Welcome to TSMC's Q1 2017 earnings conference and conference call. This is Elizabeth Sung, TSMC's 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. As 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: 1st, TSMC's Senior Vice President and CFO, Ms. Laura Ho, will summarize our operations in the Q1 of 2017, followed by our guidance for the Q2 of 2017. Afterwards, GSMC's 2 presidents and co CEOs, Doctor. Mark Liu and Doctor. C.
C. Wei and Ms. Hall will jointly provide our key messages. Then we will open the floor 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 conference presentation. As usual, I would like to remind everybody that today's discussions may contain forward looking statements and 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. Welcome to join us today. My presentation, as usual, we will start with financial highlights for the Q1, followed by the guidance of the Q2. 1st quarter revenue decreased 10.8% sequentially, but increased 14.9% year over year.
The sequential decline reflecting mobile product seasonality and about 2% appreciation in NT dollars against the U. S. Dollar. When we give our guidance in the Q1, we were assuming TWD 1 to TWD 32. However, the actual average exchange rate was 31.16, which reduced our revenue by about NT6 1,000,000,000 dollars Without the NT dollars appreciation, our Q1 revenue would have been about NT 240,000,000,000 exceeding the high end of our guidance.
1st quarter gross margin was 51.9%, slightly lower than the 4th quarter 2016, mainly due to lower level capacity utilization and unfavorable foreign exchange rate, partly balanced by continued cost improvement. Operating expense ratio rose to 11.1% as RMB as a percentage of revenue increased by 70 basis points. So operating margin decreased 1.1 percentage point sequentially to 40.8% in the 1st quarter. Overall, our Q1 EPS was $3.38 and ROE was 24.6%. Now let's take a look at wafer revenue contribution by application.
During the Q1, consumer and computer increased 30% and 1%, respectively, while communication and industrial standards decreased 18% and 5%, respectively, due to mobile product seasonality. Now let's take a look at revenue by technology. Combined revenue from 16 and 20 nanometer was 31% of total wafer revenue in the Q1, while 28 nanometer represented 25% of total wafer revenue. Advanced Technologies, which we define as 28 nanometer and below, accounted for 56% of total wafer revenue in the Q1. Moving on to the balance sheet.
We ended the Q1 with cash and marketable security of NT659 billion dollars an increase of NT27 billion dollars from the 4th quarter. On the liability side, current liabilities slightly increased by NT3 1,000,000,000. On financial ratios, accounts receivable turnover days increased 2 days to 47 days, while days of inventory increased 3 days to 44 days. Now let me make a few comments on cash flow and the CapEx. During the Q1, we generated about $1,161,000,000 cash from operations and spend $103,000,000,000 in capital expenditure.
As a result, we generated free cash flow of $80,000,000,000 dollars we also repaid 10,000,000,000 corporate bonds and net purchase of about $7,000,000,000 fixed income securities. Overall cash balance increased by NT 23,000,000,000 to reach NT 565,000,000,000 dollars at the end of the Q1. In the U. S. Dollar terms, our first quarter capital expenditure was US3 $300,000,000 Full year capital budget remained at about US10 1,000,000,000 I have just finished the financial summary for the Q1.
Now let me turn into the Q2 guidance. We expect 2nd quarter demand will be weaker than the Q1 due to supply chain inventory management during the Q2 and mobile product seasonality. Based on our current business outlook and exchange rate assumptions of US1 dollars to NT30.5 dollars we expect 2nd quarter revenue to be between NT213,000,000,000 and NT216,000,000,000, which represents 8% to 9% sequential decline. Gross profit margin to be between 50.5% 52.5% and operating margin to be between 39% 41%. The margin guidance reflect a higher utilization level for work in process building to support a strong 10 nanometer shipment in the Q3.
Also in the second quarter, we will again need to accrue the 10% tax on the undistributed retained earnings. As a result, our Q2 tax rate will be about 23%. The tax rate will then fall back to 10% to 11% level in the 3rd Q4, and the full year tax rate will be between 13% 14%. This concludes my remarks, and I will turn it over to Mark for his comments.
Good afternoon. Let me start from my message on the near term demand and supply chain inventory. Since all our shipments in U. S. Dollars allow me to just use the U.
S. Dollar to describe our demand. We just concluded our Q1 revenue to be above our January guidance in U. S. Dollars.
It gives us a minus 9% quarter to quarter in U. S. Dollars, which is about +22 percent year to year growth. This quarter to quarter change in 1Q 2017 was due to the seasonality of our major smartphone customer and a slower smartphone demand in China. We now forecast our 2nd quarter revenue to decline about 6% quarter to quarter in U.
S. Dollars. Year over year, this is an increase of about 3% year to year in U. S. Dollars.
Together with the 1Q revenue, our first half twenty seventeen revenue would grow about 12% year over year in U. S. Dollars. This is slightly higher than the 10% increase year to year we forecasted in our January Investor Conference. We now estimate fabless DOI is still high, high above seasonal exiting Q1 2017.
Our 2nd quarter revenue guidance thus reflects a quite severe inventory adjustment by our customers, particularly in smartphone and PC markets. However, the overall end market smartphone demand appeared stable in Q2 2017. We estimate the fabless DOI should approach seasonal level at the end of Q2 2017, and demand for our products will be poised for a strong growth in
the Q3.
Given the very strong demand in the second half last year, we maintained our 2nd half 2017 this year growth rate estimate of 5% year over year. And our 4 2017 growth rate target remains to be 5% to 10% in U. S. Dollar as we previously stated. On the forecast of overall semiconductor market growth rate, compared to 3 months ago, we raised it to 7% from 4% due to a stronger memory market.
Semiconductor, excluding memory market growth rate, remains at 4% this year. We also revised foundry revenue growth to 5% from 7% due to this elevated inventory in the supply chain. Our 5% to 10% full year growth forecast shows we will continue to increase our market share this year. Thank you. I'll hand the mic to C.
