Welcome to TSMC's Q2 2015 earnings conference and conference call. This is Elisa Feng, TSMC's Director of Corporate Communications and your host for today. Today's event is webcast live via TSMC's website at www.tsmc.com. If you are joining us through the conference call, your dialing lines are in lesson only mode. As this conference is being viewed by investors around the world, we will conduct the event in English only.
The format for today's event will be as follows. 1st, TSMC's Senior Vice and CFO, Ms. Laura Ho, will summarize our operations in the Q2, followed by our guidance for the current quarter. Afterwards, TSMC's 2 co CEOs, Doctor. Mark Liu and Doctor.
C. C. Wei and TSMC's CFO, Laura Ho, will jointly provide our key messages. After that, TSMC's Chairman, Doctor. Morris Chang, will host the Q and A session.
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. Welcome to join us today. My presentation will start with financial highlights for the Q2, followed by the guidance for the 3rd quarter. So now let me summarize our 2nd quarter financial performance.
In the Q2, we have achieved NT205 1,000,000,000 in revenue, 48.5 percent gross margin, 37.5 percent operating margin and $3.06 in EPS, which were all within our guidance range. On a year over year basis, our revenue increased 12.2%, net income and EPS both increased 33% versus the last year same quarter. On a sequential basis, our revenue decreased by 7.5% due to customers' cautious inventory management and less favorable exchange rate. However, we were able to largely offset the negative impacts with our continuous cost improvement efforts. Our gross margin decreased slightly to 48.5%.
For the non operating items, we have reported a gain of NT21 1,000,000,000. This significant one time gain mainly came from 2 transactions. First, the ASML share disposal recognized NT17.6 billion dollars in the second quarter, which contributed to $0.60 to our EPS. Also, we sold 5% of Vanguard shares with a gain of NT2.3 billion dollars which contributed to $0.08 of the Q2 EPS. The share disposal does not change our strategic relationship with ASML and Vanguard, we remain to be the largest shareholder of Vanguard owns 28%.
You may notice we incurred higher tax rate in the 2nd quarter. The tax expense went up to 24% in the second quarter as we accrued the 10% retained earnings. We expect the 2015 full year tax rate will be about 14%. Now let's take a look at the revenue by application. During the Q2, all major segments showed declined.
Communication, computer, consumer and industrial standard declined 3%, 24%, 21% and 1% respectively. In terms of revenue by technology, revenue contribution from up to 20% from 16% in the Q1, while 28 nanometer contributed 27% of our wafer revenue this quarter. Accordingly, these two technologies 20 and 28 nanometer represented 47% of our 2nd quarter wafer revenue, increased from the 46% from the Q1. Moving to balance sheet. On the asset side, cash and marketable securities increased TWD 32,000,000,000 to reach TWD 550,000,000,000 at the end of the second quarter.
On the liability side, current liabilities increased NT122 billion dollars which was due to the accrual of $117,000,000,000 for cash dividend. On financial ratios, accounts receivable turnover days remain flat at 44 days. Days of inventory increased by 5 days to 62 days as we preview certain wafers in anticipation of the capacity conversion from 20 nanometer to 16 nanometer. In addition, higher raw material and longer production cycle time for leading nodes also increased the DOI a bit. Lastly, I would like to make a few comments on cash flow and CapEx.
During the Q2, we generated CLN111 billion cash from operations and invested CLN54 billion in capital expenditure. Additionally, we received RMB39 1,000,000,000 from disposal of ASN shares and about RMB4 1,000,000,000 from a sell down of 5% Vanguard shares. On financial financing cash flow, we repaid NT13 billion dollars for short term debt. As a result, our cash balance reached NT529 billion dollars Now let me turn to the 3rd quarter outlook. Due to the end demand recovery is not as strong as we expected earlier, customer continue to remain cautious in inventory management, Combining these factors with customers' product transition, demand for our Q3 is expected to recover only modestly.
Based on our current business outlook and exchange rate assumption of US1 dollars to US31 dollars we expect 4th quarter revenue to be between NT207 $210,000,000,000 and NT210 billion, translate into 1% to 2% sequential growth. Gross profit margin to be between 47% 49% and operating margin to be between 36.5% 38.5%. As the remaining 20% ASML shares will be sold in the second half, we expect to recognize additional NT4 1,000,000,000 disposal gain in the second half, which will translate into $0.12 and $0.01 EPS contribution to the Q3 and Q4 respectively. This concludes my remarks. Let me turn the podium to Co CEO, Mark Liu for his comments.
Good afternoon. I'd like to deliver the several key message to you. The first, I will cover the near term demand and supply chain inventory. LoRa reported our 2nd quarter results were in line with guidance made in our last investor meeting, which shows a 12.2% year to year revenue growth. In the April investor conference, we have also noted that supply chain inventory was quite high at the end of Q1, but it was expected to be brought down to a seasonal level at the end of Q2.
However, during the Q2, we saw demand for smartphones became weaker than we expected due to slower demand in emerging markets and in China for mid- and low end smartphones. This weaker demand is partly due to a strong U. S. Dollar to emerging market currencies and partly due to regional economic conditions. As a result, the excess inventory in supply chain has only been digested about half at the end of second quarter.
The recent macro economy uncertainties in many parts of the world has further dampened supply chain's confidence in end market demand and has caused customers to become even more cautious in managing their inventory. Slow demand in emerging markets and in China, more cautious inventory management by our customers and macroeconomic uncertainties in many parts of the world. Those three reasons are behind our modest growth outlook in the 3rd quarter. That being said, we expect our customers' end market demand will improve in the second half from the first half. Growth is expected to come from industrial and automotive segments as well as from new iPhone launches and several launches of Android based high end phones.
