Q3 2020 Taiwan Semiconductor Manufacturing Co Ltd Earnings Call
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Good afternoon, everyone welcome to TSMC is third quarter 2020.
Earnings Conference call. This is Jeff Su, TSMC director of Investor Relations and your host for today.
To prevent the spread of COVID-19, TSMC is hosting our earnings conference call via live audio webcast through the Companys website at Triple W. Dot TSMC dotcom.
Where you can also download the earnings release materials if you.
If you are joining us through the conference call. Your dial in lines are in listen only mode.
The format for today's event will be as follows first TSMC, Vice President and CFO Mr. Wendell Hong will summarize our operations in the third quarter 2020, followed by our guidance for the fourth quarter 2020 after.
Afterwards, TSMC CEO, Dr. Cc Wei and Mr. Hong will jointly provide the Companys key messages then we will.
Then we will open the line for Q in a.
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 in our press release.
And now I would like to turn the call over to TSMC CFO Mr. went along for the summary of operations and the current quarter guidance. Thanks.
Thank you Jeff good afternoon, everyone.
Third quarter revenue increased 14.7% sequentially and NT dollars or 16.9% in us dollars as we saw strong demand for our advanced technologies and special technology solutions, driven by Fiveg smartphones, HPC and Iowa.
Related applications.
Well its margin increase 0.4 percentage point sequentially to 53.4%, mainly thanks to a much higher level of utilization, partially offset by the margin dilution from five nanometer ramp and unfavorable exchange rate.
The operating expenses increased by 7.4 billion NT, mainly attributable to a higher level of development activities for end four and three technologies and onetime expenses to facility our Ics Stan.
Extension in Shinjuku.
Therefore operating margin slightly declined by 0.1 percentage points sequentially to 42.1% over.
Overall, our third quarter EPS was 5.3 anti and our OE was 31.3%.
Now, let's move on to the revenue by technology five.
Five nanometer process technology contributed 8% of wafer revenue in the third quarter, while seven nanometer and 16 nanometer contributed 35 and 18% respectively advance.
Advanced technologies defined as 16 nanometer and below accounted for 61% of wafer revenue.
In terms of revenue contribution by platform.
Smartphone increased 12% quarter over quarter to account for 46% of our third quarter revenue.
HPC increased 25% to account for 37%.
Ian increased 24% to accounted for 9%.
Automotive decreased 23% to account for 2%.
Digital consumer electronics decreased 24% to account for 3%.
Moving on to the balance sheet, we ended the third quarter with cash and Mac marketable securities of 742 billion NT on the.
On the liability side current liabilities decreased by 27 billion NT, mainly due to the decrease of short term loans and the decrease of current portion of bonds payable.
Long term interest bearing debt increased by 146 billion NT, mainly as we raised $145 billion of corporate bonds during the quarter.
Our financial ratios accounts receivable turnover days decreased four days to 40 days, while days of inventory increased three days to 58 days, primarily due to end five ramp.
Regarding cash flow and Capex during the third quarter, we generated about 190 billion NT in cash from operations.
Spent 99 billion in Capex and distributed 65 billion for fourth COVID-19 cash dividends.
Short term loans decreased by 17 billion NT, while bonds payable increased by 136 billion NT, mainly due to the bond issuances.
Overall, our cash balance increased $137 billion to 604 billion at the end of the quarter.
In us dollar terms, our third quarter capital expenditures totaled 3.4 billion.
I have finished my financial summary, now, let's turn to our fourth quarter guidance based on the current business outlook, we expect our fourth quarter revenue to be between $12.4 billion and 12.7 billion us dollars.
Presenting a 3.4% sequential increase at the midpoint.
Based on the exchange rate assumption of one us dollar to 28.75 NT dollars.
Gross margin is expected to be between 51.5% and 53.5%.
Operating margin between 40.5% and 42.5%.
Now I will hand over to the call TCC for his key messages secular window.
Good afternoon, everyone.
We hope everybody is staying safe and here see during this time now.
Now, let me start with our near term demand and inventory.
We concluded our third quarter with revenue of energy to handle 46.4 period, while us down to 12.1 billion, which was approved our guidance is mainly due to better demand across all our platforms. They are now forecast three months ago.
Moving into fourth quarter Twentytwenty.
We expect our sequential cores to be supported by strong demand for our industry, leading five nanometer technology driven.
Driven by Fiveg smartphone launches and SPG related applications.
On the inventory front, we forecast our fiber as customers, our overall inventory to exit the year above the seasonal level.
As the supply chain continues to make efforts to ensure supply chain security and actively preparing for the new fiveg smartphone launches.
Looking ahead, we are.
We expect to our customers our overall inventory to remain above the historical seasonal level for longer period of time.
Given the industry, it's a continual need to ensure supply chain security abilities that lingering uncertainties.
For the full year of Twentytwenty, although Colby Nitin continue to breathe some level of impact to the global economies. We also observed Colby.
COVID-19 is accelerating digital transformation.
While fiveg and SPG related applications continue to drive semiconductor content in Richmond.
We now forecast to overall semiconductor market, excluding memory to increase mid single digit percentage.
While foundry industry cores is expected to be close to 20% year over year.
For TSMC, our technology leadership position enable us to capture the industry make our trend of Fiveg and SPC we.
We expect to outperform the foundry revenue growth and core by about 30% in Twentytwenty in us dollar terms.
Next let me talk about our Inphi ramp up and four properties Ts.
TSMC site end five is a foundry industries are most on a viable solution with the best the PPA.
In five is already in volume production, which could yield while we.
While we continue to improve the productivity and performance of the year, we tours to further enhance our leadership in EU, we technology due to.
Due to the robust demand for Fiveg smartphones and HPC applications.
I will reaffirm in five walk contributor about 80% of our wafer revenue, even 2020, and we expect even higher percentage in 2021.
