Welcome to TSMC's Q3 2016 Earnings Conference and Conference Call. This is Elizabeth Sang, TSMC's Director of Corporate Communications and your host for today. Today's event is webcast live through TSMC's website atwww.tsmc.com. If you are joining us via the conference call, your dial in number are in listen only mode, and this conference is being viewed by investors around the world. We will conduct this event in English only.
The format for today's event will be as follows: 1st, TSMC's Senior Vice President and CFO, Ms. Laura Ho, will summarize our operations in the Q3 of 2016, followed by our guidance for the Q4 of 2016. Afterwards, TSMC's 2 presidents and co CEOs, Doctor. Mark Liu and Doctor. C.
C. Wei and Ms. Ho will jointly provide our key messages. Then we will open both the floor and the line for the Q and A. For those participants on the call, if you do not yet have a copy of the press release, you may download it from TSMC's website atwww.tsnc.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 that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward looking statements. Please refer to the Safe Harbor notice that appears on our press release. And now, I would like to turn the podium to TSMC's CFO, Ms. Laura Ho, for the summary of operations and current quarter guidance.
Thank you, Elizabeth. Good afternoon, everyone, and thank you for joining us today. My presentation will start with the financial highlights for the Q3 followed by the guidance for the Q4. We have just finished another strong quarter. Despite a less favorable foreign exchange rate, our 3rd quarter revenue increased 17% sequentially to TWD260 1,000,000,000, exceeding the high end of our guidance given in July due to the strong demand in overall smartphone market.
Gross margin declined 0.8 percentage point sequentially to 50.7%, mainly due to an unfavorable foreign exchange rate and the margin dilution from higher 16 nanometer contribution, partially balanced by a higher utilization rate and cost improvement. R and D expense continued to increase, reflecting a high level of development activities for 7 nanometer since our revenue grow faster than R and D expense. Total operating expense to revenue was 9.9%. Operating margin was 40.8% in the 3rd quarter. Overall, our 3rd quarter earnings per share reached $3.73 a 33% increase Q over Q and a 28% year over year and ROE for the 3rd quarter was 31.2%.
Now let's take a look at revenue contribution by application. Our Q3 business benefited from the new mobile product launches as well as robust overall smartphone demand. Revenue increased across the board in all product segment. Communication and Industrial Standard increased by 19% 16%, respectively, while computer and consumer also increased by 3% and 8%, respectively. In terms of revenue by technology, combined revenue from 16 and 20 nanometer continue to grow and represented 31% of wafer revenue in the 3rd quarter compared to 23% in the 2nd quarter.
Meanwhile, our 28 nanometer capacity remained fully utilized and represented 24% of our wafer revenue in the 3rd
quarter.
Moving on to balance sheet. We ended the 2nd quarter with cash and marketable securities of RMB517 1,000,000,000, which is RMB151 1,000,000,000 lower than the 2nd quarter. That was as a result of RMB156 1,000,000,000 of cash dividend payment in July. Correspondingly, current liability decreased by NT141 1,000,000,000. On financial ratios, accounts receivable turnover days decreased by one day to 42 days.
Days of inventory decreased by 10 days to 44 days, mainly due to reduction in working process as a result of stronger wafer shipments and improving cycle time on advanced nodes. Now let me make a few comments on cash flow and CapEx. During the Q3, we generated CLP126 1,000,000,000 from operations, spent RMB104 1,000,000,000 in capital expenditure, paid out RMB156 1,000,000,000 in cash dividend and repaid RMB12 1,000,000,000 of corporate bonds. Our overall cash balance decreased RMB158 1,000,000,000 to NT464 1,000,000,000 at the end of the 3rd quarter. In U.
S. Dollar terms, the capital expenditure spend in the 1st 3 quarters of 2016 totaled US6.7 billion dollars Our full year CapEx budget is now expected to be slightly above US9.5 billion dollars which is at the low end of our guidance. I have finished my financial summary. Now let's turn to the 4th quarter outlook. Based on our current business outlook and exchange rate assumption of US1 dollars to NT31.50 dollars we expect 4th quarter revenue to be between NT255 1,000,000,000 and NT258 1,000,000,000, which represents 1% to 2% sequential decline.
Gross profit margin to be between 50.5% 52.5% and operating margin to be between 40% 42%. This concludes my remarks. Now I'd like to turn the podium to Mark for his comments.
Good afternoon. I would like to start delivering our key messages. Let me start from our near term outlook. We concluded our 3rd quarter with 17% quarter to quarter and 22% year to year revenue growth. This strong growth was driven by our major customers' new mobile product launch and a stronger than seasonal growth from our other customers.
In the 3rd quarter, we gained our foundry market share across most technology nodes. With strong sell through, we estimate fabless DOI exiting the Q3 will be only slightly above seasonal level. We saw the smartphone sales improving coming into second half this year. High end smartphone demand today is better than we previously expected. The 4 gs plus deployment in China and the 4 gs upgrade in emerging markets also drive end demand.
PC gaming and TV gaming markets driven by product refresh are showing good growth. Also, deep learning is increasingly applied to many diversified areas. So we forecast our 4th quarter revenue to be about flat from the 3rd quarter. The demand for high end smartphone will continue to improve. We estimate the year end inventory reduction will be relatively mild.
So exiting 2016, the fabless DOI will be slightly higher than seasonal level by about 2 days. For the whole year of 2016, we forecast semiconductor market revenue, excluding memory, will have 1% growth. Foundry revenue will have 7% growth. And TSMC revenue will achieve 10% growth in U. S.
