Q2 2023 Taiwan Semiconductor Manufacturing Co Ltd Earnings Call
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Speaker 1: Good afternoon everyone and welcome to TSMC's second quarter 2023 earnings conference call. This is Jeff Hsu, TSMC's Director of Investor Relations and your host for today.
Speaker 1: TSMC is hosting our earnings conference call via live audio webcast through the company's website at www.tsmc.com where you can also download the earnings release materials.
Speaker 1: If you are joining us through the conference call, your dial-in lines are in listen-only mode.
Speaker 1: The format for today's event will be as follows.
Speaker 1: First, TSMC's Vice President and CFO , Mr. Wendell Huang, will summarize our operations in the second quarter 2023, followed by our guidance for the third quarter 2023.
Speaker 1: Afterwards, Mr. Huang, TSMC CEO Dr. CC Wei, and TSMC Chairman Dr. Mark Liu will jointly provide the company's key messages. Then we will open the line for a question and answer session.
Speaker 1: As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the Safe Harbor notice that appears in our press release.
Speaker 1: 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. Thank you, Jeff. Good afternoon, everyone, and thank you for joining us today. My presentation will start with financial highlights for the second quarter of 2023.
Speaker 1: stringent cost control and a more favorable foreign exchange rate. Despite the industry's cyclical downturn, we continue to invest in R&D to support our N3 and N2 development. operating margin was 42% down 3.5 percentage point sequentially.
Speaker 1: Overall, our first quarter EPS was 7.01 NT and ROE was 23.2%.
Speaker 1: Now, let's move on to revenue by technology. Five nanometer process technology contributed 30% of our welfare revenue in the second quarter, while seven nanometer accounted for 23%. Process technologies defined as seven nanometer...
Speaker 1: smartphone decreased 9% to account for 33%, IoT decreased 11% to account for 8%, automotive increased 3% to account for 8%, and DCE increased 25% to account for 3%.
Speaker 1: Moving on to the balance sheet, we ended the second quarter with cash and marketable securities of 1.5 trillion NT or $48 billion US dollars. On the liability side, current liabilities decreased by 62 billion NT.
Speaker 1: Long-term interest-bearing debt increased by 53 billion NT, mainly as we raised 41 billion in corporate bonds. On financial ratios, accounts receivable turnover days decreased two days to 32 days, while days of inventory increased three days to 99 days.
Speaker 1: spent $251 billion in KPACs, distributed $71 billion for third quarter 2022 cash dividend, and raised $41 billion from corporate bond issuances.
Overall, our cash balance decreased by $109 billion to $1.3 trillion NT at the end of the quarter. Free cash flow was negative $83 billion NT during the quarter, as operating cash flow was more than offset by capital expenditures, partly due to the income...
Based on the current business outlook, we expect our third quarter revenue to be between $16.7 billion and $17.5 billion, which represents a 9.1% sequential increase at the midpoint.
Based on the exchange rate assumption of one US dollar to 30.8 NT.
Gross margin is expected to be between 51.5% and 53.5%.
Operating margin to be between 38% and 40%.
This concludes my financial presentation. Now let me turn to our key messages. I will start by making some comments on our second quarter 23 and third quarter 23 profitability.
Our actual growth margin slightly exceeded the high end of the range provided three months after growth.
mainly due to more stringent cost control efforts and a slightly more favorable foreign exchange rate.
We have just guided our third quarter gross margin to decline by 1.6 percentage point to 52.5% at the midpoint. Primarily as the higher level of capacity utilization rate is offset by 2 to 3 percentage points margin dilution from the initial ramp up of our...
In 2023, our gross margin faces challenges from lower capacity utilization due to semiconductor scarcity, the ramp up of N3, overseas fab expansion, and inflationary costs including higher utility costs in time.
to forecast a long-term gross margin of 53% and higher is achievable.
Next, let me talk about our 2023 capital budget and depreciation. Every year our KPEX is spent in anticipation of the growth that will follow in future years.
Given the near-term uncertainties, we continue to manage our business prudently and tighten up our capital spending where appropriate.
We now expect our 2023 capital budget to be towards the lower end of our range of between 32 and 36 billion US dollars.
Our depreciation expense is now expected to increase by mid-20s percent year-over-year in 2023, mainly as we ramp our 3nm technologies.
Despite near-term inventory cycle, our commitment to support customers' structural growth remains unchanged, and our disciplined KPACs and capacity planning remains based on the long-term market demand profile.
We will continue to work closely with our customers to plan our long-term capacity and invest in leading-edge specialty and advanced packaging technologies to support their growth while delivering profitable growth to our shareholders.
Now, let me make a few comments on our cash dividend distribution policy. The objectives of TSMC's capital management are to fund the company's growth organically, and to make good profitability.
preserve financial flexibility, and distribute a sustainable and steadily increasing cash dividend to shareholders. As a result of our rigorous capital management, in May, TSMC Board of Directors approved the distribution of a 3 NT per share cash dividend for the first time in the world.
