Welcome to TSMC's Q1 2015 Earnings Conference and Conference Call. This is Elizabeth Sung, 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 number 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, followed by our guidance for the current quarter. Afterwards, TSMC's 2 presidents and co CEOs, Doctor. Mark Liu and Doctor. C.
C. Wei, will jointly provide a couple of key messages. Then we will open both the floor and the line for the Q and A. For those participants on the call, if you do not yet have a copy of the press release, you may download it from TSMC's website 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 a summary of operations and current quarter guidance.
Thank you, Elizabeth. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the Q1 and followed by the guidance for the Q2. First, let me summarize our Q1 performance.
In Q1, we have achieved TWD 222,000,000,000 dollars in revenue, 49.3 percent gross margin, 39% operating margin and $3.05 in EPS, which are all within our guidance range. On a year over year basis, Q1 showed very strong growth versus last year. Our revenue increased 50%. Gross margin and operating margin went up by 1.8 percentage point and 3.6 percentage point, respectively. Net income and EPS both increased 65% versus the same period last year.
On a sequential basis, the wafer demand for the Q1 remains strong, but NT dollar was stronger than the assumption in our Q1 guidance by about 1%, which reduced our revenue by NT1.9 billion dollars Despite that, our Q1 revenue remained essentially flat versus Q4 last year. On the profitability side, gross margin was slightly lower than 4th quarter, mainly due to lower capacity utilization, offset by cost improvement, favorable inventory valuation adjustments and a favorable foreign exchange rate. Let's take a look at revenue by application. During the Q1, communication and computer declined 9% 10% sequentially, while consumer and industrial increased 32% 19%, respectively. Biotechnology 20 nanometer revenue contribution decreased from 21% in the Q4 last year to 16% in the Q1 this year, due to key customers' product seasonality.
Meanwhile, customers' demand for our 28 nanometer wafers remained solid and contributed 30% of wafer revenue. Accordingly, these 2 advanced technology 20 nanometer and 28 nanometer represented 46% of our Q1 wafer revenue, 5 percentage points lower than the Q4 last year. Now let's move on to the balance sheet. On the asset side, cash and marketable securities increased TWD 82,000,000,000 to a record level of RMB519 1,000,000,000 at the end of the Q1. On the liability side, current liabilities decreased by $13,000,000,000 as we paid down $17,000,000,000 of short term bank loan.
As cash continue to increase, the debt ratio has came down from the 30% level in the past 2 years to 28% in the Q1. Working capital remained healthy. The accounts receivable turnover days decreased 3 days to 44 days. Days of inventory decreased by one day to 57 days. Now let me make a few comments on cash flow and CapEx.
During the Q1, we generated RMB156 1,000,000,000 cash from operation and invested RMB49 1,000,000,000 in capital expenditure. As a result, free cash flow reached a record level of NT107 billion dollars and cash balance increased to NT437 billion dollars or about USD14 1,000,000,000 at the end of the Q1. So I have finished my report on the financial part. Now let's turn to the Q2 outlook. In the second quarter, a combination of a kit customer's business loss to a captive IDM, inventory adjustment, which will be explained in more detail by Mark and less favorable exchange rate, all three will negatively impact our business.
Based on our current business outlook and forecast exchange rate of 31.03, we expect our 2nd quarter revenue to be between NT 204 $1,000,000,000 and NT207 billion, representing a 7% to 8% q over q decline. Gross profit margin to be between 47.5% and 49.5 percent and operating margin to be between 36.5% and 38.5%. Here, I will give you a reminder about tax. As you know, in every second quarter, we will need to accrue a 10% tax on undistributed retained earnings. As a result, our quarterly tax rate in this second quarter will go up to 24%.
I also want to inform you that the approximately NT15 billion dollars gain from ASML share disposal is not a taxable item. After the Q2, the tax rate will fall back to 11% in the 3rd Q4 and our full year tax rate will be about 14%. In addition to the Q2 guidance, I will also update you on our CapEx. Our 2015 full year CapEx will be reduced by US1 $1,000,000,000 So we now expect our CapEx this year will be between $10,500,000,000 $11,000,000,000 dollars The reduction mainly came from 2 areas. The first area, we have continued improve our capital efficiencies, which allow us to spend less, but still achieve the same capacity.
And we are migrating our 20 nanometer to 16 nanometer faster, which allow us to convert more of the 20 nanometer tools to be used for 16 nanometer at lower CapEx. The 1,000,000,000 CapEx reduction will not affect our overall capacity buildup for the whole year. We will increase our 16 capacity, while decrease our 20 nanometer capacity. Finally, despite of the lower second quarter, we expect revenue from the second half of the year will recover and the full year will be double digit growth over 2014. This concludes my remarks.
Thank you very
much.
Now our 2 Presidents will take messages. We'll start with Mark.
Good afternoon. I will deliver the key messages. First, on the near term demand. The demand of TSMC wafer remained strong in the Q1. This led to our 1Q quarterly revenue to be essentially flat from Q4 last year.
