Q4 2022 Taiwan Semiconductor Manufacturing Co Ltd Earnings Call (Chinese, English)
Speaker 2: fourth quarter 2022, followed by our guidance for the first quarter 2023.
Speaker 3: Afterwards, Mr. Huang and TSMC's CEO , Dr. CC Wei, will jointly provide the company's key messages. The Red Bee Maurice Lab
Speaker 4: Then TSMC's Chairman, Dr. Mark Liu, will host the Q&A session where all three executives will entertain your questions.
Speaker 5: 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.
Speaker 6: Please refer to the Safe Harbor notice that appears in our press release.
Speaker 7: And now I would like to turn the call over to TSMC CFO , Mr. Wendell Huang, for the summary of operations and the current quarter guidance.
Speaker 8: Thank you, Jeff. Happy New Year, everyone. Thank you for joining us today. My presentation will start with financial highlights for the fourth quarter and the recap of full year 2022. After that, I will provide the guidance for the first quarter 2023.
Speaker 9: First quarter revenue decreased 1.5% sequentially in US dollar terms as our business was dampened by the end market demand softness and customers inventory adjustment despite the continual ramp up of our industry leading 5nm technologies.
Speaker 10: It is at the low end of our previous guidance.
Speaker 11: In NT dollar terms, revenue increased 2% in the fourth quarter due to a more favorable foreign exchange rate.
Speaker 12: Growth margin increased 1.8 percentage point sequentially to 62.2%.
Speaker 13: mainly due to a more favorable foreign exchange rate and cost improvement efforts.
Speaker 14: partially offset by lower capacity utilization.
Speaker 15: Total operating expenses accounted for 10.3% of net revenue.
Speaker 16: Operating margin was 52%, up 1.4 percentage points from the previous quarter.
Speaker 17: Overall, our fourth quarter EPS was 11.41 NT and ROE was 41.7%.
Speaker 18: Now let's move on to the revenue by technology.
Speaker 19: 5nm process technology contributed 32% of wafer revenue in the fourth quarter.
Speaker 20: while 7nm accounted for 22%.
Speaker 21: Advanced technologies defined as 7 nanometer and below
Speaker 22: accounted for 54% of wafer revenue.
Speaker 23: On a full year basis, 5nm technology contributed 26% of 2022 wafer revenue.
Speaker 24: 7 nanometer was 27%.
Speaker 25: Advanced technologies accounted for 53% of total wafer revenue, up from 50% in 2021.
Speaker 26: Moving on to revenue contribution by platform.
Speaker 27: HPC increased 10% quarter over quarter to account for 42% of our fourth quarter revenue.
Speaker 28: Smartphone decreased 4% to account for 38%.
Speaker 29: IoT decreased 11% to account for 8%.
Speaker 30: Automotive increased 10% to account for 6%.
Speaker 31: DCE decreased 23% to account for 2%.
Speaker 32: On a full year basis, all six platforms had year-on-year growth.
HPC increased 59% year-on-year to account for 41% of our 2022 revenue.
Smartphone increased 28% to account for 39%.
IoT increased 47% to account for 9%.
Automotive increased 74% to account for 5%.
and DCE increased 1% to account for 3%.
Moving on to the balance sheet.
We ended the fourth quarter with cash and marketable securities of 1.56 trillion NT or 51 billion US dollars.
On the liability side, current liabilities increase by $137 billion NT, mainly due to the increase of $48 billion in accounts payable and increase of $93 billion in accrued liabilities and others. In 2020, 2021, Office of Sentence ?We
On financial ratios
Accounts receivable turnover days remained at 36 days.
while days of inventory increase 3 days to 93 days.
Regarding cash flow and KPEX.
During the fourth quarter, we generated about $487 billion NT in cash from operations.
spent $337 billion in KPEX and distributed $71 billion for first quarter 2022 cash dividend.
Overall, our cash balance increased $47 billion to $1.34 trillion at the end of the quarter.
In US dollar terms, our fourth quarter capital expenditures total $10.82 billion.
To recap our performance in 2022,
We had a strong growth in 2022 as our technology leadership position enabled us to capture the industries, mega trends of 5G and HPC.
Our revenue increased 33.5% in US dollar terms to reach $76 billion.
42.6% in NT terms to reach 2.26 trillion NT.
Gross margin increased 8 percentage points to 59.6%, mainly reflecting a more favorable foreign exchange rate, value selling efforts, and cost improvement partially offset by lower capacity utilization.
thanks to better operating leverage.
Operating margin increased 8.6 percentage points to 49.5%.
Overall, 4-year EPS increased 70.4% to 39.2 NT and ROE was 39.8%.
On cashflow, we spend $36.3 billion US dollars or 1.1 trillion NT in KPEX.
We generated 1.6 trillion NT in operating cash flow and 528 billion in free cash flow.
We also paid 285 billion NT in cash dividends in 2022, up from 266 billion in 2021.
I have finished my financial summary.
Now let's turn to our current quarter guidance.
as overall macroeconomic conditions remain weak.
We expect our business to be further impacted by continued end-market demand softness and customers' further inventory adjustment.
Based on the current business outlook, we expect our first quarter revenue to be between $16.7 billion and $17.5 billion US dollars.
representing a 14.2% sequential decline at the midpoint.
based on the exchange rate assumption of one US dollar to 30.7 NT.
Growth margin is expected to be between 53.5 and 55.5%.
Operating margin between 41.5 and 43.5%.
Starting in 2023,
Certain tax exemptions from the Taiwan government have expired.
However, the government has recently passed the amendments to the statute for industrial innovations.
All things considered, we expect our effective tax rate in 2023 and beyond to be approximately 15%.
This concludes my financial presentation.
Now, let me turn to our key messages.
I will start by making some comments on our fourth quarter 22 and first quarter 23 profitability.
Compared to third quarter, our fourth quarter gross margin increased by 180 basis points sequentially to 62.2% of which 140 basis points was contributed by a more favorable foreign exchange rate.
Meanwhile, cost improvement efforts also helped offset the impact from a lower capacity utilization.
