Q1 2023 Taiwan Semiconductor Manufacturing Co Ltd Earnings Call
Speaker 1: decreased by 71 billion NT mainly due to the decrease of 65 billion, 65 billion in accounts payable.
Speaker 1: On financial ratio, accounts receivable turnover days decreased two days to 34 days, while days of inventory increased three days to 96 days.
Speaker 1: Regarding cash flow and KPEX.
Speaker 1: During the first quarter, we generated about 385 billion NT in cash from operations.
Speaker 1: spend 302 billion in K-Pax.
Speaker 1: and distributed 71 billion for second quarter 2022 cash dividend.
Speaker 1: Overall, our cash balance increased 42 billion to 1.39 trillion at the end of the quarter.
Speaker 1: In US dollar terms, our first quarter capital expenditures total $9.94 billion.
Speaker 1: I have finished my financial summary. Now let's turn to our current quarter guidance.
Speaker 1: We expect our business in the second quarter to continue to be impacted by customers' further inventory adjustment.
Speaker 1: Based on the current business outlook, we expect our second quarter revenue to be between $15.2 billion and $16 billion US dollars.
Speaker 1: which represents a 6.7% sequential decline at the midpoint.
Speaker 1: Based on the exchange rate assumption of 1 US dollar to 30.4 NT.
Speaker 1: Gross margin is expected to be between 52% and 54%.
Speaker 1: Operating margin between 39.5% and 41.5%.
Speaker 1: This concludes my financial presentation.
Speaker 1: Now, let me turn to our key messages.
Speaker 1: I will start by making some comments on our first quarter 23 and second quarter 23 profitability.
Speaker 1: Compared to fourth quarter, our first quarter gross margin decreased by 590 basis points sequentially to 56.3%
Speaker 1: primarily due to a lower capacity utilization.
Speaker 1: Compared to our first quarter guidance, our actual growth margin exceeded the high end of the range provided three months ago by 80 basis points, mainly due to more stringent cost control efforts.
Speaker 1: We have just guided our second quarter gross margin to be 53 percent at the midpoint, mainly due to a lower capacity utilization rate and higher electricity costs in Taiwan.
Speaker 1: After last year's electricity price increase of 15% in the second half of 2022,
Speaker 1: TSMC's electricity price in Taiwan has increased by another 17 percent starting April 1st this year.
Speaker 1: This is expected to take out 60 basis points from our second quarter growth margin.
Speaker 1: We expect the impact from higher electricity costs to continue throughout the second half of this year and dilute our full year gross margin by about 50 basis points.
Speaker 1: In 2023, our growth margin faces challenges from lower capacity utilization due to semiconductor policy.
Speaker 1: the ramp-up of M3, overseas fab expansion, and inflationary costs, including high utility costs in Taiwan.
Speaker 1: To manage our profitability in 2023, we will work diligently on internal cost improvement efforts while continuing to sell our value.
Speaker 1: Excluding the impact of foreign exchange rate, which we have no control over,
Speaker 1: We continue to forecast a long-term gross margin of 53% and higher is achievable. Next, let me talk about 2023 capital budget.
Speaker 1: Every year our CAPEX is spent in anticipation of the growth that will follow in future years.
Speaker 1: 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.
Speaker 1: That said, our commitment to support customers' structural growth remains unchanged.
Speaker 1: and our disciplined KPACs and capacity planning remains based on the long-term market demand profile.
Speaker 1: Thus, we expect our 2023 capital budget to be between 32 billion and 36 billion US dollars. With this level of CAPEX spending in 2023, we expect our capital budget to be between
Speaker 1: we reiterate that TSMC remains committed to a sustainable and steadily increasing cash dividend on both an annual and quarterly basis.
Speaker 1: 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.
Speaker 1: Now let me turn the microphone over to CC.
Speaker 1: perform over to CC. Thank you Window
Speaker 2: Good afternoon, everyone. First, let me start with our near-term demand and inventory.
Speaker 2: First, let me start with our near-term demand and inventory. Three minutes ago,
Speaker 2: We said we expect five plus semiconductor inventory.
Speaker 2: to start gradually reducing 4Q2022. Then we forecast a sharper reduction throughout the first half of 2023.
Speaker 2: However, due to weakening macroeconomic conditions and softening end-market demand,
Speaker 2: Firebase Semiconductor inventory continued to increase in the fourth quarter and exited 2022 at a much higher level than we expected. In addition, the recovery in yen market demand from China's reopening is also lower than our expectation.
Speaker 2: Therefore, the fiber semiconductor inventory adjustment in force half 23 is taking longer than our prior expectation.
Speaker 2: and may extend into third quarter this year before repellency to a healthier level.
Speaker 2: For the full year of 2023,
Speaker 2: We know our forecast for the semiconductor market is excluding memory to decline with single digit percent.
Speaker 2: while fundry industry is forecast to decline high single digit percent.
Speaker 2: We now expect our four-year 2023 revenue to decline low to mid-single digit percent in US dollar terms and our business to do better than both semiconductor X memory and fundry industries supported by our strong technology leadership.
Speaker 2: and differentiation. We conclude our first quarter with revenue of US dollar 6.7 billion, which is toward the lower end of our guidance range provided in US dollar terms.
Speaker 2: Moving into second quarter 2023, we expect our business to continue to be impacted by customers for the inventory adjustment.