In addition, the continuing 4 gs migration in China and the demand recovery in emerging markets will further support the growth outlook of second half this year. But as the demand outlook has changed, we update our 2015 full year growth forecast as follows. Semiconductor growth revised from 4% to 3%, Foundry growth from 10% to 6%. For TSMC, we are still confident to outperform the foundry segments and still target double digit growth rate this year. Now the message on TSMC market segment share.
Thanks to our strong leadership in advanced technologies, TSMC has been able to gain foundry market segment shares in recent years. This year, our market share will again be well supported by the expansion of our advanced nodes, namely 16 nanometer, 20 nanometer and 28 nanometer. For 16 nanometer, we are starting our volume shipment as we speak. The ramping of our 16 nanometer will be very steep, even steeper than our 20 nanometer. Ranging profile, similar ramping profile at similar early stage.
Looking out to the future, with many more customers joining our 16 nanometer production, we are confident that we will achieve a far majority foundry share in 16 nanometer in 2016
and beyond.
For 20 nanometer, we remain the only foundry capable of volume supply in the 2nd year of its ramp up. For 28 nanometer, we continue to strengthen our technology offerings. Following our 28 LP, 28 HPL, 28 HPM, we have 28 LPRF, 28 HPC and 28 HPC plus Those new offerings will enable us to protect our 28 nanometer foundry segment share. With all the above, we continue to gain market segment share in 2015. Lastly, I'd like to have some comments, key messages on advanced technology development on 10 nanometer and 7 nanometer.
The recent progress of our 10 nanometer technology development is very encouraging and on track with our plan. Technology risk start qualification is targeted at the end of this year, followed by many customers' product qualifications. Our volume production is planned to start from the end of 2016. Our 10 nanometer technology is designed with excellent transistor performance spec and very aggressive chip scaling factors. Compared with TSMC 16 FinFET plus our 10 nanometer features has more than 15% speed gain at the same total power or more than 35% power reduction at the same speed and with gate density of 2.2x
of that of 16 FinFET plus
Many our first wave technology adopters have signed up for tape outs with our 10 nanometer. So far, planned tape outs have already include mobile application processors, network processors and high performance computing segments. The development activity on our 7 nanometer is also ongoing with full steam. We have a parallel team working on that program. We target 7 nanometer technology qualification in the Q1 2017, only 5 quarters after 10 nanometer.
With further transistor speed enhancement and chip scaling from 10 nanometer, Our customer can plan their tape outs using the latest and the greatest technology available at the time when they launched their most competitive products. For 7 nanometer, similar to our 20 16 nanometer relationship, we are developing 7 nanometer to be able to leverage the process tool compatibility and maturity from 10 nanometer volume production. Okay, that is my message. Now I turn the podium to C. C.
Thank you, Mark. I will update the technology improvement, volume manufacturing and competitiveness on 3 technology nodes followed by Info business update. 1st, 28 nanometer. The demand outlook for TSMC's 28 nanometer remains strong. We continue to enhance our 28 nanometer technology, just like Mark just mentioned, by improving the performance.
In addition to the 28 ALP28 HPM, we have introduced 28 HPC last year to enable our customers' conversion to 64 bit CPU for mid to low end market. Our 28 HPC plus introduced this year can enable our customers to go after the market with multi core, which is from 4 to 8 to 10 and advanced LTE such as TE Category 6 to Category 4 to 6. In addition to addressing the demand for the mid to low end smartphone market, we have already seen demand for our 28 nanometer transceiver RF and the fast controller begin increasing over time. Based on tape out activities, we also anticipate customer in Wi Fi, digital TV, set top bus and image signal process will also start ramping next year using our 28 nanometer. Ever since we introduced 28 HPC and 28 HPC Plus, we are met with customers' enthusiastic adoption.
Almost all the new tape outs are adopting either of these two processes. And the number of new tape outs was in the high 80s in the second quarter, which is due to customers' inventory management. We expect this billion utilization to be recovered to above 90% in 3rd quarter, the same as we mentioned in our last conference. We intend to keep our 28 nanometer utilization rate very high by providing the best and useful technology such as our 28 HPC and 28 HPC plus to our customers so that their new products will grow nicely in the market and that will translate to increasing demand and higher loading rate for us. Meanwhile, after having manufactured 28 nanometer for more than 5 years, we can also use our lending curve or cost advantage to compete with good profit margins.
To summarize, we will keep our utilization rate high, and we will use our technology and our cost advantage to compete effectively for 28 nanometer business. Next, 20 nanometer. Since we have begun ramping up 20 nanometer in the middle of last year, we have obtained the best progress in the reduction of defect density as compared to all previous nodes. We believe we will be able to leverage this record progress and enhance defect density reduction for our 16 nanometer. The demand for our 20 nanometer this year is still good.
We expect our revenue from 20 nanometer were at least double this the level we have last year. And since the majority of 20 nanometer business will migrate to 16 frame FET, next year, we expect our 20 nanometer business will be lower than this year. However, we still expect 20 nanometer to be a long live node. We are converting right now part of 20 nanometer capacity into 16 frame bed to prepare for the ramp of 16 frame fab. So I move to 16 frame fab update.
We have begun volume production of shaking film flat in 2nd quarter. Shipment has started to dispense. The high volume ramp in 3rd quarter were mostly contributed to revenue in the 4th quarter this year. Since 16 nanometer share similar metal back end process with 20 nanometer, Our 16 FinFET can benefit a lot from 20 nanometer learning. We have already shipped more than half a 1000000 wafer 20 SoC by now.
So our 16 nanometers a year and the defect density has been excellent. And in fact, our 16 FinFET has set a new record for both progresses and in the defect density reduction. As for device performance, we believe our 16 Twin Thread plus has the best transistor performance among all countries. For low power applications, we have been developing 16 FFC, which will be cost effective and will be important for future of IoT application as well. Last, let me update on InFO business.