Dollars and 11% to 12% in NT dollars. Now I come to the leading edge technology status and competition. 1st, on 7 nanometer. Our 7 nanometer technology development is well on track. The progress of yield improvement and device performance development are both on schedule.
We are confident our 7 nanometer technology to be ahead of our competitions. Our plan of risk production qualification in 1Q 'seventeen remains unchanged. Our 7 nanometer has been adopted not only by high end mobile consumers customers, but also by high performance computing customers for GPU, gaming, PC and tablet, virtual reality, server, FPGA, automotive and networking applications. They all have aggressive product tape out plans starting from early Q2 'seventeen. So we expect to work on silicon qualification of more than 15 customer product tape outs in 2017.
Now on 5 nanometer, since the beginning of this year, our 5 nanometer technology has graduated from path finding to enter technology development phase. Recently, our EUV technology development made good progress. The throughput and reliability of EUV scanners, the sensitivity of EUV photoresist and the quality of EUV mask blank and the pedicles all improved. Of course, there is still a way to go. We will use EUV lithography extensively in our 5 nanometer flow to improve density, simplify process steps and reduce cost.
A plan of risk production qualification in first half twenty nineteen remains unchanged. Now I want to report to you about our growth platforms. I will report to you 2 our first two growth platforms. The first is mobile platforms. We believe mobile will continue to be a growth driver for TSMC in the next few years.
We forecast worldwide smartphone unit growth rate be at mid single digit in the next 5 years. The silicon content of smartphone will continue to increase, driven by increasing smartphone features such as dual camera, security sensing, ARVR and migration to 4 gs, 4 gs plus and 5 gs, particularly in high end smartphones. Those high end smartphone features will also proliferate to mid low end smartphones. There are other smartphone features yet to be seen. For example, deep learning for AI inference will also increase smartphone silicon content in the next 5 years.
More high performance processor will be used for context aware applications and provide new user experience. For this mobile platform, we will complete developing 7 nanometer in 2017, upgrade 7 nanometer in 20 18 and complete developing 5 nanometer in 2019 to support smartphone and high end mobile product on annual cadence. For mid to low end mobile and wearable products, we will continuously offer cost reduction technologies with 28 HP Plus, 16 FFC and its derivative technologies. Included on our mobile platform, they are TSMC's highly innovative and differentiated info advanced packaging for low power and small form factor. We also offer our next generation CIS technology, RF technology, SOI RF front end, power management IC, fingerprint, near field communication and various MEMS sensor technologies in this mobile innovation platform.
We believe we are in we are very well positioned to grow in this mobile market in the next few years. Now, I turn to high performance computing platform. In addition to mobile, we have also identified high performance computing as another area of growth. In the trend of digital world, more and more devices are connected and more and more data are generated, collected, filtered, processed and analyzed at all levels at local, in the network as well as in the cloud. This trend calls for more pervasive silicon processors for those computing loads.
Recently, deep learning market calls for new levels of parallelism and new levels of compute efficiency from our customers. These rapid development of artificial intelligence technology allowing machine ability to see, hear and predict has huge implication in many industry verticals like health care, media, consumer, automotive and so forth. This silicon content to support AI applications, I think, will be huge. We forecast the total wafer revenue opportunities, excluding memory in this market segments, could reach more than US15 $1,000,000,000 in 5 years. To capture these opportunities, we offer optimized 7 nanometer in 2017 and optimized 5 nanometer in 2019 in TSMC's high performance platform.
These technology offers include high performance standard cell library, optimized metal interconnect and optimized EDA design flows for high performance computing design. Our advanced packaging site, we will continue to offer 2.5d and 3d IC integration solution. In addition to the current COOS, as part of our high performance computing platform, they will support increased memory bandwidth for low power high performance computation. Thank you for your attention. I turn the microphone to C.
C. Wei. C. Wei:]
Thank you, Mark. Good afternoon, ladies and gentlemen. Let me start with 10 nanometer status. We have transferred our 10 nanometer from R and D to production in Q3 this year. Our first 10 nanometer customer product has been produced with reasonable yield.
DFA density and device performance continue to improve in much the same way as we did at the ramp up stage of every leading edge technology node. So far, we have received 5 production tape outs or high end mobile products. We are preparing capacity for 10 nanometer production ramp up by the end of this year and expect shipment in Q1 next year. Currently, there are about 2,500 engineers and 1200 technicians are working in the fabs on 10 nanometer. Additional 1,000 engineers and 500 technicians will be aided to our 10 nanometer production team by end of this year for the preparation of volume ramp in 2017.
As to our 16 nanometer FinFET, the defect density and cycle time continue to improve and are very competitive. In addition to mobile application processor, other applications such as cellular baseband, graphic processor for video game, ARVR, deep learning and AI have strongly adopted our 16 nanometer solutions. As a result, our 16 nanometer business this year is expected to become more than 5 fold of its level last year compared to last year. In order to support the applications for mid- to low end smartphone and wearable products, we continue to work with customer to further shrink the die size while improving the performance in 16 FFC. Now on 28 nanometer, the demand for our 28 nanometer technologies has continued to be strong throughout this year and is expect to last through many years.