C. Wei I'm sorry, Laura?
As the foreign exchange rate is volatile this year, it's almost very difficult to predict. So I will make some comments on the foreign exchange rate and the impact to our revenue and the profitability. As you may all know, NT Dollars is the reporting currency for all our financial statements. Due to the fact that nearly 100 percent of TSMC's revenue is denominated in U. S.
Dollars and about 75% of our cost of goods sold and about 70% of our operating expenses are based in NT dollars. Therefore, the fluctuation in exchange rate between U. S. Dollars and NT dollars will have a sizable impact to our reported revenue and the gross margins. The sensitivity of revenue to U.
S. Dollar, anti dollar exchange rate is nearly 100%, that is if every 1% appreciation of NT dollars to U. S. Dollar, we'll reduce our reported revenue by about 1%. The sensitivity of both our gross margin and operating margin to the same 1% exchange rate change is about 40 basis points.
That is, if NT appreciates 1% against U. S. Dollars, our gross margin and operating margins will both come down by about 40 basis points. Compared with the Q1 guidance made in January 12, the NT dollar has appreciated by an average about 2.6% sequentially, which negatively impact our 1st quarter revenue by about 2.6% and our gross profit margin about 100 basis points, gross margin and operating margin each. For 2017 Q2, we forecast the average NT dollars will further appreciate another 2.1% sequentially, which would negatively impact our 2nd quarter revenue by 2.1% and reduce our gross margin and operating margin by about 85 basis points.
Street exchange rate has stayed at the 4th quarter 2016 level, which was 31.77% in average. Our Q1 2017 revenue would have been 1.9% better than the actual number reported here. And our 2nd quarter revenue would have been 4% better than we just guided. Thank you. I'll turn it to C.
C. Wang.
Thank you, Laura. Good afternoon, ladies and gentlemen. Let me start with 10 nanometer ramp status. We have passed the reliability qualification on internal technology qualification vehicle and have also passed 500 hour reliability qualification on several customers' product. N10 has been transferred from R and D to operation in both fab 12 in Xintu and fab 15 in Taichung and is ready for high volume production.
Although N10 technology is very challenging, the yield engine progression has been the fastest as compared to the previous node, such as 20 and 16 nanometer. Our current N10 EU progress is slightly ahead schedule. The ramp up N10 will be very fast in the second half of this year. We expect that 10 nanometers will contribute about 10% of our wafer revenue this year. Now let's move to N7 and N7 plus.
TSMC N7 will enter with production in Q2 this year. So far, we have more than 30 customers actively engaged in N7, and we expect about 15 tape outs in this year, with volume production in 2018. In just 1 year after our launch of N7, we plan to introduce N7 plus in 2018. N7 plus will leverage EUV technology for a few critical layers to sell more emerging layers. In addition to process simplification, our N7 plus provides better transistor performance by about 10% and reduces the chip size by up to 10% when compared with the N7.
High volume production of N7 plus is expected in second half twenty eighteen I'm sorry, in second half of twenty nineteen. Right now, our focus on EUV include household stability, telco for EUV mask and stability of the photoresist. We continue to work with ASML to improve the tour productivity so that it can be ready for mass production on schedule. Now in 5, we have been working with major customers to define 5 nanometer specs and to develop technology to support customers' risk production schedule in Q2 2019 with volume ramp in 2020. Functional SRAM in our test vehicle has already been established.
We plan to use more deals of EUV in N5 as compared to N7 plus In addition to those leading edge technology, we also continue to improve N16 and 28 nanometer, which are in mass production for many years. Now let me talk about N12. After we have developed 16 nanometer technologies from 16 ff to 16 ff plus and then to 16 ffc. We further extend this technology to 12 nanometer, which will have about 10% better performance at the same total power or 25% all power consumption at the same speed and about 8 to 10 smaller die size compared with our 16 FFC. Although 12 nanometer wire has smaller metal pitches as compared to 16 FFC, we have worked with IP infrastructure partner to build a complete IP support to make sure our customers' 60 nanometer product can be successfully bolted to 12 nanometer with minimal effort.
We anticipate the completion of 12 nanometers development by middle of this year. So far, more than 10 customers has actively engaged with 7 terabytes being planned in 2017. The major applications will be mid to low end smartphones, with 12 nanometer having better cost structure and better performance than our already competitive 16 nanometer, we expect to maintain a high market segment share in this N16, N12 node. Now, TWD 22 is a half node of our 28 nanometer technology. We developed this technology to address the market segment where low operating voltage are required.
Applications in IoT, image signal processing, GPS, Wi Fi and 5 gs millimeter wave are examples that can find good use of this technology. Compared to our 28 HPC plus our 22 UOP offers 15% performance improvement or 35 power reduction. It also reduces the die size by up to 10%. In addition, the RF performance, the color of frequency was a high maximum frequency. It also improved to 400 and 370 gigahertz, which is useful in 5 gs application.
We expect to begin 22 ERP volume production in 2018, With enhanced features carried by this technology, we expect to maintain a high market share in this 20 8, 2022 technology family. Now let me talk about the specialty technology. Especially this time, I will cover ultra low power, which is very important for all mobile products. We have offered the foundries the most comprehensive ultra low power technology portfolio, including 55 nanometer, 40 nanometer, 28 nanometer, 16 FFC and now EUR 22 and EUR 12. All these technologies are targeting IoT, mid- to end smartphone, GPS, Bluetooth and other applications.
Depending on each application's performance and the power requirement, the customer can choose their optimized solution from our portfolio, 25 nanometer and 40 nanometer UFPI in high volume production since early 2016. So far, there have been more than 35 products running in the line, in while 28 European FFT are also in high volume production. In addition to those technologies, we have also developed near switch core voltage technology in 40 nanometer. This technology can achieve power consumption below 10 microampere per megahertz active power, which is 5 to 10x lower than industry's best product for today. We are working on the design enablement support for our 40 nanometer NIO threshold voltage, which will be completed by Q3 this year.