Compared to our fourth quarter guidance, our actual gross margin exceeded the high end of the range provided three months ago, mainly due to cost improvement efforts.
We have just guided our first quarter gross margin to be 54.5% at the midpoint, mainly due to a lower capacity utilization rate as customers further adjust their inventory levels and a less favorable foreign exchange rate.
In 2023, our gross margin faces challenges from lower capacity utilization due to semiconductor criticality, the ramp up of M3, overseas fab expansion, and inflationary cost.
In addition,
RDE expenses accounted for 7.2% of our net revenue in 2022.
In 2023, as we increase our focus on technology development and add more resources,
We expect RDE expenses to increase by about 20% year-on-year and account for 8% to 8.5% of our net revenue.
To manage our profitability in 2023, we will work diligently on internal cost improvement efforts while continuing to strategically and consistently sell our value.
excluding the impact of foreign exchange rate.
We continue to forecast a long-term growth margin of 53% and higher is achievable.
Next.
Let me talk about our 2023 capital budget and depreciation.
Every year our KPAC is spent in anticipation of the growth that will follow in future years.
As I have stated before,
Given the near-term uncertainties, we continue to manage our business prudently and tighten up our capital spending where appropriate.
That said, our commitment to support customers' structural growth remains unchanged.
and our disciplined CAPEX and capacity planning remains based on the long-term market demand profile.
In 2022, we spent $36.3 billion to capture the structural demand and support our customers' growth.
In 2023, our capital budget is expected to be between 32 and 36 billion US dollars.
Out of the 32 to 36 billion KPEX for 2023,
About 70% will be allocated for advanced process technologies.
About 20% will be spent for specialty technologies and about 10% will be spent for advanced packaging, mask making and others.
Our depreciation expense is expected to increase by approximately 30% year-over-year in 2023, mainly as we ramp our 3nm technologies.
With this level of CAPEX spending in 2023,
we reiterate that TSMC remains committed to a sustainable cash dividends on both an annual and quarterly basis.
We will continue to work closely with our customers to plan our long-term capacity and invest in leading-edge and specialty technologies to support their growth while delivering profitable growth to our shareholders.
Now let me turn the microphone over to CC.
Thank you Window.
Good afternoon, everyone.
First, let me start with our 2023 outlook.
Concluding 2022, the semiconductor industry growth, excluding memory, was about 10%
while the fundraising increase is about 27% year over year.
The S&P revenue grew 33.5 year-over-year in U.S. dollar terms.
Our business was supported by our strong technology leadership and differentiation, even as a semiconductor inventory correction began to dampen the momentum in second half 2022.
Entering 2023, we continue to observe softness in consumer and market segment
while other E-market segments such as data center related have softened as well.
As customers and the supply chain continue to take action.
We forecast the semiconductor supply chain inventory while reduce sharply
through first half 2023 to rebalance to a healthier level.
In the fourth half of 2023,
we expect our revenue to decline mid to high single digit percent over the same period last year in US dollar terms.
Having said that, we also start to observe some initial signs of the
demand stabilization and we will watch closely for more signals.
We forecast the semiconductor cycle to button sometimes in first half 2023 and to see a healthy recovery in second half this year.
In the second half of 2023, we expect our revenue to increase over the same period last year in US dollar terms.
For the full year of 2023, we forecast the semiconductor market.
excluding memory to decline approximately 4%, while fundry industry is forecast to decline 3%.
For TSMC supported by our strong technology leadership and differentiation.
We will continue to expand our customer product portfolio and increase our addressable market and we expect 2023 to be a slight gross year for TSMC in US startup terms.
Next.
Let me talk about the N7, N6 demand outlook.
Three months ago, we set our N70 N6 capacity utilization in force half 23. Why not be as high as it has been in the past three years?
due to in-market weakness in smartphones and PCs.
and a customer's product schedule delay.
Since then, the end-market demand for smartphones and PCs has further weakened.
And the capacity utilization of N7 and N6 is lower than our expectation 3 months ago.
We expect this to persist through 4th half 23.
as a semiconductor supply chain inventory takes a few quarters to rebalance to a hair-seal level. And we expect a milder pickup in our N7, N6 demand in second half, 23, than our prior expectation.
However...
We continue to believe N7, N6 demand is more a cyclical issue rather than structural.
We are working closely with our customers to develop specialty and differentiated technologies
to drive additional waves of structural demand from consumer
RF, connectivity, and other applications to backfill our N7 NCH capacity over the next several years.
Thus, we are confident our 7nm family will continue to be a large and long-lasting node for THMC.
Now I will talk about our N3E and N3E status.
Our N3 has successfully entered volume production in late 4th quarter last year as planned. We scared you!
We expect a smooth ramp in 2023 driven by both HPC and smartphone applications.
As our customers' demand for N3 exceeds our ability to supply, we expect N3 to be fully utilized in 2023.
Size-avoidant N3 revenue contribution is expected to start in third quarter 2023 and N3 will contribute a single digit percentage of our total waver revenue in 2023.
We expect N3 revenue in 2023 to be higher than N5 revenue in its fourth year in 2020.
N3e will further extend our N3 family.
which enhances performance, power, and yield, and offers complete platform support for both smartphone and HPC applications.
Volume production is scheduled for second half, 23.
Despite the ongoing inventory correction, we continue to observe a high level of customer engagement at both N3 and N3e, with a number of tableouts more than 2x data of N5 in its first and second year.
Our 3 nanometer technology is the most advanced semiconductor technology in both PPA and transistor technology.
Thus, we expect customers a strong demand in 2023, 2024, 2025, and beyond for our 3-nanometer technologies and are confident that our N3 family will be another large and long-lasting node for TSMC.
Finally, let me talk about our plans to expand TSMC's global manufacturing footprinting
To increase customers trust
and expand our future growth potential.
TSMC's mission is to be trusted technology and capacity provider.
for the global logical IC industry for years to come.
Our job is to provide the optimal solutions for our customers to enable their success
This including technology leadership, manufacturing,
cost, trust, and recently also including more geographic manufacturing flexibility.
based on customers' requests.