Speaker 2: We now expect our revenue in the first half of 2023 to decline by about 10% over the same period last year.
Speaker 2: in US dollar term as compared to mid to high single digit percent decline previously.
Speaker 2: Heaven says that we believe we are passing through the pattern of the cycle of TSMC business in the second quarter.
Speaker 2: While we forecast only a gradual recovery,
Speaker 2: For the semiconductor experiment industry in second half 2023,
Speaker 2: TSMC's business in the second half of this year is expected to be stronger than the fourth half supported by customers' new product launches.
Speaker 2: Next, let me talk about our N3E and N3E stages.
Speaker 2: Our 3nm technology is a force in the semiconductor industry to high volume production with good yield.
Speaker 2: As our customers' demand for N3 exceeds our ability to supply, we expect N3 to be fully utilized in 2023, supported by both HPC and smartphone applications.
Speaker 2: Sizable N3 revenue contribution is expected to start in third quarter 2023 and N3 will meet single digit percentage of our total waiver revenue in 2023.
Speaker 2: N3E wafers the exchange of N3E family.
Speaker 2: with enhanced performance, power, and yield and over-complete platform support for both HPC and smartphone applications.
Speaker 2: N3E has passed the qualification and achieved performance and yield targets and voting production is scheduled for second half, 23.
Speaker 2: Despite the ongoing inventory correction,
Speaker 2: We continue to observe a high level of customer engagement at both N3 and N3E with the number of paperouts more than 2x, that of N5 in the fourth year and second year.
Speaker 2: Our 3-nano-meter technology is the most advanced semiconductor technology in both PVA and transistor technology.
Speaker 2: Thus, we expect customers a strong multi-year demand for our N3 technologies and are confident that our 3nm family will be another large and long-lasting node for TSMC.
Speaker 2: Now I will talk about our N2 status. Our N2 technology development is progressing well and on track for boarding production in 2025.
Speaker 2: our N2W ADOPT narrow-sheet transistor structure to provide our customers with the best performance, cost and technology maturity.
Speaker 2: Our narrow-sheet technology has demonstrated excellent power efficiency, and our N2WAT delivers full-node performance and power benefits to address the increasing need for energy-efficient computing.
Speaker 2: At Yentu, we are observing a high level of customer interest and engagement from both HPC and the smartphone applications.
Speaker 2: Our two-nanometer technology will be the most advanced semiconductor technology in the industry in both density and energy efficiency when it is introduced and will further extend our technology leadership way into the future.
Speaker 2: Finally, I will talk about TSMC's global footprint and talent development status.
Speaker 2: As we have said before, we are expanding our global manufacturing footprint to increase customer trust.
Speaker 2: expand our future growth potential, and reach for more global talents.
Speaker 2: In Arizona, despite some challenges in obtaining permits, our forcefield is scheduled to begin production of N4 processing technology in late 2024.
Speaker 2: In Japan, we are building a specialty technology lab. The morning production is scheduled for date 2024.
Speaker 2: In Europe , we are engaging with customers and partners to evaluate the possibility of building a spatial device.
Speaker 2: focusing on automotive specific technologies based on the demand from customers and level of government support.
Speaker 2: In China, we are expanding 28 nanometers in Nanjing as planned.
Speaker 2: In China, we are expanding 28 nanometers in Nanjing as planned to support our customers in China.
Speaker 2: and we continue to follow all rules and
Speaker 2: At the same time, we continue to invest in Taiwan and expand our capacity to support our customers' growth.
Speaker 2: In Kaohsiung, our fab construction continues, but we have adjusted our previous 28nm expansion plan to now focus on capacity expansion for more advanced nodes and we will remain flexible going forward.
Speaker 2: In terms of talent development, a key to TSMC's success is adherence to our core value of integrity,
Speaker 2: commitment, innovation, and customer trust.
Speaker 2: and our discipline and spirit of working together as one team.
Speaker 2: In both the U.S. and Japan, we are recruiting from the top local colleges and universities, and our progress is well on track.
Speaker 2: We have hired more than 900 US employees today in Arizona.
Speaker 2: and more than 370 in Japan. We also plan to hire more than 6000 employees in Taiwan in 2023.
Speaker 2: All of our hirees are to support our future growth potential.
Speaker 2: In addition to providing extensive training programs for new overseas employees, many of them are brought to Taiwan for hands-on experience in our phase.
Speaker 2: So that taken further, the technical skills.
Speaker 2: who have been emerging TSMC's operation environment and cultural.
Speaker 2: As we expand our global footprint, our priority work continues to be identify, attract, and hire talent. As we expand our global footprint, our priority work continues to be identify, attract, and
Speaker 2: whose core values and principle are aligned with TSMCs.
Speaker 2: so that we can establish TSMC culture in all our employees, no matter where we operate.
Speaker 2: This concludes our key message. Thank you for your attention.
Speaker 2: Thank you, CC. This concludes our prepared statements.
Speaker 2: Before we begin the Q&A session, I would 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.
Speaker 2: Should you wish to raise your question in Chinese, I will translate it to English before management answers your question.
Speaker 2: For those of you on the call, if you would like to ask a question, please press the star, then 1 on your telephone keypad now.
Speaker 2: If at any time you would like to remove yourself from the questioning queue, please press star then 2.
Speaker 2: Now, let's begin the Q&A session. Operator, can we please proceed with the first caller on the line?
Speaker 3: Yes, Jeff. The first one to ask question, Goku Hariharan from Jepy Morgan.
