will use English. Please bear with us. Welcome to TSMC's first quarter 2015 earnings conference and conference call. This is Elizabeth Sun, TSMC's Director of Corporate Communications, and your host for today. Today's event is webcast live via tsmc.com. If you are joining us through the conference call, your dialing lines are in listen-only mode. As this conference is being viewed by investors around the world, we will conduct this event in English only. The format for today's event will be as follows. First, TSMC Senior Vice President and CFO, Ms. Lora Ho, will summarize our operations in the first quarter, followed by our guidance for the current quarter. Afterwards, TSMC's two Presidents and Co-CEOs, Dr. Mark Liu and Dr. C.C. Wei, will jointly provide a couple of key messages. We will open both the floor and the line for the Q&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 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. Now, I would like to turn the podium to TSMC CFO, Ms. Lora 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 first quarter, followed by the guidance for the second quarter. First, let me summarize our first quarter performance. In first quarter, we have achieved NT$ 222 billion in revenue, 49.3% growth margin, 39% operating margin, and NT$ 3.05 in EPS, which are all within our guidance range. On a year-over-year basis, first quarter showed very strong growth versus last year. Our revenue increased 50%. Growth 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 first quarter remained strong, but NT dollar was stronger than the assumption in our first quarter guidance by about 1%, which reduced our revenue by NT$ 1.9 billion.
Despite that, our first quarter revenue remained essentially flat versus fourth quarter last year. On the profitability side, growth margin was slightly lower than fourth 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 first quarter, communication and computer declined 9% and 10% sequentially, while consumer and industrial increased 32% and 19%, respectively. By technology, 20 nanometer revenue contribution decreased from 21% in the fourth quarter last year to 16% in the first quarter 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 two advanced technology, 20 nanometer and 28 nanometer, represented 46% of our first quarter wafer revenue, five percentage point lower than the fourth quarter last year.
Now, let's move on to the balance sheet. On the asset side, cash and marketable securities increased NT$82 billion to a record level of NT$519 billion at the end of the first quarter. On the liability side, current liabilities decreased by NT$13 billion as we paid down NT$17 billion of short-term bank loan. As cash continued to increase, the debt ratio has come down from the 30% level in the past two years to 28% in the first quarter. Working capital remained healthy. The accounts receivable turnover days decreased three days to 44 days. Days of inventory decreased by one day to 57 days. Now, let me make a few comments on CapEx and cash flow. During the first quarter, we generated NT$156 billion cash from operation and invested NT$49 billion in capital expenditure. As a result, free cash flow reached a record level of NT$107 billion.
Cash balance increased to NT$437 billion or about $14 billion at the end of the first quarter. I have finished my report on the financial part. Now let's turn to the second quarter outlook. In the second quarter, a combination of a key 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 second quarter revenue to be between NT$204 billion and NT$207 billion, representing a 7%-8% Q-over-Q decline. Gross profit margin to be between 47.5% and 49.5%, 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 undisputed 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 NT$15 billion gain from ASML share disposal is not a taxable item. After the second quarter, the tax rate will fall back to 11% in the third and fourth quarter, and our full-year tax rate will be about 14%. In addition to the second quarter guidance, I will also update you on our CapEx. Our 2015 full-year CapEx will be reduced by $1 billion. So we now expect our CapEx this year will be between $10.5 billion-$11 billion. The reduction mainly came from two areas.
The first area, we have continued improve our capital efficiencies, which allow us to spend less but still achieve the same capacity. 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 a lower CapEx. The $1 billion CapEx reduction will not affect our overall capacity build-up 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 two presidents will give messages. We'll start with Mark.
Yeah. Good afternoon. I will deliver the key messages. First, on the near-term demand. The demand of TSMC wafer remained strong in the first quarter. This led to our 1Q quarterly revenue to be essentially flat from fourth quarter last year. In the second quarter, some of our customer appeared too optimistic on their own market outlook. As a result, the inventory level of them appeared 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 second quarter demand will be below normal, and the quarterly revenue will decline by about 7%-8% from first quarter. Our near-term market demand will then be more moderate than we estimate in January. We now estimate fabless companies exit first quarter with inventory days higher than seasonal level.