We are increasing our capacity outside of Taiwan to continue to provide our customers the optimal solution they need to be successful.
The SMC is at decision.
are based on our customers' needs and the necessary level of government support.
This is to maximize the value for our shareholders.
Our decisions are also based on the talent pool, land, electricity, and water needs for TSMC's long-term growth.
Thank you.
In the US,
We are in the process of building two advanced semiconductor labs in Arizona.
Our US customer welcome us to build capacity in the US.
to support their need and have placed their strong commitment and support.
We held an opening ceremony on December 6th last year to celebrate the arrival of the fourth page of state-of-the-art semiconductor manufacturing equipment.
and FAB1 is on track to begin production of N4 process technology in 2024.
We also announced the construction of a second fire.
which is scheduled to begin production of 3nm process technology in 2026.
TSMC Arizona will continue to provide the most advanced semiconductor technology commercially available in the U.S. and every next generation high performance and low power computing products in the future years.
Each of our fabs will have a clean room area that is approximately double the size of a typical logic fab.
We will also consider building additional material load capacity outside of Taiwan.
In Japan, we are building a specialty technology fab which was utilized 12 and 16 nanometer and 2228 process technologies.
Warning production is scheduled for date 2024.
We are also considering building a second lab in Japan as long as the demand from customers and the level of government support make sense.
In Europe , we are engaging with customers and partners to evaluate the possibility of building a specialty fire.
focusing on automotive specific technologies.
based on the demand from customers and level of government support.
In China
We expand 28 nanometer in lunging as planned.
to support local customers, and we continue to follow all the rules and regulations fully.
At the same time, we continue to invest in Taiwan and expand our capacity to support our customers' growth.
N3 has just entered volume production in Tainan Science Park.
We are also preparing for N2 volume production starting in 2025, which will be located in Xintu and Taichung Science Park.
While capacity is not born overnight and takes time to build, we are committed to expanding our global manufacturing footprint to increase customer trust and expand our future growth potential.
Depending on the demand from customers and level of government support, our 28 nm below oversea capacity could be 20% or more of our total 28 nm below capacity in 5 years or more time.
While initial costs of overseas flaps are higher than TSMC flaps in Taiwan,
Our goal is to manage and minimize the cost gap.
Our pricing will remain strategic to reflect our value, which also includes the value of geographic flexibility.
At the same time, we are leveraging our competitive advantage of vast volume, economies of scale, and manufacturing technology leadership to continuously drive costs down.
We will also continue to work closely with our government to secure their support.
by taking such actions.
TSMC-Y have the ability to absorb the high cost of our C5s.
while remaining the most efficient and cost-effective manufacturer, no matter where we operate.
Thus, even we increase our capacity outside of Taiwan, we believe long-term gross margin of put this represented higher continue to be achievable.
And we can earn a sustainable and heresy ROE of greater than 25% who are delivering profitable growth for our shareholders.
This concludes our key message. Thank you for your attention.
Thank you, Sisi. This concludes our prepared remarks. Before we begin the Q&A session, I'd like to remind everybody to please limit your questions to two at a time to allow all the participants an opportunity to ask their questions.
Should you wish to raise your questions in Chinese, I will translate it to English before our management answers your question.
For those of you on the call, if you'd like to ask a question, please press the star, then 1 on your telephone keypad now.
If at any time you'd like to remove yourself from the questioning queue, please press star 2.
Now we will begin the Q&A session. Our Chairman, Dr. Mark Liu, will be the host.
Hello everyone. It's good to meet everyone of you online again.
At the beginning of the year, I wish you all stay healthy and have a happy new year.
Now let's answer your question.
starting.
Thank you.
Thank you, Chairman. Operator, let's begin. Please proceed with the first caller on the line.
Thank you.
The first question is from Randy Abrams with Credit Suisse. Randy, please go ahead.
Okay, yes, thank you. I wanted to ask the first question just about the rising investment costs and also the cost differential with the US. Just based on the two press releases, the Taiwan fab you cited, Fab18, and the Taiwan
about $60 billion US dollar investment for eight phases, which would be, I estimate, about 200,000 capacity. That's about $300 million per 1,000 wafer. The Arizona fab was $40 billion for about $50,000, $800 million per 1,000 wafers.
So just two questions on it. If you could maybe discuss a bit more if there's differences in those releases on the investment and calculation and a bit more color on the relative costs as you do the U.S. expansion. And then the second part of the question is, is the cost...
seeing a significant acceleration. It's been rising with each new node, but are you seeing an accelerating pace as you move through 3 and 2 nanometer?
Okay, Randy, thank you. Please allow me to summarize your question. So Randy's first question is he wants to understand, I think he's referring, I think, to our press release about N3 in Tainan and the total investment there.
and how does that compare to our announcement of the investment in Arizona for two phases? Randy, if I got you correctly, basically what Randy is asking is, what is, you know, the cost in the US seem much higher in terms of the investment. So what is driving this big difference or gap, so to speak?
That's the first part of your question, right Randy? Okay, so that's the first part. Yeah, that's right. That's the first part. Okay, hi Randy, this is Wendell. Let me share with you this.
The Arizona fabric, we make the decision based on customers' requests.
And
So we're planning on building the two FABs, one N5, actually N4, and the other one N3.
We're not able to share with you a specific cost gap number between Taiwan and China.
But we can share with you that the major reason for the cost gap is the construction cost of building and facilities.
which can be four to five times greater for a US FAB versus a FAB in Taiwan.
The high cost of construction includes labor costs, course of permits.
Cause of Occupational Safety and Health.
regulations, inflationary costs in recent years, and people and learning curve costs.
Therefore, the initial cost of overseas FABs are higher than our FABs in Taiwan.
And I think the second part of Randy's question was about the, how do we see the capex per K as we go from, I guess, Randy, you're asking N5, N3, N2. Yeah, if it's seeing a faster pace of expansion through these next couple of notes.