So we are judiciously adding some bottleneck tools to meet the strong demand. Applications related to mid- and low end smartphones as well as a Wi Fi, digital TV set top box, flash controller and others has found TSMC's 28 nanometer a desirable solution. We saw differentiated technology, stable yield, short cycle time and large capacity. We have been very competitive in this node and are confident to maintain our market segment share for this node. All the nodes from 28 nanometer all the way to 0.35 micron and even to 1 or 2 micron technology has been an important contributor to TSMC's profitability.
We developed a broad portfolio of logic based specialty technologies such as CMOS image sensor and better flash power manager IC fingerprint sensor at MEMS to backfill our legacy logic capacity, which is converted into these specialty technologies. And we continue to earn good margin from this business. Today, we have bought an 8,000,000 12 inches equivalent wafer annual capacity from these older nodes. We believe this is by far the industry's largest capacity on those older nodes. Now let me talk about one of our growth platform, automotive.
There are many new applications being developed in automotive industry, such as ADAS, nanovision, smart and green energy, electrical vehicles, etcetera. We believe those new applications will trigger or have triggered new opportunities and requirements on semiconductor industry. For example, inside a car, there will be a lot of sensors to collect environmental information, RF devices to connect with outside world, more video displays, etcetera. A car also need a very powerful MCU or many powerful MCUs to analyze data for better safety and functionality. TSMC has been working with customer to develop necessary technology to capture those opportunities.
Today, we offer a broad range of technologies, including advanced logic and better fast CMOS emission cement and BCD to serve customers' need. In addition to technology offer, we also put a lot of effort on quality and reliability for automotive platform. For example, in Q3 this year, we start to provide ISO 26,262 compliance IPs for 16 FFC for automotive ecosystem. With our manufacturing excellence, which has been demonstrated in high volume production with stable yield and the broad range of technologies we are ready to serve this growing market. We estimate the total market of automotive related ICs measured in wafer value excluding memory was about RMB4 1,000,000,000 in 2015 and about RMB6 1,000,000,000 by 2020.
We expect our wafer business from automotive related ICs were more than double from 2015 to 2020. Now let me talk about IoT. IoT is another growth area we have identified. This market is fragmented with diversified products. We estimate the total market of IoT related ICs, again, majorly in wafer value, excluding memory, was about RMB2 1,000,000,000 in 2015 and expected to reach about RMB6 1,000,000,000 in 2020.
For those IoT products, we have focused our effort on providing ultra low power technologies. For example, we offer 55 nanometer, 40 nanometer ultra low power for low to mid performance IoT product and 28 ultra low power and 16 FFC for high performance applications. First of all, we also integrate ultra low power RF and battery flash as well as sensor solutions such as CMOS image sensor and MEMS to enable machine to machine or human to machine interface. With our broad range of low power technologies and specialty technologies, we believe we are well positioned to capture the growth opportunity in IoT market, and we expect to grow our IoT business at a faster space than overall IoT market in the next few years. Now I will talk about InFO.
TSMC's InFO has been involved in production since Q2 this year. Currently, there are more than 2,000 engineers and technicians working in our long term side for InFO production. While we are confident that InFO will contribute more than US100 million dollars revenue towards the Q4 this year. We continue our effort on cost reduction and yield improvement, both with good result. More customers have engaged with us on InFO Technologies for the purpose of enhancing their product performance.
Major application is still in mobile product. We are now qualifying for the next generation InFO technology. A few 100 or more engineers are expected to be aided to our long term side when we begin our next generation InFO production in year 2017. Now let me talk about Nanjing project. Our Nanjing project was announced last December.
It includes a wholly owned 12 inches wafer manufacturing facility and a design service center for the purpose of providing closer support to our customer in China and to further expand our business opportunities. We broke ground for the fab in early July. The production is expected to start in second half twenty 18 with 16 nanometer. We believe it will be the most advanced fab producing 16 products in China at that time. Our design service center in Nanjing has already started functioning with more than 50 engineers now and expect to grow to about 100 by next year.
We expect this design center will greatly help our customer in China to shorten their learning cycle and speed up their new product introduction to the market. Thank you for your attention. Now I'll turn the podium to Laura.
I would like to make a few comments on capital expenditure, profitability and dividend. So first, regarding CapEx. TSMC's 2016 capital budget is estimated to be slightly above RMB9.5 billion, as I said earlier, which is closer to our low end of our guidance. We have guided RMB 9,500,000,000 to RMB 10,500,000,000 3 months ago. It is mainly due to improving cycle time estimated for 10 nanometer.
We are able to shorten the lead time for capacity installations, which leads to a reduction of our 2016 estimated CapEx. However, this reduction in 2016 will not change our planned capacity for 10 nanometer in 2017. Our estimate for the capital intensity going forward remains unchanged at around lowtomid30s level for the next few years. I will talk about profitability. In the past few years, despite the higher CapEx, which lead to a substantial increase in depreciation expenses, we have been able to improve our structural profitability significantly.
We plan to keep our structural profitability at high level by continue working on price, cost and utilization rate with careful planning of capacity. Going forward, we expect to be able to maintain our gross margin rate at close to 50% level. My last comment is about the dividend. Given our target revenue growth rate for the 2016 to 20 25 year period to be compounded annual growth of between 5% 10% and our capital intensity to stay at lowtomid30s of our revenue, we anticipate an improving free cash flow after debt service in the next few years. Therefore, we also expect our dividend per share to increase in the next few years.
This concludes my remarks.