Any forward leveraging the strong foundation of yen file to further extend our five nanometer family.
And for use as straightforward migration from Inphi with compatible design rewards, while providing for the pro Formas power intensity.
Enhancement for the next wave five nanometer products.
In for response action is targeted for Q Twentytwenty, one and volume production in 2022, we saw.
We saw continued technology enhancements, we expect our five nanometer family to be large and long lasting node for TSMC.
Now I will talk about our industry status in.
Ensue up another four lower stride form our inphi with up to 70% logic attached again up to 15% pro forma skin and up to 30% power reduction as compared with three and five.
We have chosen finfet transistor structure for our industry technology too.
To deliver the best technology maturity performance and cost for our customers. Our entry technology development is on track we.
With good progress.
And so you are offering complete platform support for both mobile and PC applications.
Rich production is scheduled in 2021.
Volume production is targeted in second half of 2022.
Our three nanometer technology, what be the most advanced foundry technology impose PVA and transistor technology. When it is introduced reserves. We are confident our three nanometer what be allowed another.
Gotcha and long lasting node for TSMC.
Finally, our talk about the case at the C suite the fabric care sales. He has people have an industry, leading and comprehensive wafer level suite, the IC technology Road map.
To enhance system level performance.
Our differentiated triplets and heterogeneous integration technologies drive better power efficient and smaller form factor benefit for our customers.
Shortening our time to market.
These technologies, including chip steak in solution, such as site, so I see as well as our vice packaging solution, such as a meaningful and coal worse.
We are consolidating these offering under one umbrella and naming it TSMC CD fabric.
As the industry continue to shift in operations to enhance system level performance is suitable for brick wall complement our advice technology too.
To unleash our customers are in operation.
We expect revenue from our backend services, which include impose.
Advanced packaging and testing to grow at a rate slightly above the corporate average in the next few years.
Now, let me turn the microphone over to winter.
Thank you.
Let me start by making some comments on our profitability.
Our third quarter gross margin exceeded the high end of our guidance to reach 53.4% mainly.
Mainly as we saw a much higher than expected overall capacity utilization rate in the third quarter.
That helped to offset the margin dilution from the initial ramp up of our five nanometer technology.
We have just guided fourth quarter gross margin to decline by 0.9 percentage points sequentially to 52.5% at the midpoint by me.
Primarily due to the margin dilution from the continued steep ramp up of our five nanometer and a less favorable foreign exchange rate in the fourth quarter.
Looking to 2021, we expect a strong ramp up and five to contribute a higher percentage of revenue as compared to 2020.
You Ray of Nvfive continues to improve similar to prior ordinance, we forecast M gross margin to take seven or eight quarters to reach the corporate average level.
The us and five is expected to dilute our gross margin by about two to three percentage points for the full year of Twentytwenty one.
As a reminder, the following six factors determine TSMC is profitability.
Leadership technology development and ramp up pricing cost reduction capacity utilization technology mix as well as foreign exchange rate.
Taking all these factors into consideration, we believe a long term gross margin of about 50% is achievable.
Now, let me talk about our capital budget for this year are.
Our business outlook is supported by strong demand for our industry, leading advanced technologies and specialty technology solutions, driven by the industry Mega trends of Fiveg and HPC related applications.
In order to meet this demand and support our customers' capacity needs. We now expect our full year 2000 project capex to be about 17 billion us dollars.
Now I will make some comments on our corporate bond issuances and capital structure.
The multi year Mega trends of Fiveg related and HPC applications are expected to continue to drive strong demand for our advanced technologies in the next several years.
Given the macroeconomic uncertainties. This year current low interest rate environment and the ability to diversify our funding sources TSMC is board of directors has so far to approve the issuance of 120 billion in NT dollar denominated corporate bonds.
And $4 billion in us dollar denominated corporate bonds year to.
Year to date, we have issued $89.5 billion in NT dollar denominated and 4 billion in us dollar denominated corporate bonds with favorable pricing terms.
With our solid financial performance strong balance sheet and cash position and capacity to take on debt, we are able to aggressively invest in our future to enhance our technologies and capabilities.
This enables us to continue to outgrow the semiconductor industry through the cycles.
With our disciplined capital management, we remain committed to a sustainable cash dividends on both the annual and quarterly basis.
Thank you went off this can.
This concludes our prepared statements.
Before we begin the QNX session I would like to remind everybody to please limit your questions to two at a time to allow all participants an opportunity to ask questions should you wish to raise your question in Chinese I will translate it 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 zero than the one on your telephone keypad now quest.
Questions will be taken in the order in which they are well received.
If at any time, you would like to remove yourself from the question in queue. Please proceed zero Q.
So now let's begin the Q and a session.
Operator can we please proceed with the first caller on the line.
The first caller on the line is all that Im Okay go ahead.
Well, congratulations great quarter and thanks for taking my question. My first question on Capex and cash.
And then bill.
We'll see.
Yes, let me comment.
Our men at 37% cap it they could we talk a little bit about how we should think about capital again.
Capex going forward at least the next.
Okay.
Okay like the investment cycle.
Going to be any much impact going into next year opening it up eight and share option number one way to look at it.
Let's take a benefit.
My second question is on and I think if we add.
Indicated that right now.
Okay and large floor.
It did not have a number of $8 and seven and because of the historical high.
No game, changing and we'll be talking about.
Let me talk a little bit about the end side.
And Kevin in terms, both look at Applebee's.
Absolutely and that probably in the next.
Yes.
Thank you.
Okay go call. Thank you very much we'll take your questions 1.1. Please allow me to summarize your question. Your first question relates to our Capex and capital intensity.
You point out that with the guidance that our capital intensity. This year in your estimation is probably around 36% to 37%. So your question is how should we think about capex and capital intensity in the next few years.
If we cannot give a quantitative number directionally, how do we see capex and capital intensity and how does this tie in with our recent things like such as bond issuances and fundraising hottest that factor and that's the first question, maybe CFO window can address yes, cocoa our capital intensity.