Right. Randy, we're not able to disclose the specific kpacs per k for each node, but certainly the kpacs per k is more expensive for a new node as the process capacity increases.
Okay.
Okay, and the second question just wanted to ask actually two areas that came up in the remarks. The R&D, the over 20% increase, if you could give a feel what's mainly driving that additional step up. Is it the development costs for the new nodes, the packaging, or is it some now expanding?
R&D into new geographic areas. And if I can fit in a second part, just the tax rate, Taiwan was hyping a pretty big program of CapEx and R&D, but tax breaks, but your tax rate is going up from 11% to 15. Is that alternative minimum tax or global tax?
Just want to understand why not any benefit from that. Okay so Randy's second question I guess it is sort of two parts financial related. First we our CFO said we are R&D spending will increase about 20% year on year so Randy wants to know what is driving behind that.
Is it because we're going overseas? Is it more technology development as a technology leader, etc. And then the second part, he wants to understand the guidance of effective tax rate of 15%. Given the recent legislation passed in Taiwan, why is it not lower?
Okay, Randy, for the first question, we're the technology leader and we intend to continue maintaining that leadership. Therefore, we are devoting more and more resources in R&D, including people and other kinds of resources.
That's the reason why our R&D expense will increase.
in 2023 and probably beyond.
in 2023 and probably beyond. The other thing about tax...
In 2023, part of the tax exemptions or incentives in Taiwan have expired.
Without the new amendments to this industrial innovation, the statue of industrial innovation, our tax rate would have become between 18 to 19 percent.
With this new amendment our tax rate will drop to about 15%.
Okay, does that answer your question, Randy?
Yeah, that does. I mean, this midterm R&D, do you think the rate stays at this level or could go up 1 more? That's my final 1. Thank you.
From what we are seeing at this moment, we expect the RD to revenue ratio to be between 8 to 8.5 percent in the next several years.
Okay. Okay. Great.
Thank you, Randy. Operator, can we move on to the next participant, please?
Sure. And our next question is coming from
Bruce Lu with Goldman Sachs and Bruce Priscow has...
Okay thank you for taking my question. The first question is focused on the oversea capacity expansion.
So I think you just mentioned that even though we cannot disclose it but the cost is definitely higher for the overseas capacity but the management believe that the margin will stay the same. So I mean I think I asked this question back to 2019 you know the manager was talking about like
the pricing will be the same across the board regardless the geographical locations. So what has changed now? So with the different pricing can we say the overseas capacity will generate a similar return on profitability throughout the cycle? So or what is a benchmark you're looking for?
when you set up the different pricing schemes. Okay, so Bruce is, Bruce from Goldman Sachs actually, his question is regarding, first question regarding overseas expansion. His question is, we said overseas costs are higher yet
So his question is in regards to our pricing. Are we a higher price overseas? Or if it's overall? And what is the benchmark that we use when we go overseas in terms of financial returns and price? Is that roughly correct, Bruce?
is in regards to our pricing. Are we a higher price overseas or if it's overall and what is the benchmark that we use when we go overseas in terms of financial returns and price? Is that roughly correct, Bruce? Yes, that's correct.
Okay Bruce, this is Wendell. We're not able to comment on pricing details, but our pricing is always strategic and consistent to reflect our value.
Now value to our customers as CC said in the statement includes technology leadership, manufacturing efficiency and quality, cost, trust, and recently also includes more geographic manufacturing flexibility.
Therefore, our overall pricing will remain strategic.
reflect our value which includes the value of geographic flexibilities.
Does that answer your question?
Well, to some extent, let me ask the question in different ways is that, you know, we do understand it will reflect Kismet's value, i.e. geographical location is a value, but at the end of the day, it's a cost plus for everybody across the board.
I mean, how confident that TSMC feel that the customers can swabble the cost and the end customer will swallow the cost, i.e. without triggering the potential wafer price inflation or semiconductor inflation at the end of the day.
with more and more global capacity for RMPF&C. Yeah, okay. Bruce, let me add that in CC's statement, he also mentioned that we will, aside from selling our value, we will continue to drive down our costs, but also to leverage the cost
competitive advantages of large volume economy of scale and manufacturing technology leadership.
And with all these actions plus the government support, we're able to absorb the higher cost of overseas fats.
and maintain our long-term financial goals, a gross margin of 53% and higher.
I see. Understand that. Well, Bruce, let me add some color. This is CC Wei. Actually, in our view, the semiconductor becomes more essential and more pervasive in people's lives.
and the semiconductor industry value in the supply chain is increasing.
And if we look at our customers' performance,
Their rising structural growth margin over the past five to six years continues to improve. That reflects what I just said. The semiconductors value has been recognized and also very important in our daily life.
And so we set up our pricing strategy to reflect all the values we share to customers and customers also earn their value from the end market.
Thank you, Sisi.
Bruce, do you have a second question?
Yes, please. So the second question is for the N7. I think we spent some time for 7 nanometer, which is more cyclical. I think after three months, I think the correction is even bigger. So can you share the four-year outlook for 7 nanometers? You know, when?
we can expect the customer or the technology, the capacity attention to back to normal, back to like what we utilize.
Or can we avoid the same cyclical symptoms in 5 nanometers and 3 nanometers in 2-3 years by now?
Okay so Bruce's second question is 7 nanometer so his question is 7 nanometer seems to have deteriorated versus three months ago so can you know what is our view can it fully recover in this year and then I think Bruce the second part of your question is also how can we avoid the same cyclical sipped in
PC and the smartphone and that happened to
Correct? Or let me say that inventory correct happened to be the most severe one.
And so the yen market dropped more severely than we thought.
In fact, the unit will not increase, but the content will be increased. So is demand be more softened than we thought three months ago?
the unit will not increase, but the content will be increased. So, is demand be more softened than we thought three months ago?
Why be repeated at five or three? You know, secretarity of the semiconductor always exists, but it's unlikely this time the scenario was to be repeated because of a current downturn actually.
is kind of being enhanced or being degraded by the pandemic.