Speaker 4: Good afternoon and thanks for taking my question. First of all, can I talk, can I ask a bit about the near term demand dynamics?
Speaker 4: Could you talk a little bit about what you're seeing by segments? Is the inventory correction trend largely similar across HPC, smartphone, IoT and auto? Or are you seeing any different dynamics in these segments, especially auto, you saw some shortage still in the last quarter?
Speaker 4: and maybe also talk a little bit about 7 nanometer. Previously, we had an expectation 7 nanometer will start recovering in second half of this year. Do we think 7 nanometer will still be recovering in second half? That's my first question.
Speaker 2: Okay, thank you, Gokul. Let me please allow me to summarize your first question. So Gokul's first question is more focusing on the near-term dynamics. He wants to know basically about the inventory trend across different segments and also the end demand status across the different segments including auto, and then the end demand status across the different segments including auto.
Speaker 2: And then also what about particularly for TSMC, the 7nm status in terms of the utilization recovery.
Speaker 2: Okay, Goku let me answer the question.
Speaker 5: We
Speaker 2: Observe the PC and smartphone market continue to be soft at the present time.
Speaker 2: while automotive demand is holding steady for TSMC.
Speaker 2: and it is showing signs of sovereignty into second half of 2023. I'm talking about automotive.
Speaker 2: On the other hand, we have recently observed incremental upside in AI-related demand, which helps ongoing inventory digestion.
Speaker 2: What is the second question? The second part is on 7 nanometer. We had previously said 7 nanometer utilization is lower. Do we expect this to pick up or recover in the second half?
Speaker 2: It will be recovered but slowly. As I said, most of the N6, N7 technology loading still in HPC and smartphone. However, looking into the future, some of the specialties such as...
Speaker 2: RF connectivity, Wi-Fi, all those kind of things will start to build up the loading demand. And we expect in the long term 7 nanometers loading will become more healthier.
Speaker 2: Yeah, I answered the question.
Speaker 4: Yes, that's very clear. Thank you. My second question, I just wanted to get the SMC's opinion on competitive landscape. Your IDM competitor is getting into Foundry. What does that literally mean?
Speaker 4: then they will be attaining process parity and then process leadership by 2025. Talking about engaging with several fabulous companies.
Speaker 4: How does TSMC see this competitive threat and how do you benchmark TSMC N3 and N2 which is coming in 2025 with Intel's offerings over the next let's say two to three years? And maybe I think TSMC has not commented about Foundry market share for quite some time. So could you talk a little bit about the
Speaker 2: IDM that has been claiming it will achieve process parity in terms of technology with TSMC and absolute process leadership. So he wants to know and they are also talking about engaging with several large fabulous customers. Therigel
Speaker 2: Goku would like to know how do we see or comment on this competitive threat? How do we benchmark our N3 or our N2 process technologies versus this IDM's offerings for the next two to three years? And lastly, if we have any comment on what market share?
Speaker 2: we believe we can achieve? That's a long question. Goku, this is CC Wei again. Let me say that as usual, we don't comment on our competitors' status, but then we emphasize again on our three nanometer and two nanometer. Our three nanometer is the first in the semiconducting industry.
Speaker 2: industry and when we introduce into mass production.
Speaker 2: And this one, we're fully confident that we will further extend our leadership position well into the future. As for the market share, we are very confident that we continue to have a very high market share.
Speaker 2: I cannot tell you the real number, but very high percentage.
Speaker 4: Okay, maybe if I ask, thanks, Sisi for that. If I ask if N3, your expectation that N3 market share will be higher than N5 at the same time based on what you see today?
Speaker 2: Very hard to answer your question, but let me say that it is very similar in a very high percentage.
Speaker 2: Got it. Thank you. Okay. Thank you, Gokul. Operator, can we move on to the next participant, please?
Speaker 3: The next one to ask questions, Bruce Lo from Goldman Sachs.
Speaker 1: Hi, thank you for taking my question. I want to ask about AI for the machine learning AI, which management has been saying that is a key course driver.
Speaker 1: Can we have more quantitative implications to TSMC? What is the dollar content per server or how big is the address for market for TSMC in 2025? Is the reason new AI or chat GBT, you know, the business already embedded in your long-term growth target, which is 15 to 20 percent.
Speaker 2: or can we see some equipment effects? Okay, Bruce, thank you. So Bruce's first question is around, I guess, AI and machine learning. He wants to know if we have any quantitative numbers to give in terms of, for example, dollar content.
Speaker 2: That's right, thank you. Hi Bruce, let me answer this question.
Speaker 2: We certainly have observed an incremental increase in AI-related demand.
Speaker 2: It also helps the ongoing inventory digestion.
Speaker 2: The trend is very positive for TSMC.
Speaker 2: But today, if you ask me to quantitatively to say that how much of the amount increase or how much of the amount increase increase or how much of the amount increase or how
Speaker 2: What is the data content in the server? It's too early to say. It still continues to be developed. And chatGPT right now reinforces the already strong conviction that we have in HPC and AI as a structurally
Speaker 2: mega-trend for TSMC's business growth in the future. Whether this one has been included in our previous announcement or not, we have a 15% to 20% CAGR.
Speaker 2: The answer is probably partly yes because for several we have accelerator.
Speaker 2: into our consideration. But this CHET-GPT, this large language model is a new application and we haven't really have a kind of number that put into our...