As you are right this year will be lower than 40% in the next several years longer term, we expect the capital intensity to be around mid 30 percentage point. However, having said that there may be years, where capital intensity is higher if we see.
The strong demand for our.
Technologies, our capacity and we decide to invest.
Okay and then your second question Coco. Please allow me to summarize again is really regarding to our five nanometer.
We have said that it's a long and large node.
But that we know the number of tape outs of and fibrosis and seven may be lower. So your question is we can end five exceed and seven.
Do we believe five nanometer can be a bigger nodes and seven in terms of revenue and capacity.
Well, let me say that.
We don't come in and how many tape outs, so far but we continue to see strong tape out activities at Inphi from both PC and smartphone applications and the revenue for this year, which has served Benjamin impression of total wafer revenue.
And next year it will be.
Even.
[music].
Hi, again in October.
Gross too or.
Or 20 years functionality.
The exact number we are still not there.
April two coming back.
But I can assure you that our filings.
Then file nanometer family walk you another b at long last in order for TSMC.
Okay. Thank you.
Thank you Gokul.
Why don't operator can we move onto the next caller. Please.
That's why we have Randy Abrams participation.
Okay all right. Thank you.
My first question I wanted to ask.
Well no you raised gross margin originally it was 50% could you discuss now where you're saying it could be up.
Could be above 8% the factors driving that change.
Could you clarify on that two to three point impact on five nanometer I think you already have that impact so does that imply for next year pretty soon.
Pretty similar to the type of gross margin you're running now are potentially even better.
Okay, Randy I summarize your question your first question.
In regards to I believe our gross margin and.
And long term gross margin.
Youre asking that we raised our target.
[music].
But.
I think we as Wendell said.
50% is achievable for us, but you're also asking as part of that the dilution from five nanometer.
How will that impact on gross margin next year, and where should we I guess be thinking about gross margin for 2021, okay.
Randy maybe let me answer this like this we have a very high gross margins in the third quarter and we believe we will continue to have a pretty high margin in the fourth quarter.
And.
Main reason is that we are enjoying a very high utilization across almost all the notes at this moment, but.
But the high very high utilization may not continue for ever.
So our long term growth target our long term growth goal for our gross margin continues to be above 50%.
In terms of dilution from end five.
We see the dilution of Inphi for next year to be around two to three percentage points similar to previous notes.
And remember that the Inphi will account for a much bigger.
Percentage of our revenue next year, so as we ramp up quickly the dilution will continue to exist. However, we are still expecting that it will reach the copper margin.
In seven to eight quarters.
Okay, great. Thanks, I misunderstood I thought I heard the word above perfect. Thanks for the clarification of second question.
Recent you extra restriction.
SMS fee I'm curious, if you're seeing any additional diversification or increase our effort.
For a bit here and given they're more on the mature and Eric how you're positioning it if you are seeing that extra cake.
Because I saw the mature nodes.
Okay, Randy Let me just summarize your second question. Your second question as regards to the recent restrictions on as some IC and Randy is wondering whether we are seeing any types of diversification or inquiries from customers in regards to business and as you know prime especially at the mature nodes.
We're already.
Let me answer the question.
Actually we are still evaluating the impact to the semiconductor industry.
Okay.
Due to the gain on sale.
Nick.
Well, let me say that our capacity planning and all our Capex a continue based on the long term demand profile that is underpinned by the industry may fluctuate such as Fiveg related and HPC application.
Alright, it doesn't really answer your question.
Yeah, or or maybe just one quick but after the mature nodes, which are running tight across the industry I'm just if if it farragut, there's an incremental shirt.
How well could you handle incremental EBITDA for Tim I guess type of Keith if it were to come through so Randy is asking if we were to see a surge in demand at a mature nodes, how ready or how do we have capacity to take on more handle this type of surge demand.
Well, we've continued to what we saw our customer dynamic Cody.
And we try our best to to meet their demand at all I can say for today.
Okay, great. Thank you okay. Thank you Randy operator can we move onto the next caller. Please.
The next one.
Sure. So some say let's say.
Hey, Thank you good afternoon charitable my first question.
But it is slightly higher than usual inventory, which may be a new door because of departure Cheryl structure, how ordinary occurred about how the TSMC assess customers overbooking were poor behavior and an attitude in particular.
Sorry, smartphone Oems aggressive procurement apparel, assuming always got debt next year, how do you assess that Christopher potential overbuilt inventory quick among potential future bookings talking correctional sometime next year.
Good question. Thank you okay.
Okay. Sebastian let me repeat or is tried to summarize your question. Your question is basically related to the inventory and you want to ask how does TSMC assess the risk that theres over booking.
In light of the restrictions on highway and therefore, what type of levels or magnitude of inventory overbuild is there and does this create a risk of inventory correction sometime next year.
Well, let me share with you our view on this inventory related issues.
First I want to say that due to the pandemic actually on the digital transformation has been accelerated.
And does that create a demand.
On Fiveg and HPC related products.
And.
So for the long term longer term basis, we do expect our customers our overall inventory to remain above the seasonal level for longer period of time.
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Maturity, partly because of the way.
They have some concern among industries.
Supply chain security.
And due to the uncertainties.
And so that will be.
[music].
The inventory high level inventory was up.
Such can continue for longer period of time that we can say that.
Okay Sebastian.
You have a second yeah, all our sorry.
Yes, okay.
All right anyway.
Actually what I mean.
Anyway. Thank you for further efficiencies and my second question is.
All the other as you can see pictures.
Well the Arkon beneficiary shared credit Mark that you see a lot of the grow this quarter and also prepare trial next quarter and driven by the X. sharing digital transformation you just say at let Buck.
Okay, and then Rick and were falling home demand like to stay for longer and also to continue to show dead on TSMC against our yard and when do you expect.
