will begin next year.
I have a minor question. Is 28nm breakthrough node that clients use high-k metal gate or polysilicon gate mostly?
You are saying 28nm has polysilicon and high-k metal gate, what about them?
Yeah. These two gate, which one would be chosen mostly from TSMC's experience right now?
Well, the high-k metal gate version probably is the one we are extended into the next node, 22nm. Did that answer your question?
A little bit, because that somehow some of your competitor is right now their major focus on polysilicon gate. I want to get an idea about high-k metal gate, about the usage in TSMC's experience.
Which one do we focus more? Are we focusing more on high-k metal gate or we are focusing more on polysilicon?
Yes.
Okay. We continue to improve the technology from 28 nanometer to 22. I can tell you that 22 is all on high-k metal gate. Does that answer the question?
Okay. That will answer my question. Thank you very much.
Thank you. Now let's come back to the floor. The question will be coming from JP Morgan's Gokul.
Yeah, thank you. First question on 7nm. Just wanted to get the numbers right. I think last time, Dr. Liu, you mentioned 15 tape outs. Right now, I think it's 30, three zero, in terms of 7nm tape outs that you're seeing. Could you talk about what proportion of that is HPC? Because last time you mentioned almost half of those are HPC related products.
Right now, you mean among the tape outs?
Yeah, among the 30 tape outs that you have.
Still more than half.
More than half is all HPC. When we think about seven and seven plus, do you feel that when you talk to and engage with the customers, are most customers basically looking at it as a very easy migration, or is it like there are customers who wait for seven plus or some customers who basically stay on seven for a longer period of time? Do you expect most of the customers to eventually go to seven plus from seven?
Yes. Most of the customer, after we work with them, actually, they send us the tape. We port it for them for certain function blocks.
Okay.
Prove to them it's very easy. 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 three, four 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 seven nanometer and seven 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? Maybe also try to weave in maybe what is the importance of system customers within this, especially the larger leading-edge process nodes? I think our system customers are becoming a bigger part of the customer base, especially for leading edge.
Our top 10 customers account for 64% in 2015. That number went up to 69%, as you can see from our annual report. This is mainly because there are consolidation among customer base. For this year, we expect the concentration will come down a little bit. 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 choose us as a customer and for us to them as a supplier needs to be stronger. The relationship collaboration needs to be stronger, which is in favor of foundry business model. We view that as a positive thing.
Could you also talk about the system customers? How important are system customers becoming as we go from, let's say, 20/16 to seven nanometer, given the number of tape outs that you've got?
Well, there are different 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. There are different forms of the system company getting into this own design in semiconductor. We welcome that too, because that will speed up the innovation of the chip, connecting the chip design directly with the system application. I think that our customer also share a part of those business and to grow. Indeed, that's a big portion of the future growth.
All right. The next question will be coming from Credit Suisse. It's Randy's follow-up.
Thank you. The first question, wanted to clarify on the 7+ and the 5. Last quarter, I think you talked about those dates as risk production and then the volume one 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 one year from availability to the volume ramp up?
Yeah. We estimate it's still about a year, not really the technology or science. 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 one year. Some of the high-performance computing or PC application will be shorter. But that 7 and 7+, 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+ with EUV, 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+, they share the same design ecosystem and the porting. No, I don't see that. Yeah.
Okay. 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? In top of the 90% because of the layers, there should be still pretty meaningful or similar spend next year?
The EUV itself will not necessarily reduce the CapEx per thousand wafer investment because the complexity of 5nm especially. However, as we are continuing to drive the productivity, the CapEx per thousand wafer go down because of that reason. If the two things offset each other, it's not necessary the EUV adoption will affect the CapEx per K too much.
Okay. Just to clarify, I was talking next year where you're migrating from 10 to 7nm. If you expect that tool reuse, given the common tools, it could allow, say, a lower year for CapEx from 10 to seven, given the tool reuse.
In addition to the transition from 10 to seven, we also will increase the total capacity next year, so that will compose 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 Arete Research. Please ask your question.
Yeah, 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. 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 16nm? Is it part of the reason why you're adding 28nm capacity or is it going to be 7nm? That's the first question. 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 a rise in silicon content as a result in smartphones? Thank you.