Speaker 2: But it's definitely, as I said, it really reinforces our already strong conviction that HPC and AI will give us much higher opportunities in the future.
Speaker 1: Okay, Bruce, does that answer your first question? Thank you. Yep, sorry, go ahead. Yes, thank you. Yes, I want to move on to the different topic, which is cash dividends. I mean, TSNC distributed about like, they were saying dividend policy was 70% of the cash for.
Speaker 1: And we do see the free cash flow is getting stronger especially the KFS growth rate is slower, especially for next year. Can we expect TSMC to maintain the dividend policy which is 70% of the free cash flow next year? Or we would like to improve our balance sheet given the current rate hike environment. Okay, thank you, Bruce. So Bruce's second question is around our cash dividend policy.
Speaker 2: He notes that in the past we have said our cash dividend will be based on 70% of free cash flow distribution. But his question is, you know, as our capex is slowing, our free cash flow is growing stronger, do we still adhere to 70% of free cash flow or because of the environment are we more focused on, I think Bruce.
Speaker 2: in terms of maintaining a improving our balance sheet strength.
Speaker 1: Okay, Bruce. This is Wendell. Let me make a few comments on the dividends. TSMC is committed to a sustainable and steadily increasing dividend.
Speaker 1: During the periods of high capital intensity or high capital investment, more of the focus is on sustainable.
Speaker 1: But when we start to capture and harvest...
Speaker 1: the capital investments spent, the commitment or the focus is more towards steadily increasing.
Speaker 1: The 70% ratio is a guideline.
Speaker 1: Let me give you an example. If in a particular year the free cash flow is
Speaker 1: let me give you an example if in a particular year the free cash flow is much lower
Speaker 1: because of higher KPEX or lower profits than to maintain a sustainable dividend.
Speaker 1: the ratio of recap showed to be dispersed could be higher.
Speaker 1: And on the other hand, in a year where free cash flow is particularly high,
Speaker 1: the ratio can be 70% but it can be lower because we need to look forward into the year behind that specific year and to make sure it is sustainable.
Speaker 6: Okay, does that answer your question?
Speaker 6: Yes, yes, but you know, but if we do see a comfortable range about the free travel, we can still expect like reasonable high payout ratio.
Speaker 1: Yeah, yeah. As I said, the principle is 70%, but it has to be sustainable and steadily increasing. I see. Understand. Thank you. Thank you, Bruce. Operator, can we move on to the next participant, please?
Speaker 7: Next one to ask question, Randy Abrams from Quetta Suisse. Okay, yes, thank you. I wanted to ask a question just on the CapEx in two parts. First, as you look at the 3 nanometer where you mentioned supply still short of demand and have a lot of applications coming in.
Speaker 7: Do you have plans for potential reuse of 5 nanometer in the next 1 to 2 years as you bring up more of the 3 nanometer? And then the second part of the question, I wanted to ask more on that Kaohsiung fab shift. If you could go through why the plan to pull back on 28 and then what the intention for where you would shift that investment.
Speaker 2: the N3 demand exceeds our ability to supply.
Speaker 2: So he is asking will we consider to reuse or convert N5 tools to N3 in the next few years. And also he wants to know related to our plans in Kaohsiung, what is the thinking or the reasoning for pulling back on the 28nm expansion in Kaohsiung.
Speaker 2: Okay, Randy, you got a very good question about whether we convert some of the N5 capacity to S3, because N3 today we are short of support to our customer.
Speaker 2: Instead of saying that convert N5 capacity to N3, let me say that we developed a strategy and a methodology to make some of the N3's tool can be supported by N5.
Speaker 2: And we take this kind of flexibility into our consideration so that we can...
Speaker 2: for we are committed to support our customers in Gen3 as much as possible.
Speaker 2: Although still not enough, but we are doing that. So that ends the first part of your question.
Speaker 2: You asked about Gao Xiong's...
Speaker 2: Let me say that we look at the market situation today and we are going to build initially the 28 nanometers demand is so high so that we have to put Gaussian into our consideration.
Speaker 2: However, you know, the market situation is so dynamic and we look at our plan. One of the plans is in Japan we build a new fire for 28nm of spatiality.
Speaker 2: By the way, THMVC expands the mature nodes capacity all for spatialities.
Speaker 2: We don't increase capacity just for pure logic application.
Speaker 2: The other one, no we don't do. So in order to avoid some of the overcapacity.
Speaker 2: one no we don't do so in order to avoid some of the over capacity so we build one in Japan
Speaker 2: We're also expanding our 28nm capacity in Nanjing, that's the second one. And then we are considering the Europe , that might be the third one for automotive application. Put all three together, we don't think today that Gaussian, if we build 28nm, probably...
Speaker 2: It won't be a...
Speaker 2: you know, a kind of financially feasible. So we diverted now adjusted to become a more advanced node, which we are still in shortage.
Speaker 2: And calcium is so close to a Tainan so that we can have more flexibility in between. Rennie, did that answer your question?
Speaker 7: Yeah, no, that's helpful. It sounds like it'll be very much advanced capacity than like the 5.3 and below. Just maybe one follow-up on the first question is on the CapEx framework, with the expectation if your second half kind of rebound with the share gains comes through, considering the new nodes more capo-intensive, should we think of this CapEx having an up direction as we look ahead to next year?
