Welcome to TSMC's Q1 2016 Earnings Conference and Conference Call. This is Elizabeth Sun, 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 dialing lines are in listen only mode. As this conference is being viewed by investors around the world, we will conduct this event in English only.
The format for today's event will be as follows: 1st, TSMC's Senior Vice President and CFO, Ms. Laura Ho, will summarize our operations in the Q1 of 2016, followed by our guidance for the Q2. Afterwards, Ms. Ho and TSMC's 2 Co CEOs, Doctor. Mark Liu and Doctor.
C. C. Wei, will jointly provide our key messages. Then we will open both the floor and the line for 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 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 that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward looking statements. Please refer to the Safe Harbor notice that appears on our press release. And now I would like to turn the podium to TSMC's CFO, Ms. Laura Ho, for the summary of operations and current quarter guidance.
Thank you, Elizabeth. Good afternoon, everyone. Thank you for joining us today. My presentation will start from financial highlights for the Q1 followed by the guidance for the Q2. 1st quarter revenue came out slightly better than we had expected.
Although the February 6th earthquake caused some delay in wafer shipments in the Q1, we saw business upside resulting from demand increases in mid- and low end smartphone segment and customers' inventory restocking. Therefore, our Q1 revenue was essentially flat from the Q4 last year compared to about 2% decline we guided 3 months ago. Our first quarter gross margin was 44.9% and operating margin was 34.8%, both up 3.7 percentage points lower than Q4 last year due to lower utilizations and the negative impact from the earthquake, which I will provide more detail later. Overall, our Q1 EPS was
$2.50
Now let's take a look at revenue contributed by applications. During the Q1, communication and consumer increased 4% and 15%, respectively, while computer and industrial standard decreased 7% and 9%, respectively. Now let's take a look at revenue by technology. 16 and 20 nanometer contributed 23% of our total wafer revenue in the Q1. In addition, 28 nanometer saw a nice rebound in demand and contributed 30% of our total wafer revenue.
Together, these 3 advanced technologies accounted for 53% of total wafer revenue. Now moving into the balance sheet. We ended the Q1 with cash and marketable securities of NT 648,000,000,000, an increase of CLP 62 billion. On the liability side, current liabilities increased NT24 billion dollars The increase included the reclassification of NT10 $1,000,000,000 funds payable for long term to current. During the year of 20112013, TSMC issued corporate bonds totaling NT211 billion dollars to support capital expenditure.
These bonds will gradually become due starting from this current quarter. On financial ratios, accounts receivable turnover days remain at 41 days. Days of inventory decreased by 8 days to 54 days, reflecting more shipments from finished wafers and earthquake impacts. Now let me make a few comments on cash flow and CapEx. During the Q1, we generated about TWD 122,000,000,000 cash from operations and spent TWD38,000,000,000 in capital expenditure.
As a result, we generated free cash flow of TWD83 billion this quarter and overall cash balance increased TWD 55,000,000,000 to reach TWD618,000,000,000 at the end of the Q1. I have finished my financial summary. Now let me turn to the Q2 outlook. We expect our business in the Q2 will benefit from continued inventory restocking and the recovery of the delayed shipment from the earthquake based on our current business outlook and exchange rate assumptions of US1 dollars to NT32.30 dollars we expect 2nd quarter revenue to be between NT 215,000,000,000 and NT 218,000,000,000, which represents 6% to 7% sequential increase. Gross profit margin to be between 49% 51% and operating margin to be between 38.5% 40.5%.
In the Q2, we will again need to accrue the 10% tax on undistributed retained earnings. As a result, our quarterly tax rate will be about 24% in the 2nd quarter. The tax rate will then fall back to 11% level in the 3rd and 4th quarter, and full year tax rate will be about 14%. Now let me give you some comments about earthquake impact and this year's profitability and CapEx. On February 6 this year, an earthquake of 6.4 magnitude struck Southern Taiwan and caused damages to certain parts of our tour in our manufacturing site in Tainan and the disruptive production.
As a result of wafer shipment delays, we have pushed our delivery of about 90 ks 12 inches wafer from Q1 to Q2. The financial impact of this earthquake to TSMC is as follows. 1st, it reduced our Q1 revenue by about NT.7 billion dollars and lowered 1st quarter gross margin by 2.2 percentage point, About 1.1 percentage point reduction is due to the losses associated with the property damage and the wafer scrap, net of insurance claims. Another 1.1 percentage point is contributed by the loss of productivity. The impact to our first quarter operating margin is about 2.4 percentage points, and the negative impact to Q1 operating income in dollars is about NT.7 billion dollars Wafer shipments that are delayed to Q2 will benefit our 2nd quarter revenue by about NT $7,000,000,000 and contributed positively to 2nd quarter gross margin by about 0.7 percentage points, to operating margin by about 0.9 percentage points and the positive impact to 2nd quarter operating income in dollars is about NT5 1,000,000,000 dollars On a full year basis, overall impact from the earthquake reduces our gross profit and operating profit margin by about 0.2 percent each point each and reduces our 2016 operating income by TWD 2,000,000,000 dollars Now let me say a few words about 20 sixteen's profitability and capital expenditure.
Regarding our structural profitability, as you may know, in the past 6 to 7 years, we increased our structural profitability by 4 to 5 percentage points to the upper 14% range. We are optimistic that we can maintain that level in 2016. My last comment is about 2016 CapEx. In the last investor conference 3 months ago, we have stated our 2016 capital budget to be between US9 $1,000,000,000 to US10 $1,000,000,000 We maintain the same guidance range today. This ends my remarks.
Now I would like to turn the podium to our Co CEO, Mark Liu.