Due to the pandemic,
the digital transformation progress has been enhanced and so the demand being increased dramatically
But then due to the pandemic, the supply chain disruption happened. And people during this time probably changed their mind.
strategy was their thought on the inventory build-up. So artificially the inventory had been built up quickly and dramatically.
And then the response to each industry are different. So they manage the inventory correction also differently.
this kind of phenomena, all because of, largely because of a pandemic.
and we don't think that it will happen again.
And in the next 5 nanometers, 3 nanometers, I believe TSMC and TSMC's customers will be more prudent on planning what is the demand and also the supply.
Okay, Bruce, does that answer your second question?
Yes, let me follow up a little bit. I mean, since you just mentioned for the external factors, right, so what did CSM do to avoid the same thing for 5 and 3 in the future? For example, like if you are, you know, cutting your capacity plan into a more great conservative way or something like that, is that something we should expect in the future?
in the future note? So Bruce is asking sort of a follow-on. So then with 7 nanometer, how do we avoid the same thing happening at 5 or 3 in the future? Will we cut our capacity? How do we change our capacity planning and build to avoid a similar situation?
Ruth, this is a very good question. Actually, let me share with you how we deal with it. In fact, between the N5 and N3, the technology node, our capacity build-up and with a lot of tools can be commonly used by these two nodes.
So, in fact, for TSMC to build capacity, we put N5, N3, and maybe in the future N2 as a total picture to look at it. And we will keep our flexibility to increase or to adjust.
for the future. So we will be better prepared. That's all I can tell you.
That's good to hear. Thank you. Thank you, Bruce. Operator, can we move on to the next participant, please?
That's good to hear. Thank you. Thank you, Bruce. Operator, can we move on to the next participant, please? Sure.
And our next question is come from Goku Hariharan with JP Morgan and Goku, please go ahead. Thanks, Abhinayar. And let me take my first question on the near term 2023. So you mentioned first off we have seen a worse kind of environment compared to three months back.
Is it mainly HPC data center that has seen further reduction or are we seeing it across the board including smartphone for first half? And also on second half, just putting in rough numbers on your guidance, looks like we are looking for a pretty sharp rebound in second half of 2020.
new growth for the year.
Okay, so Gokul's first question is on the near-term outlook. He wants to understand, first half we said the inventory correction is sharper. So he wants to understand what are we seeing in different end market segments. Is the sharper correction driven by data center.
it smartphone PC what are we seeing across the different segments first? Well let me answer the question. The inventory correction actually began last year and at the peak of the third quarter and we think the inventory had been picketed.
in third quarter last year, and gradually reduce in the fourth quarter. And then we did see some...
inventory reduced sharply, you know, recently, and it will continue to be sold to first half of this year. So that's why we say we have confidence that in the second half, the business will rebound.
But is that a very strong V shape? We didn't know yet but certainly it's not a U shape.
for the business to recover in the second half.
I think entry is clearly one part of that ramp but is there anything else that you are already seeing that strong confidence for the second half rebound in addition to the entry ramp up?
So, Gokuo is asking in terms of second half, why can TSMC's business be better than the overall industry? Besides N3, are there any other factors when you think about technology leadership?
Goku, you are right, N3 is a ramp up here of the business to rebound. And also actually, let me share with you some of the HPC's customer. Also I have a new product launch in the second half, especially in the AI area or in the.
you know computing area. Did that answer your question?
Okay thank you that's my first question. Jeff can I move on to the second one? Yes please.
Yeah, thank you. My second question is on CapEx and capital intensity. CapEx, we are taking it down a notch for this year given the downturn, I guess, and some conservatism. Are we already seeing the peak in CapEx intensity in the cycle or we are likely to given the fat wear.
plants in Europe , plants to expand more capacity in US, are we likely to see higher capex intensity in the out years as well.
Okay, sorry, is that your, okay, Gokou, I think I got the gist of your question. So Gokou's second question is on capex and capital intensity. He notes this year we have guided 32 to 36 given sort of some tightening up.
and such. So his question is, does this represent, have we already seen or passed the peak in terms of our capital intensity this cycle? Or as we may continue to evaluate and expand overseas and such, will there be another step up in our capital intensity? Okay, Goku, this is Wendell.
As we said before, we invest the KPEX this year for the growth in the future years. So we also said earlier that we're tightening up the spending where appropriate. But as long as we believe the growth opportunity is there, we will continue to invest.
Now we've given the guidance for this year so you can calculate the capital intensity. It will be over 40%
From what we are able to see at this moment, several years down the road, we are seeing the k-Pax intensity.
to be between mid to high 30s. That's the current view. Thanks, Wendell. Is that several years, like five years out, or is it like closer than that? Yeah, something like that. Something like that.
Okay, understood. Thank you very much. All right, thank you Gokul. Operator, can we move on to the next participant? Thank you.
Our next question is from Charlie Chen with Morgan Stanley . Charlie, please go ahead.
Thanks for taking my question, gentlemen. So, first of all, a question to Cece. And so, thanks for your sharing during the Mountain Jet Association. The presentation on Semiconductor Challenge was very insightful.
So my question is that you mentioned during your pitch saying that the biggest change for semiconductors cost is getting higher, let alone the so-called distorted supply chain.
So, I wanted to ask CC what's the true value add of a more slow going forward, since it becomes much more expensive, and whether you really see that customers can continue to expand their gross margin and create value to this world. So, this is my first question. Thank you.
Okay so Charlie's first question is around technology. He notes that you know the cost I guess and cost per transistor is getting higher and overall global costs are increasing as well. So his question is what is the
value or is there still value in the so-called Moore's law going forward? How does TSNC view this issue?
Well Charlie, let me share with you, nowadays we look at our technologies of value, not only the geometries are shrinking actually.
More importantly, actually, is the power consumption efficiency.
And also we try to help our customers with our advanced 3D IC fabric technology to improve the system performance.
And that's why it's important.