The schedule to ramp up InFO in Q2 next year remain unchanged. We have already begun moving manufacturing equipment into our new facility in long term, which is close to be completed. Now, we are also engaging with major customer for boarding production in the second half next year. Our expectation of InFO contributing more than USD100 1,000,000 quarterly by 4Q next year remain unchanged. TSMC's InFO technology does not need packaging substrate and also provide a high density interconnect.
This allow our solution to have benefit in full factor, that is packaging techniques. And in electrical performance, we continue to work with major customer on developing the next generation InFO for further improvement on device performance and package capabilities. Thank you for your attention. Now turn the podium to Gaurav.
Gohra will make comments on structural profitability, CapEx and long term financial objectives. Let me start with structural profitability. We employ 2 key indices to monitor our structural profitability. The first one is standard gross margin referred to as The second one is standard utilization, the utilization level that we strive to achieve or exceed. Over the past 5 years, we have seen consistent improvement in SGM, while our utilization has also been at consistently high level.
We plan to maintain or improve our structural profitability by maintaining or improving SGM and maintaining high utilization. For advanced technologies, we are careful in peak capacity planning. For mature mainstream technologies, we are increasing our capabilities in various special technologies to ensure all the legacy capacity can be fully utilized.
After 3 years of operating at
a high capital intensity level, about 50% CapEx intensity during the period from 2011 to 2013, our CapEx to sales has come down to about 40% last year in 2014 and is expected to be at a similar level this year. Going forward, we estimate our capital intensity ratio will be at about mid-30s level for the next few years. Regarding CapEx, there may be some adjustments as we are evaluating the capacity conversion along with better productivity improvements. We are also increasing investment in specialty technologies. So for now, we keep our CapEx budget unchanged.
Let me move into long term financial objectives. Over the 5 year target, meaning from 2015 to 2019, the 5 year target calls for a compound annual growth rate of 10% for both revenue and net income and the bigger or equal 20% in ROE. The long term growth rate of the overall semiconductor industry is expected to be grow above 4% to 6% at mid single digit level. Foundry is expected to continue our growth the overall semiconductor market by a few points. We plan to achieve the 10% compound annual growth rate in revenue by carefully positioning ourselves with the right technology and build appropriate capacity to capture the business.
With the right technologies and sufficient capacity, TSMC is well positioned to continue gaining market segment share in the foundry segment. Our current 5 year plan number is very close to the 10% revenue growth target. We believe we will grow double digit each year for the year 2015 2016 And we will continue work on the 2017 to 2019 growth ahead of time. Thank you.
All right. Thank you. This concludes our prepared statements. Before we begin the Q and A session, I would like to remind everybody to limit your questions to 2 at a time to allow all participants an opportunity to ask their 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 to English before our management answers your question. Our first question comes from the floor and it will be Bank of America Merrill Lynch Stan Hyler.
Thanks for that. Thanks Elizabeth. Good to see you again.
Congratulations on the 10 nanometer on progress by the line relative to your competitors. That's all good news. A couple of things. First, I wanted to address growth for 2016. We need to talk about the potential to grow over 10% next year.
In light of the slowing smartphone market, if it was say a 5% unit growth for smartphone units per se, what type of semiconductor growth would you anticipate for the overall industry? And then secondly, for TSMC within mobile? Thanks.
2016 growth, what is the driver? Is that the
question? Yes, the 5% growth in smartphones, what kind
of growth can we expect from TSMC's mobile related semiconductor? You're talking about
20 16, is that right? Well, first, we expect some market share gain. As C. C. Has said and as I said a year ago, we expect that our 16 nanometer market share will be much greater than our competitors, our next competitors.
And overall, we'll also see other areas where we will be expanding market share, once in the IoT area where mature more or less advanced technologies are used. Some of our customers are doing very well. So I expect a gains in market share. I'd also expect that the foundry segment of the semiconductor market will do better next year than this year. It did very well last year and so do we, of course.
We grew 25% last year. And we had a record 4th quarter last year. And our customers, for the most part, did very well last year also. And at the end of last year, it was the I think last year, the Christmas last year was a Merry Christmas for a lot of people. And the expectations for this year were very high at that time.
And however, the big growth part of the big growth that we had last year went into supply chain inventory. And the supply chain inventory at the end of last year was indeed very high. And now this year with a number of things happening that Mark already mentioned, the outlook for this year has continued to deteriorate. And so in retrospect, we should have averaged last year's growth rate with this year's growth rate. Clearly, we grew 25%.
And this year, we are still looking for a little bit, but certainly, it's considerably lower than last year's 25%. And so I do expect next year's organic growth rate, if you will, to be a little better than this year. And in addition to that, as I said, we expect market share gain. Okay.
Thank you. So if I hear you correctly, mobile could certainly achieve at least double digit growth. Mobile? Mobile related to something in small phones? Correct.
So if you're still growing at double digit, would we see your the mobile part of your business grow, say, could it can you do a high single digit high double digit type of growth or should we see kind of growth? So would you see 1 more growth across all of your segments be a lot closer, say in that high double digit range? Thank you. Correct. Thank you.
And the second question, kind of a sub question to this growth mine is, as you look at processors coming out today, 8 core, 10 core processors moving to 16 nanometer, Cortex 72 looks pretty much like a PC level processor. I'm wondering what kind of computational opportunities are there for you to grow next year as you look into the broader markets with performance levels being as high as they are? We're now moving kind of out of the smartphone era much more into a compute capability. Is that a good high performance computation?
Mark, maybe you should answer the question.
Yes, Dan. Indeed, the application processor of smartphone is increased, the complexity is keep increasing, right? And that has still that has to do with people use the experience of the smartphone today.
I think you're starting to have something more than beyond the smartphone, yes.
I'm getting there. And therefore, the silicon content of high end smartphone, we think will keep increasing because of that. Now for IoT is I think it's a prelude of IoT application because IoT devices currently often as using the smartphone as a transmitter. And but that computation world hasn't really flourished yet, I think. That has to do with service and application associated with IoT.