Good afternoon, everyone. Let me start to give you a report on our near term demand and inventory outlook. Our 1Q 'sixteen revenue is essentially flat from 4Q 'fifteen, however, exceeding our February 'seventeen's revised guidance. This result was helped by an increase in smartphone demand for China and emerging markets, pull in from 2nd quarter and faster recovery from earthquake, which offset the weakness and seasonality in the high end smartphone sector. We estimate our fabless income days of inventory to increase from 2 days below seasonal exiting 4Q 'fifteen to above seasonal level ending 1Q 'sixteen.
Looking ahead for 2Q 'sixteen, we forecast a growth of 6% to 7% quarter to quarter in NT dollars or 8% to 9% in U. S. Dollars. Most of our fabless customers may see an above seasonal growth in 2Q 'sixteen, driven by OEM's new product launches and inventory restocking in the supply chain. We estimate days of inventory will still be close to seasonal level exiting 2Q 'sixteen.
Due to the world macroeconomic uncertainties, we reduced our estimate of 2016 smartphone growth from 8% to 7% PC from minus 3% to minus 6% tablet from minus 7% to minus 9%, while maintaining digital consumer electronics growth rate at minus 5%. In spite of the reductions of these growth rates, there are still growth areas in smartphones, broadband network, wireless infrastructures and gaming.
For smartphone
growth, momentum comes from China's 4 gs plus deployment through increases of operator subsidy and the continued 3 gs to 4 gs upgrade in emerging markets. These factors will also drive the associated infrastructure growth. Recently, we also see good demand from gaming GPU and game console processor for VR applications. For the whole year of 2016, we estimate the growth of world semiconductor to be about 1%. We maintain our estimate for the foundry market growth of about 5% and TSMC revenue growth of 5% to 10% this year.
Now I move on to leading edge technology. Let me give you a first on N10 update. We have received N10 customer product PayPal in 1Q 'sixteen. We are actively preparing for more customer product tape outs in the following quarters. Most of our end to end users are for mobile products.
We will put this technology in production in 2 of TSMC's 12 inches gigafabs. Those tape outs will drive a sizable demand starting from 2Q 'seventeen through 2018. On 7 nanometer technology, N7, the technology development is well on track. N7 is a further expansion of N10 technology with more than 60% in logic density gain and 30% to 40% reduction in power consumption. N7 fully leveraged N10 new learning and shares more than 95% of common tools.
We have expanded our N7 design ecosystem development to include both mobile and high performance computing to enable our customers to deliver their first to market products. Our N7 adoption is very strong, with customers ranging from mobile, GPU, game console, FPGA, network processors and other consumer applications. We have more than 20 customers in intensive design engagement with us
and expect to have
15 customer take outs in 2017. The volume production of N7 will start from first half 'eighteen. Now on EUV. We have made good progress in the EUV development with ASML. Recently, EUV development gained quite good momentum across the industry.
2 source power of 60 to 80 watts is capable of becoming operational in SaaS now. We are working on the tool reliability under fast operating condition. EUV photoresist, mass fabrication, particle control and basic modules have all made good progress. We recently demonstrated a reasonable yield on our N7 yield vehicle 128 megabit SRAM using one EUV layer. Currently, development of a reliable EUV mask pedicle is another focus to enable a mass production operation.
Next, I want to give you an update on growth driver for our leading edge technology, where the demand comes from for our leading edge technologies. 1st, mobile. We see continuing technology advancement in baseband, application processor, RF transceiver and wireless connectivity to meet the demand of LTE advanced specifications. The growth of 4 gs data rate through carrier aggregation and high frequency Wi Fi drives the need for more complex and larger chips. All the above drive the demand for our N10 and N7 technologies, which will enter production in 2017 to 2019.
The next emerging 5 gs standard also prompts our customers to develop state of the art base station and baseband application processors to capture early business opportunity using our N10 and N7 Technologies. 2nd area is high performance computing. We also work closely with our customers to address the opportunity in the high performance computing market. We work with ARM to optimize its CPU cores with TSMC solutions to enable our customer to deliver their products in the cloud computing market. Today, our customers have only a very small market share in cloud computing, mostly in networking and storage applications.
With TSMC's high performance computing technologies, we will support our customers to participate in this fast growing cloud computing market. Now last area is VR, AR, ADAS and so forth. VR, AR, deep learning and artificial intelligence, artificial AI are the emerging applications that will require leading edge technologies. Consumer oriented VRAR products for immersed gaming and immersive video viewing experience have begun shipment in 1Q this year. The data transfer rate of VRAR products in interactive design, remote training and multisite conferencing must be still be enhanced by 10x from today's level in order to enable quality viewing experience.
Thus, all these applications require low power and high speed GPU and CPU and therefore requires our leading edge technologies. We see increasing demand also both in enhanced safety and improved infotainment systems in automotive applications. The ADAS, advanced driver assist systems, include adaptive cruising control, emergency brake, collision avoidance, lane tracking and auto parking assistance. The advanced infotainment system includes both high performance multimedia applications. Both automakers and the Tier 1 module suppliers are defining the specs and increasing their adoption for ADAS and advanced infotainment systems.
This trend will certainly also speed up the adoption of TSMC's leading edge technology. That's my report. Thank you. I'll turn the podium to C. C.
Wei.
Thank you, Mark. Good afternoon, ladies and gentlemen. Today, I will update you the status of 16 nanometer, 28 nanometer InFO and Specialty Technologies.
I will
also talk about their role as a growth driver.
1st, on 16 nanometer,
We continue to ramp 16 nanometer with yield and cycle time, better than our targets. Applications in mobile processors, serial baseband, video game player, PC graphics will contribute significant to our 16 nanometer shipment this year. Meanwhile, we also begin shipment for other applications such as Ethernet switch, CPU, networking processor, programmable logic device and others. We expect 16 nanometer will contribute above 20% wafer revenue this year. As I reported here last quarter, we have completed the development of a low power and low cost version
16 FFT. I can inform you
today that 16 FFT is now the most adopted solution by our shifting nanometer customers, and we have entered mass production since Q1 this year. In addition to shifting the FSC, we also developed an ultra low power solution with much lower operating voltage down to a level below 0.5 volts without too much sacrifice of the surface speed. We believe this is a superior solution compared to other technology approaches available in the low power area today and is ideally suited for the mobile and IoT market. Both mobile and IoT will be the main growth driver in the future. Now let me move on to 28 nanometer.