In the future, we want the world to be more greener, safer, better. So power consumption becomes very, very important while we still improve the system performance. And that's where our customers can get their value.
that's what we view in the future. Thank you, thanks for the information. So a follow-up to that is that we noticed that for your major smartphone, SLC customers, they seem to slow down the migration to
to the newer nodes, right, or so-called bifurcation for their new SoC adoption. So do you think for mobile computing particularly, do you think a value add is diminishing, based on what you just said?
And also another structural change we are seeing is about the custom chip ASIC in the HPC segment. So can management talk about that part of business, meaning the ASIC defined in terms of the total donor contribution in HPC.
and the growth rate of that ASIC business. Okay, so Charlie, I'm going to interpret. So he has a follow up to his first question and then his second question. So the follow up to his first question is then in terms of going back to cost again, do we see any sign of a slowdown in smartphone SoC?
from such customers. Correct, Charlie?
Yes, correct. Please. Okay, Charlie, let me answer your question. In fact, we do not see any slowdown on our...
customer to adopt the TSMC's leading edge technology.
actually they might have a different kind of product schedule and they might have a different kind of product plan and etc. But the technology adoption actually it did not slow down.
That's my answer to your first follow-up question. And the question is that some kind of customer, some of them are essentially are primary customers as a service,
Hyperscale customers want to develop their own chip. Yes, but I cannot give you more information than that. However, I can tell you that they also look at the compute for their own business, the positioning of the chip.
for their opportunity actually, increase their opportunity. And that require TSMC's leading edge technology. So we do have quite a few hyperscale customers working with TSMC to develop their own chips.
Okay, thank you. Would that cannibalize your merchant business, for example, those merchant CPU, GPU, are they going to be replaced or impacted by those custom?
design growth.
So, okay, last question Charlie's asking then his concern is then if hyperscalers are developing, will that cannibalize business for other types of companies?
I cannot comment but I don't think so. You know they also developed a specific purpose for their own.
I mean, it's not a kind of to replace, generalize the purpose of CPU, GPU or those kind of things.
And I think also for TSMC, we're happy to work with all types of customers, whatever type they may be. Okay, thank you Charlie. Let's move on to the next participant. Thank you.
Thank you.
And our next question is come from Sunny Lin with UPS and Sunny please go ahead.
Thank you. Good afternoon. Thank you for taking my questions. So my first question is on the N3 ramp up. And so if we look at the share revenue could be higher than five nanometers for the first year. But if we look at the sales contribution as a percentage of total sales.
It's actually a bit lower. And so I wonder...
For the share, perhaps there's some market demand issue, but looking into 2024 and 2025 based on your current customer engagement, should we model a faster ramp up into 2024, 2025? Or its overall ramp up could be slower because of maybe customer schedule.
issues or planning. If we think about the peak revenue contribution for 3 nanometer over time, do you think you will be able to reach 30% range at N5 and N7?
That's my first question. Thank you. Okay, Sunny's first question is on 3 nanometers. She notes 3 nanometer revenue is greater than 5 nanometer in its first year, but the revenue percentage contribution of mid-single digit is smaller or lower. So she's wondering...
Why is that? Is it because the market slowed down? Is it less customer adoption and interest? What is the reason behind that? And does that mean? What is our expectation for that ramp to continue?
For the M3E, the number of tape outs more than doubled out of M5 in first and second year.
So as a result, we expect the strong demand will continue in 2023, 24, 25 and beyond for our N3 technologies driven by both the HPC and smartphone applications.
long-lasting note for us. It will be an important contributor to our 15 to 20 percent revenue CAGR the next several years. Okay got it thank you. My second question is a quick one and so for you to
Just wondering what kind of industry growth are you assuming for the major end markets, including smartphone, PC, several automotive?
Okay, Sunny's second question is, you know, TSMC we have said we will grow have slight growth year on year in US dollar terms this year. Her question is what are we assuming for the end market growth in areas like smartphone, PC's, automotive and others?
Let me answer the question, Sunny.
What we look at in 2023 actually we look at the smartphone and PC unit. We think it's a little bit dropped in terms of unit.
and the content will continue to increase. And for TSMC, actually we increase our product portfolio. We also extend our market segment, available market segment to TSMC.
So that's why we expect the whole industry to drop slightly and TSMC still grows slightly.
Got it. Sorry.
Yeah, so just a quick follow up on server and automotive. So any expectations on server units for the share? For auto, I think October earnings call you mentioned, there could be some slowdown going to first of the year. Have you started to see the deceleration?
That's all my questions. Thank you very much. Okay, so Sunny also wants to know what is our forecast for server units, automotive units, and then we said in October , three months ago, we said automotive demand was holding steady. What is the case now?
the automotive demand continues to be very tight. I mean that, no, I mean demand continues to increase actually. And today we still probably not 100% supply enough wafers to them. But, you know, it's improving, it's improving. And we expect the automotive to...
the shortage to be relaxed quickly. And the unit, for the units to grow, we expect the automotive to grow this year, but that's OEM stuff.
Okay, thank you, Sunny. Operator, can we move on to the next participant? Operator, can we move on to the next participant?
Okay, thank you, Sunny. Operator, can we move on to the next participant? Thank you very much. Operator, can we move on to the next participant? Sure.
Our next question is come from Laura Chen with Citigroup and Laura, please go ahead.
Hello, hi, hi. Thank you very much for taking my question. My first question is also about the overseas expansion. Like Siti mentioned that the overseas is more advanced than 20 mm. We account for 20% in the longer term perspective. And also we are expanding...
Laura's first question is actually CC said the 28 nanometer below capacity could be 28% and more in several years time depending on customer demand and government support but her question is would we consider expanding advanced packaging overseas as well
Well, today we actually don't have plan but we do not rule out the possibility because the backend is a part of the total wafer service for our customer.
Today we actually don't have plan but we do not rule out the possibility because the backend is a part of the total wafer service for our customer.
Okay, got it. And because we see that a lot of advanced now used for the high computing PC, so along with that kind of application we see now TSMC is very good at those 3D IC or the advanced packaging. So I'm just wondering that a longer term perspective, whether that is also the direction in terms of the
need to build or have packaging in the US as we move events technology portion to the US? Well Laura I just answer say that we don't rule out the possibility but today we don't have a plan yet.