All right. This concludes our prepared statements. Before we begin the Q and A session, I would like to remind everybody to limit your questions to 2 at a time to allow all participants an opportunity to ask questions. Questions will be taken both from the floor and from the call. Should you wish to raise your question in Chinese, I will translate that into English before our management answers your question.
If at any time you would like to remove yourself from the questioning queue, please press the pound or the hash key. First person raised the hand is Deutsche Bank, Michael Cho.
Thank you. My first question is regarding the 16 nanometer UTR next year. Given that your key customer may shift to 10 millimeter next year for high end products, so what is your expectation for UTR next year in UTR in 16 node?
For UTR, actually, you are asking for the 16 nanometer business next year. There are some mid end low end smartphone will enter into node. So, so far so good.
So does that means you will have a similar UTR label next year versus this year? Roughly. Roughly. Thank you. Second question is regarding your 28 nanometer market share next year, do you expect it could be still very dominant next year versus this year given rising competition from Tier 2 foundries?
I just mentioned that we are confident to maintain the market segment share. So yes. A follow-up question for 20 and NMEs. Do you expect the Tier 2 foundry can really gain market share in high chemical area most substantially next year? Because given that since the UMC may try to increase high chemoK shipment next year?
Would you please repeat your question for the high chemoK? Gate? Yes. Given that you can see may try to increase high cumulative gate shipment next year. So how do you have a very high market share in 28 nanometer next year?
I just mentioned that a lot of customer find our solution is very desirable. And so again, I would like to say that we are confident to maintain our market share this year.
Next question will be coming from Credit Suisse, Randy Abrams.
Okay. Yes, thank you. You gave us some good figures on the growth drivers in new areas. Traditionally, IDMs have had a lot of market share in high performance computing, automotive and even microcontroller and IoT. Your foundry share is 55%.
If you could give some approximation what you expect your share in these, where you put HPC 15,000,000,000 dollars auto about $6,000,000,000 IoT growing $6,000,000,000 Like if you could talk about what your market share in these since they've traditionally been IDM applications?
On this high performance computing, I cited the RMB15 1,000,000,000 in next 5 years is really a rough estimate. Many of the application we cannot really grasp today like artificial intelligence. We don't know how fast and what form it will grow. So this is based on current knowledge. And we've been indeed this high performance computing included data center, network, storage and attached all the silicon attached associated with the data center and also include VR and AR and gaming and that's our definition, not including artificial intelligence yet.
Today, in this sector, we have about 30% share. Of course, we want to grow with this total segment and we also want to increase our share with the together with the IDM. And could you
talk about the automotive with the contribution where you talked about doubling the revenue, if you could give a starting point or market share in automotive?
We are working on this automotive platform across all the technology node, We We today, we most of our product is on the MCUs, and we expect that to grow into that a lot of high speed computation, just like Mark pointed out. And also a lot of sensors will come with it. And so we expect to grow the market. So I don't know that, that's where they answer your question on the automotive.
Or if you could give how much automotive is today for TSMC, like percent of revenue?
Today, she just gave me some hit. It's BRL1 bidding.
My second question about the margins, where you're guiding a little bit down in sales, but the margins are improving. And it looks like for next year, if I caught it right, it was 49% to 50%, but it's moved up a bit to 50%. You talked some on cycle time. Is the factor from cycle time improvement? And if you could talk about what strides you're making on the cycle time or if there's other factors driving that margin improvement?
Cycle time, when I refer to the CapEx, I was talking about the cycle time improvement actually help the capital to be more efficient. That's why we can spend less money, but you get the same capacity investment, okay? Of course, cycle time helps you as well. So that means, when you start to productions and you can reach to optimal sooner, of course, that will help the margin as well. You were talking about the 2017 in my prepared message.
I I was talking about our effort on the structure profitability improvement and our confidence on maintaining 50% level, okay? Given this year's depreciation has only increased a little bit and our CapEx is very much back end loaded. As you can see, first half only about 30%, second half maybe 70%. So we expect the margin will we expect the depreciation will go up next year. Although I cannot quantify that number because we're still working on the CapEx number for next year.
So but with all those plus and minus reason, we are still confident that margin will be close to 50%.
Just one quick follow-up. On the Q4, you have a couple of headwinds from currency and utilization, I guess, slightly lower. So just the improvement sequentially, is that from a 16 nanometer yield learning or if there's like a factor that's offsetting that to drive the improvement in Q4?
16 nanometer will be a key reason because we are ramping very fast in 16 nanometer. And 16 nanometer is the 2nd year of production. I think you still remember, you asked me when can we 6 nanometer reach to corporate level. We expect the 6 nanometer will reach to corporate level by Q1 'seventeen. So Q4 is very close to that corporate level.
So that really helps our margin rate. Next
questions will be coming from Citigroup's Roland
Good afternoon. Last quarter, we thought customers are probably going to adjusting inventory in 4Q. But look at your 4Q guidance now, it seems your customer are actually still building the inventory. So this inventory correction be delayed to Q1 next year and we are going to see a sub seasonal Q1 next year.
I mentioned our estimate that 4th quarter will be flat. Is because we see the end market demand is still healthy. And therefore, we also estimate the previously anticipated inventory reduction at the end of the 4th quarter will be mild. This also supported by our major customers' 60 nanometer ramp. So that support the 4th quarter results.
So I think this the end of this year is more peaceful than previous years.
Okay. So that means inventory correction probably won't be the case in Q1 next year.