2023. For 2023, TSMC shareholders will receive a total of 11.25 NT per share dividend and at least 12 NT per share cash dividend for 2024. Going forward,
As our capital intensity begins to decline in the next several years, the focus of our cash dividend policy is expected to shift from a sustainable to a steadily increasing cash dividend per share in the next few years. Now let me turn the microphone over to CC. Thank you, Window.
Good afternoon, everyone. First, let me start with our near-term demand and inventory. We concluded our second quarter with revenue of 15.7 billion US dollar in line with our guidance in US dollar terms.
how business in the second quarter was impacted by the overall global economic conditions, which dampened the end market demand and customers are ongoing inventory adjustment.
Moving into third quarter 2023, while we have recently observed an increase in AI-related demand, it is not enough to offset the overall security of our business. We expect our business in the third quarter to be supported by the
by the strong rim of our three nanometer technologies, partially offset by customers and a continued inventory adjustment.
In the last quarterly conference, we said we expect Fabless Semiconductor inventory to rebalance to a healthier level exiting the third quarter. This statement continued to hold true. However, due to persistent weaker overall econ bicycle market graduation by was when the technology world was coming back EUC looks collated with a
While we maintain our forecast for the 2023 semiconductor market as crude memory to decline in single digit year over year, we now expect the fundry industry to decline mid-teens and our full year 2023 revenue to decline around 10% in US dollar term.
With such inventory control, we also forecast the 5.7 conducted inventory to exit 4Q23 at a healthier and lower level as compared to our expectation three months ago. Next, let me talk about HPC and TSMC, the long-term course outlook.
As we have said before, the massive structural increase in demand for computation underpinned by the industry mega trend of 5G and SPC continues to drive greater need for performance and energy efficient computing which require use of leading edge technologies.
These mega trends are expected to fill TSMC's long-term growth. Even with a more challenging 2023, our revenue remains well on track to grow between 15 and 20 kg over the next several years in US dollar terms, which is a target we communicated back in January 2022 in the investor conference.
The recent increase in AI-related demand is directionally positive for TSMC. Generative AI requires higher computing power and interconnect bandwidth, which drives increasing semiconductor content.
Whether using CPUs, GPUs or AI accelerator and related ASIC for AI and machine learning, the commonality is that it requires use of leading edge technology and a strong functional design ecosystem. These are all TSMC's strengths.
Today, server AI processor demand, which we define as the CPUs, GPUs, and AI accelerators that are performing training and inference functions, account for approximately 6% of KSMC's total revenue.
We forecast this to grow at close to 50% CAGR in the next 5 years and increase 13% of our revenue.
The accessible need for energy efficient computation
is starting from data centers and we expect you are proliferate to edge and end devices of time, which will drive further long term opportunities. We have already embedded certain assumption for AI demand into our long term KPEX and growth forecast.
Our HPC platform is expected to be the main engine and the largest incremental contributor to TSMC's long-term course in the next several years.
while the quantification of the total addressable opportunity is still ongoing. Generative AI and large language models only reinforce the already strong conditions we have in the structural remake of trends to drive THMPs long term growth.
and the transistor technology. N3 is already in volume production with good yield. We are seeing robust demand for N3 and expect a strong ramp of N3 in the second half of this year supported by both HPC and smartphone applications.
N3E is expected to continue to contribute a single digit percentage of our total wafer revenue in 2023. N3E further extends our N3E firmly with enhanced performance, power and yield and provides complete platform support for both HPC and smartphone apps.
from our customers and are confident that our 3nm family will be another large and long-lasting node for TSMC.
Finally, I'll talk about our N2 status. Our N2 technology development is progressing well and unchecked for boarding production in 2025.
Our N2W adopts narrow-sheet transistor structure to provide our customers with the best performance, cost and technology maturity. Our narrow-sheet technology has demonstrated excellent power efficiency and our N2W delivers full load performance and power benefits.
to address the increasing need for energy efficient computing. As part of the N2 technology platform, we also developed N2 with backside power rail solution, which is best suited for HPC applications. Exide power rail will provide 10-12% additional speed gain.
10 to 14 percent large density boost on top of the baseline technology.
We are targeting backside power rail to be available in the second half of 2025 to customers with production in 2026. We are observing a high level of customer interest and engagement at N2.
from both HPT and smartphone applications. Our 2-nanometer technology will be the most advanced semiconductor technology in the industry in post-density.
and energy efficiency when it is introduced. And to further extend our technology leadership, we are into the future. This concludes my prepared remarks. Let me turn the microphone over to Mark.
Thank you, Sisi, and good afternoon, everyone. Today I want to talk about TSMC's Global Manufactured Footprint status update.