We think it will be back to normal towards the end of second quarter this year. For forward-looking for full year, we will be continuously working on a double-digit revenue growth year for 2015. I want to comment a few on our long-term outlook. TSMC target our long-term revenue CAGR, compound Annual average growth rate to be 10% in the next five 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 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 the long-term outlook. I will 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 256-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 fourth quarter 2016, and to contribute billing in early 2017. This technology adopts our third-generation FinFET transistor and have scaling more than one 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, 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's 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. I would like to give you an update on EUV. We have been making steady progress on EUV.
Both our development tools, we have 2 NXE 3300, have been upgraded to the thick configuration of 80-watt of EUV power with an average wafer throughput of a few hundred wafers per day. We continue to work with ASML to improve tool stability and availability. We also are working with ASML and our partners on developing the infrastructure of EUV, such as masks and the resist. Although today the process of record of both 10-nanometer and 7-nanometer are on immersion 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. I 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 16FFC, a compact version of 16 FinFET+, 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 55-nanometer and 40-nanometer ULP will be the most cost-effective solution for low to mid-performance wearable and IoT devices. The 28 ULP and 16FFC will be the most power-efficient solution for high-performance IoT applications. In particular, our 16FFC 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. 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-inch to 12-inch 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. Recently, we have started production of foundry's first 40-nanometer industrial embedded flash technology. That will start from November last year. This technology recently passed automotive-grade qualification. That was in March for engine control applications. Above there was my update of new technology. I hand the podium to C.C.
Okay. Thank you, Mark. Good afternoon, ladies and gentlemen. I will update you the 28-nanometer, 20-nanometer, and 16nm FinFET status and also InFO business. First, 28-nanometer. This is the fifth year since TSMC's 28-nanometer entered mass production. 28-nanometer has been a very large and successful node for us. Our market segment share at this node has scaled 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 40-nanometer node. The demand for 28-nanometer is expected to grow this year due to the growth of mid- and low-end smartphone and as well as the second-wave segment such as radio frequency, circuit product, and the flash controller that migrate into this node.
Due to some customers' inventory adjustment, which we believe are only going to be for short-term, the demand for 28 nanometer in the second quarter will be lower than our previous quarter, resulting in 28 nanometer capacity utilization rate to be in the high 80s range. 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 compute 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 28HPC+.
For comparison, 28HPC+ will have 18% 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 at 28 nanometer outside TSMC. Since we have already shipped more than 3 million 12-inch 28 nanometer wafers, the learning curve has given us an absolute advantage in cost. Let me move to our 20nm 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. Recently, we have observed customers are planning the schedule for product migration from 20 nanometer to 16nm FinFET, started sooner than we forecasted 3 months ago.
As a result, even we continue to grow our 20 nanometers of business in the second quarter 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 about mid-teens. That being the case, we still forecast the revenue from 20 nanometer will more than double that of year 2014's level. 16nm FinFET. The schedule for 16nm FinFET high volume production remains unchanged. We will begin ramping in the third quarter this year. The ramp rate appears to be faster than we forecasted 3 months ago. Thanks to the excellent yield learning that we can leverage our 20 nanometers experience, also due to a faster migration from 20 nanometer to 16nm FinFET. In addition to good yield, our 16nm FinFET device performance also met all product specs.
That's due to our very good transistor engineering. We believe our 16nm 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 16nm FinFET is very competitive. As we said repeatedly, combining 20 nanometer and 16 nanometer, we will have the largest foundry share in year 2015. If we only look at 16 nanometer alone, we still can say TSMC will have the largest 16 or 14 nanometer foundry share in year 2016. Let me move to InFO business update. The schedule to ramp up the InFO in second quarter next year remains unchanged. We expect InFO will contribute more than $100 million, the quarterly revenue by next year, fourth quarter next year, when it will be fully ramped.