Now let me update on InFO. First, we expect InFO revenue in 2017 will be about US500 million dollars Now we are engaging with multiple customers to develop next generation InFO technology for smartphone application for their 2018, 2019 models. We are also developing various InFO technologies to extend the application into high performance computing area, such as info on substrate, we call it info OS and info with memory on substrate, InFOMS. This technology will be ready by Q3 this year or Q1 next year. That's all my update.
Thank you for your attention.
Okay. Let me
share with you the last bullet, AI, artificial intelligence and ubiquitous computing. This is to share with you the recent development in the semiconductor industry and how TSMC positioned ourselves to ride on this trend. We are in a new era where billions of devices are connected at all times and computing takes place at any time and any place. This is what we refer to as ubiquitous computing. For smartphone, for example, in addition to the smartphone unit growth, more intelligent features such as voice, image recognition and AI for decision making will further increase its computing power and silicon content.
Given the vast established subscription base of smartphone today, it is the best launchpad for new consumer hardware and software innovation. For AI in high performance computing, let me first define the HPC, high performance computing, as the semiconductor used in data centers, servers, networking, storage and gaming. Artificial intelligence, application and services and 5 gs infrastructures are the major driving force with leading edge technology behind this HPC growth. For example, more than half of our customer product payouts with our 7 nanometer today we see are HPC products. Recently, we are also very encouraged by the support of a major AI service provider on ARM based processor for data center in Open Compute Project Summit this year.
Accelerators used in data center are also increasing, adopting the GPUs, FPGAs and ASICs, we expect HPC to become our major growth engine from 2020. The trend of ubiquitous AI also shows up in many IoT and consumer devices such as robot, drones, surveillance devices, smart TV and set top box. Ubiquitous AI will also be widely used in the fast developing autonomous car market. All these require very intensive localized parallel computing capability, which drive up the silicon content. At TSMC, we work with innovators around the world.
TSMC's long term growth engine ride on this industry trend from mobile computing to ubiquitous computing. The proliferation of AI demands insatiable computing capability from semiconductors. As we see just talked about our technology updates, we are developing various technologies and innovation platforms to satisfy this industry trend. Thank you for your attention.
This concludes our prepared statements. Before we begin in the Q and A session, I would like to remind 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 also from the call. Should you wish to raise your questions in Chinese, I will translate that to English before our management answers your question. For those of you on the call, if you would like to ask a question, All right.
First one the first questions will be coming from Credit Suisse, Randy Abrams.
Yes. Thank you. First question, I wanted to ask about 28 nanometer, where you talked about still gaining a bit of market share. There's a couple of rival options. Intel announced 22 nanometer using the FinFET that they have on 22.
And then also the Samsung GlobalFoundries have the FDSOI. And for China, they haven't been a presence, but starting to ramp up. So I'm curious how you're viewing these other options and the driver of confidence on the 28 nanometer relative to these?
Well, Randy, we continue to improve our technology. So we are very competitive. As I said, we developed 28 nanometer from time up to 28 HPT plus Now we have a 22. So we are still confident we can maintain a fairly high market segment share on this technology node. I don't want to comment on our competitors' progress.
Okay. The second question, I wanted to ask about the margins. You've actually done a great job weathering 2 quarters in a row, where margin is still above 50% since sales are down high single digit 2 quarters in a row and high margin. If you could take a forward look towards second half where we ramp up 10 nanometer and at these exchange rates? And since you're building WIP in the Q2, how you expect the margin to trend if there's still some leverage in the model as we go into peak season in second half?
Wendy, we intend to keep structure profitability close to 50% margin. As you know, we are renting 10 nanometer significantly starting from the second half of this year. I remember I said last time, there will be some dilution from 10 nanometer. In terms of the magnitude, our estimation is for the second half, you will have 2 to 3 percentage point dilution to corporate level gross margin.
Do you expect offsetting that any incremental leverage from the rest of the business to potentially offset the 10 nanometer dilution?
Usually, at the very beginning stage of any technology ramp, it's difficult to find offset immediately. But when time goes by, we can offset gradually as the 10 nanometer margin will also continue to improve.
All right. Next question will be coming from Deutsche Bank, Michael Zhou.
Sisi, since you mentioned before, there will be only 1 7 nanometer UV customer. So are you seeing more customer for 7 nanometer UV?
Yes. We are as I just reported, we are engaged with many customers on 7 and also 7 plus. So that answer your question?
I mean, for 7 nanometer plus EUV, right? So management mentioned before, only one customer for EUV in 7 nanometer. So now are you seeing how many customers you have?
Many.
Okay. The next question, management mentioned the log scale comparison versus Intel, I think, 2014, right? So since Intel came out to say that their technology seems to be 3 years ahead of older competitors, certainly including your company. So do you have any comment on your minimal metal pitch and gate pitch comparison versus Intel? Or do you have any comment for your 5 nanometer bridge Intel 10 nanometer potential 7 nanometer?
Well, that's a tough question. I think every company right now, they have their own philosophy in developing the next generation ZEP technology. As I reported, in the boundary, we work with our customer to define the specs that can fit their product well. So the benchmark pitch to define the technology node, we are compatible to the market. But the most important is we are offering the best solution to our customers' product roadmap, and that's what we care for.
So I don't compare that really what is the minimum hedge to defy the technology node.
Just a follow-up question. Can we say your power consumption efficiency in your final meter in 2020 will be ahead of older competitors, including Zheng IBN. Can we say that?
We have confidence to do that, yes. Thank you.
Next question will be coming from UBS, Bill Lu.
Hi, good afternoon. Thank you very much. A question for Doctor. Lu, you said that AI ubiquitous computing will be a driver starting in 2020. I'm wondering if you can talk to us about why that timing, because you said that half of your 7 nanometer customers are HPC related.
It seems like your customers and your customers' customers are pretty bullish right now as well. So why that timing? Thank you.