In the Q2, some of our customer appeared too optimistic on their own market outlook. As a result, the inventory level of them appear to be higher than they planned. Recently, we saw several mobile customers cut back their delivery schedule, because their demand did not come to what they anticipated. Therefore, we forecast our 2nd quarter demand will be below normal and the quarterly revenue will decline by about 7% to 8% from 1st quarter. Our near term market demand will then be more moderate than we estimate in January.
We now estimate fabless companies exit Q1 with inventory days higher than seasonal level. However, we think it will be back to normal towards the end of Q2 this year. So for forward looking for full year, we will be continuously working on a double digit revenue growth year for 2015. Next, I want to comment a few on our long term outlook. TSMC target our long term revenue CAGR compound annual growth average growth rate to be 10% in the next 5 years.
We intend to maintain our structural profitability and the net profit growth will be in line with revenue growth. The continuous demand of more functionality and integration in smartphone drives for more silicon content. We expect smartphone will continue to drive our growth in the next several years. In the meantime, we see IoT appears us present us new growth opportunities. The proliferation of IoT not only will bring us growth in the sensor, connectivity and advanced packaging areas, the associated application and services such as big data analytics will also further our growth in the computation space, including application processor, network processor, image processor, graphic processor, microcontroller and other various processors.
That was a long term outlook. I'll update some of our 10 nanometer development progress. Our 10 nanometer technology development is progressing well. Our technology qualification remains in Q4 this year. Recently, we have successfully achieved fully functional yields of our 2 56 megabit SRAM.
Currently, we have more than 10 customers fully engaged with us on 10 nanometer. We still expect to have 10 nanometer volume ramp in Q4 2016 and to contribute billing in early 2017. This technology adopts our 3rd generation FinFET transistor and have scaling more than 1 generation. Its price is fully justified by its value for various applications, including application processor, baseband SoC, network processor, CPU and graphic processors. Its cost and price ratio will comply to our structural profitability considerations.
As for new technology development of TSMC, I'd like to start with to update you our 7 nanometer development. We have started our 7 nanometer technology development program early last year. We also have rolled out our 7 nanometer design and technology collaboration activity with several of our major customers. Our 7 nanometer technology development today are well in progress. TSMC 7 nanometer technology will leverage most of the tools used in 10 nanometer.
In the meantime, achieve a new generation of technology value to our customers. The 7 nanometer technology risk production date is targeted at early 2017. Now, I would like to give you an update on EUV. We have been making steady progress on EUV. Both are development tools.
We have 2 NXE 3300 have been up graded to the configuration of 80 watt of EUV power with an average wafer throughput of a few 100 wafers per day. We continue to work with ASML to improve stool stability and availability. We also are working with SML and our partners on developing the infrastructure of EUV such as masks and resist. Although today the process of record of both 10 nanometer and 7 nanometer are on emerging tools with innovative multiple patterning techniques. We will continue to look for opportunity to further reduce the wafer cost and simplify the process flow by inserting EUV layer in the process.
Now, I'd like to give you an update of our recently announced ultra low power technologies. We have offered the industry's most comprehensive ultra low power technology portfolio, ranging from 55 nanometer ULP, 40 nanometer ULP, 28 nanometer ULP to the recently announced 16 FFC, a compact version of 16 FinFET plus enable continued reduction of operating voltage and power consumption. Today, more than 30 product tape outs planned in 2015 from more than 25 customers. This 5540 nanometer ULP will be the most cost effective solution for low to mid performance wearable and IoT devices. The 28 ULP and 16 FFC will be the most power efficient solution for high performance IoT applications.
In particular, our 16 FFC offers the ultra low power operation at a supply voltage of 0.55 volt with higher performance than all of the FDSOI technologies marketed today. Lastly, I'll give you an update of our recent IoT specialty technology development. We have developed the world's first 1.0 micron pixel size 16 megapixel CMOS image sensor with stacked image signal processor, which was announced in March by our customer for the next generation smartphone. Secondly, we continue to drive the best low resistance in BCD technology roadmap from 0.18 micron to 0.13 micron and from 8 inches to 12 inches production. For wireless charging and fast wired charging of mobile devices.
We continue to extend our 0.13 BCD technology from consumer and industrial application to automotive grade electrical system control applications. Lastly, recently we have started production of foundry's first 40 nanometer industrial embedded flash technology that will start from November last year. And this technology recently passed automotive grade quantification that was in March for engine control applications. Above it was my update of new technology. Now I hand the podium to C.
C.
Okay. Thank you, Mark. Good afternoon, ladies and gentlemen. I will update you the 28 nanometer 20 and 16 FinFET status and also InFO business. First, 28 nanometer.
This is the 5th year since TSMC's 28 nanometer enter mass production. 28 nanometer has been a very large and successful node for us. Our market segment share at this node has held up well and is in the mid-70s this year. We expect this to continue in year 2016. In comparison, this is better than what we had in the 14 nanometer node.