Since our last conference, we have seen strong demand for our 28 nanometer coming mainly from the mid- and low end smartphone related applications. As a result, the utilization rate of 28 nanometer has remained well above 90%. We think it will stay at a high level throughout this year. Key to this strong demand has been THMC's 28 HPC and 28 HPC plus In addition to the mid low yen smartphones, applications related to networking processor and consumer products also adopt our 28 HPC HPC plus Our 28 nanometer focus today is in the low power area, and we developed a strong platform. Our 28 UOP plus and 28 HPC plus are very effective in addressing the need for low power consumption, which is critical for the IoT market.
Again, we expect IoT related applications will become the next demand driver for TSMC's 28 nanometer technology. We are confident on the competitiveness of our 28 nanometer solutions and believe we will hold our strong market segment share over the next few years. Now let me update on InFO. Equipment installation at our long term site for volume production is almost complete. We expect to complete customers' product qualification shortly and will be ready for volume production in this quarter.
Our expectation of InFO contributing more than US100 $1,000,000 per quarter in 4Q this year remain unchanged. In addition to high volume preparation and product qualification, we are working on EO improvement and cost reduction. Now let me make some comments on InFO technology. Compared to the conventional package, THMC's InFO has advantage in form factor, such as smaller area and similar thickness and also in power efficiency, but it can reduce the power consumption by as much as 20%. Meanwhile, InFO supports higher memory bandwidth and therefore improves circuit performance.
With TSMC's input technology, our customers can integrate the multiple chip in the same package while reducing the overall cost. This advantage will enable input technology to play an important role in the chip partitioning, which can be one of the effective ways to reduce cost for products which utilize leading edge technologies such as 7 nanometer technology and beyond. As a result, we believe InFO will be a powerful technology to capture the growth opportunity in both mobile and IoT market. Now I will talk about the specialty technologies. Currently, specialty technologies at THMC include embedded flash for MCU and automotive products, CMOS image sensors, image signal process sensors, data converter, display driver, touch controller, fingerprint and mains for smartphone and also high voltage for power management.
These specialty technologies have contributed increasingly to our revenue in recent years and are now accounted for more than a quarter of our total wafer revenue. There are many exploratory efforts ongoing at TSMC, and I will first talk about the largest three sectors, the embedded flasks, CMOS image sensor and MEMS. We have completed 14 nanometer embedded flasks development and the down volume production. We are now developing 28 nanometer embedded flash for automotive related applications while working on other nonvolatile memories for technologies beyond 28 nanometer. For CMOG image sensors, we have completed a hybrid bound technology, which will enhance the connection between chips.
This technology will push the image sensor performance to a new level and will be used by future smartphone. In addition to the mobile phone application, we are developing other Cboe CM sensor technology to improve the safety feature in automobile and for use in the medical area. Now let's move to MEMS. MEMS has been widely used as a motion sensor in mobile phones. We are also developing MEMS technology for environmental and biosensors for smart healthcare and medical IoT applications.
In summary, we believe both automotive, medical markets and IoT present good growth opportunities for specialty technology in the next few years. Thank you for your attention.
All right. This concludes our prepared statements. Before we begin the Q and A session, I'd like to remind everybody to limit your questions to 2 at a time to allow all participants an opportunity to ask their questions. Questions will be taken both before and from the call. Should you wish to raise your question in Chinese, I will translate it to English before our management answers your questions.
For those of you on the call, if you would like to ask a question, in which they were received. If at any time you would like to remove yourself from the questioning queue, please press the pound or the hash key. Now let's begin the Q and A session. First, we will ask quite a sweet Randy Abrams.
Thank you. First question, just want to ask about the business outlook. For 2nd quarter, it looks like somewhat mild growth, like mid- to high single digit growth. Just factoring of the earthquake, some shipments pushing out, smartphone launches and relatively lean inventory.
Could you
talk about some headwinds you may be facing just to offset some of those positive drivers? And then if we look at the second half, what does that imply, factoring of the 16 nanometer and info starting in second half? How you feel about second half at this stage?
Well, the second half, the headwind is not much different than the first second quarter's headwind is not much different than the Q1. But we do have we do see the customers, even the end market demand is increasing, the inventory restocking is still cautious. And going forward, we're still watching this month by month to see the demand will change and or not. But this is currently our perspective. Okay.
And then if I could ask, for the forward technology, you're doing a much faster move to 7 nanometer, where it's a new bump every 1 year, where some of the other foundries like Intel is going to an optimized taking longer. And I'm curious on 2 fronts, one, if there's any trade off or risk to your strategy moving faster. And the 7, your density shrink is about a 60%, so not a full shrink. If as we go through the notice, competitors could leapfrog with a full 7 nanometer or you can upgrade the process as you move through. So maybe talk about that strategy for what you're doing on 10 to 7.
Well, I cannot tell you all our strategy,
but we think we are developing a technology fit for our customers' product announcement. So all this strategy and roadmap is collaborating with our customer at the shortest time to be able to reach the maximum technology development benefit for their products. So that has been in the past 2 or 3 generations, but I don't see no difference in going forward.
Quick follow-up. Can you put EUV and you gave the update, but could you bring that in partway through 7 to enhance the process, say, partway through? Or is it more targeted now for 5 nanometer?
Yes. On EUV, even though the recent progress is good, however, as you see, our 7 nanometer development is already on full steam and is getting to yield enhancement mode now. And production is imminent. It's beginning of 2018. So looking at this schedule, EUV is hard to reach for, be able to contribute.