And that is a big market we see the IoT will bring us in the future. And so that hasn't this one is not yet for the computation for the IoT world. That's my perspective. And that is the growth momentum to come.
So IoT is portion of TSMC business today. You guys have a rough ballpark figure, How much is IoT related to your business today and how big can it be? Relating maybe more just to the kind of the access point side of the equation, I know the processor side is difficult to calculate. Thanks.
I think they have got historicals to work with our long answers. Let's go on. I'm sorry.
I mean, I'll answer to you. We see our customers bring interconnectivity function on many devices. Okay. So for us, the IoT portion is not specifically defined like other company will produce IoT product or services. So we see this trend will continue and it will liberate many, many different segments.
So we see that part is keep increasing. But today, it's hard to characterize a specific IoT among so many segments that we are doing today. We just see the connectivity and the competition is increasing in many segments. Interesting. Thank you.
All right. Next, we will have questions coming from Deutsche Bank, Michael
Zhou.
My first question is, since Intel is saying they were sold on the process migration to 2.5 years. The cadence actually will be longer than the previous now. So what will be the case for TSMC in 7 nanometer from 10 to 7?
We are looking right now. 1610, 2 years and for the 2 years and the time between 10/7 is about 1 year, right? So, for those 2 generations for us anyway, it's years. Now, Intel size is 2 years or maybe we could do it sooner, but maybe Intel might do it later and we might do it later too. Okay.
2.5 sounds right.
Thank you. Second question is, given that you should start the mesh productions of 10 nanometer by the end of 2016, so your customers' 10 nanometer product may hit the market in Q2
2017. Yes. So you are trying to calculate the time when the customer's product will arrive at the marketplace using TSMC's 10 nanometer?
Can we answer that question?
Can we answer that question? We'll try to nail down the executive time, but actually we ramp up 10 nanometer in the 4Q 16 next year, just Mark mentioned. But the real product shipment was in 1Q17, yes, okay? Exactive new products into the market, I cannot comment. Okay.
But since the Intel is saying that 10 nanometer platform will be in the second half twenty seventeen, so does that mean your 10 nanometer progress could be better than or faster than Intel? Can we say that? I only say that our product generated 1 in the Q1 of year 2017.
All right. Next, we will have questions coming from Credit Suisse, Randy Abrams.
Thank you. The first question I wanted to ask about the inventory correction. It's extended for 2 quarters. And now are you expecting as we go into 4th quarter potential for restocking where we traditionally go into low season, so do we wait, say, until after Chinese New Year? And then with 16 nanometer ramping up, how much could that support Q4 being above seasonal?
And then also how do you see the 16 nanometer ramp in first half if you expect to continue to steep ramp up on 16 in first half next year or if it's more a second half event?
Well, the inventory picture is what you said correctly. And for the 16 nanometer, it's all our new products. So at this point, we are ramping, but the inventory issue is not in the picture. We just keep the production ramp in second half this year and get into the first half of next year. Now, we as only as we know that the demand customer demand is very strong and that is different than the inventory level I was commenting about.
It was snoring here. No supply chain inventory of 16 nanometer yet.
Yes, it was 2 parts to it. The first part is the core business, the existing 20 and above, if you expect restocking in 4th quarter. And then for 2016, if you expect there's still a steep ramp in 4th quarter and then also a steep ramp continuing in first half? I guess I was curious, do you expect the core business to have restocking in Q4, so that's above seasonal? And then also do you expect 16 of a steep ramp continue in the first half?
We expect the core business will
in still continuing the depletion mode until the end of this year. Now then the coming to the Q1, we might see a restocking. But as you know, the Q1 is a seasonal weaker quarter. So that true competition, how that reflects our demand is yet to be seen yet. So Randy, I suppose you have another part of your question, which is with a fast steep ramp of 16 nanometer in 4Q, will we still have a fast steep ramp of 60 nanometer in 1Q next year?
That's your second part, right? Yes.
Okay, good. And if you could the second question is on the CapEx. You mentioned capital intensity coming down. Was that a statement on next year? So capital intensity, if that's how we should look at 2016.
And so far, you're underspending CapEx this year. So I'm just curious how you're seeing the overall CapEx levels, if it's kind of tracking similar ballpark this year and next year. And is there potential to actually start raising the dividend again next year if CapEx is not going up? Yes,
I just said the CapEx capital intensity will come down to a bit 30 level over the coming few years. With that and with the 10% growth target that we are targeting for, we are confident we are able to generate increasing free cash flow from operations. So we will consider dividend increase on a year by year basis when the time comes.
All right. I think this is about time that we will take our next question from the call. Operator, please proceed with the first caller on the line.
Thank you. We have a question from the line of Martin Luther King. Please go ahead.
All right. So, it's Donald Lu from Goldman Sachs. Okay.
The competing opportunities. I think now TSMC seems to be narrowing the gap in this process technology. I want to be pleased that the TMS has been really entered the market? And also what is preventing TSMC to the ARM server or even TSMC made at TSMC to enter the notebook margin in large volume. Is that software or more up the hard
path? You need to repeat the question.
Donald, I have to tell you that we did not really get your voice very clearly in here. So I'm just going to repeat your question and correct me if I didn't hear you right. Your question is what is TSMC's opportunities in computation segment. Due to ability to narrow the technology gap, when are we able to enter this market And you are asking what is our advantage or differentiation, especially if you are thinking of the market area where the ARM servers are related. Is this your question?
Yes. And also not only ARM server, but also notebook.
Also notebook, okay.
And also what is the bottleneck today? Is that software related or it's more
of the hardware?
All right. So what will be the sort of other factors that we need to overcome such as software or architecture?
Yes. Also notebook.
Yes, servers and notebook.
I think we are obviously very actively pursuing that market. As to what our advantage will be, it's our advantage as a 5 gs. We are pursuing we are going to pursue this market, this high performance computational market with our founding experience and founding record and also the degree of trust that our customers have placed on us. That's our advantage. That's our differentiation.