Right. But the Q4, I don't think it's a major inventory adjustment in the Q1 either of general customers. But there are seasonalities. There are seasonalities that is not we cannot avoid it, in particularly, the big customers' seasonality. That is the I think the only factor that affects the Q4.
But many things can still happen between now and then. So right now it's too early to tell.
Okay. Thanks. My second question is from different angle. Intel is licensing on the physical IP for 14 and 10 nanometer process manufacturing. We know you don't comment your customer and the competitor directly.
However, from the industry and from technical perspective, how do you think the impact to the overall foundry and impact to TSMC going forward? Thank you.
Well, I think that's strengthened the ARM based CPU in the processing world. And we have traditionally very strong in ARM based ecosystem. It's not just the ARM and also many architectural license people. So it's proof that this in order to get to the non datacenter world, this is the ecosystem you're going to ride. How much threat?
We don't know. Of course, we never underestimate our competitions.
Next question will be coming from UBS, Bill
First question is a follow-up on HPC. Mark said that this business becomes more than RMB15 1,000,000,000 by 2020. Can you talk a little bit more about the different segments of HPC and what do you think are the big opportunities within that 15,000,000,000? Secondly, when I talk to your customers, it seems like a lot of people think that you need 7 nanometers for this to take off. So this is maybe hockey sticking after 7 nanometers.
I'm wondering if you would agree with that. What is the linearity of that business? Thank you.
First part, you asked what is the component of HPC. Well, it includes many things associated with the data centers. It includes the network processors and also includes switches. And in our domain, we include the gaming and VR and AR and so forth. So for those markets, we are in a good position.
However, for data center, we are trying to get into a good position. Yes, indeed, we see our growth we expect our growth momentum will shift from mobile to high performance computing around 2019. So that's the ballpark estimates. It will depend on our 7 nanometer, but also there are many other processors. There are many other processors that are still using 10, still using 16 nanometer and even 28 in this high performance computing sector.
Yes. I'm sorry if I wasn't clear. I appreciate the answer, but I'm just wondering within HPC, if you can look at of the things that you talked about data centers and switches and etcetera, VR, how big is each? Will maybe you rank them in terms of the opportunity?
Oh, boy, I haven't bring it with me. So but these are the industry models. There are existing industry models that you can exit and you can estimate. It's not very special, not particularly TSMC's secret.
Okay, great. Thank you. My second question is on packaging. I think roughly maybe about a year ago, maybe a little bit more, you talked about info being about $100,000,000 by Q4 of this year with gross margin below corporate average. If we now look into second half of twenty seventeen, can you give us the same kind of forecast with info and COAS, both in terms of revenue opportunity and margins?
Thank you.
Well, I cannot that 2017 second half, but I can tell you that revenue will be greater, margin will be better.
That's actually a very happy answer. Let's go to the line now. Operator, please have the caller on the line.
Hi. My first question is, can you comment on the your silicon content for smartphones for this year and next year? And if you can specify low end, high end as before, that will be good. The second question is on your 10 nanometer yield ramp. Is the progress we think expectation or is at little better or worse.
And also, I think you commented that the shipments for the first product will start in Q1 next year and maybe you can specify whether early Q1 or later Q1? Thank you.
Okay. First of all, I have to inform everybody the caller is from Goldman Sachs, Donald Lu. And Donald, your first question is about smartphones, average silicon content of a smartphone, right?
Yes. And also high end, low end, if
you can Yes. That's right. You want the breakdown between high end, low end and medium. And then your second question is with respect to 10 nanometer in terms of the yield as well as the projected shipments of 10 nanometer next year by quarter?
Yes.
Donald, I will try to answer the first part of your questions regarding the silicon content. If we look at the revenue per box on a smartphone, we have seen the dollar per box actually continue to increase and 2015, 2016, a slight increase. We expect the content will continue to increase in 2017 with weighted average about $10 per box for us, okay? So this is especially on the high end part, that's where the increase is coming from.
So I remember the average content this year is about $8 per phone?
No, this year is more than $9 This year is more than $9 same for last year. We expect the dollar will go up to about $10 next year.
Got it. Thank you.
2nd question was with respect to 10 nanometer. The yield
as well
The 10 nanometer yield ramp, whether it's the same expectation similar to 16 or it's more challenging?
It's similar. It's similar. But of course, 10 nanometer is much tougher than the 16 FinFET as compared with 1 year ago.
Got it. And also you commented that you'll enter volume production. The volume product takeout will start in early next year, Q1 next year. Is that the guidance?
Yes. We start production at the end of this year, but the wafer will be out in the Q1 and enter into the volume production after that.
Okay. So the volume production takeout will start in Q4 this year? That's right. Got it. Thank you.
We can have the next caller on the line. Operator, please.
Thank you. The next question comes from the line of Brett Simpson from Parete Research. Please go ahead.
Thanks very much. My first question on 7 nanometer. Can you maybe talk about how many customers are committed? I know you talked about tape outs for next year, but how many customers in total are committed to 7 nanometer? And if you plan to convert your 10 nanometer capacity to 7 over time, do you think your peak capacity of 7 nanometer will be higher than 28?
All right. I will repeat Brett's question. I think he's asking us about 7 nanometer. First, how many customers do we have at 7 nanometer total. And then if we will convert some capacity eventually of 10 nanometer to 7 nanometer, will we be able to generate 7 nanometer business eventually bigger than 28 nanometer business?