TSMC's mission is to be the trusted technology and capacity provider.
of the global logic IC industry for years to come. Our strategy is to expand our global manufacturing footprint to increase customer trust.
and to expand our future growth potential.
and to reach for more global talent. Our overseas decisions are based on our customers' needs.
and the necessary level of government support. That is to maximize the value of our shareholders.
and to fulfill our fiduciary duty.
In Arizona, we are building a first step to provide US most advanced semiconductor technology in mass production. In Arizona, we are building a first step to provide US most advanced semiconductor technology
to support the need for US semiconductor infrastructure.
Our fab in Arizona started construction in April 2021 with an aggressive schedule.
We are now entering a critical phase of handling and installing the most advanced and dedicated equipment.
However, we are encountering certain challenges.
with those specialized expertise required for equipment installation in a semiconductor-grade facility. While we are working on to improve the situation, including sending experienced technicians from Taiwan to train the local skilled workers for a short period of time.
We expect the production schedule of N4 process technology to be pushed out to 2025.
In Japan, we are building a specialty technology factory, which will utilize 12, 16, and 22, 28 process technologies.
The audience production is on track for late 2024.
In Europe , we are engaging with customers and partners to evaluate building a specialty fab in Germany.
focusing on automotive specific technologies.
based on the demand from our customers and the level of government support.
In China, we are expanding 28 nanometer in Nanjing as we planned.
to support our customers in China. And we continue to follow all rules and regulations fully.
At the same time, we continue to invest in Taiwan.
and to expand our capacity to support our customers' growth.
From a cost perspective,
The initial cost of overseas FAP are higher.
Then TSMC fabs in Taiwan due to one, the smaller fab scale, two, higher costs throughout the supply chain, and three, the early stage of semiconductor ecosystem on those overseas sites as compared to a matured ecosystem.
in Taiwan.
In our recent meetings with senior government officials in the US
Japan, and Europe . We discussed our plans to expand our global manufacturing footprint to them.
We also emphasize...
One of our major responsibilities is to manage and minimize the cost gap.
to maximize the return for our shareholders. Those discussions went very well. All sides understand the critical and integral role TSMC plays in the semiconductor industry.
And we appreciate all the government's ongoing support in working with TSMC to help narrow down the cost gap.
We will continue to work closely with all the governments to secure the further support.
Our pricing will also remain strategic to reflect our value, which includes the value of geographic flexibility.
At the same time, we will leverage our fundamental competitive advantage of manufacturing technology leadership, large volume and economies of scale to continuously drive our costs down.
By taking such actions, TSMC will have the ability to absorb the higher costs of overseas fab while remaining the most efficient and cost effective manufacturer, no matter where we operate.
Thus, even as we expand our capacity overseas, TSMC's long-term gross margin of 53% and higher and sustainable ROE of greater than 25% is achievable, and we will continue to maximize the value for our shareholders. This concludes our key messages. Thank you for your attention.
Thank you Chairman. This concludes our prepared statement.
Before we start 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.
Should you wish to raise your question in Chinese, I will translate it to English before our management answers your question.
For those of you on the call, if you would like to ask a question, please press the star, then 1 on your telephone keypad now.
If at any time you would like to remove yourself from the questioning queue, please press star 2. Now, let's begin the Q&A session. Operator, can we please proceed with the first caller of the line?
The first one to ask questions go to Hari Haran from JP Morgan. Go ahead please.
Thank you. Good afternoon and thanks for a lot of clarity on the AI related exposure. My first question is on the AI front. A lot of GSNC customers have been talking about capacity shortage and...
having to kind of queue up for capacity for AI accelerators including GPUs and ASICs. Could TSMC talk a little bit about what TSMC is doing on the capacity side, especially on the advanced packaging, but also on other areas? And when do you expect to get back to some degree of demand and supply balance?
for these AI accelerators? Is it going to be only sometime next year, or do you think it could happen quicker based on what you see on demand from your customers and the capacity plan?
Okay, Gokul, thank you. Please allow me to summarize your first question. So first question from Gokul is that he notes that customers are seeing strong demand from AI related, but they're facing capacity tightness or shortage. So his question is what are we doing to ensure that our customers are not getting
Yeah, thank you.
Okay, Koku, this is CC Wei. Let me answer your question. For the AI right now we see a very strong demand, yes. For the front-end part, we don't have any problem to support. But for the back-end...
the advanced packaging side, especially for the callers, we do have some very tight capacity to, very hard to fulfill 100% of what customer needed. So we are working with customer for the short term.
to help them to fulfill the demand, but we are increasing our capacity as quickly as possible. And we expect that these Titanies will be released next year, probably toward the end of next year. But in between, we are still working closely with our customers to support their growth.
Okay, and Sisi, maybe one follow up, could you let us know what kind of capacity expansion is it like, how much capacity you are expanding on the COBOL side, any kind of modification of what kind of capacity you are adding?