Well, look, we look at our customer PayPal at 7 nanometer and look at our development activity in our 5 nanometer, I think that is the time frame that we our customer can have a strong advantage to get into that market and grow.
I guess I'm not so clear because 7 nanometer starts running 2018 to 2019. 2019, yes. 2019 is the
7 plus.
7
plus. And in order to accumulate
huge volume revenue for us, it takes a couple
of years cooking to bring the whole value up.
Okay. So you're saying it becomes a bigger driver by 2020? Yes.
By driver, I measure by the incremental revenue dollars.
Do you have an estimate for how much as a percentage of revenues or total size by 2020 of HPC.
I mentioned last conference is currently it's 15%. And at this point, this slightly increases this year by a couple of percent. But really, it is in the cooking from today to 2020. And we expect we do have a number, but currently, it's a model I really cannot be certain on that numbers accuracy, but it is the trend is picking up at that time.
Thank you. My second question is related as well, which is, it seems like every quarter you're getting more confident on 7 nanometers, both in terms of your execution and your customers' progress. I know the comment previously had been that CapEx stays relatively flat next several years. Does that change at all with the confidence that 7 nanometers going out between now and 2020? Thanks.
Yes. We as the program development continues progressing, our confidence gets more and our customers' confidence also gets more. So in terms of the CapEx, of course, we try to make the 7 nanometer and 10 nanometer relatively compatible. So that's we try to maximize our CapEx efficiency when we're starting to ramp in the 7 nanometer.
Can I
just ask a quick follow-up? If you look at 28, which I think was the last dominant node for TSMC, that coincided with the smartphone ramp between, I'm throwing out numbers, 2011, 2015, CapEx went from about $3,000,000,000 to about $10,000,000,000 right? But that also included a huge revenue ramp. Now as we look at HPC, I mean, to me, it's a big opportunity as well. And that's over the next several years.
But you're not saying that CapEx is going to triple, right? So what should we expect?
You're talking about CapEx after 2020?
Do you think we should add up CapEx as we be more confident on the technology development? Actually, I want to mention one thing is, actually we have spent tremendous effort trying to improve the capital efficiency. You can see the equipment generation to next generation, the conversion ratio is pretty high. We're talking about 80% in our time, people feel it's good. Now I can tell you the 10 nanometer transition to 7 nanometer, the migration compatibility is more than 95%.
That's the effort we have spent. So we believe the CapEx guidance we're talking about at a RMB 10,000,000,000 level has reflected our confidence and all the effort we have put in to improve the efficiencies. Thank you.
Next question will be coming from Citi's Roland Xu.
Xu. First question to Mark. Mark, you mentioned ARM based process for HPC, for datacenter HPC accuracy, demand increased a lot. So do you see the same trend for this ARM based process for PCs? Yes, because Microsoft actually is right now the Windows 10 supporting this ARM based process.
You're referring to Microsoft Windows 10 supporting the ARM based CPU in the PC and notebook last year. That was very good news to us. But I'd rather not to review our customers' booking individually. So I think we see their business to grow and they get all the support from us and many other OEMs.
Yes. So we can assume a very strong second half momentum. Definitely, we probably included some momentum for this window.
I didn't say that, but yes, it will grow. Okay.
Thank you.
I mean,
I cannot review to you.
Okay. Thank you. And also same question for your 22 ULP. You said you are going to make production from next year. So when can we expect this 22 ULP revenue to achieve 10% of total revenue?
I did not look at that, but I all I can say is we start to engage with many customer and it's very competitive. So I expect some of the 28 nanometers product will move into 2022. When we are going to reach 10% of wafer revenue, I did not see the exact schedule yet.
Actually, we don't separately looking at 2022 and 28 because it's an extension of the technology. We look at a combined revenue. We don't do look at separately.
Okay. So going forward, that means we will include 20 year, 2022 as the same node. So how about 2016 and 2012 that will be also include into the same node?
Okay. Thank
you. Well, next question will be coming from Goldman Sachs, Donald Lu.
Lu.
I will need to translate that first. Donald, so if I misrepresent you, you have to let me know. Donald's question basically is with respect to the implementation of AI in smartphones. And he's asking whether or not this increment of AI functionality to the smartphones will increase the die size of the smartphone.
Sure. But every company have their different product strategy, some target to the low end, some target to
the premium. They're all very different.
For the low end, still the cost is still critical, and they want you just to get
the votes from the customers.
And so they have different strategies that I cannot really quantify for you. But definitely, certain piece of silicon will be dedicated to AI. And in the beginning, it could be a separate function and it could be integrated too. So remember, our chip size will shrink
along the progress of technology. So even
maintaining the chips size already is a huge capability built and contribution from AI already.
So maybe I can follow-up TSMC's smartphone content question. For this year, I think last year, last time, 6 months ago, you commented it will increase for this year. And is that still the trend? And can you repeat like how much it will increase from last year to this year again?
Roughly, if you calculate from our share and our average dollar perform, it's about high single digit.
And this trend, you think, will continue because of AI and other things for next
year? I hope so. Okay. I hope there will be more. Okay.
But second question is on the guidance for this year. I think in January, you said 5% to 10% U. S. Dollars. And now the whole market, it's slowed down a little bit.
That so we will be more like in the low end of that range for this year?
No.
Okay, great. Thank you.
Okay. Next question will be from JPMorgan's Goldcorp.
Thanks. My first question, just wanted to refer back to your comments on 10/7 nanometer being a bigger node than 16. Could we also compare that to 28, which was, I think, at its peak, like US8.5 billion dollars in terms of revenue? Are we How much what is your degree of confidence in terms of 7 and 10 nanometer combined at its peak rate being significantly higher than 28? And maybe also could talk about you talked about half of the tape outs being HPC related.
Could we also have some idea about is the revenue still going to be mostly mobile related or smartphone related? Or is the revenue also going to be more or closer to the split that we saw see in the tapered side in terms of HPC?