Speaker 2: Okay so Randy I'll allow this to be a follow-up but Randy's question is basically well considering the second half business will be stronger I think Randy basically you're asking we have provided the guidance range of between 32 to 36 billion you're asking could that be upside or revised higher is that correct?
Speaker 7: Yeah, more the framework into next year since this is more kind of prudent management, a bit recessionary. All right, Randy, let me answer that. As we stated before, every year our KPEX is spent for the opportunities in the future years.
Speaker 1: So although there are short-term cyclicality in the industry, but we believe if the structure of long-term demand is there and the future opportunities is there, we will continue to invest.
Speaker 1: That will be the framework that we can provide to you. Okay, Randy? Okay, yes. We do have a quick second question.
Speaker 7: Yeah, I'll do the quick second. So, for 2 nanometer, if you could clarify the ramp, do you expect the steep ramp to be in 2025, or is it more 2026? And do you also view that ramp being much more with the SOIC, the back-end integration chiplet? Okay, so Randy, second question is on 2 nanometer. We have said volume production in 2025.
Speaker 2: definitely will start to ramp in 2025. Then you ask about the volume. The volume in 2026 certainly is much higher than 2025 because 2025 is the fourth year.
Speaker 2: But saying that, I mean that we are having HPC customer and the smartphone customer now engage with N2 and the Wabi-Rimbinabi in 2025.
Speaker 2: Now whether it's related to chiplets or not, it depends on the customer's product and their plan. And today I cannot share with you all those kind of minor details.
Speaker 2: because they are related to customers' product plane. Okay, great. Thank you, Sisi. Okay, thank you, Randy. Operator, can we move on to the next participant, please? The next one to ask question, Charlie Chan from Morgan Stanley . Go ahead, please.
Speaker 8: Thanks for taking my question. Good afternoon, Cece, Wendell, and Jeff. So, first of all, congrats for the first quarter growth margin, and great to hear that N3E ERA continues to improve. So, let me stay with the CAPES question for a little bit as my first question.
Speaker 8: So first of all, the major equipment supplier, ASML, yes, that seems to suggest that EUV orders get pushed out a little bit. And we all know that your company is a major user of EUV. So can manager answer the question? First of all, celebrate civil always as an adventure.
Speaker 8: whether the KPAV-C0 will be lower end of your guidance range.
Speaker 8: And also for next year, whether your capex intensity would decline year on year, given that EUV push out. Thank you.
Speaker 2: Okay, so Charlie's first question is related to CapEx. He points out that newspaper talks about EUV orders being pushed out. So his question is really for our CapEx in 2023, do we think it will be towards the lower end of the range?
Speaker 2: And then also any indication for 2024 in terms of both capex and capital intensity. Is that correct, Charlie?
Speaker 2: Yes, thank you.
Speaker 1: Yes, thank you. OK, maybe Wendell can answer. Hi, Charlie, this is Wendell.
Speaker 1: First of all, we don't comment on specific suppliers or customers or competitors. In the year 2019,ted by Xiaomi, BerberMac, cute case model, they installed Lenovo phone
Speaker 1: When we gave out the K-BACs range 32 to 36 billion, we have already started or tightened up our 2023 capital budget.
Speaker 9: At this moment, we believe this range is appropriate and is prudent under today's
Speaker 9: economic environment. That range is still valid. Now for next year is too early to talk about next year but as I just stated if the KPAC spend this year will be for future years and KPAC spend next year will be for even future years.
Speaker 9: So if we see the growth opportunities is there, then we will continue to invest. That's the main policy, the principle that we have.
Speaker 8: Thanks for the clarification.
Speaker 8: The question is if, right? Whether those growth drivers still there, meaning big customers outsourcing for 2024, and whether your customers are aggressively adopting your N3 and N2. Yeah, I guess that's why we are concerned about whether...
Speaker 8: 2024 you're reducing some KPACs. But anyway, let me shift to the next one. I think lots of investors also quite interested about the US CHIF act. So I remember a chairman shared this I'm concerned about.
Speaker 8: those are the requirements. I'm not sure which one is specifically concerned. For example, I need to disclose customer information, profit sharing, some restriction for the future China fab investments. So my question is that how KSCI is going to reconcile your own interests versus
Speaker 8: the US government's requirements. And if it is hard to reconcile, whether TSMC would consider not to take US government's grants. Thank you.
Speaker 2: Okay, so Charlie's second question is regarding the CHIPS Act. He notes, we have recently said that some of the terms may be not acceptable. So he wants to understand how will TSMC reconcile its own interest versus some of the other terms.
Speaker 9: guidelines or guardrails around the CHIPS Act, and is there a possibility that we will not accept or participate in the CHIPS Act? Okay, Charlie, let me make a few comments on this one. We are currently in the application process, and therefore we're not...
Speaker 9: able to comment on specific details.
Speaker 9: However, we are in close and constant communication with the US government so that we fully understand all the details and provide our feedback and comments to them. In the end, all the decisions that we make will be based on the best interest of TSMC.
Speaker 8: Okay, thank you for that. Yeah, I will be back to the queue. Okay, thank you Charlie.
Speaker 3: Operator, can we move on to the next participant, please?
Speaker 10: Yeah, thanks very much. Wendell, I wanted to just talk a bit about Arizona and now that you're scheduled to move into production next year and you've been hiring a lot of people, how do we think about the cost premium for TSMC operating in the US? And then when it comes to the pricing for the wafers.