Sure, sure. Thank you very much. And my second question is about the GALERON roadmap. Can you give us more colors on the current progress? We know that we have the schedule to ramp it up in 2025, but that the NAUV, the high-voltage equipment, will probably only ready then. Do you think that could be any like a potential...
or pushed out by the availability of things such as, I think you're asking high NA, LoRa, and things like that, correct?
Thank you. Okay. Actually, our end-to-technology development is...
is on track actually is better than what we thought. We have very good progress recently and you know our risk production will be in 2024 and the volume production 2025. The schedule is not changed if we don't put it in.
But so far so good, let me assure you that. Okay. Okay, thank you very much. Thank you, Laura. Operator, can we move on to the next participant, please?
Thank you.
And our next question is from Ruth Book with New Streets Research. Please go ahead.
Yes, thank you for taking my question. I had a question on your 2023 CapEx purchase and your fab build out plan.
Earlier on in the conference call you talked about the build-out cost of TAPs in the US being 5 times higher versus Taiwan. In that context I was wondering if you could talk about the share of CAPEX spending that you expect to go towards TAP build-out versus equipment this year versus last year. Will the larger share of CAPEX go to those TAP build-outs and if so, what is the impact of the
how much more. Thank you. Okay, sorry, Rolf. Let me try to summarize your first question. His first question is on our CAPEX in 2023 and our fab build-out plans overseas, correct?
Yes, exactly. What I'm trying to understand is if I think about your capex, like this year versus last year, what share will go towards infrastructure, so that build out and what percentage will go to equipment roughly. Okay, so Rolf wants to know for our capex, how much is going to building and facilities, how much is your tools?
Rolf, I want to make one correction. When our CFO said that the... When you refer to five times greater, I think our CFO was saying the construction costs are four to five times higher, not the capex cost.
but nonetheless, Rolf is asking for a breakout of the CAPEX. Well, Rolf, we provide the breakdown on CAPEX per year, advanced versus specialty technology, but we do not provide the breakdown between tools and constructions.
But as I said, in the US, the construction of buildings and facilities...
is probably five times that of Taiwan. And it lasts for a few years.
Okay. Rolf, do you have a second question? Thank you very much.
Yes, as a second question, could you talk about the growth that you achieved in your advanced packaging segment in 2022 and what growth you are expecting in 2023? In particular, could you talk about your SOIC products?
and whether interest in those products is accelerating. Thank you. Okay, thank you Rolf. So Rolf's second question is on the event packaging business. What was the growth in event packaging last year and what do we expect the growth to be this year? And then also more specifically in terms of our SOIC technology, what is the outlook or the momentum there?
Okay, Rob, this is Wendell again. In 2022 our advanced packaging grew at a similar rate to our corporate rate.
So it counted for about 7% of our total revenue in 2022. And we think that in this year the growth will be also similar.
pretty well slightly lower than the corporate. It will be probably flattish for the backend.
Okay, thank you, Rolf. Alright, in the interest of time maybe we'll take questions from the last three participants.
Operator, can we move on to the next participant, please? Sure. The next question is come from Charles Xu with Leadham and Charles, please go ahead.
Okay, thank you for taking my question. I want to ask a little bit about the 20% R&D expense step up in this year. Can you provide a little bit more details what the incremental R&D expenses are going to be directed at? Well, for one thing, I
If I understand correctly, your N3 R&D team are going to move on to the N plus two node if we assume three nanometers the current N node. Or is there any other incremental R&D spending this year you are expecting to be around design enablement, advanced packaging, specialty technology? Can you kind of give us a sense where the big step up is coming from? Thank you.
Charles, let me answer your question. All your comments are correct. I mean that is because of newer technology like N2.
M1.4 and also a lot of new things are more expensive than before and actually the technology complexity continue to increase exponentially.
So, that's why we spend much more on this project. We want to continue to be number one in the world. So, we continue to invest, including the geometry shrinkage, including the new transistor architecture, including the design and development.
and including buying the new equipment. That all is up.
Okay, Charles.
Do you have a second question? Yes, yes I do. Maybe a second question. I want to ask about specialty technology. Obviously you expect specialty technology to backfill your 7nm fabs.
I think this may be a more common knowledge inside the industry, but I recently spoke to some of your customers who are more on the analog mixed signal side. A lot of them are.
I mean driving volumes more from 28 nanometer and above and they could tell me that the benefit of going to 14 nanometer, I know 16 nanometer for you 7 nanometer Is there but but it's not large enough as in the past moving note to note And and at the same time the cost is much higher
And I look at your technology roadmap, specialty technology roadmap, it does seem to me that the specialty technology platforms are not as broad at the 7 nanometer if I compare with the 28 nanometer and above. I just want to get some insights from you. How do you think about the progression of specialty technology?
technology, specialty technology portfolio at 7 nanometers seems not as broad as prior nodes. And that the question is, do we see this slowing scaling of analog and mixed signal areas in terms of the specialty technology development.
and moving down to lower notes or more advanced notes. Cheers
Your observation is quite good. Actually, you are right.
But then let me share with you a little bit more detail inside. Actually, you know, you are right for the analog portion or mixed signal portion, we do not need to really move into a 7 nanometer or more otherwise known, but...
As time goes by now is more and more computing functionality needs to be aided into that product.
Let me share with you that one thing like the Wi-Fi, you need a really very high speed to move to the next generation and also the RF. For those kind of things, you need a very high performance of the computing together with a low power consumption. It is important.
And if you want to get low power consumption, only the leading edge node can give you that kind of opportunities.
you know, all the footprint stays the same. Then if you want to have a higher functionality, with a lower power consumption, that's where you have to move into the 7nm or more advanced node, even without the analog product.
Does that answer your question? Yes. So I think this is one of the reasons that you feel so quite comfortable about 7 nanometer utilization will come back. You said it will mildly come back a little bit in 23, but you're still confident 24 and forward. That.
the 7 nanometers will still be a very, very long-lasting node for you. You are right.
it will still be a very, very long lasting note for you. You are right. Okay.