So for the N7, it's purely a development vehicle for EUV. We do plan to use EUV on our N5. And that is our plan. And we will look at the schedule, appears that we'll fit probably EUV. Given some margin, it still will fit.
It depends on the following progress for the EUV.
Thank you.
All right. Next question will be coming from Deutsche Bank, Michael
Zhou. Regarding your comments on 10 nanometer, so you mentioned you have more than 20 customers for 10 millimeter MRIs. 7. Yes. So let me you actually seen the stronger than expected 10 millimeter compared to 6 months ago based on your progress?
Because in the past, it seems that I remember management mentioned 10 millimeter will be smaller than 16 millimeter wide. So based on latest progress, are you seeing the better demand outlook for 10 nanometer?
When I talk about 20 customer is on 7 nanometer. Okay. So 7 nanometer indeed we see stronger adoption in the past quarters. So that's what we are addressing. Okay.
Second question is for IoT.
Is there
any way LinkedIn can quantify the IoT sales portion or because it seems that a lot of people are saying IoT will be an important growth driver in the long term, but we still cannot see a lot of IoT product coming out, mainly for infrastructure build So is there any way you can try to quantify?
Well, I don't think that we can really quantify what is the IoT market today, but a lot of products that, for example, connect the sensors that essentially that IoT's most important product. 1 of the IoT most important is sensors, including CMOS image sensor and the MEMS that you can see today. But you want to quantify the whole IoT market? No, we cannot.
One follow-up question is that, will some of the IoT use advanced node or they will just use 28 or 16 in the long term?
It should be because IoT related to a lot of data transmission, data communication. So the computation, the high speed computation is one of the essential part of the IoT area.
Next question will be coming from JPMorgan Skokley, Haruhana.
Thanks. My first question is on a little bit of granularity on the 2Q outlook. Could you talk a little bit about advanced node versus older node given that there's a lot of restocking in 28 and below? Is it fair to say 16 nanometer is probably weaker than other nodes in Q2?
I think you are asking us about the restocking in the Q2, whether it is
on certain nodes It's time to be
on older nodes, period and above or
Whether the restocking is on the advanced nodes or across the
2nd, I think, but you mentioned about cloud computing, high performance compute as a potential market, and you're working with ARM on 7 nanometer high performance compute product as well. I think a year or a couple of years back, you mentioned that software ecosystem readiness has still been
an issue for this market. Any thoughts on
what you're seeing from your customer side on this front? How far we have gone? And how is this market likely to evolve given that, as you said, right now, it's not really interesting the meat of the market, which is surplus. It's primarily on the periphery.
So that momentum has collected quite a bit recently, as you hear from Red Hat, who is a software developer and from the some of our customers' software alliances, as you know, has collected quite a bit, and they are services, cloud services for application software development on several sides. So the application software development also on progress. So that's part of the momentum that we see increases. And for TSMC, of course, we will support our customers in that kind of high performance computing platform. For us, mostly, it's the technology development.
Technology development also including the interface circuit development with our customers, also including the packaging solutions for that application. So I think compared with a couple of years ago, indeed, you must see a lot of reports that momentum is collecting quite a bit recently. So all the parts have received the drivers for that into the high performance computing market. And just one follow-up.
If you have to take a guess right now, is that going to be mostly merchant fabless or system fabless, like you mentioned, as the potential growth there over the last couple of quarters?
We see both. We see both, including the service provider. They participate, too.
All right. Next question will be coming from Citigroup's Roland
Thanks. Good afternoon. First question is, for the Q2 guidance, now it's RMB 215,000,000,000 to RMB18 1,000,000,000. But if we exclude the push out, push out should be the shipment push out from this quarter, that should be about RMB7 1,000,000,000, right? So that actually is about CNY208 1,000,000,000 to CNY211 1,000,000,000.
So that actually is much smaller than if we times March March 30 by 3, that's 219. So I think for this the growth in the second quarter for this quarter, I feel that is this how much you expected earlier this year or are you going to see because of some weakness on the demand?
There's a factor that affect our Q2. One factor is exchange rate. We're using 32.30, which is very close to today's market. And in Q1, our exchange rate was 33.1%. So that's a 2.2% depreciate appreciate, so that will affect 2% of revenue.
Another reason is what Mark was mentioning, We see the inventory restocking continues throughout the Q2. So that's another factor that we have kind of weaker than expected Q2.
Okay. And also for the shipment delay, I think according to your news release, you said probably about 100,000 of 12 inches wafer shipment had been delayed. And however, I think earlier you said you probably shipped about 19,000. So why is the difference between 10,000 because canceled by
Now, in fact, people work really hard to recover customer shipments. So actually, we did better. I think we have announced 120,000 in our press release and it come out at around 90 ks, so it's about 30% lower. Okay.
And I think my second question is, I think Simon just reported for PSM 3 last year, overall foundry market share was about 64.5%. So this year, we are recovering 60 millimeter market share aggressively. And also we are also going to be production 10 nanometer with very high market share next year. And I believe for the 7 nanometer production in 2018, net sales will be much ahead of the period. So question is on your after this 3 year technology leadership, what do you think your growth your market share will be?
Well, the battle is still ahead of us. So I cannot claim any territory yet. So we try to improve our market share just according to what you mentioned the fact is.
Well, 50% of market share are achievable.
Of course. So at least 50%. That's not what I said.
Okay. Thank you.
I think with this 3 years technology leadership is better, are you going to have any upside for your PBT target? I think now you said
that for
IUS PBT target to grow by 7% in CAGR. So with this technology leadership, any update on this PBT target?
Well, the competition is still ahead of us. Right now, it's just not the time to talk about what
the trophy is, yes. Yes.
Next question comes from Daiwa,
Just one question for me. About your Q2 guidance, I think it looks to me a bit below seasonal in terms of the growth momentum. And you also mentioned that the demand is mainly from the 28 millimeter, 40 and 65 millimeter, not much for the 16 millimeter. You also mentioned that your 15 millimeter for this year, the full year revenue contribution will come to about 20%. Can I take that as a your Q3 momentum is going to be really strong and less about seasonal?