The demand for 28 nanometer is expected to grow this year due to the growth of mid and low OEM smartphone and as well as the 2nd wave segment such as radio frequency, circuit product and the flash controller that migrate into this node. However, due to some customers' inventory adjustment, which we believe are going to be for short term, the demand for 28 nanometer in the second quarter was below than our previous quarter, resulting in 28 nanometer capacity utilization rate to be in the high 80s range. But we expect the utilization rate of the 28 nanometer to recover soon and to be above 90% in the second half of this year. While we are in the mass production, we also continue to improve the performance of our technology. Last year, we have introduced a 28 HPC, which is a compact version of 28 HPM.
For the purpose of helping 64 bit CPU conversion for mid to low end market, this year we further improved the 28 HPC to 28 HPC Plus. For comparison, 28 HPC Plus will have 18% power consumption, lower power consumption at the same speed or 15% faster speed at the same kind of power. As for the competitive position, we are confident that we will continue to lead in performance and yield. So far, we do not see there is a very much effective capacity in high ks metal gate at 28 nanometer outside TSMC. And since we have already shipped more than 3,000,000 12 inches 28 nanometer wafers, the learning curve has given us an absolute advantage in cost.
Now let me move to 20 SoC. TSMC remains the sole solution provider in foundry industry for 20 nanometer process. Our yield has been consistently good after a very successful ramp last year. But recently, we have observed customers have planned the schedule for product migration from 20 nanometer to 16 FinFET started sooner than we forecasted 3 months ago. As a result, even we continue to grow our 20 nanometers business in the Q2 of this year.
Our earlier forecast of 20 nanometer contributing above 20% of total wafer revenue this year has to be revised down by a few points to a level above the mid teens. That being the case, we still forecast the revenue from 20 nanometer were more than double that of year 2014's level. Now, switching film fat. The schedule for switching film fat high volume production remains unchanged. We will begin ramping in the Q3 this year.
And the ramp rate appear to be faster than we forecasted 3 months ago. Thanks to the excellent year learning that we can leverage our 20 nanometer experience and also due to a faster migration from 20 nanometer to 16 FinFET. In addition to good yield, our 16 FinFET device performance also met all product specs that's due to our very good transistor engineering. So we believe our 16 FinFET will be a very long life node due to its good performance and the right cost. This is very similar to our 28 nanometer node.
We are highly confident that our existing film fare is very competitive. As we said repeatedly, combining 20 nanometer and 16 nanometer, we will have the largest foundry share in year 2015. And if we only look at 16 nanometer alone, we still can say TSMC Y have the largest 16 or 14 nanometer foundry share in year 2016. Now let me move to our InFO business update. The schedule to ramp up the InFO in Q2 next year remains unchanged.
We expect YingFO will contribute more than US100 $1,000,000 to quarterly revenue by next year, Q4 next year, Huanilua be fully ramped. Right now, we are building a new facility in Longtan. That's a city way near to Xindu, where our headquarters are, for ramping up info. Today, a small pilot line is almost complete and is ready for early engineering experiment. This pilot line will be expanded to accommodate the high volume ramp in year 2016.
And that's all. Thank you for your attendance.
All right. Thank you, C. C. 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, so to allow all participants an opportunity to ask questions.
Questions will be taken both from the floor and from the call. Should you wish to raise your question in Chinese, I will translate that to English before our management answers your question. Our first question comes from, I see Andrew first. So Barclays, Andrew Lu.
Thank you, Mark and Cixiwei and Laura. I have a couple of questions. Thank you, Doctor. Sung, because I haven't been pick the first one for very, very long time. Earlier, Cixiwei mentioned 16 Fin fab ramp up faster than earlier expected few months ago.
So can you give us some color on the revenue contribution by Q4? Suppose it should be also few percentage points higher than few months ago. I think earlier guidance 9%, high single digit for Q4 revenue contribution from 16 fanfare.
And Zhu, I think you already answered the question by yourself, few
percentage more. So no precise number like 12% or 15% or something like that? That's too specific. Okay. My second question for Mark.
I think Mark present at the Technology Symposium San Jose, mentioned the 16 Thinkfair versus competing technology is about 10% performance better. So can you elaborate what's 10% performance better if our die size is larger than our competitors? How can we get the 10% performance better? Thank you.
In the conference, we talked about 16 FinFET plus that is our 2nd generation FinFET transistor. In that, we improved our transistor performance great deal. According to our information, that transistor speed, talk about speed and fixed power is higher than the competitor by 10%. That was what I meant.
So how? Because of transistor?
Yes, transistor structure, transistor engineering. So it's
also competing is competing the current competitor solution or the next generation competitor solution? For example, LPE versus LPP or something like that?
The fastest one. The fastest. The fastest one. Yes.
Thank you.
All right. Next question will go to Bank of America Merrill Lynch, Stan Hyler.