As if your revenue.
Im sure to crossover which upon revenue.
Percentish.
Obviously that part and a mix shift will probably try to queue. Thank you.
Okay. So.
Sebastian let me just.
Summarize your question, which is regarding to our HPC platform business you point out that there is the trends of the accelerated digital transformation.
And the work from home and also our market share gains versus IDN. So you want to know when do we see our HPC platform revenue crossing over.
With the smartphone or others to become the primary.
Okay.
Let me answer the question.
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We do see HPC platforms of growth rate is higher in among our four platform, which is our smartphone HPC automotive and aiotv.
And.
In the next few years, we continue to expect while we forecast our ESP is of course will be how again the copper at the level, where you are cross over.
I don't make any comment right now.
Okay. Okay. Thank you Sebastian.
Operator can we have the next caller please.
Excellent we have first flow from Goldman Sachs.
Hi, guys.
The f. all the fighting our penetration rate and what is the latest forecast for the quarter back on growth pipeline connection rate case, other funding or maybe a little color on what Paul. So we also see that some of the telco and slowing down they are fighting a pacesetter info.
And what kind of impact are we see at this moment.
Okay. Bruce your question is regards to Fiveg and smartphones you want to know.
What is the smartphone growth and Fiveg penetration rate for 2020 as was 2021 and then in light of the telecoms potentially slowing down the deployment.
Correct, yes, okay. Okay. Thank you ill, let me answer the question.
We continue to expect the faster penetration of Fiveg smartphone as compared to Fourg.
And for this year, we still forecast.
A high teens, so penetration rate and next year, even higher much higher let me say that and Thats all we have today.
Oh and any impact on the help of our office Apple Oh I can't go all countries in all regions are preparing to build up our the infrastructure right now and I.
The next.
Next year, even now the 100% completed but.
All the reach in all the countries our war.
For now, though for Fiveg Forum being introduced and our creator a higher percentage penetration rate.
Okay and then my next question.
Another a lot of the clarified that the China revenue contribution only included a thriving company, 10% to 28 and the third one.
So once region, well, where we see the strongest growth in the fourth quarter.
Okay. Bruce your question is regards to our revenue by geography.
And you want to know for the fourth quarter.
Which region will contribute the most growth in the fourth quarter.
Okay, Bruce we're not prepared to comment on geographic allocation among revenues in the fourth quarter I can share with you that we expect.
The platforms that will grow in the fourth quarter will be smartphones and automotive.
And the other two were likely to be down.
Okay understand thank you.
Thank you Bruce operator can we move onto the next caller. Please.
So.
Filing from you yes.
Hi, Good afternoon. Thank you for taking my question. So my first question is on five nanometer can match so into next.
To say, yes, but do you think that exploit our cookie by special education et cetera, and you see that coming.
Yes.
Our quarterly EBITDA from from seven in EMEA.
Sorry can you repeat your question Sterling are you broke up a little bit.
Sure sure no problem I'm, sorry about that so I want.
I wonder profit than me that demand into the next two to three yes.
But I guess, the Max sensing revenue mix could be by special SPC et cetera, and the product mix update a bit if trump seven net.
Okay, Alright, let me summarize thank you Tony Your question is regards to five nanometer.
Then when we look out over the next three years, how do we see the demand of five nanometer the mix changing in terms of smartphone HPC different platforms and then how does this compare to seven nanometer correct.
Thank you Jeff.
Hi.
We don't we don't break it down or disclose the platform mix of certain notes, but we can share with you as cc just mentioned in the next several years we expect.
HPC to be the largest contributor of our growth.
So that should give you some idea and these guys use our advanced technologies.
Sure got it.
And my second question.
If thats likely to share a key part of the accordion smartphone is driven by higher Capex for Fiveg and your share again, so I wonder if you could walk us through how your average silicon content factual may trend up until 2021 and 20 take it. Thank you very much.
Okay. So sunny your second question as regards to the silicon content in Fiveg phones.
The silicon content increase in Fiveg phone along with share gain is contributing to our smartphone growth. This year. So she wants to know what is the silicon content outlook for 2021 and 22.
You know this is a pretty hard for me to answer because variety I cannot release, all the information like Cartiform, a customer, but let me say that.
And the average the Fiveg phone.
We have about a 30% to 40% more silicon content as compared with a fourg does that give you some kind of idea.
Idea.
Sure so.
I have a quick follow up I Wonder if you could give us some color regarding your expectation for your market share for smartphone into next to say yes.
So funny is asking whether we can give some comment on the market share our market share in fiveg phones. The next two to three years.
No it's not a very appropriate for me to give us some kind of an estimate of right now.
But let me say that as long as we have technology leadership position we.
We are very comfortable that were going to have a heightened market share.
Okay got it.
Got it. Thanks. Thank you Sunny all right, let's move our operator can we move on to the next caller on the line. Please.
Next we have rolling shade from Citigroup.
Hi, good afternoon.
My first question is can you.
Can you update the status of your license allocations that portion less for our way and we expect to have instead of portfolio, Scotland and also that you are focusing revenue forecasting core anyway. She led to highway. It's my first question. Okay. Okay. Roland. So your question is regards to.
He wants an update of our license application status regarding far away and he also wants to know does our fourth quarter guidance.
Guidance include any shipments to follow it.
Hi, Ron.
We are comprised of fully with the regulations.
And so.
And we also noticed that Gary so.
Reports, saying that the TSMC cotton prices.
We are not.
We're not going to come in and visa unfunded speculation and we also don't want to comment on our status right now for the full Q shipment to walk away now.
The pen the regulation already say that after September 17th zero.
15 September we'll keep okay.
Okay. Okay.
Okay. Thank you, okay, let's take a quick as tight lipped platelet patients of course, not all technology low sulfur therapies.
Well.
He is our core theater in tune with with a very high utilization at eight inch fab. So when you consider him to follow to raise the pricing our eight inch or other material technology out there okay Roland.