Yes. Can you elaborate a little bit more? Actually, the high volume ramp we expect in the second half of this year for the 16 print bed. That's because of leading edge was the high end smartphone. Okay.
And other applications actually in the 16 foot fab is continuous on and we saw a lot of tape out since last year. So the momentum cumulative and I believe in the second half of this year, we will see a higher
growth.
I think we need to go to the line for some questions. So operator, could you please have the first caller on the line? We'll take the next question from the call.
Our next question comes from the line of Mr. Donald Lu of Goldman Sachs. Please ask your question.
Hey, good afternoon. I have two questions. One is on info. I think C. C.
Just commented that you will package more chips and the cost will come down. And in what year, which year do you think the infill cost will be similar or even lower than the conventional packaging? And also, assuming it will happen this 10 nanometer, 7 nanometer then, will TSMC expect your mobile market share to increase significantly at 7 nanometer versus 10 nanometer or 16 nanometer global market share? So that's question number 1. Question number 2 is on the in second quarter, the TSMC's 16 nanometer utilization is going to decline from Q1?
Thank you.
So Donald's first question is, if we can package multiple chips in info, which is the chip partitioning and reduce the cost. He asked which year we will begin to see that the cost on info is lower than the cost from conventional packaging. And if we can apply this very useful technology on 10 nanometer and 7 nanometer, that means that our mobile market share will be higher at 7 10 nanometer compared to our mobile market share at 16 nanometer? That's first question. 2nd question is, do we have a utilization decline at 60 nanometer in the Q2?
Okay. Let me answer the first question on the import.
Yes. Okay.
I mentioned that the Yinfo was here of the chip partitioning and instead of reducing the cost. Actually, this kind of thing will incur the design, architectural, different changes. So we are working with the customer. I cannot give a very certain date of which year that you will be in the market and then compare with the conventional packaging method. But our analysis show that in any year when we introduce this kind of technology and this kind of new approaches, it certainly will be better in performance than in cost as compared with conventional packaging.
Whether you want to help us to increase market segment share in the mobile, certainly, we hope so. But I cannot give you a number.
Sorry. Just particularly at 7 nanometer, would you see new customers will adopt PSM27 nanometer together with InFO at this stage?
We are working with customers. That's all I can answer your questions. Okay. So the Q2, our utilization rate for the 16 nanometer decreased? Decrying.
No. If I can add some comment on 60 nanometer. And we are ramping at very fast speed on 60 nanometer across the whole year. So Q2 utilization for 60 nanometer will be much higher than Q1.
All right. So we will go to the next caller on the line. Operator, please help.
Your next question comes from the line of Mr. Brett Simpson of Arete. Please ask your question.
Yes, thanks very much. I just had a quick question on 28 nanometer. We saw a nice recovery there in Q1, but you have a lot of 28 nanometer customers migrating to 60 nanometer going into second half twenty sixteen. So how do you see 28 nanometer outlook as you start to see this big shift in mobile, low end smartphones, gaming? What impact do you think that has in your 28 nanometer outlook?
And what areas might backfill that 28 nanometer node? Thank you.
So Brett, your question is, even if we are seeing very good recovery of 28 nanometer in the first quarter, but since a lot of the customers' products will be migrating to 16 nanometer in the second half, you are asking us what kind of applications or business we can have to sell 28 nanometer in second half of the year. Is that your question?
That's right. And whether you think 28 nanometer can maintain these revenue levels?
Okay. Let me answer the question. Actually, he asked the way that this 20 nanometer's strong demand can continue or not because of smartphone adapting the 16 nanometer technology quickly. Actually, that in the smartphone, we have high end smartphone, mid- and long end smartphone. For the high end smartphone, moving to the 16 nanometer is a natural choice, and then they're moving very fast.
Yes. But then the mid end OEM smartphone, that demand increased. So a lot of them adopting KSMT's 28 nanometer technology. That's where the very strong demand come from. And we see that strong demand throughout this year.
In addition to that, I just mentioned that we also have a networking processor, consumer product. They are all adopting THMC's 28 HPC HPC plus Furthermore, in the future, we saw that high OT mobile application for the low power consumption is very important and TSMC offer a very competitive platform in this area. So we believe the 28 nanometer demand will continue to be strong. Thank you.
Thank you. And I just had a sort of industry question as my second question. There's a lot of talk about the rising cost of developing chips at leading edge. How much do you think it costs your customers to develop chips at 10 nanometer and 7 nanometer compared with 28? And I think you mentioned 20 customers are you're engaged with 20 customers on 7 nanometer.
Can you talk a bit about how big the customer engineering teams are that you're engaging with at these nodes?
Well, I cannot comment on the exact number of the NRE, new engineering expense for the new end. Of course, each note that the development cost is higher. And but on the other hand, the chip integration is also increases where it used to be several chips. Right now, it's being developed by 1 in 1 chip. So secondly, actually, although we have, as mentioned, 15 tape outs, typically, the first tape out incurs the highest cost and the following TEPOS doesn't it can be synergistic.
So indeed, customers see the 7 nanometer is a long standing, long mode. Therefore, I think the customer is willing to put into their investment resources in it for many years to come.
Thank you. Could I ask a third question?
All right.
So maybe just I wanted to ask on Graphics because you talked a number of times in your prepared remarks about VR and graphics and game console. And there's quite a big performance jump coming as some of these customers go to 60 nanometer later this year. What sort of growth are you seeing in gaming and graphics specifically at the moment this year?
This VR and AR still is emerging application. So the growth rate come from very small numbers. So probably, I cannot put into accurate number. Currently, this application, this product is under the application software development. I think you've been tried several VRs and ARs products.
Many of the application software is a demo software. And both all the producer of the chips right now create their software development platform. So this is at this stage. So we just see an starting shipment, but there is yet to be a volume quality this year for this application.