Thanks. So a couple of quick questions. Congratulations on the 16 nanometer success and faster yield ramp than previously planned. As you go to convert your 2020 capacity to 2016 due to those better yields, I guess two parts to the question. Do you what's the implication on margin if you're as you're converting a fab from I know you do this a lot, but this is a big transition with limited products.
So as you're going from 2020 to 2016, what are the implications on margin? Can you do you take maybe 1 quarter hit on margin before you get back to trend? Thank you.
Dan, I will firstly talk about the implication for CapEx. Probably that's the more important, which will lead to the margin in a later stage. Conversion is cost less than adding new capacity. So when we see a node need to be converted, if we can do it faster, I mean, we can spend less CapEx. That's actually how this $1,000,000,000 reduction coming from.
In terms of margin, actually it has multiple factors. Depreciation, of course, being number 1. Other thing is how fast can you bring up your yield? And how does economic scale get into play. So from what we have seen right now, we believe the 16 nanometer margins will begin better than our 20 nanometer margin, because we have the basis of 20 nanometer.
So, well, as we have said many times, we don't want to separate 20 versus 16 and always you guys always ask 20 margin and 20 margin separately. So I would say, if we combine 2016 and 2020 margin and it will be a pretty good progress. And we have seen 2020 has progressed quite well and 2016 will be even better. So although this 20 plus 16 will still have some small dilution to TSMC in the year in 2015 2016, For 2015 maybe 2 to 3 percentage point and 2016 would mean more 1.1 to 2 percentage point, but we are targeting to achieve corporate level margin by year 2017.
Okay. Thank you. And then just as a quick follow-up on that. Does 20 nanometer still grow from its lower level in the Q1 sequentially? Will it in absolute dollar terms, can you maintain the current level throughout the year?
I think you implied that in your guidance. You can say mid I think you said mid single digit just to confirm that. And is that throughout the year? Does 2020 stay at about 15% of revenue throughout the year?
Dan, would you please repeat your question again? Do you
think 20 nanometer will remain at the current revenue level throughout the year? Because you have new some customers not successful in 2020 products and maybe didn't succeed and some customers more successful. So as you put everything together, I'm wondering if 2020 kind of stays at the current revenue level?
In my statement, I say that contributing 20% revenue cannot hold because of customers' demand. But I also say that Q2 we continue to increase the 20 nanometer business. So that means in the second half, no, we cannot maintain the same level of business. In dollar terms?
In dollar terms. Okay. Cannot? Okay. And then my second question was relating to 20 nanometer.
Here you certainly have a lot of growth in 2016 with customers taping out aggressively especially next year. Given your high share at 28, how do you keep 28 full? You obviously have a lot of technology there. Customers will move forward. So I'm wondering, could you elaborate on new areas that are actually creating new demand in 28% such that you can continue to grow 28% next year?
And do you think you can grow? I think previously you said maybe hold it at current levels even with 2016 growing. So just maybe revisit that question. Thank you.
Okay. To answer the question, I think the high end smartphone will move to shaking film flat. However, the mid- to low end smartphone was staying at 28 nanometer because that's very cost effective. And mid- and low end smartphone continue to grow, grow significantly. So that will give a very strong demand on 28 nanometer.
In addition, we still have a second wave product like RF and flash controller as I'm using as an example move into 28 nanometer. So, by summing it up, I think the 28 nanometer demand continue to grow, while we move into the shifting footprint for high end smartphone.
Excellent. Thank you. And is there an element of as you add value on 2018 as you add value, is there an element of being able to hold pricing there because it's an old node and all the old nodes face pricing pressure. And I think we get a lot of questions from investors on old nodes getting pricing pressure. But at the same time you're adding a lot of value there.
So maybe give us a little bit of sense of the 20 28 and kind of pricing environment next year? Thank you.
All I can say is we remain more very competitive in our value proposition. That gives you some idea about capacity support yield and performance and also including pricing, but all combined together we are better than the competitive.
All right. Next, we questions will be coming from Deutsche Bank's Michael
Hi. Two questions. First one is for EUV. So Mark has highlighted your EUV program. Does that imply you may consider using EUV in the second stage of your 16 nanometer 10 nanometer ramp up potentially in 2018 or 2019?
Thank you.
We always look for opportunity to insert EUV in both 10 nanometer and 7 nanometer. The EUV technology provide not only some cost benefit, but also simplify the process. That means you can replace multiple layer with 1 layers that helps your yield improvement. So this opportunity both in the quality and the costs are always exist, so long as EUV's productivity come to the threshold point. And in as you noticed on 10 nanometer, our capacity built were largely done in 2016 2017.
So the 2018 will be inserted if inserted will be combined with some other tools upgrade, some tool upgrade to 7 for example and replaced by the EUV tools. In that mode, it will not be a fresh capacity built with EUV at that time, because that's a little bit late in schedule for the 10. 7 nanometer, of course, it will be higher probability adopting EUV. And the benefit will be bigger because the 7 nanometer has a lot of multiple layers, quadruple even multiple patterning layers that EUV can be more effective in reducing the cost and improve the EU for example. So that's our current status.