Speaker 10: Would this be something that you charge a premium for, for accessing US capacity? Or would you be sort of offering similar wafer pricing to what you offer in Taiwan? Thank you very much. Okay, thank you, Brett. So Brett's first question is around regarding our Arizona fab. He notes that the volume manufacturing schedule is on track and we've hired lots of people. So his first question...
is to wind all around sort of what is the cost premium that we face in Arizona and how will we manage this including our wafer pricing. Will we charge a different price for the different fab or how do we intend to do it? Okay, but the overseas fabs is indeed
the cost is higher, at least in the first several years. We stated last time that some of the components, like the construction cost, may be as high as five times.
Now the way to mitigate that, first of all, it represents our global expansion, represents energy stole, and enters the core of our global economy.
value to the customers, then we will be selling that value as well. And secondly, because of our large base and volume, we'll be able to leverage that big base and volume to lower down the cost.
And at the same time, of course, we will need to secure the necessary level of government support. So putting all these efforts together, we will...
time of course we will need to secure the necessary level of government support. So putting all these efforts together, our job is to minimize the number of people who
the cost gap and make a popular return.
for the whole company on a combined basis.
the 53% and higher gross margin remains our long-term financial goal and is achievable.
Great, thanks for that Wendell. And maybe just a follow up, I wanted to ask about the subsidies that TSMC are getting today, particularly in areas like Japan. How much is this going to be in 2023 and are you expecting a meaningful increase in the
support in the second half of the year. I'm just trying to understand what's embedded in guidance and how to think about how to think about accounting for the support that you're expecting you know over there over the medium term. Thank you. Okay, so Brett has a quick follow-up regards to Japan. His question in terms of the government support or incentives we may receive. How will we account for it?
receive from the government and we will be production start production at the end of next year so the the incentives from the government will be according will be based on the progress that we are building our FAPS.
So that gives you some idea of how much we can receive this year and next year.
How do we account for it? Basically, that will be accounted for as an offset of depreciations.
Okay. Great. Thanks very much. Very helpful. Okay. Thank you, Brett.
Operator, can we move on to the next participant then? Next we have Sunny Lin from UPS.
Thank you very much. Good afternoon. So my first question is on the pricing. So I think just now management again reiterated that your supply chain value is increasing and you look to sell that value. And so with that, as you are about to start ramping over this capacity more significantly.
into the next couple of years, how should we think about your ASP tread?
Okay, so Sunny's first question is also related to pricing. She knows that semiconductor industry value in the supply chain, she said, is increasing. Her question is that, Sunny, I believe as we expand our footprint and capacity beyond Taiwan and go overseas...
what will be the ASP trend in the next few years, is that correct?
That's right. Thank you very much. Okay. Sunny, I'll answer this question. First, actually our pricing strategy actually is strategically and long term. We work with our customer.
Yes, you are right. I mean that the inflation or others, the cost is increasing.
especially in the overseas fabs.
However, we already put all those kind of things into consideration and we have a lot of action items to work with internally and also with our partners, our supply partners and to go down all the costs.
and we are also working on the supply chain management. So we hope that we will control that, even with today's very tough situation.
Got it. Sorry, if I could have a very quick follow up. And so how should we think about the mechanism for you to reflect that supply chain value? Will it be an annual pricing negotiation? And I also wonder what's the customer feedback?
under the current situations.
All right, so Sunny wants to know how will we do the pricing? Is it on an annual basis? What's the feedback from customers?
This is very specific, but let me emphasize again.
Our pricing is strategic and we reflect our value. Now our value includes the value of geographic flexibility.
Did I give you some hint? Got it. Thank you. That's very helpful. My second question is on your KPAC expansion. And so I wonder if we look at the equipment lead time, are you seeing ongoing improvement? What I'm trying to understand if you need to...
tighten up the key packs, but let's say if later on demand starts to recover or get better into second half of the year, how much flexibility you have to pulling the equipment.
Okay, so Sunny's second question is around capacity expansion and equipment lead time. She notes that we have said we're tightening up our capex this year and being prudent given the economic environment, but her question is if the demand recovers in the second half.
how quickly can we adjust our equipment and capacity and would equipment lead time then become a bottleneck? Is that correct, Sunny? That's right. Thank you, Jeff. Okay. Sunny, this is a very, very good question. We are tightening up on the KPEX.
But at the same time, we also remain flexible that once demand picks up quickly, we should have prepared enough capacity for our customers to grow. And so both factors are very important and we are working with all the suppliers.
to tighten the KPEX. But the main trend stays the same because we believe AI, 5G, the mega trend will continue to grow and TSMC's business will continue to grow.
Got it. Thank you very much. All right. Thank you, Sunny. Operator, can we move on to the next participant, please? Next one, we have Laura Chen from Citi.
Yes, hi, good morning. Thank you very much for taking my question. My first question is about the data center and server space. We know that in the high computing PC category that also includes some of the PC CPU or consumer related applications. So that may show some weakness as we see the quote unquote.
Okay, so Laura's question, she notes that our HPC platform includes more consumer facing things such as PC CPUs, but it also includes data center and servers.
So her question is really, I guess, what is TSMC's view on the growth outlook for AI data centers? And how significant this could be for HPC business? Yes, so if we're including those like a gaming GPU or consumer PC CPU in this category, so what's the
Data Server and Server Business looks like now. Thank you. Laura, let me answer this question. We did see some positive signs of people getting much more attention.