Okay. Roland them. Thank you saw your second question as regards to pricing pressure youre noticed that some of the foundry peers are concerning to raise the eight inch wafer price.
So you want to know does TSMC plan to raise our eight inch wafer pricing or also raise our pricing on the mature nodes.
Let me answer the question.
They also have to pick answer is no. We continue to work with customers and customer our partner so for short terms our supply.
Shortage, we are definitely we are now using this kind of opportunity to raise our price our wafer price we are setting our way to use our service to our customer not including the technology delivery quality everything certainly.
TSMC is working with all the customer and view them as our partners and so we don't using this opportunity to raise our wafer price.
Did that answer your question.
Yes. Thank you say, okay. Thank you Roland.
Let's move on operator to the next caller.
Yes, we're having great success from our retail recession Hadley.
Thanks, very much I just had a question on your long term capacity planning and you've laid out.
The view that we're going to see some structural tightness for the next couple of years and foundries potentially.
And I'm just wondering if you say you have a very strong growth position and HPC, but you still have a very low market share in like X NSX.
Or PC end servers that broadly I'm just wondering if we do see Intel looking to outsource major CBU lines to foundry it could be a large one time boost to the straight to the foundry industry. So.
Yes.
With TSMC being a meaningful what would they be able to meaningfully support intel's needs. If that was a big onetime outsourcing and would you be prepared to take capital intensity to much higher levels should the opportunity arise. Thank you.
Okay, Brett let me try to summarize your question. Your question basically is premise.
Around our long term capacity planning and pointing out that there is a structural tightness in foundry and we TSMC has a strong growth position. So your question specifically relates to X 86, and Intel if Intel were to outsource.
Any one time.
In Q2 foundry.
Your premise is that this could be a onetime big outsourcing opportunity and so how would we.
Prepare or handle for this.
Well.
Let me say that we do not come in on the specific customers no on the specific product, but let me see.
Our capex and capacity planning is based on the long term demand profile that is underpinned by the industry to make our trend to meet our customers demand.
And India is one of our employees.
Important to customers and we continue to work with him.
Okay.
Okay. Thank you and maybe just as a follow up.
A follow up.
Regarding your capacity plans over the over the near term are you planning to add any capacity at the mature nodes.
It maybe not so much.
Somewhat eight inch but certainly for the 28 nanometer or or even 60 nanometer and do you foresee putting any customers on allocation given the backdrop with that with tightness at the moment. Thank you. Okay. So Brett your second question as regards to our capacity plans in the near term specifically at some of the mature nodes like to.
Thank you and 16 nanometer are we planning to add capacity and with the tightness our customers on allocation.
Well again, let me say that we pin our capacity to.
To meet the customers' demand when there is a leading edge was mature node or specialties, we always work with our customer dynamic Cody and also.
Also work with them closely so to pain our capacity.
And definitely today, yes.
Some shortage, but we are doing our best to serve our customers.
Okay. Thank you Brett.
Thank you Barbara Alright, operator can we move onto the next caller on the line. Please.
Next I want to ask question Charlie Chan from Morgan Stanley Go ahead.
Thanks, and good afternoon gentlemen, my first question is failure to navigate head for equation because.
In couple of weeks ago, there was a near talking about you may see that 10 nanometer in metal production to entity for us.
Just want to get companies that clarification about your progress here and maybe you take cash format and is that a realistic timing for the net okay. Thank you.
Okay. So trolleys first question is in regards to our two nanometer. He says according to news reports that the production is going to begin in 2024. So he wants to know.
Whether we can share the technology roadmap requirements and the timing of our two nanometer Charlie.
Save Brinkley, we're now ready to make any comment on the two nanometer yet or.
Right.
Okay.
Okay.
Yes.
This is based on.
Can't comment Frank.
As a forum.
So any reason why it and that they felt that investors have here.
No I think try they are all we have disclosed about our two nanometer is the location, which will be in ginger. We have not commented on the technology specifications, the timing or anything beyond that so that is you as you said according to your reading the news that is not t's and c's comment and assists.
He said we are not prepared to comment on two nanometer.
Okay, Okay, well and then second question is there any.
Uh huh.
A window about the gross.
Gross margin trends follow up.
So based on your current that depreciation table. When do you think the depreciation is going to peak.
In a in coming years over coming quarters and our partners.
And also I think you mentioned that that new node fan base, a key factor to the gross margin dilution.
Being four nanometer.
Part of the fascinating family right. So can we get better at being at 2022 days.
Is that going to be any EBITDA margin.
Margin dilution from from the four nanometer Okay, Alright. So Charlie your second question is regards to depreciation and gross margin chart. He wants to know when when do we expect depreciation to peak out on a quarterly or an annual basis and he also wants to know that.
We would we expect dilution from four nanometer in 2022.
Given that four nanometer is an extension of our five nanometer should therefore not be dilution from four nanometer.
Okay. Charlie the first question really difficult to answer because if you continue to invest you.
You may not have a peak in depreciation.
Just as if you continue to have a strong growth you may not have a peak annual revenue.
So the second question.
Yes, we still expect that Nvfive family the gross margin to reach corporate average in about seven or eight quarters, which is somewhat sometime in 2022.
Great.
All right.
Very helpful. Thank you. Thank you Charlie operator, let's move onto the next caller on the line. Please.
Right now, we're having fluorescent sockets, yet at least hi, Thank you for taking my question and a clarification for decades.
My first question is regarding the same there can you.
Can you get there.
Correct, correct engagement and we know that.
He just mentioned over half our risk production next year and.
Asset action probably second.
Second how fat 20, Okay Thats, one thing so I won't be a smartphone it go faster.
Okay that might scratch think okay. So Laura your first questions regards to our three nanometer. She wants to know what is the current engagement with customers and then with the volume production targeted for second half 2022 is that going to be smartphone or HPC driven.