Right now, we are building a new facility in Longtan. That's a city very near to Hsinchu, where our headquarter 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. That's all. Thank you for your attendance.
All right. Thank you, CC. This concludes our prepared statements. Before we begin the Q&A session, I would like to remind everybody to limit your questions to two 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. For those of you on the call, if you would like to ask a question, please press the star, then one on your telephone keypad now. Questions will be taken in the order in which they were received. If at any time you would like to remove yourself from the questioning queue, please press the pound or the hash key. Let's begin the Q&A session.
Our first question comes from I see Andrew first, so Barclays, Andrew Lu.
Thank you, Mark and C.C. Wei and Lora. I have a couple of question. Thank you for Dr. Sun, because I haven't been picked as the first one for very, very long time. Earlier, C.C. Wei mentioned the 16nm FinFET ramp up was faster than earlier expected few months ago. Can you give us some color on the revenue contribution by Q4? Suppose it should be also few percentage point higher than a few months ago. I think earlier guidance, 9%, high single digit for Q4 revenue contribution from 16nm FinFET.
Andrew, I think you already answered the question by yourself, a few % more.
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 16nm FinFET versus competing technology is about 10% performance better. 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 talk about 16 FinFET+. That is our second 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 meant.
How? Because of transistor?
Yeah, transistor structure, transistor engineering.
Compared to competing, is it competing the current competitor's solution or the next generation competitor's solution? For example, LPE versus LPP, something like that.
The fastest one. The fastest.
Their best one.
Yes.
Thank you.
All right, next question will go to Bank of America Merrill Lynch, Dan Heyler.
Thanks, Elizabeth. A couple of quick questions. Congratulations on the 16-nanometer success and faster yield ramp than previously planned. As you go to convert your 20 capacity to 16 due to those better yields, I guess two parts to the question. What's the implication on margin as you're converting a fab from I know you do this a lot, but this is a big transition with limited products. As you're going from 20 to 16, what are the implications on margin? Do you take maybe one 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 the later stage. Conversions, it cost less than adding new capacity. When we see a node need to be converted, if we can do it faster, that mean we can spend less CapEx. That's actually how this TWD 1 billion reduction coming from. In terms of margin, actually, it has multiple factors. Depreciation, of course, being number one. Other thing is how fast can you bring up your yield? How does economic scale, get into play? From what we have seen right now, we believe the 16-nanometer margin will be getting better than our 20-nanometer margin because we have the basis of 20-nanometer.
As we have said many times, we don't want to separate 20 versus 16, and you guys always ask 20 margin and 16 margin separately. I would say if we combine 16 and 20 margin, it will be a pretty good progress. We have seen 20 has progressed quite well, and 16 will be even better. Although this 20 plus 16 will still have some small dilution to TSMC in year 2015 and 2016. For 2015, maybe 2-3 percentage points. In 2016, will be more 1-2 percentage points. We are targeting to achieve corporate level margin by year 2017.
Okay. Thank you. Just as a quick follow-up on that, does 20 nanometers still grow from its lower level in the first quarter sequentially? In absolute TWD terms, can you maintain the current level throughout the year? I think you implied that in your guidance. I think you said mid-single digit, just to confirm that. Is that throughout the year? Does 20 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? You have some customers not successful on 20 products and maybe didn't succeed, and some customers more successful. As you put everything together, I'm wondering if 20 kind of stays at the current revenue level.
In my statement, I say that contributing 20% revenue cannot hold because of customers' demand. I also say that second quarter, we continue to increase the 20-nanometer business. That means in the second half, no, we cannot maintain the same level of business.
In TWD terms?
In dollar terms.
Okay. Cannot. Okay. My second question was relating to 20 nanometer. Here, you certainly have a lot of growth in 16 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. I am wondering, could you elaborate on new areas that are actually creating new demand at 28 such that you can continue to grow 28 next year? Do you think you can grow? I think previously you said maybe hold it at current levels, even with 16 growing. Just maybe revisit that question. Thank you.