AI application, especially the chat GPT area. However, as I said, quantitatively we haven't had enough data to sum it up to see what is the contribution and what kind of percentage to DSMC's business.
But we remain confident that this trend is definitely positive for THMC. And we don't break down our HPC platform into those type of sub-segments. Thank you. Okay, understood. Thank you very much. And my second question is also related to that high computing PC angle. Just wondering that you're...
right now and what's the current capacity or revenue you can share with us and also the growth trend. Thank you.
Okay, so Laura's second question is on the advanced packaging. She notes that applications like HPC, PC, CPUs, etc. require, you know, COBAS or 3D stacking, 3D IC advanced packaging technology. So her question is, what is the capacity expansion outlook or plan for our advanced packaging? And also, what is the revenue growth outlook, I guess, over the next few years? Is that correct, Laura?
Yes, thank you very much. Okay Laura, let me start. For the advanced packaging, the backend services, we think that its growth in the next five years will be slightly higher than the corporate average. However, for this year, it's...
the revenue will be lower than that of last year because of customer demand.
Last year the revenue accounted for about 7% of our total revenue. This year is somewhere between 6 to 7.
So that should give you an idea of the overall. Okay, so in terms of the capacity, is there any change in this year versus last year?
So, also part of the question is specific to the capacity for packaging. What is the
year-on-year growth in the advanced packaging capacity. Well, Laura, no, no, no, I mean that's a semi- Actually just recently in these two days I received a customers phone call requesting a big increase on the back-end capacity especially in the cold world.
we are still evaluating that. Okay, got it. Very clear, very helpful. Thank you very much. Okay, thank you. Operator, please move on to the next participant, please. Yes, next one to ask questions. Amadi Hosseini from SIG. Go ahead, please. Yes, thank you for taking my question.
Your guide for June and also 2023 revenues suggest revenues in the second half of the year would be up by 25% versus the first half. What I want to better understand is how will new product ramps...
drive this growth. Is there anything quantitative or qualitative that you can offer us to understand the mechanics or the drivers behind this 25% growth in revenue from first half into the second half? And I have a follow-up. Okay. Thank you, Medice. So Medice's first question is in looking at our guidance. His calculation implies it's around $2.5 million.
mid-20s half on half growth in the second half. So he wants to know how much is new projects or new business driving that percentage of the growth.
Well, I can answer that question. To give you a hint, I mean that we talked about a customer's new product launch.
which uses 3 nanometers.
So you can understand that we stopped to ramp up 3nm quickly because it fully utilized and still not enough to meet customers' demands. In addition to that, actually all the platforms, their performance, their demand was increased.
in the second half. So as these new products drive wait for shipment increase, we should assume that utilization rates would bottom in June and improve into the second half.
So, he wants to know can you assume utilization bottoms in 2Q and improves in the second half?
Yeah, Maddie, that's a reasonable view. CC has already said second half will be stronger than first half.
Do you have a second question? Yes, I have one for Wendell. This question comes from every conference called capital intensity. Should we assume that as you tighten your capitalized project for this year and especially in the context of declining revenues for the whole year, are we at the tail end of the year?
elevated capital intensity. Should we assume that over the past couple of years there has been significant investment and starting next year you're going to be able to scale your revenues? Is that the right way of thinking about all these investments that you have done? Okay, so Mehdi's second question is around capital intensity. He wants to know, given the guidance we have provided for 2023, what are the risks for capital intensity?
Are we at the tail end of the higher capital intensity period or elevated capital intensity period? And then will we start to, I guess, harvest or see that capital intensity come down next year or into the next few years? Matty, I am not going to share with you the peak, where the peak is, but I can tell you from my current five-year outlook, we are looking at about mid-30s percentage of capital intensity.
Great, thank you. Thank you, Madis. Let's move on to the next participant.
Yes, the next one to ask questions. Chris Sankar from TD Cowen. Hi, thanks for taking my question. My first one is on your comment that the entry capacity will be fully utilized this year. Is that capacity that will be online in the second half same or higher or lower than what you planned a year ago?
And also at this point you see the N3 wait for demand profile to be similar or better than N5 at the same point in the cycle. So I will add a follow up.
Okay, so Chris's first question is on N3 capacity. He notes we said it will be fully utilized this year. He wants to know the capacity that we build or plan for N3 this year and in the second half. How does that capacity amount compared to what we expected a year ago? This is
Well, I can answer the question. Actually, the demand is higher than we thought a year ago.
And that's why we need to work very hard to be customer-centered.
Does that answer your question, Krishnaji? Yes, it does. Thank you for the piece here. Just a quick follow-up. You spoke about AI being a positive and all the innovations happening in generative AI today. Just from a TSMC standpoint, is it fair to assume that AI is a positive and a positive
What you're going through today is more on the training stage and therefore it's more semiconductor and wafer intensive But when you go into more inference that Intensity has to decrease Is that a fair assumption or do you think that this level of intensity will continue growing from a TSMC standpoint for AI?
Okay, so Chris's second question is regards to generative AI and these type of applications. His observation is that you know, the majority is training today which seems to be beneficial but as training moves to inference would it be less?
semi-intensive or semi-content intensive and then therefore would that be i.e. lower benefit to TSMC?
Chris, I mean, today your observation is right because right now most of the AI concentrate or focus on training. In the future, you will be in foreign. Let me say that. Let me say your observation is right because right now most of the AI concentrate. Let me say your observation is right because right now most of the AI concentrate.