Alright, let me answer the question first on the engaging with the customer.
We are engaged with more customer end suite as compare we say in five and seven at a similar stage okay.
Okay. So.
But there is another customer side.
Working with us and.
And now which one in the second half of 2022, which one will be the first product as Julio.
In smartphone end.
HPG.
Applications.
Both.
Okay. Thank you.
My second question is about an hour.
Supply channel equipment Cannon pad I think is an hour.
Okay Fowler can continue as capex, so we plan to evaluate and more local suppliers I think given.
Say silicon position in the Gulf War, and frankly, I think Thats a kit.
Yes.
Position till later localization equipment. So can you give us some color about the horse here in R&D.
Tim.
Hi, Lloyd criminal from towing supply AOL current state total.
Total.
Hello, Thanks for telling is that okay.
Okay. Lawrence for your second question as regards to our vendor and supply chain procurement strategy. Your question is really.
Now will are we considering will reconsider to use more local Taiwan suppliers are doing.
Do we have any type of percentage breakdown or anything like that correct.
Yes, yes, right okay.
We didn't have the technology won't we've maintained the technology and demand picture in.
Based on the best performance and the best cost structure.
So we did not put the you know the.
The way that came from or we did not put that the region's site into consideration to be Frank with you. So the best the technology the best element, which in concert is current we can't.
And so we don't have any certain percentage is a limitation on which area ordered the equipment came from.
Right.
Okay.
Does that answer your question Laura.
Okay. Thank you operator, let's move onto the next caller. Please.
Next on what happens Chris factor Cowen and company go ahead. Please.
Yes, hi, Thanks for taking my question I have two of them first one on the mature nodes 28 nanometer and about.
Not currently with all the next few years are the expected revenue and wafer starts to trend on the mature north, especially at a market customer guidance.
Really leading edge.
And then my second question is in the past you spoke about converting from 28 nanometer capacity to 20 nanometer. So for Aiotv and other applications can you provide us an update on our transition is going.
Okay. Thank you Krish, let me try to summarize your questions maybe.
Maybe I'll summarize the first one and then we.
We can summarize second your first question is regards to our mature node, specifically 20 nanometer and above you want to know in the next few years what is the revenue outlook.
Also the demand or wafer starts outlook over.
Over the next few years, especially as customers may start to migrate to more leading nodes what do we do at the 28 nanometer and above what is the outlook wonder.
Well, let me answer that specifically on the 28 nanometer.
We continue to improve the technology and now we offer a 22 nanometer side out for low power and that's for.
Not for Io T. applications, and we also work with the customer to migrate.
Proto reform 65, 35 to 45 to 28 and to 22.
Today, the doting east not appropriately yet, but we expect it.
In the one or two years and we expect the loading was greatly improved.
And so.
To to enter.
To answer your question on and all the.
Mature node, we still are improving our technologies and we still expect.
The pools.
Okay, and I think Chris just to clarify your second question was in regards to 28 and your question was our conversion to 20, but as CC said, we're converting 28 to 22. So hopefully that also address your second question.
Alright EBITDA. Thank you think it sure krish. Thank you very much all right, let's move on operator to the next caller. Please.
That's what we're halfway Rick Shane from our Securities face.
Yes, hi, good afternoon guys.
Okay. My first question I, just want to make a.
Make a little clarification about your Capex for this year I think winter said about it.
Yes kartik.
It could be around 17 billion euros. Those oil is crappy over 17 cannot make it can you clarify on this and also give us a little bit color about the capex for next year.
So your first question to clarify our 2020 Capex.
What is it about or above 17.
Yes, it's about about 17.
Okay Yep for Twentytwenty that I'm sorry.
Yes, yes, yes, yes.
Your second question is about 2021, Capex, it's too early to discuss the Twentytwenty one capex at this moment.
But as as.
If we see strong demand and the we will make the investments because the capex investment this year as always for the demand in the following years. So.
So if we see the following years have strong demand we will invest.
Alright, thank you so much presently.
That is not a question to celebrate.
Hello.
You can ask for more.
Youre So youre second question. Please.
Okay. So second question is about the inventory I think if we did mention that right now because the.
Macro uncertainties Carbonite Taylor professional so customers intend to keep their inventories adopt stays low for a longer period of time, but what if it goes and unless an uncertainty we minstrel show and it goes our waiver otherwise one day, we'll uncertainty our remote you worry about all your customers.
Wide inventory and customer focused business question.
Okay rig so your second question with regards to inventory, although there is macro uncertainty in Kobe 19, but someday. This will be over so does this worry us where we see sudden sharp correction or inventory drop as a result.
Okay, Let me share with you again.
Our view on inventory.
Impact.
We don't worry too much about it but.
Because of the.
As I said now because of a pandemic the digital transformation has been accelerated.
And that created a lot of new demand, let me say that now looks like.
Can trigger for example, now wolf warm homes. So now everybody by a PC every kid had to buy a PC.
And then.
Let's look at again and the Fiveg smartphones benefit their advantage also underpinned we've done this be done the low latency every season and people are going to need it in this digital transformation.
And so.
Even right now is that so we have spent the inventory is higher than historical high level.
But.
The demand will pick up.
And.
And as you know in next year awards or the or the 2022.
We are confident that demandware pickup.
And so that the minimize or mitigate.
The impact of the inventory correction that everybody has a doubt on your mind.
Okay, great. Thank you so much sure. Thank you Rick operator, let's move onto the next caller. Please.
That's why as material savings from exciting.
Yes. Thank you for taking my question first one if your customers are willing to have inventories about this.
Rich trend line should we assume that your weight per shipment in the first half of 2021, specifically Q1 would also.
Although.
It will trend I will follow up.
Okay. Somebody's first question is regarding to basically our first quarter if customers are willing to hold a higher level of inventory should we assume that our wafer shipments in the first quarter, we'll also be much better.