Okay. Thank you.
All right. We will continue to have the next caller from the line. Operator, could you please have the next caller on the line?
Our next question comes from the line of Ms. Mehdi Hosseini of SIG. Please ask your question.
Yes. Thanks for taking my question. Going back to your prepared commentary where you described smartphone unit growth, that is going to be less than your prior expectation, which is also, in my opinion, is having adverse impact on your assumption for semiconductor revenue growth. How is it going to impact your revenue expectation growth for this year? The range of 5% to 10% has remained unchanged, but the largest end market smartphone, you have downticked on it.
And then the semiconductor industry revenue is also going to be up only 1%. So in that context, if you could help us understand how this downtick is impacting the range? Do you see your revenue coming to the low end, to the high end? Or are you still on track to hit the midpoint of the guidance given all the programs that are coming to the fruition?
All right. I think Nadeep's question was that since we have revised on some of the growth rates like smartphones and semiconductor revenue, etcetera, how would TSMC still keep our revenue guidance? So you were saying whether we are on the high end of the guidance range or low end of the guidance range, etcetera.
Well, on semiconductor growth, we forecast 1%, and part of it is memory market that appears to be shrinking this year. Excluding memory, it will be about 2%. But our system is very complicated. It's very difficult for me to describe everything for you here. But the smartphone growth this year is mostly from the mid end and the low end in terms of unit growth.
So is that want to reconcile for your numbers? Our number for this year is to maintain 5% to 10%. That is more aggressive, more conservative.
It is still the same number.
Sure. Let me rephrase the question. Historically, you have had more content in high end smartphone, but the growth rate for low to mid range is much higher than the high end smartphone growth rate. Would it be fair to assume that if the growth rate for the low to mid range is offsetting lower growth rate for high end, even though the high end gives you higher content?
It's possible. We see the over $500 phone is reducing, but $400 phone is increasing quickly. And both high end and mid end silicon content are increasing with this high single digit, but the unit of the mid end phone increased and high end unit number decreased this year.
Okay. I have a follow-up. I have a follow-up, my second question. There's been a lot of emphasis on Discove on 7 nanometer and your progress. Is great to see you have maintained your lead.
But in that context, should we assume that the 10 nanometer will be a shorter node? And if so, what happens to backfilling? You mentioned that 90% of the equipment for 10 90% of the 10 nanometer equipment could be used for 7 nanometer. Is that going to have an impact on your spending, which ties into backfilling? Any comment or any color there would be great.
Okay. Mehdi's question is that he's happy to see that we have a leadership in 7 at 7 nanometer. However, does that mean that we will have a short node for 10? And if it is a short node, what will happen to this common tools, this equipment being 90% -plus common? What's the impact to our capital spending?
I think this 10 nanometer will run very fast, but it appears to be shorter node than that of 7 nanometer. So the picture could be similar to our 2016. And also, we anticipated this before enough that we try to maximize the compound tool from 10 nanometer to 7 nanometer. Therefore, this is 95% is by design so that when the 10 nanometer after 3 years reduces, the tool can be readily expand into the capacity for 7 nanometer ramp. The question is impact spending?
Impact to our capital spending.
Well, that
has been long been planned into our capital expense. It's an integrated number, what we offer to you.
Okay. So now we come back to the floor. And the next one will be from UBS Ryo Yu.
Thanks very much. Going back to the info, I'm trying to figure out when this might broaden out. And I've spoken to a couple of your customers and maybe some of the back end players. And what I'm hearing pretty consistently is cost and the fact that this is a TSMC proprietary, but NASA people seem to love it. I know you're working very hard on cost.
In terms of this being TSMC proprietary, I'm wondering what you are telling your customers to try to convince them. And I think it looks to me like it's going to be TSMC with Intel, everybody else with
some sort of other fanon technology.
Is that the way that you see developing? And I guess number 2 is, would you consider possibly licensing info? Because we've certainly seen success stories in terms of licensing and sending out theirs. I think that would help other customers. Just want to give your thoughts on that.
Thanks.
Okay. We developed in for technology that with much lower cost than the cohorts that we introduced earlier. And InFO give advantage, as I said in the presentation. We have mentioned in the last quarter that we only focus right now, we only focus on the few high volume customers because of we start to ramp it up. And I also said in the presentation that we are working on the yield improvement and the cost reduction.
That's meaning that today, we still have some improvement ongoing. And once we complete it in our high volume production this year, we believe you will be very competitive. However, in every technology node that we work with that offset people and to better serve our customer. For now, we also see that the cooperation between TSMC and back end people. But for this year, before we complete the volume production and ready for other consideration.
This year, we only focus on our own weighing up of this volume production.
Yes. Thank you. That's very clear. I guess I'm
just wondering what happens beyond this year as you start thinking about more customers.
We will tell you that next time.
Okay. Sorry, my second question was the one that Mehdi just asked, but maybe I'll just follow-up. If it turns
out that the 10 nanometer turns out
to be a little bit smaller than what you expected previously, the 7 turns out to be much bigger, And you only spent $1,000,000,000 in the Q1 of this year versus your guidance for the year 9 to 10. Is it a possibility that maybe the CapEx becomes very back end loaded or some of it gets pushed out into 2017?
It is true, and we spend much less in the first half. And this year, the CapEx will be very much back end loaded. Reason being because we are preparing the capacity for 10 and 7 nanometer, those spending gets mostly spent in second half of the year.
All right. Next question will be coming from Morgan Stanley's Charlie Chan.
Thanks for taking my question. So very quick follow on on Bill's question on info. So what would be the margin impact to your corporate margin from the InFO business when we get to a mass production?
Since the in for volume is still small for this year and C. C. Was mentioning about US100 $1,000,000 by Q4 compared to the total revenue is still small. So it will have very small dilution
to this year's corporate average margin.