Brett's question, the first part is with respect to artificial intelligence used on phone. 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 28nm type of process. The second part is, Arm commenting on material challenges, particularly with respect to thermal issues on chips. He's asking if we can comment on solutions like new architectures and other aspects to solve this problem.
Well, I think much of that information is really our customer's confidential. I cannot talk about it. AI is indeed getting to smartphone, that's for sure. Actually, AI is going to every segment in our growth sectors. AI is getting into mobile. AI is getting into high performance computing, like deep learning. AI will go into automotive, which is ADAS and so forth. AI will go to simple IoT, MCU also. This AI is a general application driver, a momentum, put it this way. One of the driving momentum, and it is ubiquitous. I wouldn't comment I think our customers will adopt the AI whenever possible, and doesn't limit you to certain technology.
Brett, do you have a follow-up question or this is good enough?
Well, just one follow-up. I understand that AI is a ubiquitous trend, but specifically Google's talked about their next O 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 semiconductor content is going to rise for smartphones because of AI. I don't know whether you see this accelerating the smartphone growth rates that you see over the next couple of years.
Yeah, I think it will, just for the reason you just stated.
Okay.
Operator, let's have the next caller on the line, please.
Our next question today comes on the line of Peter Chan from CIMB. Please ask your question.
Hi. I have a question regarding the storage class memory. C.C. mentioned about the MRAM, RRAM earlier. Just wondering, is this TSMC's answer to Intel's 3D XPoint, and how would this tool help the customer to develop the future applications? Is there any difference between the MRAM, RRAM? For example, is RRAM more suitable for, say, for example, automotive and MRAM is more suitable for consumer? What would be the strategy in terms of application for those two? Thank you.
When we develop the emerging memories, we cooperate with the customer due to their requirement. Specifically, we are going to talk about the 3D XPoint memory that's proposed by another company. The 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 product's requirement. Because different product has a different kind of retention time, different kind of insurance requirement. Sometimes you will use RRAM, sometimes you use MRAM, and I will not comment on that.
As a follow-up to that, for MRAM, I'm assuming that this will be offered to customer as an embedded solution. Do you consider these are the essential element to address the future applications in AI?
The question is, since MRAM, RRAM 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 to embed a memory inside to replace or not, just to get the lower cost and the lower power consumption, for IoT, for automotive, and Mark just mentioned the AI is everywhere. 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, Steven Pelayo.
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 16 is about 25%, 26% of revenues. It looks like it's down the last few quarters versus 28 nanometer being relatively steady for the last four to six quarters or so. Could you quantify a little bit, looking into the third quarter and the fourth quarter, 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 two quarter will come down somewhat. It will not be as high as second quarter.
Okay. Fair enough. Thank you. Then on another 25% of revenues is in your industrial and standard. 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 do you break down that quarter of the company?
I would like to mention the three big sub-segment on that industrial and standard. I think the top three are MCU, power IC, and data converter. They account for a majority part of the industrial and standard.
Okay. 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 third quarter depreciation? Will it grow faster than your revenue guidance and outlook for depreciation for the full year?
The depreciation for the whole year with about TWD 10 billion CapEx will be high teens, I would say 17%-18%. You can expect the second half depreciation will come up faster growth than the earlier quarter.
Okay, maybe the last question from Mark and C.C. We're seeing the first 10 nanometer chips being tore down that you're producing and massive die size shrinks on an apples to apples basis, well, maybe I should say like for like basis instead of saying apples, upwards of 40%-50% type shrink. 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' die size per se. Whether that's going to reduce the requirement on the wafer, we ramp up quickly and with, again, 10% wafer revenue for the whole year, so you can calculate it.
All right, fair enough. Thanks, C.C.
Okay. The next questions will be coming from Citigroup's Roland. Roland Shu.
Yes, we know AI is for everything. I think we would like to know how about AI at TSMC? In your annual report, you said you already built a team to dedicate doing this machine learning and AI development. Can you share with us what's your progress for this machine learning and AI development? What can we expect once you implement your AI in your production line? What kind of a change it will be? Thank you.
We utilize the AI technology in our own manufacturing area most. We use that one to improve the defect density, to improve the productivity, and also at the same time to improve the quality. How we did it? It's company confidential.
You already implemented on your production line?
Yes, we did.
When you talk about you have this efficiency improvement, actually the productivity has been achieved by this AI adoption.
Yes.