Well, it's in dollars, right now, to be honest, many of our customers are still working on their products with our 10 and 7. So what do we do is just to try to bring their product to the market. And how successful that is still really is still yet to be seen. So it's very difficult for us to calculate what's the business and how many wafers or how many product units their product gets to achieve. But I can tell you that in dollar sign, to us, it's a much bigger volume, much bigger notes than either 16 and 28, okay?
And but for the same reason, how much is the HPC, how much is the mobile computing, I think on 10 or 7, it's still too early to say. HPC will be the bigger portion than you have been known. Okay. My follow-up
is on 7 and 7 plus. Since there is additional EUV steps, do customers have to redesign their product? Does it drive more customers towards 7 plus rather than 7 or you're not seeing any of that happen?
They do have to recapitalize the standard sales, something like that. But the efforts will be very minimal because we try our best to work with IP infrastructure partner to minimize that effect. So it will be I cannot say transparent, but the effort will be minimized.
You don't see any customers delaying their 7 plants because they want to wait for 7 plus with EUV? You don't see that?
I think the customers have their own product roadmap. And their new product introduction to the market is probably the most important thing for them to consider. So when they're developing their product from 7 to 7 plus, We did not see that yet. Thank you.
All
right. We will now take our next question from the call. Operator, please proceed with the first caller on the line.
The first question is from the line comes from Brett Simpson from RIT Research.
Yes, thanks very much. I have two questions. First of all, on the HPC segment, if I look at that segment and look at chips like data center chips, server chips, this HPC segment is structurally much higher margin and much more profit in the value chain. Do you think TSMC can make structurally higher gross margins in HPC? Maybe you can discuss that opportunity.
And just on the earlier questions of evolving customers to 22 nanometer and 12 nanometer ULP, you mentioned there's minimal upfront NRE for customers to evolve their chips from 28 2016. Can you talk a bit more about this? Because it seems to be quite a big differentiator versus a customer going to FD SOI or another fab. Can you maybe talk about how significant a saving this is for customers? Thank you.
Okay. Let me answer your
HPC's how to capture values.
Yes, you're right. The HPC products produce much more value in the system build. And our customer will command more value products. And we work with our customer also will trying to get more value along the supply chain. We also remember this HPC product will not only be wafer business, all our advanced packaging technology and associate with our future platform of system integration, we also come to the service provide to our customers.
So in the future, the advanced packaging, we also intend to increase our value to our customer, therefore, capture more value along the supply chain.
Well, let me answer the question on 22 EURP 12 EURP, how competitive it is versus our competitors offering the 22 FD SOI or others. The first one on the EUR 22. This one, we offer lower power consumption, higher speed and with the die size shrink about 10%, as I said. But the beauty is our customers don't have to change anything. They can use their IP portfolio in 28 nanometer.
The 10% dye shrink is actually optical direct shrink. So the customer does not have to do anything. They can easily port their existing product or the new product into EUR 22 and take advantage of the higher performance and most important, much lower power consumption and then for their new product to compete in the market. So we think it is very, very competitive. On the 12 UP, we did shrink a little bit on the metal pitch.
And as I just mentioned, we also work with IP infrastructure partner to go down to minimize their effort. So again, this one offer a very effective pass and cost effective pass from 16 nanometer into 12 nanometer. So we expect for this kind of advantage we offer to our customer, we still can maintain a fairly high market share.
All right. We will still stay on the line and take the question from the next caller. Operator, please.
Next question is from Stephen Talajo from HSBC.
Thank you. A year ago, we talked about your lead customers at 16 nanometer being on 16 nanometer for the 2nd year. Yet I believe it was CC that said, yes, they're increasing the functionality there, so the die size doesn't really change too much there. Yet this year, as we go to 10 nanometer, we get a little bit more benefit from a stronger shrink. So I'm curious, what
do you think
are the impacts? Will a smaller die size thus require less wafers from you in the second half of the year? Or more importantly, is the ASP differential at 10 nanometer significantly more versus, let's say, 16 nanometer FFC that it more than offsets any potential die strength. So could you comment a little bit on die sizes and maybe ASP differential on 16 nanometer FSC versus 10 nanometer?
All right. I will repeat Stephen's question. He's basically asking that our major customer this year will migrate from 16 nanometer to 10 nanometer, and therefore, he assumed that it will be a smaller dye. And since it's a smaller dye, whether or not it will be fewer wafers. And if it is fewer wafers, whether or not the ASP increase can more than offset by the fewer wafers.
Well, we don't comment on customers of that size, 1st. And second, I think Mark already pointed out, as we move along the path of the technology, the geometry gets smaller and smaller. However, the content also increased quite a lot. And you can see that from your smartphone you are using today and 2 years or 5 years ago. But again, I don't comment on the customer's bite
size. Stephen, do you have second question?
The second part of that first question was relative to the ASP differentials on 16 nanometer FFC versus 10 nanometer.
Oh, He wants to know how much more we charge at 10 nanometer compared to 16 FFC.
Confidential information.
Okay. Operator, let's move on to
the next caller on the line. Thank you.
Thank you. Next question is from Patrick Liao of Macquarie. Please go ahead.
I'd like to ask your view of anti year seasonality. Is it changing gradually from recent years and the first half has become relatively sluggish? This is my first question.
So Patrick's question is what has changed in terms of our business seasonality? It looks like our first half is sluggish compared to second half.
Your observation might be right. This is the 2nd year that we have a slower first half. And that we at this point, look at the it has to do with the premiums phones seasonality, as I have mentioned. And we are going to develop more customer products, hopefully, to smooth out this, but this is the current seasonality we see. Okay.
My next question would be TSMC moves 3 millimeters fab claim to U. S. I know this is probably not right to ask, but very curious, I assume for many audience. Thank you.
So Patrick, you are asking if we will go to U. S. To build a 3 nanometer fab? Is that your question?
Yes.
Well, we continue to look for the options on the new fabs allocation. So far, the fab in the U. S. Is not very optimal due to many consideration, although it's still an open option for us to choose.