Now, of course, we need a very capable partner as well as ARM. ARM we already have. ARM is a valuable has been a valuable partner for us for many years now. But in addition to ARM, we also will need a capable design company. And then, you know, the bonus together, the 3 main ones, TSMC, the design company and many others that we have always had, the government people as such, etcetera.
And we think that we have a chance of
becoming
an important factor in that market.
Donald, are you happy with the answer?
Yes. Can you see more specific? Chairman, when you talk about the capable partner, I believe there has been a few companies buying in the notebook market. Do you mean that you would expecting a new company in this market or existing GPU company to use TSMC as a boundary?
Again, I have to apologize because the noise transmission has not been quite clear. So let me repeat what we think we have heard from you is that you want something more specific such as when Chairman talked about the capable partners in terms of design companies and you are asking in the notebook area, there are I think you are saying that there are some consolidations and then what will be whether we will be able to have new customers coming in to work with TSMC as a good partner in this area. Is that what you were saying?
Specifically, who our partners will be? Well, more specifically, who are the most capable design companies. And our partners will be among those.
Okay. I guess, let's come back to the floor and we'll see if we can fix the voice issues on the call. Let me come back to the floor. Next, we'll be having questions coming from UBS Eric Chan.
Okay. Thank you. And my first question, I will now go to Nomura. Nomura, you just mentioned a free cash flow will give an increase. And then maybe double check.
And you mentioned before the free cash flow at the end of this year will double from the end of year 2013. Is that correct? I don't have 2013 in front of me. I think based on the current outlook for the whole year, it should be right. Okay.
So that indicate probably 35%, 40% year on year growth. And based on the CapEx to revenue ratio, the guidance guidance, the means that you gave and also the revenue target. So can we expect the same ratio growth for your free cash flow going and free cash flow is going to increase, but it's hard for me to quantify the degree of increase over year. It's difficult. Okay.
Okay. How about the other one? How about depreciation expense and gross? And you give guidance for this year like mid teen? And based on your CapEx and the revenue target going forward, what kind of depreciation expense growth we should expect?
I can only talk about this year, okay, because we have not fixed the CapEx for the remaining years. This year, the depreciation is expected to go up by 13% year over year. 13%. 13%, which is lower than the number I gave you last time. Yes.
I said 'eighteen last time. And how about the EUV for 7 nanometer process?
And I will pass the question to Mark.
The window is not closed. We work very closely with S and L. And hardware is not without challenges. And we made a very good progress on the source power as well as on the photoresist. And the mass inspection solution appears more likely.
However, the current technology is challenging is more on mask of the EUV Technologies that is currently actively working with SML. On the tools stability, we have a criteria to for the working team to reach a certain target. And that target is likely to reach by the end of this year. And then we will start development using EUV tools. As you can see in our 7 nanometer development schedule, that probably will not use EUV.
But we are planning to exercise EUV using the set 7 nanometer technology. And currently, we are planning to use EUV at 5 nanometer. But of course, it does depend certain development criteria milestones to be reached. And it has a good benefit from our assessment on the 7 on the 5 millimeter that reduce a lot of many masking layers and increase their increase a lot of better control for the 5 nanometer. Yet?
As I said, we will exercise EUV on 7 nanometer and we will plan our EUV on our 5 nanometer technology. But not for 10. Okay. Thank you. And
For those of you who are on the line trying to call in for questions, since we have this voice transmission problem, could you please send me your questions in e mail to my mailbox so that I can read out your questions? And I think those of you know my e mail address, that's elizabeth sanpsnc.com. So if you are on the line waiting to ask questions, please send me your questions through e mail. Thank you. So Roland now.
Thank you. Good afternoon. First question is, we know there are customer
The customer deposits are balance sheet items. It does not has to do with the P and L. There's a certain commitment from the customer waiting. When they reach the loading, we will return part of deposit to them. So still a balance sheet item.
Okay. So we will never go to the deal now? We're not. Okay. Understood.
Thank you. Okay. And second question is for 20 nanometer, I think, CCR, they said a lot of the
So Roland's question is that 28 nanometer has been a very big note for us. Last year, according to Roland's estimate that we have made $8,000,000,000 revenue from 28 nanometers. So with the 2nd wave applications coming in, his question is, will we be able to expand that $8,000,000,000 revenue next year from 28 nanometer second wave customers?
I don't know about the $8,000,000,000 If you think it's $1,000,000,000 maybe it is $8,000,000,000 I can't verify that. But I can I will say that planning in the middle will continue to be strong for several years?
Okay. Thank you.
Okay. 20 plus 16 together next year, will that be bigger than 28 nanometer last year or this year? Again,
I don't know the answer to that. But I can say that 2016 next year will be much bigger than 20% this year. And as percent of total corporate revenue, 16% next year will be higher than 20% this year. Then next time, come in and tell me how many $1,000,000,000 we have.
Okay. Now at this point, I think we have Brett Simpson on the line and he has already sent me his questions. So operator, first please open the line for Brett Simpson and then I'm meeting out his questions and then our management can answer and then Brett may have follow-up. Brett Simpson's question number 1, you talked about your outlook for 2016 double digit revenue growth and mid-30s CapEx to sales ratio. What do you foresee SIMFET to be as percent of sales in 2016?
And directionally, how might 28 nanometer and 20 nanometer trend can be grow in 2016? Say it again. All right. 16 nanometer percentage of revenue next year and whether 28 nanometer and 20 nanometer will be bigger next year than this year.
16 percentage of revenue will be what?
Yes. He's asking us how much we will get as a percent of revenue from 16 nanometer next year.
Well, I stick with my previous answer. 16% next year revenue percentage and revenue dollars will be greater than 20 this year. All right. And is there another one? Is there
another question? Yes. Okay. 2nd part is 28 nanometer and 20 nanometer, whether they will be bigger next year than this year. 28?