Okay so Gokul just an additional to the first question how much capacity are we going to increase in terms of co-op?
Let me give you a roughly appropriate 2x of the capacity what we aided.
Okay, Goku.
Thank you.
Google.
Okay, Goku are you there? If not, operator, maybe we move on to the next participant.
Okay, Goku, are you there? If not, operator, maybe we move on to the next participant. Goku, are you there?
Okay, I think there was a disconnected. Alright, let's move on to the next caller.
Next one to ask questions. Bruce Lu from Goldman Sachs. Go ahead, please. Thank you for taking my question. I still want to know about the KSMG Maintender 15 to 20% revenue trigger when we cut this year's revenue to minus 10%.
But if we use that 15% revenue CACR to 2026, that's implies about like 25 plus percent revenue CACR from the coming two years, which means that the overall semi-growth is going to increase like a lot for the next two to years. And you just mentioned that the AI only accounts for 6% with low things per day.
So, Bruce's first question is on our long-term growth CAGR, which we have said is to be between 15 to 20% from 21 to 26 CAGR period. So, Bruce's question this year, you know, CC just said we will decline around 10%. In his calculation, I think he's saying, well, this implies you should grow 25% the next several years, which of course is...
Let me let me handle this question
Your rationale is correct. However, some of the factors may not be totally included.
For one thing in your model that the customer's gross margin is 60% a plus. I don't think that we understand the average customer's gross margin and maybe some specific.
However, the other one is the market share. The market share factor, you assume the constant. That is not one thing that could be different than in your formula. The semiconductor, the collision factor, can Communicate whether there is a ONE or Uh, Loch.
Did I answer your question? Yes, but the reason I do that is that I'm assuming that you have like Tomin and Markish here in the best know.
and also that the growth is mostly coming from the advanced node, which your customers' growth is supposed to be higher. So I still think that the gap is wide enough. That's why I'm wondering whether I miss anything which might be big enough to move the needle that might...
you know, investment that the management might can give us some call from callable. I don't, this is the factor as far as the market share value you might.
Not totally included, all the factors. That's my perspective. But I cannot dig into the numerical comparison at this point.
What I mean is the market share is not just the advanced leading edge technologies, but also the share of the outsourcing. So maybe, Bruce, if I summarize again, TSMC's growth is driven by both the underlying structural mega trends, but also by our technology leadership and differentiation. So our CAGR... can focus their Seattle Theatre on operating real estate and the digital entertainment of Seattle Market. So in the confinflammatory of what we develop in Seattle, we are going to be focusing on
Now it's about 10% decline.
So the gap is like 5% of the total revenue, which is like quite sizable in terms of revenue. Well, with that 3-4 beating, highly concentrated in the second half or fourth quarter. Can you give us like what is the... What are the changes in terms of this shortfall? Where are the weaknesses coming from?
Okay, so Bruce's second question is looking at our 2023 four year guidance. He knows this last time we had said low to mid-single digit decline. This time we have guided to around 10%. So his question is the delta of this seems to be all, a lot of it also in the fourth
Yes, we did see something different. The first, the macro is weaker than what we thought. You know, three months ago, we probably more optimistic, but now it's not. Also, for example, China's economy recovery is actually...
expected that of the whole year what becomes a minus 10 percent. That's what we thought.
And in terms of by particular segment or the particular market? It's almost, thank you, you are asking me the question. It's almost, yes, yes, I understand my question. Thank you, John . Yes, it's overall for market segment.
it's being impacted because of either its combination of the macroeconomics. So can we conclude that other than AI almost every application sees some weakness in the second half?
You got it.
Thank you. Okay, thank you, Bruce. Operator, can we move on to the next participant, please?
Next one to ask a question is Goku Harihalan from JP Morgan. Goku you're back. Okay yeah sorry about that. So next question, I just wanted to ask about TSMC management's view on the current inventory cycle.
it looks like this cycle is taking it much longer to get through the down cycle compared to 19 and 30, 15. When do you think we kind of bottom out? And do you feel that the recovery in...
next year is going to be a strong recovery? Or do you think it's going to be a more gradual recovery? What are the kind of plans that you're putting in place as we think about next year's recovery once the inventory situation normalizes? Thank you.
Okay, so Goku's second question is about the inventory correction cycle. He notes this cycle seems to be taking much longer to get through as compared to 2019 and 2015. So his second question is when do we think this cycle can bottom out? What will 2024 next year look like? Do we expect a strong recovery and what factors will be needed to keep the economy going?
it's become weaker than we thought. In fact, higher inflation and interest rate impact and demand in all market segments in every region in the world. As we said, under such situation, our customers are more cautious because of their inventory control in the second half of this year.
So while we expect the five-place semiconductor industry, their inventory to be cleaner and healthier, exceeding existing this year, but much closer to the seasonal level. But our...
our expectation for them, they will continue to manage their inventory. And 2024, it is still depend on the macro situation.