Will 7 nanometer eventually
7 nanometer bandwidth wafers, yes, wafer capacity.
And 7 nanometer's capacity?
Yes. Okay.
7 nanometer customer are many. I don't remember how many, but more than 20. Many of them are working on their tape out next year as well as 2018. We expect the 7 nanometer business will, of course, will be larger than 28 nanometer. Capacity wise, we don't it could be comparable, could be it really depends on the later on, what the customer's product launch, how successful they will be.
But we are planning probably within it's comparable within the range. There's no significant drop, okay, is capacity wise. So in that terms, the business will be much bigger in dollar sense.
That's very helpful. And second question was on the Nanjing fab in China. Is that going to be CSMC moving existing capacity from Taiwan to China? Or will it be incremental capacity we add in with Nanjing?
All right. The question is with respect to our Nanjing fab. Brett is asking whether we'll be using our existing capacity from Taiwan to be used in Nanjing or will it be incremental capacity?
The majority of the capacity we're moving from Taiwan fab to
Okay. Thanks very much.
Okay. Let's come back to the floor. Next question will be coming from Morgan Stanley's Charlie
Chan. Thanks for taking my question. So my question is also on 7 nanometer. So it sounds like customers demand a restaurant for 7 nanometer and you just mentioned that the 10 nanometer cycle time is shorter than your expectation. So is it possible you can bring in the mass production timing of 7 nanometer to so called later 2017, if your risk production in 1Q next year will be smooth?
Thanks.
I hope our preparation can be ahead of schedule, which we are working on to ensure our customer when they do the product launch, they get more matured condition. However, if you ask, can we pull in the ramp, that will be affected by many factors. It depends on their product launch timing and nor do we want to produce much inventory either. So that is a business decision rather than a technical decision.
Okay, understood. And also on 7 nanometer, so do you expect customers number or TABON number to be more than 16 nanometer? I mean, because the 7 nanometer cost could be much higher than 60 nanometer. So when you communicate with your customer, would they justify the higher cost in terms of photo mask, better price, IP cost, etcetera?
Right now, it's hard. What I cited that customer number really is, at this point, those customers already working with us on 7 nanometer, okay? By no means, the total number of customers. As any node, when technology gets mature, there are many, many smaller customers or more innovative other new companies would come on board. So if you look at the 16 nanometer, they're quite a bigger number than what I tell you on 7.
But as time goes on, I believe 7 nanometer customer will continue to increase. 1 is, in addition to mobile application, I expect the high performance application, where VRAR, artificial intelligence application will come added to our customer portfolio product portfolio. And that is the reason we see, in one way, the entry barrier is higher, so less customer can get into. But the application of that technology will be wider than before. So that is what I what we see.
Okay. Thank you. So lastly, very quick on the Q3 revenue upside. I guess the question is to Laura. So I just want to clarify, do you think the revenue upside in Q3 mainly coming from the 28 nanometer or 60 nanometer because you mentioned that the margin dilution comes from 60 nanometer.
So it seems to imply the upside coming from 60 nanometer in Q3.
Actually, the 3rd quarter revenue was supported by the smartphone growth. When I say smartphone is more than 16 nanometer, of course, it includes 16 nanometer, also the companion chip that goes along, of course, to support smartphone.
Okay. So it's smartphone demand across different nodes? Yes. Okay. Thanks.
All right. The next question will be coming from JPMorgan's Gokul Harihana.
Thank you. My first question is on HPC. I think you provided a rough estimate of $15,000,000,000 before revenue in 5 years. Just to get some granularity around that, is that the total market demand including IDM, fabless, everything or is it just the foundry opportunity within that market? Because as you mentioned, some of the segments are very dominant IDM players, some of them like GPU are a lot more fabless.
What I cited are the wafer revenue in terms of foundries revenue. But we many of our customers, Fabry's customer wants to get into that market. And any product can be foundry by the way, okay? So we just play together in that sector. That's all.
Okay. All right.
So would you say that server is still a big portion of that opportunity or you're not including the server opportunity, which is predominantly IDM in that $15,000,000,000 Server is included in that opportunity.
Okay. All right.
Second question is on 7 nanometer. I think you mentioned about 15 customer tape outs already ready for next year. Are there a significant number of HPC related tape outs there or the starting tape outs are mostly high end mobile in that 7 nanometer?
There are significant number of HPC tape outs. But in terms of volume, it will be high mobile product volume will be much higher
in the beginning. Okay. And maybe last one, I think you had mentioned 10 nanometer, you'll have more than 70% market share. Any rough thoughts in 7 nanometer? Is this going to be 90% to 95%, any early thoughts on how you think about 7 nanometer market share?
High. You said
high. Higher than 10. We want to do our every node is higher than the previous node. Fair enough.
Next question will be coming from Credit Leonese, Sebastian Ho.
Thank you, Doctor. Sung. My first question is on the packaging business. So info and coals. If I understand correctly that the TSMC will take full responsibility of the packaging of logic and memory.
And my question is that how to split the yield issues of memory with the memory partners? And as this part of the business continue to grow in terms of revenue percentage and dollar amounts, and how do you expect this to will this increase the business risk for you? And how do you see that impact your risk yield and profitability?
To answer your question, no, we don't have full responsibility as you said on the memory portion. Memory will work with a memory supplier, but it's mainly their responsibility to make it reliable and fully functional and can be cooperative into in force technology. But we don't take the full responsibility as you just mentioned.