In 2020. In 2020 will be? His question is whether they will be bigger next year than this year. I think 20 nanometer we have already mentioned in CEC's comments earlier, which is a smaller level next year than this year. I think C.
C. Has already mentioned that. Right. Okay. So, Brett, second question.
Consolidation among your customers. They are talking about savings with foundry partners as a result of higher scale economies. Can you give us your perspective on the impact that large scale M and A has on wafer pricing?
I don't expect any impact. I think, of course, when 2 companies combine, there are synergies and there are savings. But that doesn't necessarily mean that we have to save for them.
Okay. This is a very clear answer. And Brad has another question. When you think about capacity planning for 10 nanometer, 7 nanometer, how does this compare with 28 capacity and 20sixteen nanometer? Should we assume that with lower capital intensity that 10 nanometer and 7 nanometer will be smaller nodes for TSMC in wafer capacity?
Say it again.
Whether or not 10 and 7 will be smaller than 2016 in capacity. In what? In capacity.
Look, let me just say it by an overall sense. We expect the 28 course was very successful. But we expect 2016 together to be at least as successful as 28. 8 over the lives of the 2. In fact, we expect 20 and 60 together to be bigger in revenue over the lives of those 2 technologies than 16.
Now, CAN 7, our present plan is that in terms of vapers, it may be combining the 10 and 7 together. In terms of wafers, maybe a bit lower than 2016. In terms of dollars, we expect it to be as significant as 2016 over again over the lives of the respective technologies.
Okay. Brett, I think we have addressed all three questions you sent over. And if you have further follow-up, please send me an e mail again. Let's come back to the floor. Next, questions will be coming from Daiwa's
Yes. Thank you for taking my questions. My question is about your Q4 which just seems to me is back end loaded. You're talking about your another year of which just seems to me is back end loaded. You're talking about your another year demand driver is coming from 16 nanometer FinFET ramp up, that is also kind of a back end loaded for me given the long cycle time.
So can we fairly anticipate your Q4 total revenue will be better in Q3?
Well, it's we are not ready to forecast Q4 at this meeting.
Now
I think there was a related question that was pre submitted. No, it wasn't pre submitted. I saw it on the Paraguay Newspaper today. The related question, I am ready to answer that. So let me just answer that.
The related question appeared in the commercial lately, I think was Commercial Times, I think was the question is, will the inventory going down so slowly? What is the implication for the Q4 this year and Q1 next year. So I thought it was a pretty good question. So I got ready to answer that one. And maybe answering that one will also at least partially answer yours.
Clearly, the slowing, slowly decreasing inventory, is not a very good element for the 4th quarter. The inventory is being depleted more slowly than we expected. However, the impact on the Q1 is entirely different story. We do expect that Q4 by the end of the Q4, inventory will be factored the so called seasonal level or even lower and that bodes very well for the Q1. But still, I having said all that, I still repeat to you another thing I said.
For the entire year, we still think that we'll have double digit
Okay. Thank you so much. My second question is about maybe in 2016 or 2017. How do you see the rise of the Samsung insourcing strategy? How do we see the increase of the Samsung's insourcing strategy?
Samsung is using more of its internal products than go to foundry. It reduces the foundry market. We
kind of that as non foundry market, okay?
Thank you so much.
Okay. All right. Now since several analysts have sent me questions, I need to read out the next one. And operator, please open the line for Mehdi Hosseini. Mehdi, two questions.
1, how will consolidation among China based smartphone OEMs impact TSMC's revenue CAGR of 10% China smartphone OEMs consolidation impact TSMC's 10% CAGR.
China's
OEM consolidation.
So smartphone OEMs. Smartphone OEMs consolidation. I don't think any of us is really qualified to answer.
Sorry, Mehdi, we cannot answer. 2nd question?
I mean, it gets to be the consolation of some of our customers' customers in China. I think that's what you have. Right. Right.
2nd question is still related to our CAGR of 10%. What are the key assumptions for wafer shipment and ASP trend in our revenue CAGR guide of 10%. All right, all right.
All I want to do is to make it at least 10%. And this is a bottom up thing. No. It's not something that's it's not top down. Actually, 99% of our plans and focus are bottom up.
So when you say that whether we are some or, oh, I'll have to have 50 people what their assumptions are. And I just, or I should say we just tend to trust them. Actually, on the whole, for years or maybe even decades, on the whole, they have done a very good job. They have done a much job better job in forecasting or planning in this bottom up way than any top down kind of thing. Top down, you make assumptions and so on.
And your assumptions could be all wrong. Bottom up, of course, many people make assumptions. And I we I would have to ask 50 people or maybe even 100 people. And I certainly am not going to do that. But anyway, it's that's our 10%, right?
10% is the bottom up kind of a forecast.
Okay. Since there are still quite a few questions posted online, I'm going to the next one online, which is from Steven Pollo at HSBC. Steven has a couple of questions. I'm just reading it out. Clarification of full year guidance.
You said full year to grow double digit, but you also recently said second half twenty fifteen will be greater than first half.
In June of 9th June. That's right. 9th June, something like Shareholders Meeting. Shareholders Meeting. Well, that forecast has become more marginal
Okay. So then Well, I said 2 things.
In the meeting, first, the second half will be better than the first half. 2nd whole year will be the provision. The second part still holds. The first part may still be true, but as I said, has become more marginal now.
Since Chairman has already answered this, so I will skip Steven's follow questions, which is all the minute details of that first half, second half thing. But then he indeed had a question about Q3 guidance. He said 3Q guidance of 1% to 2% growth. What nodes will grow and which will decline? Or are all stable?
Say it again. All right. He wants to have color on Q3 note by note sequential growth or decline? Q3 note by note sequential growth. Growth or decline.
Can we answer that, Laura or C. C. Or Mark? Or do you want to answer it?