Okay. To answer the question, I think the high-end smartphone will move to 16nm FinFET. However, the mid to low-end smartphone will stay in the 28 nanometer because that's very cost-effective. Mid and low-end smartphone continue to grow significantly. 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 using as example, move into 28 nanometer. Summing it up, I think the 28 nanometer's demand continue to grow while we move into the 16nm FinFET for high-end smartphone.
Excellent. Thank you. As you add value on 28, is the 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. At the same time, you're adding a lot of value there. Maybe give us a little bit of sense of the 28 nanometer kind of pricing environment next year. Thank you.
All I can say is that we remain More very competitive in our value proposition. That give you some idea about the capacity support, yield, and the performance, and also including pricing. All combined together, we are better than the competitive.
All right. Next, questions will be coming from Deutsche Bank's Michael Chou.
Hi. Two questions. First one is for EUV. Mark has highlighted your EUV progress. Does that imply you may consider using EUV in the second stage of your 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 one layers that helps your yield improvement. This opportunity, both in the quality and the cost, always exist, so long as EUV's productivity come to the threshold point. As you notice, on 10-nanometer, our capacity built were largely done in 2016 and 2017. The 2018, 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 would 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. EUV can be more effective in reducing the cost and improve the yield, for example. That's our current status. Today, EUV is still in the engineering mode. The productivity, as you heard, still have some gap for practical insertion of the technology. We're still working on in that mode. Although we have one day, a performance up to 1,000 wafer per day, but I was talking about average, still a few hundreds. We need to get to more than 1,000 to consider the 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.
On Q2?
Yes.
Okay. Q2, I have just said there will be 7%-8% decline. I think mainly it's from a communication segment. As you can see, my presentation, the communication, industrial, and standard, both segment constitute about 80% of TSMC revenue. The decline mainly come from those two segments.
Thank you.
All right. Next, the questions will be coming from UBS, Eric Chen.
Hi, Mark, C. C. Wei, Lora, and Elizabeth. Okay. My first question probably go to Lora, regarding to the CapEx. You just mentioned that we cut the CapEx by TWD 1 billion, 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 it?
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. Our overall year, 28 capacity will still grow.
How many % year-over-year growth we talk about?
Well, we will not specify the %, it is still growing, okay? With the combination of both. Okay.
Okay. Maintain the original schedule, right?
Yes.
Okay. How about the depreciation growth, given that we cut TWD 1 billion CapEx?
I think I have said in last quarter, we expect total depreciation increase will be around 20%.
With this TWD 1 billion cut down, the increase will be in high teens, will not be 20%.
Okay. High teen. Okay. The other question, probably go to Mark or C.C. Wei, regarding to our investment in China, any update or any improvement or any logic behind. The some newspaper talk about we would like to build out a fab our own. Any strategy behind? Thank you.
Okay, let me take this one.
Okay.
We have an eight-inch fab, it's running very well in Shanghai, and it's making profit. We are growing our China business quite nicely in the past few years, now accounts for about 5% of TSMC revenue. We have seen a few very big fabless company engaging with TSMC more closely. We have sales office in the north part, the middle part, and southern part of China. 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 Hsinchu fab in China?
We are aggressively evaluating what's the best way for us to do it.
On your evaluation, what kind of geometry you put a first priority for your Hsinchu fab in China?
It's probably too detailed. We are still evaluating. Okay. We will let you know when we have a better picture. Okay.
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. To what extent do you see a speed up in second half? As you go to fourth quarter, how broad is the customer base? Is it a single key product, or are you seeing broadening out of 16nm FinFET as you ramp that in fourth quarter?
The second quarter scheduled delay is, we see in the mobile product area in several of our customers. It's not one single customer. 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 second quarter. We think the end market of smartphone is still healthy growth this year. Therefore, the second half will resume the growth. More importantly, our 16nm FinFET technology will start to ramp in the second half. That will contribute a lot of growth, more than the 20 nanometer shipment reduction. Those two factors.