We're going to share with you.
In the first Investor Conference Alright, right now, we're not ready to make any comment on 2021, especially the first quarter.
Okay. Your second question Mehdi Okay.
Sure can you please remind us how we should think about tapeout activity, specifically in four and five and how does it compared to guidance and any color would be great.
So your question is the tape out activity at the end.
And four and five as compared to and seven.
Well.
It's an uptick okay the tumor.
The demand these are very strong in info in flight.
Yes, we are engaging many customers.
So the exit in number of the tape outs are right now is our oil into our planning.
But I can share with you that customers are demanding sebree shrunk and won't be continue to be strong for the next couple of years.
Okay, all right. Thank you Mehdi.
Operator can we move on to the next caller. Please.
By now we have the cocoa Hardy Heller from JP Morgan.
Thanks for the question that began.
We can Bob.
That said on market share our leading edge.
So.
Could you comment a little bit on how do we think about the market share and then I think it probably indicated any higher.
And compared that that what that means I think Bob and by family, including.
And.
Okay all right.
Of course first follow up question is in terms of market share he wants to as Cc, what do we.
What do we see in terms of our market share as seven nanometer and what is our expectation or outlook at the five nanometer family.
Co COO.
Since I continue to say, we have technology leadership. So I can share with you that we have very high percentage of market share but.
What exactly the number is now the appropriate too.
To answer it.
Because you to all our own estimate but.
But.
Again, the most important thing is not a market share. The most important thing for US is to continue to maintain the technology leadership.
We are focused on that.
Okay. Okay.
Question on that EBITDA.
Directionally and by market share in our on net I add Dan and Devin often less than that.
Okay. So the second question cocoa wants to ask is still our market share due.
Do we see Directionally will end five market share the higher than that of and seven.
Now were similar because a we are always are the technology leader when.
When we introduced in seven we are the technology leader and one we introduced the Inphi. This year in mass production, we continue to be the technology leader.
So.
They are very similar.
Okay. Thank you.
Yep.
Thanks, Gokul, Craig and I are going up, but I think our cocoa sorry, that's too so I will sorry, I would like to ask you to get back in the queue. Because we still have I think quite guidance, but thank you all right operator, let's move onto the next caller. Please.
Ed have Randy Abrams from credit Suisse.
Okay. Thanks for the follow up.
I want to cash guidance fee R&D, except that faster in the quarter.
This higher level could you discuss the investment rate that you're expecting for R&D as a percent of sales and with the new advanced nodes and packaging investments start to increase the R&D intensity.
Okay. So Randy first question is that I've noticed four points out actually that our R&D has increased or stepped up in the third quarter. This year. So he wants to know given advance packaging and the continued technology leadership, what is the R&D percentage of sales outlook.
Page, we should expect.
Randy Let me share with you that in the third quarter. The R&D expenses are higher because of our development activities and four and three.
Longer term, we are still expecting the R&D expense to be about eight or slightly higher than 8% of our revenue.
Okay, Great appreciate that and then.
Second question I had I just had a couple of seconds auto I think you mentioned earlier about coming back at it were soft in the quarter could you discuss now exit growth driver from a low base. If you're finally seeing some of those content driver towards next one to two years or could be.
A meaningful pickup even without auto but from a content and then the other side on consumer.
Which was quite weak just despite a lot of work from home and consumer electronics.
Capex through so if you could give color maybe on something happening in the consumer segment.
Okay. So Randy second question is really a little bit split into two but he wants to know with.
With the automotive business seeming to bottom out how do we view view, our automotive platform as a growth driver outlook over the next few years and then similarly, he also is asking about digital consumer.
Alright.
Actually let me come in on the automotive so platform.
Yeah actually the Cobi Nike has a major impact on the automotive market and supply chain. This.
This year.
All being affected by the we assumed a sign of recovery in for Q either loan.
Either longer term the trend toward a safer greener and smarter, we call will continue to drive silicon content increase as well as the demand for our wine and specialty technology.
And again I want to emphasize with our technology leadership, we are well positioned to capture the opportunities.
Other growth rate the growth rate.
You know youre continue to pick up and but still feel.
Behind the HPC so growth rate.
And for the digital consumer.
It's kind of a flat or it's a DP course.
So I can see today.
Does that answer your question Randy Yes, yes, just on maybe the near term I was surprised to say whats has as much down factoring in or stay at home <unk> consumer electronics demand, but I know if anything specific or short term in nature.
Okay, I actually you know some of the product.
Because of a stay at home or the work from home some of the product we put into the ESP pizza category.
Okay, all right great.
Thank you okay. Thank you Randy.
Operator, let's move onto the next caller please.
Next one is the best show Theyll essay.
Hello Sebastian.
You may need to Unmute.
Hey.
Right exactly.
Thank you thank you Jeff.
So let me just first question, let me try to overbooking inventory crusher in another way again, if I may so we understand the higher inventory structural if I caught the lighting.
But how about the higher imagery expect led by customers.
Chandrika profit targets, we just.
It is now over supply almost everywhere as a leading edge to edge based on the past cycles.
A tighter supply of any component or the risk of supply chain over book and heritage I'm curious what are TSMC is seeing a gap between customers ordering Paulo, and your internal forecast edge or if not concerned at all as open strong owners are just a reduction okay. Thank you, okay. So sebastian's costs.
First question is around the inventory and while his view some of the inventory maybe related to COVID-19, and more structural or linger for a while he wants to know is there a concern does TSMC have a concern that because the foundry is tight that therefore the customers are doing.
A lot of overbooking or so called double booking.
And also therefore does this create a concern for TSMC when we look at our internal forecast for the end demand market versus customers booking that there is a large gap and risk of shortfall.
Well I suppose you are.
Actually in.
In TSMC is a view.
All my customers are our partners. So we worked with them very closely and.
And so to them.
Two.