Let me try. I will not answer no by no revenue growth, but I can give you some color on the segment growth. The Q3, we believe communication will come down, computer will go up, consumer will go up and industrial and others will go up.
So okay, with that, let's come back to the floor. Michael Zhou from Deutsche Bank has follow-up questions and then afterwards we'll go to JPMorgan. Thank you. Mario is who is Deutsche Bank? Yes, Michael.
Were you the one that asked that I thought I said was a pretty small question. In the commercial in the
commercial In 10 nanometer actually, given what we're seeing, 16 nanometer for your market share, you think your 1st year in 10 nanometer You didn't answer my question.
Were you the one that asked that question about how the inventory decrease will impact were you the 1? No? Yes. Oh, Randy. Okay.
Never mind. You ask me a
question then. Okay. Do you expect that your 10 millimeter market share in the 1st year will be quite dominant? How about your 10 nanometer market share in the 1st year, going forward will be quite big because given what we see in 16. What will the 10 nanometer market share be?
Yes,
for the 1st year. Do you want to answer that? Well, actually the answer is we don't move. The 1st year, 10 millimeter will be the very 1st year will be year after next, all right, 2017. I mean, it will start end of next year.
I mean, spot means not very much not very many papers. And 2017, it will become quite significant. Well, all right, I will try to answer you. I think it will be bigger than the 1st year 16 nanometer market share.
That's a very safe one.
Thank you. Mr. Chang, just wanted to get your updated view on what you think about locating 12 inches fab in China given that China's innovative ecosystem seems to be developing very quickly? Any updates or any new thoughts on also what's happening in terms of the Chinese semiconductor ecosystem build out itself?
All right. Gokul's question is, can we talk about whether we have a plan to build a 12 inches wafer fab in China? Can we comment on our competitors building out ecosystems in China? We are only considering
it and we have no comment on the competitors doing
Okay. A follow-up on the new areas of growth that you mentioned like IoT, automotive, industrial going from next year onwards. There is a perception that a lot of that growth could be happening in mature nodes and not so much in advanced nodes. Could you address what areas would that growth be coming from? Because in the past, a lot of the new markets have been demanding advanced processes rather than the mature processes.
All right. So Gokul's second question is with respect to the new growth area. Since we have mentioned the new growth area of IoT, automobiles and industrials, he thought that these are all more related to the mature nodes and not necessarily the leading Azure advanced nodes. So he likes to have us
I missed the last few words.
Those applications tend to use only the mature nodes and not the advanced nodes. So what will be the growth opportunities that would probably use the advanced nodes, right?
As long as there is a new application, it's And yes, they use materials. But generally, they don't use just mature equipment. We have to upgrade the equipment. We have to make capital investments. In fact, we have all along been making considerable capital investments in the materials.
Some years more than other years, I think we have been telling you most years how much of our capital CapEx is in the leading notes and so on. And there is a pretty significant portion that's not leading edge. So that's the mature notes. And usually, there's considerable investment additional investment we need to make to adapt the equipment to it's not really change of equipment, it's buying new equipment in order to do the specialty IoT kind of products. So even if it's a mature node, it means growth.
Okay. I think Donald will hand over some follow-up questions. I will read it out right here. Daniel's question, do you still think that global foundry, I mean, it's not that company in New York, it's worldwide foundry, 14 nanometer and 16 nanometer capacity is rational, I. E, whether or not the world's overall 14 and 16 nanometer the world's overall 14 and 16 nanometer capacity, will that be rational?
2nd question, does TSMC still expect its smartphone content to increase year over year in 2015 2016?
First question is
this? Whether the total capacity will be rational, whether they'll be rational.
The 16 nanometer? Mhmm. I think the 16 nanometer global capacity will be national. And the second question, well, look, there are many companies in the 16 nanometer. So, there are just a few players.
I expect the capacity to be more rational than if there are a lot of players. And then another thing is it's very expensive, well, anyway, more expensive than the 10 and a lot more expensive than the unknown. 20. And a lot more expensive than the 28. I'm talking to 16 now.
So those two reasons, people pay us and more expensive capacity make me think that the 16 capacity will be rational. And the second question? Do we expect the smartphone content to increase for us? Yes, yes, yes. And do you have any more quantitative answer?
The overall content for smartphone us will increase next year versus this year in general slightly, but especially on the high end. I think he means how many dollars we have. Yes, that's what I'm talking about. Okay. Especially the high end smartphone, we expect the content dollars will go up by $1 next year from this year.
And mid low to lower end also? Yes, mid low end also increased slightly.
Okay. Now we are coming back to the floor. This question will be coming from Dan Heiler, Bank of America.
Just a quick follow-up on Moa's numbers there. Could you remind us from what to what you said $1 So what's the absolute number for 2016 in terms of content of the high end
and the minimum? Okay. For high end, the dollar will be from $18.7 to $19.7 for TSMC.
And then on the market share opportunities that you highlighted in mobile, Doctor. Chang, you mentioned that next year within the mobile market, you anticipate the potential to increase share. Does that require significant share gains across kind of will that be share gains across all the customers or do you anticipate some share loss, let's say, one of the major customers in those assumptions? Because it looks as though it's competition is actually increasing in mobile. So I wanted to get more color.
No, I don't know. Share gain for every customer, well, that is that can only be dreamed of. And so there are always some share gains and some share losses. But on the whole, I expect a share gain, yeah.
Follow-up question from Credit Suisse, Wendy Abrams.
I just wanted to follow-up on last quarter you mentioned thin fat would be better than your prior plan implying like low teens growth by Q4. Could you give an update on the pace of that, like if you'll get some revenue in 3rd quarter and you still expect it over 10% 4th quarter. In the 20 or in the second quarter, it got close to 20%. So if we could get toward that by first half next year?
Would you repeat the question?
Sorry, I was busy with my BlackBerry.
Okay. So I was just asking if in fact you still expect to have some revenue in Q3 over 10% in Q4 and then to match 20% to get to about 20% of sales by first half?