Okay, so it sounds like you're still expecting at least early part of next year to still be a little bit challenging, similar to what it is looking like right now. Is that bad to say?
Thank you. Thank you.
Thank you. Thank you, Gokul. Operator, can we move on to the next participant, please? Next one, we have Charlie Jahn from Morgan's Landing. Hi, gentlemen. Good afternoon. Thanks for taking my question. So, I'm going to ask you a question. Thanks for taking my question.
My first question is about the overseas FAF cost seems to get higher. So would the TSNC consider to adjust your pricing?
to absorb those increased costs. And also, a manager mentioned that you're doubling, or more than doubling your elements packaging, given an AI rush order. Now, would that give you a chance to reprise?
the Bacon Foundry Service because I remember there was kind of below companies a Gross Margin Average. Would that be a chance to bring that back to the corporate average? Thank you.
Okay, Charlie. Charlie's first question is I guess regarding pricing. Two parts or two angles. First on the overseas fab, given that the costs are higher, would TSMC consider to further adjust our wafer price? And also along similar lines related to advanced packaging given we are, you know, C-
Yes, the overseas fab will cost higher, at least for the near future, where their supply ecosystem is not mature yet. And the labor cost is, from our experience, actually is a little bit higher than we expected. But to answer your question, yes, the
These are all considered. The aim is to one, to increase our customer trust, make them continue to work with us for going forward under the geopolitical concerns. Secondly is to maximize the shareholders value. To answer your question of price, is it strategically? Yes. Why is it so difficult to actually put time and energy into theYeah, I mean, that's
you know, as soon as possible manner, of course, that including actual cost. So, in fact, we are working with our customer, and the most important thing for them right now is supply assurance, is a supply to meet their demand. So, we are working with them, we do everything possible to increase the capacity.
Thank you. Thanks, Jeff. So another question is about the AI semi demand, right? Thanks for providing, you know, your your learning contribution, growth, growth assumption, that is a super helpful.
But I'm wondering how TSMC can judge the AI demand. Because right now, it's arm's race right now. Cosmos are very aggressive booking capacity. So I'm wondering how companies can judge whether those AI demand is for real.
And also in terms of breakdown, I'm wondering whether the ACIC, the custom chips, is outgrowing?
GPU? I think the more important one should be the first part of question, especially investors are concerned whether AI is cannibalizing the CPU server demand. So those are kind of questions you know are mine. Thank you.
Okay, let me summarize your second question, Charlie. Charlie is on AI demand. He wants to know, you know, how do we judge the demand properly because customers are very aggressive, but how, in his words, how do we know that this demand is real? And then also how do we see the demand specifically for AI demand?
And neither can we predict the near future, meaning next year, how the sudden demand will will continue or will flatten out. However, our model is based on the data center structure. We assume a certain certain percentage of the data center processor are. We assume a certain percentage of the data center processor are.
a big portion of data center processor will be AI processor is a sure thing. And when they cannibalize the data center processors, in the short term, when the K-packs of the cloud service provider are high-pressure.
And I mean, the KPACs will increase because of a generative AI services. Anything more for you? Yeah, Charlie, I think part of Charlie's question is also how do we see ASIC?
related in AI development? Well, actually, the customer also have a high demand on the AC part for the AI application. And as Mark pointed out, a short term sudden increase, you cannot incorporate it to be a long term. So on and so forth...
And they all have one symptom they are using, the very large diet size, which is the TSMC's strength.
Thank you. Thank you very much. This is Charlie. Thank you. Operator, can we move on to the next participant, please?
Next one to ask questions, Randy Abrams, please. Okay, yes, thank you. I wanted to shift to the profitability, maybe more for Wendell. In looking at the fourth quarter, you mentioned the three to four points dilution from N3.
I think that is two to three points in third quarter. Is that what you're suggesting, the directional change could be a little bit down margin profile? Or do you have positive offsets that could keep it more stable? And then a follow-up on the margin, where you discussed it's a tough year for margins on these factors like the energy ramp of three. But could you discuss 2024? Do you think we're going into a period of...
a bit more challenging profitability or UC factors that we could comfortably get back to the 53 and above next year. Okay. Thank you, Randy. So, Randy's first question is on gross margin. Fourth quarter with the N3 dilution of 3 to 4%, does that mean directionally fourth quarter margin is sequentially down? Are there any positive offsets? And then for looking to 2024 for the full year, if Wendell can give some comments about
in the fourth quarter, plus the higher electricity cost. But we're not giving you our guidance on the fourth quarter at this moment. We're just spelling out some of the challenges that we're seeing. And of course, we are going to continue to drive down our costs and sell our value to ensure that we will have a...
good return on the node. That's for this year. For next year, we're not talking about the whole gross margin, but we'll still see that N3 will dilute about 3 to 4 percentage points of next year's gross margin.
although the yield rate will be better next year, at the same time the percentage of revenue contributed by N3 will be bigger. So net net, we also see some dilution from the N3 next year. But the margin, the guidance will be given out next year.