But today EUV is still in the engineering mode. The productivity as you heard was still have some gap for practical insertion of the technology. So we're still working on that in that mode. And we have although we have one day performance up to 1,000 wafer per day, but I was talking about average still a few 100. And we need to get to more than 1,000 to consider a schedule to put it into the production.
Thank you. Second question is regarding the outlook by segment. That's for CFO. Outlook by segment in Q2. Q2?
Yes.
Okay. Q2, I have just said there will be 7% to 8% decline. I think mainly is in the phone communication segment. As you can see in my presentation, the communication, industrial and standard, both segments constitute about 80% of TSMC revenue. So the decline mainly come from those 2 segments.
Thank you.
All right. Next we will the questions will be coming from UBS Eric Chan.
Hi, Mark, C. D. Wei, Laura and Elizabeth. Okay. My first question probably go to the Laura and then regarding to the CapEx.
You just mentioned that we cut the CapEx by RMB1 1,000,000,000 but we maintain our capacity schedule. How about for the 28 nanometer process in terms of the capacity, in terms of the CapEx for the 28 nanometer process, the schedule is going to change?
We only spend very little money on 28, especially in the first half to add capacity. In addition to that, we have continued productivity improvement. So our overall year 20 28 capacity will still grow.
How many percent year on year growth we talked about?
Well, I will not specify the percentage, but it is still growing with the combination of both.
Okay. To maintain the original schedule, right? Yes. Okay. How about the depreciation growth given that we cut the US1 $1,000,000,000 CapEx?
I think I have said in last quarter, we expect total depreciation will be increase will be around 20%. With this RMB1 1,000,000,000 cut down, the increase will be in high teens, will now be 20%. Okay. High teens.
Okay. The other question probably go to the mind of CCY regarding to our investment in China, the ending the update or any improvement or ending the logic behind and the Sun Newspaper talk about we would like to build out for our own. So any strategy behind? Thank you.
Okay. Let me take this one. Okay. We have 8 inches fab and it's running very well in Shanghai and it's making profit. And we are growing our China business quite nicely in the past few years.
Now accounts about 5% of TSMC revenue. We have seen a very big few big very big fabless company engaging with TSMC more closely. And we have sales office in the north part, the middle part and the southern part of China. So we are participating the China's growth and we will continue to participate the growth in the future.
Okay. How about the capacity growth for like
8 inches fab in China? We are aggressively evaluating what's the best way for us to do it.
Okay. And on your evaluation, what kind of geometry you put the first priority for your engine fab in China?
It's probably too details we are still evaluating. We will let you know when we have a better picture. Okay. Thank you.
All right. Next we will ask Credit Suisse Randy Abrams for questions.
Okay. Thank you. The first question, I want to ask about the duration of the pullback, because second quarter you're seeing the issue from mobile, but inventory exiting near normal levels. So to what extent do you see a speed up in second half? And as you go to 4th quarter, how broad is the customer base?
Is it a single key product? Or are you seeing broadening out of 16 FinFET as you ramp that in 4th quarter?
The Q2 schedule delay is we see in the mobile product area in several of our customers. So it's not one single customer. But of course, there is one single customer impact the most, which is last year to the captive IDMs. As for the second half, we think first of all the inventory adjustment will largely complete towards the end of Q2. We think the end market of smartphone is still healthy growth this year.
Therefore, the second half will resume the growth. And more importantly, our 16 FinFET technology will start to ramp in the second half. So that will contribute a lot of growth more than the 20 nanometer shipment reduction. So those two factors. Okay.
And the follow-up question and I'll ask on the 16, if that's multiple customers contributing this year or if it's a single key product. But the second question I wanted to ask about the internalized silicon. One of the impact was the it's kind of well known now the Samsung ramping up with more of its own silicon. If you could kind of talk about how much is that impact versus the broader kind of smartphone weakness in inventory? And as you look forward, do you see that risk staying with you as far as Samsung Intel internalizing silicon versus ways you can prevent that or mitigate that risk?
Well, we definitely see the impact on the second quarter. Yes. But as far as the future, how that internal captive power portion will take away from the foundry is really hard to say, because each product they always have some competition considerations. So but we are on the and also this year, the 2 big smartphones sells very well and that squeezed the Android nonsense on non Apple phones at this point. But that part, I think, will recover.
This is probably a competitive competition status in the for the period of time only. So but we know that we do not compete with our customers. So the relationship with us and our customer to build the best product to compete is still the best solution seen by many of our customers. And that is we are continuing to work on. And so we will try to produce the best product with our customer to compete.
All right. Next one in line actually is Citi's Roland Xu.
Xu? This is Mark, C. C. And Laura. My first question is on your given the fast ramp for 15 nanometer, so are we going to see meaningful revenue contribution for 16 in 3Q?