Do I expect in the 3rd quarter 10% would you say?
In Q3 to get revenue and then 4th quarter 10% or more revenue and then first half to start approaching 20%.
I don't think I'll say anything about 10%. That's about 10% about a whole year. Okay.
I think last conference the comment
was No. Wendy, I think we remember last conference, one analyst was saying that he predict we will get 12% revenue from 16 nanometer in the 4th quarter, but the management did not agree to that number. The management did not accept that 12% number.
Okay. That was last time. Was that your question?
Yeah. My question was if you could comment, like how it will grow as a percent of sales over the next couple of quarters?
How would the 60 nanometer grow as a percent of our revenue in the next few quarters?
Well, do you want to talk about I know that we don't want to talk about 4th quarter, but do you want to talk about 3rd quarter?
3rd quarter will be very small single digit revenue contribution. Oh, 16 nanometer.
Okay. In other words, we
started ramping when? 3 months, 4 months ago? Yes. Last month. And the process cycle is very long, Randy.
Right. Okay.
It's a month before we get a first finished wafer out. And some customers want us to do the bumping and all that stuff, and that takes even that takes longer. And so it's a long time between first starting to ramp and the timing you get even the first wafer option. So, 4th quarter will be very little.
Okay. Yes, it sounds like you don't want to mention on Q4. I guess the other question I was going to ask on structural profitability where you were talking in the prepared remarks. Do you still expect structural profitability to be in line to better? Like you've kind of maintained that track record the last few years, if as you look out over the next 12 months, you still have that trajectory?
Yes. The answer is yes. Okay.
Thank you.
Good. All right. There is a question coming to my library from Areti's analyst, Jaguar Bashua. His question is this. How does the strategy of quicker node transitions and the reuse of tools as we have seen in 20 nanometer to 16 nanometer affect the depreciation for new process nodes.
And this 2 transition allow you to offer better ASPs to your customers? So quicker node transition, reuse of tools whether this translates to better ASP to customers and how that affects depreciation?
Well, I can answer
in a
very general manner.
That is something
making 1 generation's tools compatible with the next generation or vice versa. That has been a prime effort of TSMC R and D and TSMC Operations in the last 3, 4 years. That of course started because the complexity of the process has increased and because we have adopted the faster cadence of the technology. So now I think the prime effort, this very big focus on reducing what we call internally, we call it the conversion loss. Our effort in reducing the conversion loss has borne a lot of food.
And now in the ideal case, all of the tools are compatible, but that's impossible because when you advance go from 16 to 10, we do need new equipment. That's even now still being developed by our equipment partners such as the part materials and so on. However, we have been able to reduce the conversion loss to a very low level now. And I think from that, we can start calculating depreciation and whatnot. You want to add anything to what I said?
Yes.
Yes. I can add some comments on this equipment migrations. Just like Chairman said, the operational R and D people made a tremendous effort trying to increase the migration rate. As far as we can see now, from 20% to 16%, 16% to 10%, we can manage migration more than 95% of the tool, can be reusable.
Okay. Now there's another follow-up question sent over by Steven Puleo at HSBC and his question is this. Since TSMC learned a lot at 20 nanometer, will a steeper ramp of 60 nanometer this year not impact gross margin too much, I. E. Not much of a dilution or perhaps the faster learning will allow for higher starting 16 nanometer gross margin compared to 20 nanometer, whether 16 nanometer gross margin will be higher than 20 nanometer at the starting stage?
Yes. I think the answer is 16 nanometer we have learned a lot from the from 20 nanometer to benefit 16 nanometer. And therefore, as a result, we expect '16 to be more profitable than 'twenty and we expect the new learning curve to be to actually be a part of the 2016 total learning curve. And I think that's actually one of the advantages of
Okay. Now we come back to the floor. The question will be coming from UBS Eric Chan.
Okay. Thank you. My question and probably just one question and I'll go to the other way. You talked about 20 nanometer process and then you talk about HPC. And I would like to give you the roughly idea for your 28 nanometer process business, how many percent and the growth of HPC and how about HPC plus going forward, what kind of exploitation and then we should keep?
Actually, I cannot give you the exact number, but I can give you the taste on the tape out. Our 28 nanometer tape out right now is higher than any quarter previously we announced. And then most of the tapered are in 28 HPC and HPC plus. So that's give you a hint of future business, what is the percentage is it going to be. Okay, got it.
So I don't get it. I mean, for the HPC 9 standing, it's lower than average of the 28 nanometer process business. And given the low I just mentioned, we are low end. The smartphone IC, the content value will increase slightly. But, you know, it doesn't match, you know, that If HPC the revenue could increase, I assume that the low end smartphone, I see the content value should decline.
Thank you.
Let me be more precise on the content, okay. I was talking about the high end smartphone, TSMC revenue will go up. As you remember is, this year is $17.80 next year 19.7 so it's $2 up, that's the high end. The mid end $6 this year, dollars 6.4 next year, slightly up. The low end keeps the same $3.40 next year
or HPC Plus. It's a second wave for a lot of other products. They are using HPC and HPC Plus.
What's that?
Well, Eric, maybe I can do a little bit clarification here. When Laurent talk about mid end low end smartphone content, it is not just from one geometry. It has many silicons inside and that's in average price. HPC or HPC Plus is only adopted by certain applications in those boxes and they are not the whole thing. The overall silicon content of the smartphones doesn't matter if it's a low end or mid end or high end, those contents are increasing because of complexity and functionality.
Or at least ours. Our content is increasing. Our content is increasing, yes.
Thank
you.
So I think it's about time that we should extend our conference here and thank you very much for coming over. Before we conclude the conference, please be advised that the replay will be accessible within 3 hours from now. Transcript will be available 24 hours from now. Those are all available through TSMC's website at www.tsmc.com. So thank you for coming.
Hope to join us again next quarter.