Okay, a quick follow up to the first question. I think the last few nodes was two to three points dilution in the first year or two of RAMP. The factor for it larger, is it the higher capital intensity or something different with three versus five and seven, or it looks like a little bit more dilution? The increasing process complexity does...
Okay, and the second question I wanted to ask how you're thinking about capex just netting a few things the geographic expansion the three and then the start of two nanometer the first ramp up or tool move in Versus the mixed outlook you're looking at for macro For a ballpark capex into next year and if I could maybe within it ask
If the Arizona fab delays, does that push out where you mentioned the low end of guidance, push out some of this here to give some lift to next year?
Okay, so Randy's second question is on CapEx. He wants to know, basically focusing on 2024 CapEx, do some of the delays in the Arizona fab push out CapEx from this year to next year? As we expand overseas, as we invest in N2, but at the same time as the macro remains uncertain, how does...
Sorry, Randy. Sorry. Do you... Oh, yeah. My quick follow-up. I think you mentioned that perhaps you could use your 5-nanometer to support the ramp of 3. Given the AI and some of that pickup, do you still see that potential that could help optimize CAPEX or do you need to keep it...
Sorry, do you... Oh, yeah, my quick follow-up. I think you mentioned that perhaps you could use your 5-nanometer to support the ramp of 3. Given the AI and some of that pickup, do you still see that potential that could help optimize CapEx, or do you need to keep it for existing node? And that's my final one. Thank you.
Yeah, so Randy is just also asking then how does tool commonality play a role in our future capex? Yeah, we always build the tool commonality between nodes to provide a greater flexibility. We mentioned last time the strong multi-year demand from N3.
capture the future growth opportunities.
Thank you, Wendy. Thank you, Randy. Operator, can we move on to the next participant?
Next one to ask questions, Dora Chen from Citi. Thank you very much for taking my question. Good afternoon, gentlemen. Very appreciative, C.C. and Mark sharing TSMC view on the longer term outlook in AI. So I'm just wondering how does TSMC evaluate your backend capacity expansion to see...
Say like advanced no-utoration rate may go higher into next year. Thank you, that's my first question.
Okay, so Laura's first question is looking at our expansion of advanced packaging or backend versus the frontend wafer. As we are expanding the backend, but not the frontend, does that imply that first that our frontend wafer, particularly leading node, we expect the...
AI today is a very hot topic.
A lot of my customers right now increase their demand and that will increase their front-end demand, of course. TSMC almost have the major share or the largest share, let me say, in the front-end waiver.
According to that finance loading, we really work closely with our customers and to decide what is the backend that they need. And so on that perspective, we are planning our course capacity. Although probably still not enough, but we're working on it.
And my second question is also about the growth margin outlook. If you are wrong, please correct me. I recall that the previous cycle, like 7 or 5 nanometer, the capacity usually will be three times in the third year of the new technology ramping. So I'm wondering, is still the case for N3?
In particular, we are seeing that a significant capacity intensity increase may lead to some margin pressure, particularly in the first few years. So I'm just wondering how does TSMC balance your technology leadership and also the margin saturation? Does TSMC balance your technology leadership and also the margin saturation?
Thank you. Laura, you said three times, sorry, are you referring to the revenue contribution? Sorry, you said N7. The capacity. Oh, come on. Yeah.
Okay, so all right, let me try to summarize your question. I think Laura is asking, N7 and N5, we substantially expand the capacity.
So what is the case for N3 and then also in terms of the profitability of N3 or gross margin to be more specific as it compares to N5 and N7 previously. Is that roughly correct, Laura? Yes, thank you, Jay.
and then also in terms of the profitability of N3 or gross margin to be more specific as it compares to N5 and N7 previously. Is that roughly correct, Laura? Yes, thank you, Jay.
Okay, Laura, let me answer this question. As I just mentioned, the N3 due to the increasing process complexity is becoming more challenging than the previous nodes. We-
But at the same time, we will continue to sell our value and drive down the cost at the same time. But we still believe that N3 will be a long-lasting or a large note for TSMC.
With all the efforts and we still believe that the whole company's gross margin will be 53% and higher.
Okay, thank you, Laura. Operator, let's move on to the next participant, please.
Yes, right now we have Rolf Boak from New Street Research. Go ahead, please. Thank you for taking my question.