We ramp up in Q3 this year, but it's many days of process plus about 1 month is a back end. So in 3Q, we expect just revenue just very minimum. Okay.
But we will start reporting 16 nanometer revenue from 3Q? Yes. Okay. Thank you. And with this faster ramp on 16 nanometer, so how do you think about your 16 nanometer overall market share this year?
Are we going to see a bigger market share than our major competitor on the 60 nanometer this year?
I only can say that it's better than we expected.
Okay. Okay. Thank you. And my second question is, I think Intel cut CapEx at least the year. And also we are talking about we also lower the CapEx spending by RMB1 1,000,000,000 by converting more 20 nanometer to 15 nanometer.
And I think this is as I said, they also said this is a rising trend to convert the N plus 1 node to N minus 1 N minus one to N plus one going forward. So question is, will this trend continue? Whether or not this year CapEx spending is picking up in the near term to TSMC, the over CapEx spending, because I think Mark also said for 7 nanometer, we probably were also going to use similar tool as 10 nanometer as well. So with this continued to a conversion whether or not the CapEx spending is picking up this year? Thank you.
It's probably too early to say that peaking out because we are still ramping our 16 nanometer and we're going to spend more money next year in 2016, got about 7 nanometer and we will continue to spend money. So I won't say it's picking up for now. Okay.
So how about the capital intensity? What's the longer term view of the target for the capital intensity?
What I can say now is capital intensity came down from previous year at close to 50 at 40% range. And at least for now I can see we'll at this 40% range, but more specific we have to be wait for later time.
All right. Also in the order of questions received, I have to go to Morgan Stanley's Bao Lu.
Lu.
This is sort of a follow-up to Randy's question, but I'm going to run some numbers by you first before I ask the question, which is we did the math. I don't think these are exactly right, But over the last 5 years, we've got IDM 0 growth, fabless 8%, but system houses above 20%, right? So system houses, I'm excluding memory just the system LSI, the logic portion. And I think that might be slightly conservative. Now, that's a pretty big change.
And I'm wondering how you should think about that. How you should if you look at TSMC addressing the system houses versus the fabless customers, if you look at, for example, your market share, if you look at your margin for the system analysis versus the fabless, how do you think about that? Thank you.
Yeah. Indeed in the past 5 years, the system houses sourcing and foundry business to us has a much higher growth rate as you quoted. But remember that came from a very small base, okay. But we welcome system outsourcing because we consider them our fabless too, fabless company, the company without fab bring to business to us. It's not necessarily the margin has to do with what type of company sourced.
It has to do with our value to that company. And also the size of the business, I mean, if the business is bigger, of course, you probably can enjoy a slightly a little bit better price. So it depends on the size of the business, less depend on what company, system company or non system company's business.
I guess my question is pretty simple, which is when the fabless is outgrowing the industry, it's easy for me to understand the foundry is going to benefit, right? When the system house is outgrowing the industry, some of them have their own fabs. And so is it a positive or negative?
I'm sorry, system company, someone
For example, you had said earlier that one of your customers lost market share to an internal solution, I consider that to be a system house as well, right? So overall, system house could be an IDM or they might outsource.
Okay. Our system houses are considered fabless system houses, what you just quoted. Mainly it's a fabulous system house. We have very little business from the system house with their own fabs. Sure.
Okay. So, so long as a fabless company, how well the business of that system has depend on their business competition.
Thank you. I guess we take it offline. My second question, I'm not trying to pin you down, but Mark, you had said earlier that the inventory correction ends by 2Q and second half of the year will be more normal. Now typical normal seasonality, second half is better than the first half. Are we saying that second half of the year this year revenue is going to be higher than the first half?
Yes. That's what we see. 2nd half this year will be better than first half.
Great. Thank
you. All right. Next one will be from HSBC, Stephen Peleo.
For the last 3 years or so, TSMC has been growing 20%, 30% year on year revenue growth rates, Q1 50% year on year. But to Bill's question there, it does look like in the second half of the year, if I play around with your full year guidance and what you're doing in it, low single digits year on year growth rates. And if we exclude maybe 16 nanometer above 16 nanometer maybe it's flat or down. Is that the new industry? What are we talking now for industry growth rates for both the semi industry and the foundry market this year?
So your question is
the 90 days ago you suggested the semi market was going to grow 5% this year with foundries growing 12%. In light of your new guidance, in light of what looks like you're going to have very slight year on year growth rates in the second half of the year. What do you think that means for the overall industry?
We think the semiconductor growth this year currently is indeed we adjusted down from 5% earlier to 4% at this time. Yes, we think it's really due to the macroeconomic situation around the world today. And therefore, the foundry market foundry growth rate will adjust it down too. We are looking at about 10%. 10% to
2 points lower.
So that's why we revised the view on the current semiconductor growth.