Okay.
Okay.
The follow-up question, I'll ask on the 16, if that's multiple customers contributing this year or if it's a single key product. The second question I wanted to ask about the internalized silicon. One of the impact was, 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 does that impact versus the broader kind of smartphone weakness in inventory. 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 second quarter, yeah. As far as the future, how that internal captive portion will take away from the foundry, it's really hard to say, because each product, they always have some competition considerations. This year, the two big smartphone sells very well, and that squeezed the Android non-Samsung, non-Apple phones at this point. That part, I think will recover. This is probably a competition status for the period of time only. We know that we do not compete with our customers. 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. We will try to produce the best product with our customer to compete, yeah.
Thank you.
All right. Next one in line actually is Citi's Roland Shu.
Thank you. It is like Mark, C.C., and Lora. My first question is on, given the fast ramp for 16 nanometers, so are we going to see meaningful revenue contribution for 16 in 3Q?
We ramp up in third quarter this year, but it's many layers of process. About one month is a back end. In 3Q, we expect just a revenue, just very minimal.
We will start reporting 16 nanometer revenue from 3Q?
Yes.
Okay. Thank you. With this faster ramp on 16 nanometer, 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 16 nanometer this year?
I only can say that it is better than we expected.
Okay. Okay, thank you. My second question is, I think Intel cut CapEx this year. Also we also lower CapEx spending by TWD 1 billion by converting more 20 nanometer to 16 nanometer. I think this is ASML also today, they also say this is a rising trend to convert the [N−1 and N nodes to N+1 nodes] going forward. Question is, will this trend continue? Whether or not, this year, CapEx spending is peaking out in the near term to TSMC, the overall CapEx spending. Because I think Mark also said for 7 nanometer, we probably will also going to use similar tool as 10 nanometer as well. With this continued tool conversion, whether or not the CapEx spending is peaking out this year. Thank you.
It's probably too early to say that, peaking out. We are still ramping our 16 nanometer, and we're going to spend more money next year in 2016. About 7 nanometer, and we will continue to spend money. I won't say it's peaking up for now.
Okay. How about the capital intensity? What's the longer-term view or the target for the capital intensity?
What I can say now is capital intensity did come down from previous year at close to 50% to a 40% range. At least for now, I can say we'll be at this 40% range. More specific will have to wait for later time. Okay. Mm-hmm.
Thank you.
All right. In the order of questions received, I have to go to Morgan Stanley's Bill Lu.
Yeah, hi. Good afternoon. Thanks for taking my question. This is sort of a follow-up to Randy Abrams' question. 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, over the last five years, we've got IDM, zero growth. Fabless, 8%. System houses above 20%. Right? System houses, I'm excluding memory, just the system LSI, the logic portion. I think that might be slightly conservative. Now, that's a pretty big change. I'm wondering how you should think about that. 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 houses versus the fabless, how do you think about that? Thank you.
Yeah. Indeed, in the past five years, the system houses sourcing and foundry business to us has a much higher growth rate, as you quoted. Remember, that came from a very small base. Okay. We welcome system house sourcing because we consider them our fabless, too. Fabless company, the company without fab, bring 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. Also the size of the business. If the business is bigger, of course, you probably can enjoy a slightly, a little bit better price. 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's going to benefit, right? When the system house is outgrowing the industry, some of them have their own fabs. Is it a positive or a 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?
Oh.
Overall, system house could be an IDM, or they might outsource.
Okay. Our system houses are considered fabless system houses, what you just quoted. Meaning it's a fabless system house. We have very little business from the system house with their own fabs.
Sure.
So long as a fabless company, how well the business of that system house depends on their business competition.