This is not really Mike satterfield, our booking because of where they don't have to they don't have to be afraid to offer to cap.
Capacity showed GTN games to the mobile booking to TSMC no we work with them as a partner and we.
We both parties are there all my customer, what which TSMC and countless I'd our view on the market and we share our view on the market, which didn't Mosul. So this one will remain so.
A lot of the possibility of our booking.
That's the way that TSMC working with our customers they are or our partners.
Does that answer your questions are answered thank you.
Yes, yes.
Very very great answer to HSBC.
My second follow up question is that we think are rising.
Cross correlation risk in recent months.
So order if TSMC for your customers are concerned or discussed with you about your risk and production operation.
Most of your facts are located in Taiwan and such.
Such heightened risk continue for longer than just bottled water TSMC will consider both multi family well in Taiwan toward creating best on your other Richard Eckert. Okay. Sebastian. Thank you. Let me summarize your second question. Your question is regarding.
That you know you observed a rising or growing.
Risks in the cross trait relationships and so for therefore for our customers do they feel there is a heightened risk and US is the need for TSMC to I guess paraphrase will expand our manufacturing footprint.
And two other locations given the state of crossed straight relations in the next few years, Okay service you.
Yeah.
You bet tier since you are continue.
To focus on.
Hi, one I mean that our centre of R&D and maturity of our products you fast what continues to be located in Taiwan, regardless of the order geopolitical geopolitical tension or any kind of disruption.
Does that answer your questions.
Yes, yes, that's correct and just if I could just sure. Thank you Sebastian alright, operator, let's move onto the next caller. Please.
Next we have purslow from Goldman Sachs.
Okay, all right okay.
Or the other.
Packaging product the revenue growth.
The best packaging of important he and other costs I think very strong by the American also own guidance for life now our future growth.
Packaging only slightly higher than the corporate average venture is much broader than what we have in the past.
Nothing yet any reason behind that and what the pop prepares for the average for now.
So Bruce your first question is regards to our advanced packaging business you want to know.
What is the growth of the advanced packaging business in 2020, and also what is the profitability of the advance packaging.
Yes, Bruce the growth of our advanced packaging in this year is.
Close to the corporate but not.
But not as high.
In the next several years, we do expect that on casual basis, it will be faster it will go faster.
And the corporate average.
In terms of margins its margins is slower than the corporate however, its investment intensity capital intensity is lower therefore on a return basis ROI see basis.
Is acceptable to us.
Okay. Okay.
Okay. So.
Our next question is for the pointing inovalon that I want to clarify something in.
In the fourth quarter 2019, I think management show very comfortable.
Okay.
He's asking where we are factoring the corporate average.
By the Mod page plus a whole lot when we think the capex.
However by almost all rap Medicare is overwhelming.
Well the mobile advertising will continue a year in terms of international way.
You know that.
Anymore.
Okay. So your second question Bruce is regarding our 20 nanometer.
Into holiday.
Sorry 2020.
Yes, 28 nanometer and that you you said that we had commented in the fourth COVID-19, only result January this year that our 28 nanometer utilization would improve in one to two years time and sold and to the corporate average and now. Your question is does that statement still hold true.
Bruce Let me say that.
The progress is a little bit stronger than we expected, but still in one to two years.
The utilization rate of the 28 nanometer.
Particularly we are advances to 2200 meter walk be brief gene.
Corporate average.
Okay. Okay. All right. Thank you. Thank you Bruce alright in the interest of time, we will take the question from the last caller or last participant please.
The last one to ask question as Roland shape from Citigroup go ahead. Please.
Yes.
I'm sick technology with one more you layer insertion Len said that fast, but so if we've got retail smartcycle layers.
And it's a with a stable up by profit. So can you elaborate your technology development logic.
Okay.
And for our thought the target market for sex info and our assets and focus up to your best.
Okay, respectively going forward.
Okay.
Roland. So your question is regards to end six versus end for positioning are you point out technology wise six Nana and six has one more ERP layer seven plus but end for me have reduced mass players versus and five and with simplified process. So you really want.
Youre asking does end for our served the same group or target the same group of customers and six or are they separate.
While markets or targeting separate customers and applications.
Correct, Okay Road.
Broaden is I actually very hard to answer your question, whether the NCS.
The Sim card group that in for Alan.
Let me give you some kind of idea nccs cantaloupe.
The Brahmin continued enhancement not the in seven or eight seven profit and so.
Oh, the second wave of the customer why use like NCS when they want to enter the seven nanometer family.
And because of that offer the better density better performance and better power consumption now.
Now the similar to the end.
In six employees also we continue to improve the in flight and we also observed that you. We can reduce a mask account, we can improve the dividends t., we can improve the cycle time and we also at the same time also.
Over the better density better performance at et cetera et cetera.
So are they the same group.
I can answer this question, but is the same purpose. We are we also in six to be the second wave of the instruments a customer will allow for the info also to offer to the second wave of the customer base and five.
Okay, Yes.
They will be complicated Africa.
But is there a need for solace in Castlight.
Our actual side because that is the single up by profit.
It feel there is no I cant understand alleges that the equivalent Elisa.
Feedback on this product production cycle type, but how about that for the up almost a point of view, it's not going to people he has done.
Okay. So your second question Roland continues to ask about the four nanometer will four and four.
Does it carry any performance enhancement or PPC improvement as compared to end five.
Yes.
The short answer is yes, we.
We improved the density we improve the pro formas, including the transistor performance.
Okay. Thank thank enrolling yep. Thank you very much alright. This concludes our Q and a session before we conclude todays conference. Please be advised that the replay of the conference will be accessible within four hours from now the transcript will become available 24 hours from now both of them.
Are going to be available through TSMC is website, a triple double EBITDA TSMC dotcom. Thank you everyone for joining US today, we hope everyone continues to stay safe and healthy and we hope you will join US again next quarter Goodbye and have a good day.