You know, no matter what, no matter what kind of application, they need to use a very high performance semiconductor component. And that actually is the TSMC's advantage.
So we expect that semiconductor content starting from a data center, poly-fib-k2 device and edge device or those kind of things put all together. They need a very high speed computing with a very power efficient one. And so we expect that the
It will add to TSMC's business a lot. Qualitatively, as I said, we didn't know yet. We hope that in the next few quarters, we can give more clear picture. Thanks, Sisi. Thanks, Jess.
Okay, thank you. Operator, in the interest of time, we'll take the last two questions from the last two participants, please. So, can we proceed to the next participant?
Yes, of course. Next up is Brad Lin from Bank of America. Go ahead, please. Thank you for taking my question. I have two questions, one on the internal organization change and the other on a recently announced strategic alliance.
So while the global expansion is a key focus of TSMC, I noticed that TSMC set up a new unit code overseas operations office OOO. What are the targets and impacts that the TSMC management would look for from this new unit? Thank you. That's my first question. Okay, so Brad's first question is about our internal...
all the organizations, now the FAB.
So always you have a number and the amount will be more and more. So we need to have a coherence or in the culture, so everything aligns to the headquarters to TSMC's core value.
So we established this Overseas Operations Office to make sure that headquarters support to each overseas fab will be sufficient and enough so that the performance will be aligned or match with the TSMC fab in Taiwan.
But more importantly, because we have this organization, so we can tell them to succeed and in the future can be more profitable.
Thank you, CC. Brad, do you want to? Yeah, your second question? Sure. Thank you, Jeff. So my second question will be on the recently announced Traditrik Alliance. No migration is the foundry's competition focus and we know that the SMT leadership is on the leading edge.
We recently see TSMC partner up with NVIDIA, Synapse and FML on 2nm production at beyond. What is the target and how is the progress so far? TSMC is currently the only fundry within that group. Should we expect an even larger gap to peers?
with this or should we allow more companies or competitors to join this group? Thank you. Brad, sorry, let me clarify, make sure we understand your second question. So your second question is talking about you call it an alliance, but I think you refer to ASML and NVIDIA. So are you referring to this announcement?
and what does this mean for TSMC's competitiveness going forward.
Okay, that's a good question. It is initiated and invented by TSMC's customer in media. And actually we are working with them. And this, particularly the software and the hardware together will help speed up computational lithography.
by moving expensive operations to GPUs which will help us deploy disography solutions like inverse disography technology, deeper learning more broadly, etc.
Because of this one, we get involved with our customer and our supplier, and we expect that this one give us some advantage over our cost improvement and also competition. Got it. That's very clear. Thank you very much for the insight. Thank you, Sisi. Thank you, Jeff.
Sure, thank you, Brad. Operator, then can we move on to the last participant, please? The last questions are from Chiaxie from Nian Company. Go ahead, please.
Thank you for squeezing me in. I have a question about your CapEx. Maybe I want to start with one item you disclosed in your filings on your balance sheet. You have an item called equipment under installation and construction progress. That number has hit a record high, I think over 40 billion.
reiterating that 32 to 36 billion capex.
That seems to be adding on top of that 40 billion, a lot more investment is still expected in this year. So my question really is about this. Are you expecting significantly higher incremental revenue opportunity in 2024 and beyond to justify that 40 billion plus maybe another 32 billion?
please let me try to summarize it a little bit into two parts. I think Charles' question, he does rightly note that on our balance sheet, equipment under installation reached roughly about $40 billion at the end of 2022. He notes this is a very high level. His concern, maybe Wendell can address, is we also guided for $32 to $36 billion CapEx this year. So is this number going to only increase?
and what is driving this is this, you know, preparing for significant revenue opportunities in 2024 and beyond. So this is his first question. Okay, Charles, the $40 billion asset under construction at the end of last year primarily come from two nodes.
N3 nodes and the N5 nodes. N3 nodes that is because we're ramping up the N3 nodes. And N5 we continue to increase our capacity. Therefore these two add together you see a bigger asset under construction at the end of last year. From what I can see going forward this number will be...
at least in the next one year or so of the next 12 month horizon. How do I reconcile that? Or are you expecting like next year that's gonna be a significant revenue, incremental revenue coming to TSMC?
Charles, as we said, it's too early to talk about next year, but we also said that if we continue to see the future growth opportunities is there, we will continue to invest. Thank you.
Thank you. May I ask the second question? Sure. Yeah, thank you for that. So the second question is about CHIPS Act. I've heard you provided some help to the question from another analyst about that. Can you kind of quantify?
modeling going forward. And maybe if I may, can I ask, one of your US peers seems to be favoring investment tax credit over grants. They seem to only want the investment tax credit, not the grants. What is the TSMC thinking between these two different funding opportunities? Thank you.
Okay, thank you Charles. So Charles' second question is around the CHIPS Act. He is asking if we can quantify the potential benefits both in terms of grants and also in terms of tax credits and also do we favor one over the other or preference for one over the other? Charles, thanks for asking me to...
As I said, we are in the process of application, so we're not in a position to disclose any details. I will refrain from sharing more information at this moment.
Okay, thank you, Wendell. All right, so thank you everyone. 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 and the transcript will become available 24 hours from now. Both of these will be available through TSMC's website at www.tsmc.com.