Thank you. I guess we take it offline . My second question, I'm not trying to pin you down, Mark, you had said earlier that the inventory correction ends by 2Q, second half of the year will be more normal. Now, typical normal seasonality, second half is better than first half. Are we saying that second half of this year, revenue is going to be higher than first half?
Great. Yes. That what we see. Second half this year will be better than first half.
Great. Thank you.
All right. Next one will be from HSBC, Steven Pelayo.
For the last three years or so, TSMC has been growing 20%, 30% year-on-year revenue growth rates. First quarter, 50% year-on-year. 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, low single digits year-on-year growth rates. If we exclude maybe 16 nanometer or above 16 nanometer, maybe it's flatter 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?
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 now?
We think the semiconductor growth this year currently is indeed. We adjusted down from 5% earlier to 4% at this time.
To 4%.
Yeah. We think it's really due to the macroeconomic situation around the world today. Therefore, the foundry growth rate, we'll adjust it down, too. We are looking at about 10% range.
10%, two points lower.
That's why we revised the view on the current semiconductor growth.
I just want to get some specific numbers there. For you, Lora, spending $1 billion 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 billion in cash, but now it sounds like you got an extra billion 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 capability to generate free cash flow. 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. The cash may go up, and we have several way to consider. Mark was mentioning we have a new target for the 5 years. We want to grow 10% in revenue and EPS. For that, we need to continue to invest, both in capacity and also in R&D. We need to have some bullet to do that, too. Okay, thank you.
Can I just quickly add? How much cash do you need on your balance sheet to support a 10% revenue CAGR over the next 5 years? Is $14 billion enough?
It's difficult to make a quantify, depend on how much we need to spend to keep that 10% growth. I would not answer this question for now.
All right. I think it's about time for us to actually go to the line. We will now take our next question from the call. Operator, please proceed with the first caller on the line. The first question comes from the line of Mehdi Hosseini from SIG. Please ask your question.
Thanks for letting me ask question. Two follow-up. You talked about converting 20 to 16 nanometer. Can you elaborate on the magnitude of this conversion? I have a follow-up.
Without going into specifics, 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 install base of the equipment, and therefore, would that help you with a one-time positive impact to gross margin?
I don't think it will help our one-time improvement 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. Then just one quick follow-up on the CapEx cut. 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 two 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 pure savings. Another thing is the conversion faster from 20 to 16. As we see a customer migrate to 16 faster than we thought. There will be some excess capacity for 20 nanometer going forward if we don't do it. It's not a magic, at the very beginning, we know these 2 nodes has very high commonality in equipment. The commonality is about 95%. It's just a matter of timing, what's the timing to do this transition, we decide 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. To the line, the next question comes from the line of Brett Simpson from Arete Research. Please ask your question.
Yeah, thanks very much. My question on 10-nanometer, I know it's still 18 months away from ramp up, can you talk about how fast this ramp might scale relative to 20 nanometer or 28 nanometer? As you ramp up 10-nanometers for high-end smartphones, would you expect low-end smartphones to start migration from 28 to 16nm FinFET in 2017? Thank you.
All right, 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?
Yeah. Just to add to that, Elizabeth, how quickly will 10-nanometers scale up relative to the scaling of 20 nanometer the ramp up of 20 nanometer.
All right.
in the near term?
The profile of the 10-nanometer ramp, will that be steeper than the profile of the 20 nanometer or the 28 nanometer?
Yes.
Yeah. Thank you.
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 nanometer? I think this is up to our customer's product portfolio. We definitely know a lot of customer is looking at 28 nanometer to do as a low-end. The specification, the smartphone processor specification changes constantly. What portion of that product will move to 16 nanometer? We think definitely they are some portion, but how big a portion? We 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 as we do in 16 nanometer and as we do in 20 nanometer.
Great. Thank you. 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 16nm FinFET for the same chip later this year. We haven't really seen a single chip get picked out on two new processes at the same time before in the industry. My question, how does this really work between the two foundries? Does it mean that one customer can adjust dynamically month to month how they allocate wafers between you and Samsung? How might this work? Thank you.