This quarter your refuse in the legacy notes 16 and 28 nanometer in particular we're down around 15 to 20 percent Q and Q and my question is what any particular end markets that cost is decline and how do you think about recovery of of those legacy notes should be should be still expect recovery in a quarter of this year?
or is that more 2024? You said? Thank you. Okay, so Rolf's first question is looking on the mature nodes, such as 16 and 28. He notes that those all saw sequential declines in the second quarter. So his question is, what is driving this, what end markets are driving this decline, and what is the expectation for this end market decline?
the total unit of smartphone become weaker and PC become weaker so is a high the leading edge technology node being also demand dropping and so the mature node not together did I answer your question
Yes, thank you. That's very clear. For my second question, if you focus on COBOLs and advanced packaging in general,
and also the weakness that you see in the remainder of your business. Could you maybe comment on the percentage of your cap expending that will go towards leading notes?
specialty nodes and packaging this year compared to last year. Okay, so Rolf's second question is for 2023 CapEx, which our CFO has said towards the lower end of the 32 to 36 range, can we give a breakdown between leading edge specialty technologies and CFOs.
and then the packaging, testing, mask making and others. Leading edge technology accounts for between 70% to 80% of our total KPEX in a year. Mature specialty technology between 10% to 20% and the remaining are split between advanced packaging and EBO and some others. Okay. Thank you, Raul. Perfect. Thank you. All right, operator, let's move on to the next participant.
So I wonder now how should we think about the overall rent of 3 nanometer if we compare with 5 and 7 nanometer. If we look at 5, you reach toward 18% of revenue in the second year of mass production and then about 24% of revenue in the third year.
We will ask for 3nm, I think the concerns by the smartphone customers have been on cost. Then the question will be if HPC is significant enough to still drive a meaningful pickup of 3nm. So it would be greatly appreciated if you could provide us any kind of thoughts.
Her question really, I believe, is coming from a percentage of revenue contribution. She wants to know how is the ramp of 3 nanometer, and then can it contribute to the revenue like N5, N7 in the past? How is the ramp of 3 nanometer contributing to the revenue contribution?
Yeah, as I just said, we believe N3 will be a long-lasting and large note for TSMC. Now, in terms of percentage, I think it's sometimes less important because our overall corporate revenue is much, much bigger these days than before.
either profitability. And so Wendell has provided pretty good insight about the dilution for 2024. But historically, a new note would take about seven to eight quarters to get to corporate average after mass production. I understand now corporate average growth margin is also higher.
but any expectations that NCE would become in line with copper average growth margin? Yeah, so Sunny's question is looking at the 3 nanometer. Her question is really...
you know, that with three nanometer impulsive complexity. Sunny, you're asking really, kind of reach the corporate average over time.
Or is there a timeline that you are expecting? Or end a timeline to reach?
Yeah, Sunny, as I just mentioned, it's becoming more challenging for the leading nodes because of the process complexity increases a lot. It applies to N3, so it will be challenging for N3. We actually mentioned that at the beginning of last year already. It will be challenging for N3 to reach the next level of the N3.
is on 2 nanometers. And so if we look at your target for 2 nanometers improvement over 3 nanometers in terms of speed and power, the upgrade seems to be actually less than 3 nanometers over 5 nanometers. So I wonder what's actually the implication of GAA transition to come up?
that the performance and the improvement seem to be less than 3 nanometer versus 5 nanometer, so could we talk more about that? Yeah, let me answer the question. Sunny, you have a very good observation. Yes, you are right. As I compare node to node from 5 to 3, the improvement you see over here is mainly back earth.
it becomes less from 3 to 2. But let me point it out, usually we are talking about the performance, the speed, and also the density, so that's the geometry shrinkage. Now we focus on the power consumption reduction, which is still a full load of performance.
because as time goes by, more and more customers, really, they are increasing toward greater power efficiency. This is very important for the data center, very important for the server. And that's what we are working on. So did I answer your question, Sunny?
Thank you for the color and good to know that you are on track to deliver a second generation of 2nm in 2026. Thank you. Thank you, Sunny. Operator, let's move on to the next participant, please.
Next one to ask questions, Brett Simpson from Aritay.
Yeah, thanks very much. The first question is for CC. Was interested in getting a read on the customer reception you're getting for the new variants for N3. I think you talked about N3P, N3X. Are customers still as focused on N3E? Or are you seeing a preference for them to migrate to the new variants such as N3P, N3X, N3X, N3X?
N3P, N3X rather than the N3E. This is a follow-on for AI, when do we actually start to see N3 adoption for N3? Thank you.
Okay, so Brett's first question is looking at our 3 nanometer families and the continuous enhancements that we always have. He is asking what is the customer reception of N3P and N3X? How does this compare or cannibalize N3? And when do we expect AI related to adopt?
So we have a N3E, N3P, N3X. X is actual performance that is for the very high speed, very high, let me say, performance computing for some of the CPU's application. But N3E is...
variation. There's a lot of customer engagement right now. Okay. Thank you, C.C. Okay.