Okay. There seems to be quite a few people still on the line, so we will continue on the line. Operator, please have the next caller. Thank you.
Next question is from Mehdi Hosseini from SIG. Please go ahead.
Yes, thanks so much for taking my question. Two follow ups, one on EUV. Can you please help us understand the extent of EUV adoption? Specifically, how many layers would you expect the 7 plus nanometer node to adopt EUV? And I have a follow-up.
Well, I see a few critical areas, which is we used to do 2 purpose. 1 is just swing the die and then to do the practice for the EUV. How many critical layers that I cannot share with you now?
Did you say a few critical layers?
A few critical layers.
Okay. Thank you. And then my follow-up question has to do with the capital intensity and how you have been able to increase efficiency of equipment. I want to better understand the equipment reuse from 10 nanometer to 7 nanometer. I heard Laura talking about a $10,000,000,000 CapEx for a few years.
But then I also heard the equipment that is used for 7, 77 plus is going to be pretty much same set or very much reusable from 10 nanometer. Can you help me reconcile the CapEx with the equipment reuse commentary?
Okay. You're asking capital intensity and how do we reuse the tools from generation to generation. I have said maybe a couple of times in the coming few years, we expect our capital intensity will be ranging from 30% to 35%. I'm still with that view. In terms of how do we do it, because capital is very expensive in the company and that's the utmost important decision in the company.
So we spend a lot of effort trying to as the generation become shorter, So that make the equipment reuse even more critical. So we have invented a lot of way trying to increase the commonality from node to node. If there is some idle or open tool, we're trying to utilize those idle open tool. So either migration or mutual several fabs back up each other. And a lot of innovation coming from operation people trying to reduce the trying to reduce the CapEx we have to spend.
And also, we are putting more focus on what's the peak capacity building. You cannot follow just follow what customer tell you the highest demand they need. You have to look at the cycle and find out which the optimal peak capacity you build. And once you build it, you try to utilize the capacity as much as possible, including you have sometimes you have to move product among quarters just for the purpose to utilize the capacity. So that's the several ways that we have been doing the company to improve the capital efficiency.
Just very quickly, as you scale the into back end technology, should we expect the mix of CapEx between front end and back end packaging change going forward?
So Madhik's question is now since we have started volume producing with info, what will be the mix going forward between the capital spend for the front end,
which is for the wafer and then the capital spend for the back end, which is the packaging? Yes, indeed, our back end capital has been increasing. For example, we are ramping the InFO technology starting from last year, and I didn't show you the CapEx breakdown. It's pretty high. In the past, I think our bank is a couple of $100,000,000 It can be go up to $1,000,000,000 And this year will be the case.
Okay. I think we'll come back to the floor now. Now we are back to the floor for questions. First, let's have Morgan Stanley's Charlie Chan.
Thanks. So my first question is on the 2nd quarter guidance. So Mark, you mentioned that there were some supply chain inventory management. So besides smartphone, what area do you see a weakness? For example, gaming, PC, even industrial?
And would you also attribute that smartphone chipset weakness to your customers' market share loss, meaning those 2 Qualcomm? Thanks.
The 2nd quarter weakness, smartphone is 1. I think we think the PC is the other one, mostly because of inventory though. And industrial, I don't see the weakness at all. And come to your question about the second question?
Yes. So your customers' market share loss is compared.
Okay. This is not news, right?
We anticipate this, and we are working to recover for quite some time.
And all these years,
recovery work is ongoing, and we already factor those factors in. And still, we expect this year, we overall, we should be able to gain market share overall to overcome this. For the long term, of course, this customer the relationship with this customer gets much better, warmer and warmer now, and we are working on them with them on the future technologies.
Okay. And also on your HPC, you already commented, you mentioned that you are excited about ARM based server get qualified. But does that mean you already have that starting win for your 7 nanometer, They're on based server processor in your 7 nanometer customer already.
Yes. I'm sorry, the question is?
Yes. Do you already have unmet server?
Yes, of course. Already.
Of course. Okay. Thanks.
And my next question is to Mr. Wei. So regarding your 28 nanometer capacity expansion, I think a couple weeks ago, you at your technology symposium, you said you mentioned that nanometer capacity will increase 50% year on year. But the trend is that I don't doubt your competitive of 22 nanometer ULP, but the fact is that some of your customers are moving to 60 nanometer. And also your market share at 28 nanometer is already more than 90%.
So how confident that your demand can grow another 15%
in the coming year? Well, we build our capacity of cooking to customers' demand, and we do it very carefully. So you say that we are going to increase 15% every year?
This year.
This year, yes. So far, I can share with you that we are still fully loaded and probably a little bit not enough. So we work very hard to increase the capacity to fulfill customers' demand.
Even with China smartphone weakness, you're building your 20 nanometer is fully loaded?
Yes. It's continued to be that.
Okay. Yes. So very quick on just one number. So you mentioned that your 7 nanometer customer already exceeded 30 customers. So what's the customer number for 10 nanometer and 60 nanometer,
respectively, currently? Well, probably comparable to 60 nanometer, nanometer.
Similar.
Okay. Next question will be from Sai Wang, Rixhun.
Yes. Hi. Good afternoon and thank you so much for taking my question. Just a quick follow-up to the previous question about your 2nd quarter demand driver. I think Mark mentioned about the weakness mainly from smartphone and PCs due to some more inventory question and industrial tend to be stable.
Do you see any pocket of strength for Q2?
I don't
particularly notice the particularly strength in certain pockets. Industrial is considered heating up. We have that's the number showing the overall Q2. Okay. Automotive, although a small percentage is still heating up.
Okay. Thank you. My second question is, if I remember correctly, I think your 28 millimeter is a very strong node. And even for this year, you still constantly build up more capacity. But for your 2016 and 2010, I think capacity wise for each node is much lower than 28 nanometer.
So my question is, do you anticipate the next 7 and 7 plus would be a strong no? Would capacity build maybe by 2020, it will be at least as comparable as your 28 nanometer?