All right. Thank you. Thank you, Charles. Operator, let's move on to the last two participants.
Thank you. The next question is coming from Brad Lill with Bank of America. Brad, please go ahead. Hi, Happy New Year. Thank you for taking my question. I have two questions. One is on the globalization challenge and the other on the material note.
So, first of all, we know that QP is excellent in managing the supply chain and the clusters in Taiwan. However, when we now expand Japan and US footprint with the lack of the cluster there, would the management please share with us the strategies to maintain the strong decision-making of the cluster?
supply chain and cluster management, but as we go overseas to US and Japan, how will we continue to ensure that we do a good job? OK, let me let me answer. I think the window has answered this question earlier.
Let me summarize a little bit. PSMC is in a service business.
not in just pure production. The service depends on the trust from the customers.
So, in the past, our trust and service depends on our technology leadership, manufacturing excellence, and the lowest cost and quality.
But recently the geopolitical development is evolving just in front of us.
that 100% in one place cannot suffice our customers' needs. Therefore, we started the overall global footprint planning.
Now of course the cost will be higher and I think our team has been focused on how do we do this at the same time, keep our minimum gross margin to be 53% and above. And that is the standard that we...
decide how the pace of our global expansion is going to be. And there are other segments in terms of the space, of course.
The global expansion increased the value to our customers and to the new geopolitical environment.
and therefore the pricing, how the customer can shoulder the increased cost in terms of pricing.
Geopolitically, the semiconductor in the US and Japan are all new.
So I believe we are working hard on how to reduce the cost by building up the semiconductor supply ecosystem.
in the US and Japan and I think indeed both governments ECHO are not just us, it's also rally other major companies to build a similar capacity in this place to reduce the cost. So that is the general agreement arrangement we are planning.
There's no fixed rate. Of course, the government support will be another factor. And so that is, we are cautiously step by step to make sure our shareholders' value will still be kept.
Thank you, Chairman.
Thank you, Chairman. Brad, do you have a second question?
Thank you very much for the answer. My second question is on the mature mode. As we know, the mature mode is investing and generates pretty good profits with TSMC technology leadership. So while we are standing overseas, measure willhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhh
what is the strategy for mature nodes in the long run, especially on China expansion, backed by also by the government subsidies. And also, R&D is quite valuable for PSM3, and so we continue to allocate the R&D to mature nodes when the time group pays in the leading edge and otherwise packaging. Thank you.
Okay, so Brad, second question I think maybe to summarize is more on the mature nodes. So he wants to better understand our strategy on the mature nodes as we expand our manufacturing footprint and increase capacity outside of Taiwan. What is our strategy for mature nodes?
Will we bring mature nodes overseas? What is the product status in China? How are we allocating R&D resources to mature nodes or really especially technology strategies, etc.? Well, actually our mature node capacity strategy is very simple. We develop...
differentiated specialty technology for our customer.
In fact, we are working with customers to define what they need and then what kind of technology that we need to develop.
we are working with customers to define what they need and then what kind of technology that we need to develop.
We don't add any commonly used logical technology per se, but we develop specialty and differentiate it.
and for the long-term structural market demand. And that's our current strategy. And because of that, of course, we put on these efforts and resources to...
cooperated with our customer and so we can generate profitability with a reasonable utilization.
Okay, thank you, CC. Got it. Thank you very much. Thank you very much. Okay, thank you. Operator, in the interest – well, can we move on to the last participant, please?
Our last question comes from Miri Hasani with...
Subscojana International Group and please go ahead.
Yes, thanks for letting me ask the question. I want to go back to gross margin. I'm a little bit confused if you could clarify something. Your wafer shipment in Q4 declined.
and also ethics actually strengthened by a little bit, which should be negative of gross margin.
So your cost cutting efforts must have been
greatly exceeding these trends and I want to get a better feel for it and have a follow-up.
And Mindy's first question is on gross margin.
He notes wafer shipments decline sequentially in the fourth quarter, but with the foreign exchange movement, he notes it's a negative for gross margin.
So he wants to understand what is the magnitude or rate of cost improvement. Maybe our CFO can clarify some of these, particularly the FX. Right. Ok, great.
Our fourth quarter gross margin is 180 basis point.
Fourth quarter gross margin is 180 basis points higher than that in the third quarter.
Foreign exchange rate actually went towards our favor.
The NT depreciated in the fourth quarter from 3032 in the third quarter to 3139. So that gave us about 140 basis points of gross margin expansion. Of the remaining one there are...
cost improvement, but offset by, as we said, lower wafer utilization.
Okay, so the volume helped. Now, if I just take your comment about the first half, declining 5 to 10 percent on a year-over-year basis, that implies that there is a chance that revenues in Q2 would decline on a sequential basis. Would that also...
drive gross margin down on a sequential basis? Okay, so Mehdi's second question is then we have noted we did not say 5 to 10 percent, but our first half revenue will decline mid to high single digit year on year. So he wants to know does this mean that second quarter revenue will be down sequentially and is there a chance that we will see a decrease in revenue?
Does that mean that the gross margin will go below 53% or decline in 2?
Right, we'll give you the guidance so you can really calculate yourself on the revenue growth on the second quarter. And it's too early to talk about the growth margin in the second quarter and beyond. However, we can tell you that we work very diligently to...
to make sure our growth, long-term growth margins of 53% and higher is achievable even in this year.
Sure, understood. But could it go below 53 and then rebound so it would average to 53? It's too early to talk about that but as I said we work very diligently to make sure this long-term gross margin target of 53% and above can be achievable including this year.
and we will give you the second quarter gross margin outlook in April , in three months.
All right, thank you. Thank you. Okay, this concludes our Q&A session. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within 30 minutes from now. The transcript will be available 24 hours from now, both of which you can find and is available through TSMC's website at www.tsmc.com.
Thank you again for joining us today. We wish everyone a Happy Lunar New Year, and we hope you will join us again next quarter. Goodbye and have a good day.