I just
want to get some specific numbers there. For you Laura, spending $1,000,000,000 less in CapEx is going to help what already is a pretty good free cash flow story this year. Can you talk a little bit about maybe the free cash flow targets for this year and what you'll do with some of that excess cash? You have $14,000,000,000 in cash, but now it sounds like you got an extra $1,000,000,000 from a lower CapEx budget too. I think you're going to generate free cash flow that's maybe double your dividend payment this year.
Can you talk a little bit about free cash flow goals and dividend plans?
We are confident with our free cash capabilities to generate a free cash flow. As if we want to use all the money to pay dividend, which is not a good idea, but certainly we have some capability to do so. Our view on dividend is that we need to sustain the level without going down and we will try our best to maintain that level therefore. So the cash may go up and we have several ways to consider. Mark was mentioning, we have new target for the 5 years.
We want to grow 10% revenue and for that, we need to continue to invest, both in capacity and also in R and D. So we need to have some bullet to do that too, okay? Thank you.
Can I just quickly add that how much cash comes on your balance sheet to support a 10% revenue CAGR over the next 5 years? Is $14,000,000,000 a year dollars 14,000,000,000 enough?
It's difficult to make a quantify, depends on how much we need to spend to keep that 10% growth. So I would not answer this question for now, okay?
All right. I think it's about time for us to actually go to the line. So we will now take our next question from the call. Operator, please proceed with the first caller on the line. Certainly, our first question comes from the line of Mehdi Hosseini from SRG.
Please ask your question.
Thanks for letting me ask the question. Two follow-up. You talked about converting 20 to 16 nanometer. Can you elaborate on the magnitude of this conversion? And I have a follow-up.
Without going too specific, what I can say is, at the early of this year, we expect to have more 20 than 16 capacity. Now with the conversion more aggressively, we now see 16 nanometer capacity will be bigger than 20 nanometer for this year.
Sure. As this conversion actually takes place, would that impact the installed base of the equipment? And therefore, would that help you with a one time positive impact to gross margin?
It I don't think it will help our one time improvement in gross margin. As I said earlier, these 2 technology nodes share the same facilities. So the depreciation has to go to the 2 nodes for a period of time.
Okay. And then just one quick follow-up on the CapEx cut. What can you help me better understand what has happened over the past few months that has given you the confidence that you can reuse the equipment? I imagine the reuse is something that has happened very often in the past. What happened in the past couple of months that made you decide to cut the CapEx?
There were 2 things that make us do this decision. Number 1 is, we did improve our capital efficiency, meaning we are reducing our CapEx per k investment. That's a few savings. Another thing is the conversion faster from 2020 to 2016. As we see a customer migrate to 16 faster than we thought.
So there will be some excess capacity for 20 nanometer going forward, if we don't do it. It's not a magic and in the very beginning we know these 2 nodes has very, very high commonality in equipments. The commonality is about 95%. So it's just made of timing, what's the timing to do this transition and would you try to do it now?
Great. Thanks so much. All right. We will continue on the line. Operator, please have the next caller on the line.
So, Tali, the next question comes from the line of Brett Simpson from Arete Research. Please ask your question.
Yes, thanks very much. My question on 10 nanometer, I know it's still 18 months away from ramp up. But can you talk about how fast this ramp might scale relative to 20 nanometer or 28 nanometer? And as you ramp up 10 nanometer for high end smartphones, would you expect low end smartphones to start migration from 28 to 16 fintech in 2017? Thank you.
All right. So Brett, we just want to make sure we hear you correctly. Your question seems to say that if we ramp 10 nanometer in the future, which will be targeting the high end smartphone, will the low end smartphone be migrating from 28 nanometer into 16 nanometer? Is that your question?
Yes. And just to add to that Elizabeth, how quickly will 10 nanometer scale up relative to the scaling of 20 nanometer, the ramp up of 20 nanometer and 28? Nanometer.
So the profile of the 10 nanometer ramp, will that be steeper than the profile of the 20 or the 28 nanometer?
Yes. Yes. Thank you.
Okay. The first part of the question has to do with when 10 nanometer ramp for the high end smartphone will the mid low end move to 16. I think we it is up to our customers' product portfolio. We definitely know a lot of customer is looking at 28 nanometer to use to do as a low end. But the specification the
smartphone
processor specification changes constantly. So what portion of that product will move to 16 nanometer? We think definitely they are some portion, but that how big a portion really depends on their product strategy. On the 10 nanometer ramp, I wouldn't say is the bigger, but at least a similar scale of our ramp in as we do in 2016 and as we do in 2020.
Great. Thank you. And maybe just a follow-up here. There's been a lot of talk in the industry about one of your larger customers planning to introduce a new application processor on both Samsung's 14 nanometer process as well as your 16 FinFET for the same chip later this year. And we haven't really seen a single chip get taped out on 2 new processes at the same time before in the industry.
So my question, how does this really work between the 2 foundries? Does it mean that that one customer can adjust dynamically month to month how the allocate wafers between you and Samsung or how might this work? Thank you.