I cannot share with you, but I certainly hope so.
Okay. Thank you so
much. Okay. Next question will be coming from Credit Leonate, Sebastian Ho.
Thank you, Doctor. Song. I think my first question is to Doctor. Liu on the HPC. Can I follow-up on that you mentioned by 2020, HPC will become the bigger driver for the company?
Is it bigger or biggest In terms of incremental revenue, right?
Well, that depends on how smartphone clear out then. It's a competition. I think in 2020 to 2025, that's the time where they really picked up. So I wouldn't say in 2020 to compare with the smartphone yet.
And just a follow-up on that one is that I think 6 months ago, that conference, you gave us some ideas about the wafer adjustment market revenue, but HPC is about US15 $1,000,000,000 by 2020. I remember that time you mentioned about it's hard to it's really hard for you to quantify artificial intelligence in the numbers. So I wonder the thing that you talk about today, is it on top of that RMB 15,000,000,000 or already included?
It's part of the story. It's still a consistent story. Part of the okay. When I talk about AI, I only I talk about HPC, but I also talk about IoT, automotive and smartphone. So AI is a phenomena, phenomena of using more silicon in all kinds of devices.
Of course, the AI will require more computation in the data center and more communication in the network and storage. That HPC is part of this AI portion in HPC application.
Okay. Thank you. And one follow-up. I think this one for Doctor. Wei is we understand that your 16 nanometer, one of the major customers moving to 10.
And with your launch of the 12 nanometers, do you expect your 16 nanometer family with 12 next year, the total revenue in absolute level will recover to the same level as we've seen in 2016.
We hope so. But let me stress again that 12 nanometer will be used for the need to go in smartphones. And we offer a way for our customer to have a cost effective road map for their product. Again, the most advanced premium grade smartphone will move to the next node as we expected.
Thank you.
Okay. Follow-up question from Randy Abrams, Credit Suisse.
Yes. Thank you. This one probably for Cece. On the fan out, you talked about more mobile products. Could you talk if that's still for the high end smartphone or you see it moving down into the mass market versus now cost competitive with flip chip?
And do you see any cases where customers are splitting the architecture now to using info and maybe migrating a smaller part of the die size, say, the 7 10 nanometer and then with info keeping some unlagging nodes.
Okay. So far today, InFO are still used by most advanced smartphones, okay? We are engaging with the customer, many, to do the things you just mentioned to move into more area, including separate die size into Manipur 1 to get more efficiency and to roll down the cost. That's what we are doing. But more importantly, we are moving the application into the high performance computing because Mark just mentioned the AI and all those kind of things will start to develop in the next few years, and we try to catch up with the market.
Great. The second question I wanted to ask, you maintained aside from currency your growth assumptions for this year, but you lowered the overall foundry industry. Could you maybe talk about Factor? Was it a difference in share? You feel like you've taken some share in certain applications or a view on what you expect your competitors versus a few months ago?
Well, the main reason we revised our foundry growth rate is due to the inventory accumulation we see in end of Q1 and also expect it to at towards the end of Q2. Regarding we have some our forecast currently, however, is better than the average foundry growth rate forecast. Therefore, we consider we are gaining market share this year.
And just to clarify, from this inventory correction, you think you've gained enough share to offset, say, for TSMC, the impact of this inventory correction?
Well, inventory correction applies to everyone. So simply that therefore, everybody's the average foundry market share will drop. So will we if we are not gaining other share to be better than 5%. Thank you.
Okay. Next question will also be coming from a follow-up and that will be Citi's Roland Xu.
Thank you. I just look at your annual report actually, Daniel, your 4th quarter report and you have the annual result. So last year, your non wafer revenue actually declined in both absolute number and also as a percentage of the total revenue. And even I look at in the past year from 2013 to 2016, the percentage of the non wafer revenue actually declined from 6.1% to 4.1% last year. But in this actually, I think that is against because in the past years actually we had a lot of activity to doing with the 20 nanometer, 20 or 16 nanometer means a lot of the photomask type out of revenue.
So can you expand what's the disconnection with a lot of new wafer activity, but we still have this declining wafer revenue in the past year? Thank you.
I probably cannot link your statement about the declining revenue. But there is a period of time our non wafer revenue basically the back end and the EVO, that's the 2 major non wafer revenue. It has been about 10% for many years. And with the In for that we're joining the company starting from this year, we expect at least we can maintain or even a small increase now with the revenue as far as I can see.
Yes. But the 10% I think the 10% is the level, we are probably 2 business numbers compared to what's the number you reported. That in last year was only 4.1% of the non waver revenue.
Can I be? I have to check which page you are
looking at. Page 80 something. Page 80 something.
I will go back and check. Okay.
You have the weighted revenue and the non weighted revenue there. And also the second question is for the info. I think Doctor. Wei guided for info revenue last year, book last year was above US100 $1,000,000 So how about your forecast for InFO revenue this year? Thank you.
I mentioned this year, you will be for the 2017, you are about USD 500,000,000.
All right. Follow-up question from UBS, Bill Lu.
Thank you. 2 quick follow ups. One is on Donald's question on smartphone content. In the past, you've given us the content for high end, mid end and low end. Can you provide that for this year?
I don't have that with me, but the similar situation than last year, I think.
Okay, great. Thanks. And then just a clarification with Doctor. Wei. You had said that HPC will increasingly use info.
I had thought that maybe a lot of HCC applications will use COWAS. Can you talk about the 2? Oh, yes.
Today, most of the HPC almost all of the HPC customer using the cohorts because of that one is a very high performance. And I'm talking about the extent the input into the HPC area because that offered lower cost. And also, we improved the input performance. So it still be lower than the performance is still lower than the core was, but cost effectiveness is much better. That's what we expect to be widely used by HPC customer.
Okay. Follow-up questions from Deutsche Bank, Michael Zhou.