Okay. I think my question is sorry, I should have asked more clearly. So my question is when the packaging, for example, it failed, the URA is not good, but you have to be responsible for that cost, including the memory cost, right? That's a good question.
Once the part fail, which we don't expect too often, of course, once the path fail, we trace it back. We work with the customer, identify who's the responsibility is.
Okay. So the year rate is in fact, the year rate problem is led by your memory partners and that cause will be attributed to them, but not you?
That's correct.
Okay. And my second question is a very simple one. Just I noticed that your 0.11 and 0.1 3 micron revenue increased quite a lot in terms of quarter on quarter year on year in Q3. Can you give us some hints and colors on what type of application and products of that? Thank you.
Okay.
On 0.11.13 micron, we are as I mentioned, we developed some specialty technologies. And so I give you the one off major reason probably is some of the power management I see.
Next question will be coming from Daiwa's Rick Chu.
My first question is, I think Laura was talking about your revenue CAGR in the next 3 to 5 years will be 5% to 10% per annum. Wondering if you could give us some ballpark number. If I want to break it down of the incremental revenue increase across the board with your 4 demand drivers that include your HPC, mobile, auto and IoT. Could you give us some idea how the contribution from each category?
I cannot. I think Mark said last quarter, in the 5 year time frame, half of our growth will come from the mobile still. And about a quarter for high performance computing area and the other half quarter will be from IoT. That's the ballpark.
All right. Thank you. The second question is, I think this year your revenue growth is going to be pretty strong and be sure 5% to 10% guidance. And that also increase the comparison base for next year. So if I want to ask for some color about your next year's growth, it's going to be a 5% to 10% range.
Would you be would that be close to the lower end or high end?
I will not comment 2017 growth in this moment. You can just follow our indications. We still believe in the 5 to 10 years compound annual growth rate will be between 5% to 10%. Of course, some year will be higher, some year will be lower, but this is our goal to drive the compound growth rate, 5% to 10%. Okay.
Thank you so much.
I think we will need to go to the line first before we come back to the floor for the follow-up questions. Operator, could you please have the next caller on the line, please?
Thank you. Our next question comes from the line of Steven Salaita from HSBC. Please go
ahead. Yes. Just a couple of clarifications first. Your China revenue, despite total company revenue being up so much, your China revenue in dollars was down pretty significantly. It seems that in every Q3, but I guess I'm surprised given some of the strength that we've seen in China smartphones.
Maybe you can comment a little bit about what's going on in China, what you're seeing there and thoughts for the Q4? And then the second clarification question that I had was just on gross margins. You said that around 50% for next year. I'm curious if that's more of a full year number or when I think about it on a quarterly basis, when you talk a little bit about seasonality with our customers, rising depreciation? I'm going to pass you smooth it a little bit as well in the first half by starting wafers.
I guess I'm worried a bit about first half next year gross margins and they also still be close to 50% in the kind of a season soft period. Those are my 2 kind of clarification questions.
Stephen, you talk so fast. It's even beyond me. So I really I haven't caught your question quite well, but I think the second question you want us to explain about gross margins for next year, right?
Primarily during the seasonally soft period. So in the first half of the year, I think your gross margins still sustained about 50% as you have suggested, I think, for the full year.
Are you asking about 2017? Okay. Yeah. Correct.
First half next year in a seasonally softer period and gross margin the same
50%. I will not particularly comment on quarter gross margin outlook. But if you hear what I said earlier, in the longer term, we intend to keep about 50%. Of course, some quarter, depending on the seasonality and utilization, they may kind of swing a little bit. And we have a 10 nanometer, which will be dilution to our margin as it comes on.
But over and over, I think 50% above 50% is probably good directions.
Okay. Let me just jump to my last longer term question. Midway through the Q3, one of your competitors now, Intel, seems to have rebooted their foundry effort. TSMC has been under attack many times over the years, and you guys have done a great job with your scale, your tech leadership, getting relationships, your kind of customer agnosticism, if you will. But I'm just curious, is there anything different this time with some of the competitive breadth out there?
Are you hearing any differences from a customer perspective or even from just a competitive perspective on pricing or incentives or just the general speckship that's going on right now. Any thoughts on competitive landscape on our own?
Stephen, can you speak slower because really the bandwidth is very narrow. So only part of the spectrum was received.
So Stephen, if I understand you, maybe I can sort of summarize your very long question. You are just asking what's the impact to TSMC if Intel becomes very serious about foundry, right? Okay.
They certainly have threatened in the last 90 days with a greater level of intensity. And so I'm curious if anything different from a competitive landscape perspective this time around? In the past, you've done a great job fighting off competition. Do you see anything different this time around?
We can intend to do a great job going to the future too.
Okay, fair enough. Thank you.
Thank you, Stephen. Let's come back to the floor. Okay. Follow-up question first come from Credit Suisse, Randy Abrams.
Thank you. Last year, there was CapEx savings where the mobile products migrated 20 to 16 and there was capacity conversion. Could you talk about the outlook for the 16 node if you expect to backfill as some of the leading products move or you could see the same type of move of converting capacity from 16 down to 10 and 7? And then is it efficient to make that capacity conversion?
We build our capacity according to the demand, of course. And so the next year, we expect customer move, especially the high end smartphone, they move from 16 to 10. And then we expect the 2nd wave and 3rd wave customer to enter into 16 nanometer. So, so far, we will convert some of the 16 nanometer's capacity into 10, we will if the demand is not as high as this year, okay? And you are talking about the converting efficiency, quite high.