Brett, I think I try to understand your question while the photographer's camera is very noisy here. Your question seems to say that there is a customer that appear to be working with two different foundries on the 14-nanometer and 16 nanometer node. The products are about to arrive. You would like to understand how this customer will be allocating month by month the production or the orders with both of the two 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 16nm FinFET has been very competitive, we did not know the customer, how they're going to allocate. I cannot even make any comment on that.
Brett, did you hear the answer?
Yeah.
Okay.
Yeah. Maybe instead, if I can perhaps just ask, you've previously said 16nm FinFET will be high single digit % of sales in Q4. 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? Yeah. Andrew suggests that whether it will be 12%, right?
Thank you.
Okay, now we come back to the floor. The questions will be coming from Goldman Sachs, Donald Lu.
My first question is about the InFO. Just to confirm, you said by Q3 next year, the quarterly revenue from InFO will be TWD 100 million. Also Q4, sorry. What would be the gross margin for this business? Also, how many customers you have? That's question number one. 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 ask about what is the margin. The margin is in line with TSMC's back-end business. That I can say. I am pretty sure for that. How many customers? That I cannot tell you. Many.
Many? You will have more than one customer next year?
Oh, yeah.
Thank you.
To answer your question, we will not offer eight nanometer.
Okay. Next, we'll go to J.P. Morgan's, Gokul.
Thanks for taking my question. First of all, on 16 nanometer, since Dr. 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 second wave demand for 16 nanometer? A related question would be, with your combined 20/16 nanometer capacity plan as it stands right now, how much below 28 nanometer would it be? It would be at the same level of whatever you built for 28 nanometer in the last five years? Thanks.
You talk about the second wave for 16nm FinFET?
Yeah. What is the visibility that you have? Is it going to be really strong? You mentioned that a lot of the cost-sensitive customers would still stay on 28 at least for next year.
Oh, okay. For 28 nanometer, I said a bit to low-end this year, next year probably, that smartphone was staying 28 nanometer because it's very cost-effective, and performance-wise, it's very good. For 16nm FinFET, I think that people will start to move with their product plan, and some of the mainstream smartphone will move into 16 nanometer. That's for sure. In addition to that, we also see improving our 16nm FinFET ultra-low power, Mark just mentioned. That will have a lot of application on every product. Low power consumption is one of the advantage. That will be our second wave of 16nm FinFET.
Okay. When you think about capacity planning for 20 nanometer combined with 16 nanometer right now, given that you're at accelerated conversion, would you be building similar level of capacity as 28 nanometer that you've built over the last three, four years?
Well, that is too early to say right now. We expect 16nm FinFET is a long-last node and very similar to 28 nanometer.
Okay, thank you.
All right. Daniel Heyler has a follow-up question. Dan?
Thank you, Elizabeth. On 16, this FinFET Compact, which is getting introduced, when would we expect to see that in volume production?
16nm FinFET?
Compact. FFC.
FFC.
FFC. That will be ready next year, and we expect that high volume production start probably two years later. That's year 2017, 2018, we'll have reached the high volume.
The cost-down version for mid-end phones of FinFET that you alluded to, plus low power, when is that available?
Probably in 2017, second half.
Okay, great. Then on just number of customers that are in volume production in the third quarter and fourth quarter of 16nm FinFET, just the number of customers that are in volume production?
Oh, you ask a very specific question now. We have a few customer in the volume production. Not to say, I cannot tell you it's 10, 20, or those kind of shit, no.
A few meaning three?
Too specific.
Thank you very much.
All right, Michael. Yes.
Follow-up question for InFO. As your customer is concerned about concentration risk for your InFO, is that possible for you to consider outsourcing to licensing to also venture, or you would 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 OSATs, 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 the OSATs. There's a lot of flexibility and possibilities.
Well, it seems that we have answered everybody's questions successfully today, 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 three 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. Thank you for joining us today. We hope you will join us again next quarter. Goodbye.