Okay. Thank you. Second question for C.C. Last year, you spent TWD 1 billion CapEx in InFO, you ran up InFO revenue to TWD 500 million this year. This year again, you are going to spend TWD 1 billion CapEx in back end. Can we expect next year we can generate another TWD 500 million revenue on InFO, then go up to TWD 1 billion in total revenue next year? Thank you.
We put the CapEx for the back end area, not 100% for InFO. Okay. We still have a CoWoS. We still have a lot of testing. I cannot comment that next year, what is the revenue will be. Okay. This year, TWD 500 million.
Are we spending the similar amount of the CapEx for this year?
I don't comment on that.
Okay. Thank you.
Next question will be coming from Morgan Stanley's Charlie Chan.
Thanks for taking my follow-up question. For second quarter, your industrial segment outgrowing other segments. Can company elaborate a little bit what kind of semiconductors or application that industrial and other segments?
Well, second quarter industrial and standard mostly come from MCU power and data converter, in particular application automotive and industry, factory automation, those applications.
Okay. Understood. Thanks. Second question is regarding your business strategy in trailing edge. I guess this question is to C.C. You mentioned that you want to fully utilize your fab space. I am 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. I guess most of your trailing edge tools already fully depreciated. What is the right way to maximize your company's profits and shareholders return?
Technology. Technology is the weapon that we are using most. We develop a lot of derivative technologies to meet customer's requirement. That reduce their die cost, at the same time improve the performance. That where we get the business.
Can I assume that you will fulfill your trailing edge capacity to 100% regardless, whatever-
That's our goal.
It's what?
That's our goal.
It's your goal.
Yeah.
Okay. Thanks.
Next question will be coming from Deutsche Bank's Michael Zhou.
Lora, what is the total capacity increase magnitude this year?
If I remember correctly, it's about 10% year-over-year.
Okay. Second question. Management seem to mention that last year, 20% reduction in cycle time. Would you reduce your cycle time further this year to improve the cost structure?
I cannot give you the specific number because of confidential, but we continue to improve. That I can say.
As a follow-up question, do you think when you enter 7nm you will continue to reduce cycle time? Because you mentioned 10nm per layer cycle time seems to be lower.
Reduced.
Yeah.
Yes.
Do you think that will continue to 7nm?
We definitely, it's our goal. We have a lot of weapons.
Next question will be coming from CLSA's Sebastian Hou.
Thank you. My first question is for Mark, that do you have any committed customers or any tape outs confirmed on N7+ right now? What type of application is that? It's for mobile or for HPC? No one is confirmed right now.
Well, there are customer are committed to use it, They don't have a specific tape out date for that. Yeah. Most of them working on N7 today. Yeah.
Okay. For those customers who 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. It's higher margin or difficult to do than consumer type of the product from that perspective. At the same time, it's also harder to make. Die size larger, process control become more important. What's the net net impacts in terms of the margin profitability, for TSMC from operating margin perspective?
At this point, the net net impact is no impact to our gross margin as we estimate today.
Okay. Thank you.
Okay. We still have two callers on the line. Operator, let's move to the next caller on the line.
Next question on line comes from Douglas Smith from Agency Partners. Please ask your question.
Yeah. Just to clarify on the N7+, am I correct in assuming that you're going to target 250 watt source and mask with fully working pellicle? Do you see any potential bottlenecks in terms of either the masks or the resists for EUV for N7+?
The 250 watts still happen in the laboratory, we don't count on that high number to do the cost reduction. Currently, we estimate if we do well on 125, for example, it will be sufficient enough for us to make the cost reduction.
Okay. In terms of pellicle, do you think that's necessary or it's not necessary for N7+?
We have very active pellicle 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 on the line of Mehdi Hosseini from SIG. Please ask your question.
Yes. Thank you. Just a couple of follow-ups. Lora, can you please tell me how should we think about depreciation this year? Did you say it would be up 17%-18%?
Yes. This year's depreciation will be 17% higher than last year.
Okay. All right. 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 in second half of next year. As far as the depreciation, I don't think there's any impact at all.
Okay. I think in the past you have talked about 20,000 to 30,000 wafer per month, and it's going to be mostly 12nm, 16nm. Is this still the case?
We talk about 20,000 wafer per month and 16nm technology. That's what we said. It's continued to be the same situation.
Okay. Thanks for the color. Appreciate it.
Thank you, Mehdi. 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.