And so when you're saying so your base case is no conversion, it's only on a demand disappointment that your base case is you can fill that capacity. Okay. The second question, you used to disclose IDM business every quarter. It's no longer in the quarterly, but IDM last year grew from 15% to 18%. So it's actually a reversal that IDMs grew as a percent of sales.
If you could talk about that bucket, which it seemed like it continued to come down relative to fabless, But with some of the mergers like NXP Freescale, are you seeing as a result of that any change in outsourcing or for your overall IBM business any change?
Did you say the IBM revenue growth is 18%?
Yes, in the annual filing, it was 18%. The year before it was 15%. IDM? For IDM. IDM Outsourcing or IDM.
Well, just IDM as your percent of revenue, like the total bucket of IDM. I see. We
indeed, our growth more recent years comes from fabless also from IDM Outsourcing and from system companies. As a matter of fact, if I look at the recent history, the growth fastest is from system companies, then the IDM outsourcing, then the fabless growth.
If I can add this year, the number will be similar to last year. Okay. Next follow-up question will be coming from Citigroup's Roland
Xu. Thank you. Just one follow-up question for your inventory label. I know your inventory is mainly from WIP and also finishing goods. However, looking at this 3Q, you have 17% higher revenue compared to 2nd quarter, but your inventory have been declined about 10%.
I agree you said you shift off its WIPs. However, in 3Q, you probably have a much more wafer start also. So that actually will be turned to the VIB. Yes, so I just I want to understand, what is the percentage for your finished goods in your inventory? Are you did you ship off this finished goods to your customer in 3Q?
Simple answer is yes. We have very low finished goods inventory. If you understand this model, that's the way it should be. So majority part of our inventory is wheat. So when we're talking about a cycle time, it does help to reduce the inventory because you don't need to build that earlier.
So you can do pretty efficient, okay? Okay. So can
I ask how much cycle time you have been reduced in 3Q?
Actually, most of the cycle time reduction come from the manufacturing side. I'll give you one example. I cannot nail down that between the Q2 and the Q3, but I'll tell you that last year and this year, we probably improved by 20%. We shortened the cycle time.
Okay. There are follow-up questions. First from Morgan Stanley's Charlie
Thanks. So, Mark, so a couple of weeks ago, you announced that TSMC is going to kick off the 3 nanometer R and D, but that doesn't really show in your competitors format, not even 5 nanometer. So what is the TSMC that your competitors don't see in terms of technology breakthrough or any customers who is demanding for that 3 nanometer? Thanks.
I'm sure our competitors are working on it. So I just have the chance last week in TSIA's annual meeting, I spelled out our 3 nanometer status. And everybody is working on it, I believe, at least the top 3 or 4. And it's still in the path finding mode. And how to do the transistor, I think everybody is still searching it.
It is not obvious at this point. But that is what the research is about. So we intend to invest heavily in the much forward looking R and D anticipating all kinds, both in the Moore's Law scaling as well as the 3 d IP integration. So we intend to fulfill the future system requirement this way and to customize to fit our technology just for the future system requirement instead of just so called CPU cadence. Thanks.
So, and your long term revenue mix, so Roy just mentioned that long term your mix will be held from mobile, 1 quarter from HPC, 1 quarter from IoT. So what is it today, I mean the mix today from these 3 segments?
We didn't separate the revenue on the way you described. We just have communication, computer consumer industrial standard, which you can find from our management report, which a very big part is communication and increasing important part is industrial and standard, computer getting smaller.
Okay. Follow-up questions also will be coming from Credit Liones, Sebastian Ho.
Thank you. I have a question from more from in terms of margin from the application perspective. So if you look at your future growth driver, smartphone, which is mobile and high performance computing in automotive and IoT. So we understand mobile so far account for a large chunk of your business revenue contribution. And automotive and hyper versus computing right now is still relatively smaller.
But I believe this part will be presumably this part these two business will grow faster. So in terms of the margin, will these two part of business carry higher than the other business margin? And how do you see this impact your margin? Would it bring more upside to your margin down the road?
Right. Laura just mentioned, we try to keep our 50 around 50% margin. And of course, the higher the better and we want to work on our value add
for our customers. Okay. And my follow-up questions on that is on your 7 nanometer because you have 2 variants for mobile and high performance computing platform. And do you see any margin or probability difference between these two variants?
At this point, it's too early to say. We're just working with our customers. The price changes year by year. So how it pans out is yet to be seen. I certainly hope the high performance computing margin is higher than our mobile, because look at the Intel's margin.
But we still at the same time want to enable our customer to enter that high performance computing market, and that is a consideration. At this point, we do not assume major differences. But of course, we work with our customer to get their margin high. Therefore, we benefit our margin too.
All right. Finally, the follow-up question will be coming from Deutsche Bank's Michael Cho.
All right. So outlook by segment in Q4.
We have guided kind of flat 4th quarter. So on the segment side, we expect communication on computer will grow slightly and consumer industrial will decrease. So net is kind of
flat. Regarding the 60 nanometer market share, what is your expectation for next year versus this year? Would that be similar? [SPEAKER UNIDENTIFIED COMPANY
REPRESENTATIVE:] It will be similar.
All right. In that happy note, we will conclude this quarter's conference and conference call. Thank you for joining us this time, and I will see you next quarter.