And maybe just the second for my second question for Mark. Mark you were talking about the building up the ecosystem in some of the overseas markets like the US and you were talking about skill shortage but can you talk about what you think the like-for-like wafer cost difference is to operate in the US versus Taiwan? I think your TSMC founder talked previously about a 50%
How big is the cost gap of fab in the US versus in Taiwan? Founder has said 50% or more. Is it that high? And then concurrently with the CHIPS Act, when or how and when do we expect to receive the incentives to support? Yes, Simpson. I think the...
That is to cover the gap in the first five years, approximately.
When the tool is depreciated, then the ecosystem becomes prominent. That is, what is that, material cost, chemical cost, and the labor cost. We are working with our supplier to set up some of the more efficient supply sites.
and to be lower, but the US administration has decided also to subsidize our suppliers. So that is still in the work. How much it can further decrease, I don't know, but I think either way we will.
So, we will strengthen our pricing values and be able to keep the corporate profitability as we forecast it now.
Thank you Chairman. Okay, thank you Brett. In the interest of time operator, we'll take questions from the last two participants in the queue, please. Yes, next one to ask question is Madi Husseini from SIG.
Yes, thanks for taking my question. I'm going to go back to the gross margin and I think you highlighted the factor for 23. You're still tracking to 53% gross margin on a USD basis. That would imply that Q4 could be flat to up and I just want to better understand how this works.
tracking. I'm not asking for a guide on Q4, but if the 2023 gross margin is going to be 53% plus, that would imply Q4 flat to up. Is that correct? All right, Madi, I think we'll let Wendell answer this question.
Madi is asking basically, are we saying that 2023 will be 53% and higher? Madi, we're not giving our guidance beyond the third quarter, so we're not saying what Jeff just said. What we're saying is only some of the negative factors.
will affect the second half of the year. As to 53% and higher, that's a long-term growth margin target for TSMC.
Yeah, we did not provide a guidance for 2023 specifically. As Wendell just said, 53% higher is our long-term target, which we believe is achievable.
Do you have a second question? Thank you for, yes. Your updated guide suggests that revenues in the second half would be up 10 to 12% versus the first half. Obviously, a step up is lower than prior expectation. What I want to better understand is how should we think about...
continued inventory correction among your customer versus new product ramp by some of the other customers. Is there any way you can differentiate these two trends? Okay, Madi is asking with our full year guidance, what it implies.
That's a tough question to answer. Your observation is right. Our second half of seasonality is more mild than previous years. But of course, we have densely ramped up for the new product launch.
what is the impact, how to separate them. Now I cannot show too much of the detail of that. Okay, Mehdi. Thank you. Operator, let's move on to the last participant, please.
Yes, the last one on cue is a child from Lincoln. Thanks. Thanks for squeezing me in. I have two questions. The first question I want to ask about AI.
especially around the TSMC monetization of the AI trend. We did hear some commentary that for certain AI applications TSMC selling chips for a few hundred bucks, but the TSMC customers can actually sell for tens of thousands of dollars to their own customers. So if you can postpone your's to the
I mean some investors I spoke with really feel it pains them to see TSMC create advanced technology that probably deserves greater value than this. So the question really is how does TSMC think about maybe better monetization going forward for the capability to produce all these AI chips.
And really I want to tie back to one thing management mentioned in the prepared remarks, the AI growth 50% tater. How much of that is volume and how much of that could be the pricing activity in terms of what TSN is expected to growth over the next few years in AI. Thank you.
Charles, his question first is on AI. Again, basically, he's asking about monetization or capturing value, let's say. He notes that TSMC, we may be selling chips for a few hundred dollars, but our customers are able to sell it for tens of thousands or even more. So is TSMC giving away too much of the value? Can we better sell our value or monetize to capture greater value with the AI trend?
Well, Charles, I used to make a joke on my customer saying that I'm selling him a few hundred dollars per chip and then he sold it back to me with 200,000 US dollars. But let me say that we are happy to see customer doing very well. And if customer do well, TS&P does well. And of course, we work with them and we share our value to them. And fundamentally, what we say that
The first part is about close to 50% CAGR for AI, sorry, server with AI processor. How much of that is volume, how much of that is price?
We cannot separate out, but let me share with you again. We talked to the customers because we have a major share of all the leading edge technology node. So we know that we can make our judgment. And so we...
forecast of 50% CAGR. How much of that is, you know, on the frontend, backend, or others, you know, I am not able to share with you about it. Let me assure you that TSMC is going to capture a major portion of the market.
clarification on that comment on leveling up. Thank you. Okay, so Charles second question is on our capex. He wants to know capital spending, starting to level off, I think Wendell said in the next several years, so not any specific but what does that mean? Is it going to stay around?
You know, there's a 30-some level, or what does that mean by spending leveling off? Charles, as I mentioned, in the past few years, our KPACs increased dramatically, from $10 billion to $36 billion last year. As we start to harvest those investments, the increase in KPACs will be a big part of