You mentioned HPC folk info in the future. So for very high income HPC product, would I still use CoWoS or you think that you will shift to influentarily in the future?
No, I would think it's still using CoWoS. That's still the much better performance for very high ping count in the few 1,000 content or those kind
of things. So can we say maybe 70% to 80 HPC HPC will be still based on COVID? No.
Today, I cannot do any prediction, but we are working with the customer because of overall cost structure is very important. That's what we are working on. And we also try to make a lot of variation to meet the customer's requirement.
Yes. As a follow-up for your info, do you think the mid to low end product will shift to info because the things that mid to low end product care about cost?
I would expect that, yes. It's not happening yet.
But in the future, is it possible? It's possible. Okay. The second question for Mark, as management mentioned before,
you should have a higher
market share 7 nanometer versus 16, 14, right? Yes. So can we say that you can gain more market share in 7 nanometer smartphone market versus 16, 14 nanometer in 2018 to 20 19. I'm not mentioning the customers. I'm just mentioning market share.
Yes. I think so. I think so. This is we will be at higher market share in 7 and 7 plus and those are for high end smartphone. The mid low end smartphone, we still working on 22 ULP, all those low power technology to capture.
We have a multiple OT clone strategy on this to capture share.
Okay. Questions will be coming from JPMorgan's Gokul.
Thank you. First question, when I look at HPC currently, unlike smartphone, like you mentioned, premium will be at 7 nano and 10. Older nodes can also be driven by smartphones because of low cost or mid end. HPC, if I use the current biggest IDM, which is probably the biggest HPC player right now, most of their capacity is leading edge, and they probably have n and n-one, that's pretty much it. And they work on a very accelerated schedule in terms of capacity conversion.
So when TSMC when HPC becomes a bigger driver for TSMC, how do you think about capacity planning? Are we going to have a lot more conversion from, let's say, 10 or tenseven to 5? Or are there enough second wave, 3rd wave even within that ambit of ubiquitous computing that could drive 2nd or 3rd day for the fresh capacity that you put on?
You're talking about sometimes in the future. Let me ponder this with you. TSMC is very different than this IBM company. We are in every segment in the market. Therefore, we attack the leading edge and we capture the HPC doesn't mean those technologies later on when the technology moves, it doesn't have the usage for all other segments.
Let alone, you talk about HPC's volume, volume compared with today's high performance no, I'm sorry, premium phones is still smaller. So I don't we will consider the technology migration, capacity migration then, but I don't consider that a major change or major problem for us. Okay. My follow-up is on
a more near term question, especially for second half. If I look at the half on half growth, it's almost like 20% going into second half. I just wanted to understand, are we anticipating that except for the big premium customer ramp up, are we also anticipating some inventory restocking, the payment correction to finish in first half and we anticipate some general inventory restocking in second half? Or is it primarily driven by the super cycle that people are expecting?
Yes. We anticipate we try to prepare for the flexibility of the to cope with the demand over the second half. So you're right, certain activity is already ongoing in the Q2 to make sure that we can deal with the needed demand in the second half. If I could phrase it
a little bit differently, do we expect the customers who are really weak in the mid end smartphone, etcetera, also to have a big rebound in the second half of the year along with the big seasonality for your main customer?
The smartphone midhighmidlowend, we consider is we can deal with it because at this point, it still follow the relatively seasonal patterns and it's more predictable than the premium launch.
Okay. Follow-up question from Goldman Sachs, Donald Lu.
May I ask a question on other gains and losses? It's still fluctuating their guidance and where it's coming from, etcetera. It's RMB 2,620,000,000
for Q1.
Which line you are asking?
As you look at Page 3 of the management report on the second table there, There is other gains and the losses was like $1,800,000,000 in last Q1 and $2,600,000,000 this Q1. So I was wondering.
You referred to the 2.62% 2nd quarter versus the 1.8% last year, right? Yes. I think a big component of this slide is the interest rate interest income. If we have more cash and generate more interest and that help on this one.
Okay. Another question is on this year's guidance again. I think you mentioned the lower foundry forecast because of inventory correction. But have you considered news or speculations now that one of your high end premium phone launch this year might be delayed?
For example,
it could be launched in September, then shipment is in November, December, things like that. If that happens, what will happen to TSMC's guidance?
This is totally speculation, right?
So I
don't make comment.
Okay. In the interest of time, we'll just allow the final follow-up, and that will be from Credit Leonnay, Sebastian Ho.
Thank you, Doctor. Song, for choosing me. So the first follow-up I have is we've seen TSMC blended wafer price on the 12 inches equivalent basis has increased every year since 2010. And my question is that, are you confident in terms of continuing to increase your blended wafer price in the next 5 years?
Well, so far, we're doing okay. So we're still trying hard to continue improve our ASP. That's all I can say, yes.
Thank you. And my second follow-up is, can you share with us your strategy and how you look at memory? We understand that TSMC has been developing embedded memory and also that a new type of the innovative memory like MRAM, RM. And can you share with us on your how you progress on that? And when we're going to see that embedded memory technology being commercial ized on like 16 or even like 7 nanometers?
And also, can you share with your strategy on the discrete memory?
Let me talk about discrete memory, and C. C. Will cover the embedded memory. We consider we are not in commodity business. Therefore, we at this point, we do not intend to enter the commodity business currently, which is discrete memory is.
So other than the commodity, actually, we work with customer to offer them the embedded memory because of today, we are the largest provider of embedded flash. Then embedded flash has its own limitation after 28 nanometer. So we work with the customer to find a better solution. That means we have to find some memory that can dissipate low power and higher speed. That's why we are working on the RM, MRAM and others, okay?
So that's our strategy. We certainly work with customer to meet their demand, and we define our embedded memories roadmap.
All right. With this answer, we conclude today's conference. Please be advised that a replay of the conference will be accessible within 3 hours. Transcript will become available within 24 hours from now. Both of them will be available through our website.
Thank you for joining us today. We hope you will join us again next quarter. Goodbye, and have a good day.