Brad, I think I tried to understand your question while the photographer's camera is very noisy here. Okay. So your question seems to say that there is a customer that appear to be working with 2 different foundries on the 14 and 16 nanometer node And the products are about to arrive. You would like to understand how this customer will be allocating month by month the what the production or the orders with both of the 2 foundries. Is that your question?
Yes, that's right. Whether they can move around dynamically how they allocate wafers. That's right.
Well, my answer is very typical. Our shifting from fab has been very competitive. And we did not know that customer going to how they're going to allocate. I cannot even make any comment on that.
So, Brett, did you hear the answer?
Yes. Okay. Yes. Maybe instead if I can perhaps just ask, you previously said 16 FinFET will be high single digit percent of sales in Q4. And what's the latest update on that?
All right.
I think that question has already been asked earlier that I think it was Andrew, right? Yes. He Andrew suggests that whether it will be 12%, right?
Thank you.
Okay. Now we come back to the floor. Next, we will the questions will be coming from Goldman Sachs, Donald Lu.
My first question is about Yinfo. Just to confirm, you said by Q3 next year, the quarterly revenue from Yinfo will be $100,000,000 And also Q4, sorry. What would be the gross margin for this business? And also how many customer you have? So that's question number 1.
The question number 2 is, I think Mark talked about 10 nanometer and 7 nanometer. Will TSMC offer 8 nanometer similar to 20 nanometer? Thank you.
On info, you asked about what is the margin. The margin is in line with the TSMC's backend business that I can say, I'm pretty sure for that. And how many customers that I cannot tell you? Many.
Many? So
you will have more than one customer. Oh, yes. Thank you.
To answer your question, we will not offer 8 nanometer.
Okay. Next, we'll go to JPMorgan's Gokul.
Thanks for taking my question. First of all, on 16 nanometer, since Doctor. Wei mentioned that next year a lot of demand on entry level to mid end smartphone is still going to stay at 28 nanometer. Could you talk about your visibility for 2nd wave demand for 16 nanometer? And related question would be, would your combined 20, 16 nanometer capacity plan as it stands right now, how much below 28 nanometer would it be?
Or it would be at the same level of whatever you build for 28 nanometer in the last 5 years? Thanks.
So you talk about the second wave for seeking FinFET?
Yeah. What is the visibility that you have? Is it going to be really strong? Because you mentioned that a lot of the cost sensitive customers would still stay on 28 at least for next year. Okay.
For 28 nanometer, I said a bit to low end this year that and next year probably that smartphone was staying 20 nanometer because it's very cost effective and performance wise is very good. For 16 FinFET, I think that people start to move with their product plan and some of the million smartphone will move into 16 nanometer. That's for sure. In addition to that, we also see improving our 16 FinFET ultra low power, Mark just mentioned. And that will have a lot of application on every product, low power consumption is one of that advantage.
And so that will be our 2nd wave of seeking
to compare. Okay. Just wanted to add on to that. So when you think about capacity planning for 2020 combined with 2016 right now given that you're accelerated conversion, would you be building similar level of capacity as 28 that you've built
over the last 3, 4 years? Well, that is too early to say right now. But we expect 16 pin ferries at long last node and very similar to 28 nanometer. Okay. Thank you.
All right. Dan Heiler has a follow-up question. Dan?
Thank you, Elizabeth. So on 16, the FinFET Compact, which is getting introduced, when would we expect to see that in volume production? 16 FinFET Compact FFC? FFC.
FFC that will be ready next year. And we expect that high volume production start probably 2 years later, that's year 2017, 2018, we have reached the high volume.
Okay. So is there so the cost a cost down version for mid end phones of FinTech that you alluded to plus low power. When is that available? Probably in 2017 second half. Okay, great.
And then on just number of customers that are in volume production in the 3rd quarter and fourth quarter of 2016 FinFET, just the number of customers that are in volume production?
You asked a very specific question now. We have a few customers in the volume production. Now let's say, I cannot tell you it's 10, 20 or those kind of sheet down? A few meaning 3. Too specific.
Thank you very much.
All right. Michael, yes.
Follow-up question
for info. As your customer may be concerned about concentration rates for your info, is that possible for you to consider outsourcing to licensing to OSAT vendor or you will try to do info in the long term since you are developing 10 nanometer info?
Whether we are going to license this technology out to OSAT, it will depend on the business. At the beginning when we ramp it up, of course, it will be 100% inside TSMC. After that, we will work with customer, see whether the business need or not and whether we work with OSAT. There's a lot of flexibility and possibilities.
Well, it seems that we have answered everybody's questions successfully today. And then that way, we will end our conference here. Thank you for coming. Before we conclude, the replay of this conference will be accessible within 3 hours from now. Transcript will become available 24 hours from now, both of which will be available through TSMC's website at www.tsmc.com.
So thank you for joining us today. We hope we will you will join us again next quarter. Goodbye.