Okay. So the first is just the margin is slightly below corporate average even if it is small? It is below. Okay. Thanks.
And my second question is regarding the EUV adoption. So it seems like it is already a done deal that you will adopt EUV at 5 nanometer. So the production time is sometime like 2020. So from now to 2020, do you think the capital intensity will increase? I know the company gave guidance before that the new loan will be 30% to 35%.
But in terms of the ratio, do you think that you will grow, especially when you produce 7 nanometer? Thank you.
Well, I'll
try to answer what I
heard from you all.
Yes, we plan to use EUV on our 5 nanometer and we have already 3 EUV tools on the floor and the 4th is coming. So all these are using actively for the development. So until 2020, when N5 is currently planning to production, yes, it will be adopted. But just to remind you that if you think about CapEx, don't think about everything we're going to change to EUV, okay? There are 80 layers and only 10.
They are about 50, 60 if you discount the multiple patents. Only the 10 of them roughly will use EUV. So a lot of tools you'll be able to common tools. So did I answer your question?
Yes. So just want to clarify because I thought quadruple planning or multi planning will cause a lot of CapEx, but also you mentioned that you will use a common tool strategy to reduce the appetite. So just maintenance in terms of CapEx, in terms of absolute dollars versus RMB10 1,000,000,000 or in terms of CapEx ratio versus 35% in the coming 4 years, do you think that you will increase or decrease? So that was essentially my question. Yes.
Cannot be so specific, as you said. But in general speaking, conversion a tool is cheaper than buying a new tool. So more conversion is beneficial to the CapEx.
All right. Next question will be a follow-up from Credit Suisse, Randy Abrams.
Thanks for fitting me back in. For the second half, you mentioned a lot of the ramp will be 16 nanometer, which is still relatively new node. The second quarter, you're already 49% to 51% gross margin. I'm curious with further growth to come from that project, if 'sixteen is approaching corporate average and we could get further leverage to the model in second half from that growth?
For this year, 16 nanometer, topping margin is improving as we have much more higher volume, but it's still below corporate average this year. We expect the 60 nanometer will get close to corporate average by second half of twenty seventeen.
Okay. I guess for second half, if you net out the ramp of 2016 still below corporate, can we get some incremental leverage from that filling up utilization that we normally see? Like from first half to second half, if there's potential for further margin expansion, where we normally get pickup from utilization improving?
Utilization will be better in second half. That's the number one. And we have other technology who has high utilization with very good profit margin. So that's kind of a mixed issue.
Okay. Okay. The second question
I want to ask. You mentioned, Mark, in your prepared remarks about the server opportunity and development moving along on software applications. If you could think about for your technology when you think we start to get the first volume where it gets to 1%, 2% of revenue, if that's times around 7 nanometer or you think it will take more time, it might be further out?
We think it's on 7 nanometer that we'll see Ron significantly in growth. Okay. Thank you.
All right. We need to go back to the line. Operator, could you please have the next caller on the line?
Our next question comes from the line of Mr. Stephen Colaiho of HSBC. Please ask your
Yes, just first a follow-up there. On capital spending, you mentioned it being back end loaded this year. I'm curious, does that, from a run rate basis, really start to suggest what may happen in 2017? Or do you think 35 percent of sales is kind of a normalized CapEx level even though you're getting kind of high reuse rate of 16 today, but maybe not so high at 10 nanometer before 7 kicks in. So CapEx to sales next year kind of sticking to 35% range?
What do you think?
All right. The question is, this year's CapEx is back end loaded, like 35% to 65% with the same pattern similar pattern in 2017? And what will be our CapEx to sales ratio next year?
Probably cannot tell about the 2017 where it's going to be front end loaded or back end loaded. But in terms of capital intensity, we have went through this high intensity period since last 5 years, and it has come down to mid-thirty percent range. And we believe this 30% to 35% range will be for the next few years.
Okay. Excellent. In your 20 F filing this week, we see that your largest customer fell from 21 percent of revenues to 16% of revenues. You obviously made it up with some other customers with good growth last year. But I guess my question is, is expectations as you go through 2016, do we have to worry about that kind of significant declines in your largest customers continuing?
All right. The question is, we used to have a very big customer that accounted for 21% of our revenue last year, and this year is probably in the mid teens. What would be in the future? What is the percentage drop? What's the impact?
Yes. Just to clarify, Elizabeth, it was in 2014, it was 21% of revenues 2015, it was 16% of revenues. I'm curious if you have any concern over that trend continuing, could they fall to single digit percentage of revenues?
Well, we will support our customer fully and let them grow.
All right. I think we have answered your questions. Thank you. Operator, could you please have the next caller on the line?
Our next caller comes from the line of Mr. Donald Lu of Goldman Sachs. Please ask your question.
Hi. I have a question on 28. I think the conventional wisdom is that 28 will be a long and very strong node. But I checked in Q4 last year, 28 is only maybe less than 5% higher than 65 nanometer at the same stage of the node. So my question is, have you done any study to see how much bigger 28 will be for the next few years relative to 65.
And I mean, the reason I ask this is a lot of your competitors are actually increased CapEx this year for 28%. So I'm afraid that we might have a price war.
Okay. Donald's question is that 28 nanometer last quarter, 4Q2015, which I think we said it was 25% of our revenue, and he said that this is only 5 percentage points higher than 65 nanometer at the same stage. So since many of our competitors are building up capacity for 28 nanometer, Donald is asking us how big can 28 nanometer really be and whether we will have a price war?
Well, I cannot too specifically for the quantity, but I say that we saw the strong demand that's due to TSMC's technology very competitive. And for this year, the middle year in smartphone increased a lot, and then we also developed a very competitive door power technologies, which we think is much better than our competitors. And so we continue to have confidence that we will continue to have strong demand and hold our market
share. But in the next 2 years, if you look out, I mean, compared to 65, do you think 25, 28 nanometer will have 10% more revenue than 65 at the same stage after launch? Or is 5%, 10% or 15%? Is there a number that we can use in our model? Approximately
Donald, this is Elizabeth. Let me answer your question. This percentage basically is not directly comparable because the base is different. 65 nanometer, 30% back in, say, 2012 is a much smaller number than 28 percent 28 nanometer at 30% in today's number. In fact, if you look at same stage, say 65 nanometer after 5 years and 28 nanometer after 5 years, 28 nanometer in terms of dollar is almost twice as big as 65 in terms of
No, actually sorry, it is. I'm comparing is I compared 65 nanometer revenue, absolute numbers of all the foundries I can find versus the same foundries, total 28 nanometer revenue. So the total 28 nanometer revenue in Q4 last year was only 5% higher than 65 nanometer total 65 nanometer revenue at the same stage after launch.
You're talking about market share percentage, not revenue percentage. Is that right?
Not the market share, the total absolute amount. Because I think TSMC has much more information than us in terms of looking forward in terms of k quality, etcetera. So do you think 28 nanometer is a long node, a stronger node than 65 and by how much? And for the whole market, not the debt loan.
Well, let me answer the question again. It seems to me that you are not so competent on the 20 nanometer demand, but it is strong. And this is a very sweet node, offers with low power, but very competitive performance and the cost structure is also good. So I want to say again that THMC's technology is very competitive and we are holding our market share, and we have covered in some.
And let me add some comment to this one. That follow-up, I think you're trying to figure out how big is 28 versus the 65 millimeter. Is that what you're asking for?
Yes, exactly. That is for the whole market. Yes, that's my question.
Okay. I think I don't know about a pen, but for us, if I look at the number, 65 nanometer revenue versus 28 nanometer revenue, if you look at a high peak revenue versus 65, peak revenue, I would say the 28 nanometer revenue is much bigger than 65 nanometer at the same
stage. Okay. Yes, I will follow-up with Elizabeth on the question. Yes, I think the 28 ramp up very fast and dropped very quickly too, right, for the whole industry. So the question is, going forward, it may whether it will be bigger, how much bigger it will be versus 65.
But I will follow-up. Thank you.
Thank you. Let's come back to the floor. Next question comes from Citigroup's Roland Xu.
Thanks, Jiang. Just to follow-up on the InFO question, I think Bill just asked about the collaboration with info, we've also likely candidate. But I would like to hear from or learn from you about the competition for the Infor, InforLight. Do you think is there any growth competitor who can do Infor production quietly as we do in the near term? Thank you.
Well, just a lot of fan out technology available today. TSMC developed the YINGHOR because of we develop a technology that we have some certain advantages that like I mentioned that we have signal checklist that's suitable for your smartphone because today it's a smartphone, it needs to be signal and signal. And also that we found out that our approach can give bandwidth or advantage for the higher bandwidth, which is important for the smartphone for all the application also. So we believe among all fan out technologies, TSMC is the info is very best. And when we ramp it up, that will be the highest volume of the nanotechnology in the industry.
But our main purpose is to hear about our customers who again to have their product into the market with very competitive performance and cost.
Thank you. So, John, conclusion is I think you think probably it's very difficult chance for any competitor to do the similar job at TSMC to compete with you at the same customer or same application. Am I right?
I don't want to say that, but you might be right.
Okay. Follow-up question from Deutsche Bank, Michael
Zhou. Hi, Citi. Is there any way you can mention will Octomodial be using InFO as well as the transceiver, this kind of product?
Yes. To answer your question today, we focus on very limited customer with a high volume. But in the future, of course, it will be adopted by a lot of customers in a lot of different applications that we expected.
Thank you.
Okay. I think in the interest of time sorry, there's a question. Sebastian Ho in the back from CLSA.
Thanks for taking my questions. So my first one is, if you look at the base on the inventory cycle, so we started to see some rush orders towards the end of last year. And Q1, we also have some business upside because of the inventory restock. And now in Q2, we'll continue to you just comment that you continue to see some inventory restocking into the Q2. So that's about like this is like the 5th month or 4th month of inventory restocking.
So where do you think that most of your customers are now in the inventory cycle, so apart from your largest customer, which are starting to build soon, but apart from that, what about the rest of your customers?
Well, what we see, the Q4 last year, if you remember, is people drastically reduced their inventory. We only see the restocking almost
after the Chinese New Year.
So that's where if you count the cycles. And what I don't see very, very I don't see signs of overbuild
at this point because we're
still cautious. So that's what we see, the cycle. How long will it last? I don't know. It depends on I just mentioned addressed on my prepared message.
Even to the end of Q2, appears the inventory was still above the signal level. It's restocking, but at about the seasonal level at the end of Q2. So that will be 4 months into the building. That is still the cautious condition.
Thank you. My second question is on the your revenue application side because you break down revenue into 4 parts, and one of that is the industrialstandards. And we've seen very strong growth for the past 4 years, about 27% CACR, very similar growth to the communication category. So I wonder, can you provide some of your expectation for the CAGR for the next couple of years? And if you can talk about what the specific driver inside that industrialstandard and what kind of profitability is above corporate average or above the other applications?
Thank you.
Actually, the industry industrial and the standard,
for example, including the MCU, including that category,
but and power management in that category. Both of those components are also used in smartphone. So when we talk about smartphones growth in the past few years, it includes some of the category into the industrial and standard. That's the reason we see the growth. Part of this is contributing from the smartphone.
So what's the growth outlook for the next couple of years?
I cannot forecast into the exact numbers for you, but it will be a growth situation, yes, would be a still growth pattern, I think.
Will it be continuing similar to the communication, publication growth or would it be higher or lower?
That's hard to predict. I hope the communication grow faster, but that's hard to predict.
Okay. Thank you.
Okay. So before we conclude today's conference, please be advised that the replay of the conference will be accessible within 3 hours from now. Transcripts will become available 24 hours from now, both of which 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.