Taiwan Semiconductor Manufacturing Q3 2023 Earnings Call Transcript

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Provided by Quartr
October 19, 2023

Key Takeaways

  • In Q3, TSMC achieved 10.2% sequential revenue growth in USD to US$17.3 billion, with gross margin of 54.3% driven by strong ramps of 3 nm and 5 nm technologies and EPS of NT$8.14.
  • For Q4, the company guided revenue of US$18.8–19.6 billion (an 11.1% sequential increase at midpoint) and a gross margin of approximately 52.5% at midpoint, reflecting dilution from the steep 3 nm ramp.
  • TSMC expects continued inventory digestion despite early signs of stabilization in PC and smartphone demand, forecasting fabless semiconductor inventories to exit Q4 at healthier levels.
  • 2023 CapEx is pegged at about US$32 billion—70% on advanced processes, 20% on specialty technologies and 10% on advanced packaging—with depreciation set to rise ~30% year-over-year.
  • The global footprint expands with new fabs in Germany (22/28 nm by 2027), Arizona (N4 in H1 2025), Japan (12/16 nm in 2024) and an on-track N2 (2 nm) volume ramp in 2025, all aiming to sustain long-term gross margins above 53%.
AI Generated. May Contain Errors.
Earnings Conference Call
Taiwan Semiconductor Manufacturing Q3 2023
00:00 / 00:00

There are 13 speakers on the call.

Operator

Afternoon, everyone, and welcome to TSMC's Third Quarter 2023 Earnings Conference Call. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. 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. If you are joining us through the conference call, your dial in lines are in listen only mode. The format for today's event will be as follows: 1st, TSMC's Vice President and CFO, Mr.

Operator

Wendell Huang will summarize our operations in the Q3 2023, followed by our guidance for the Q4 2023. Afterwards, Mr. Huang and TSMC's CEO, Doctor. C. C.

Operator

Wei, will jointly provide the company's key messages. Then we will open the line for the Q and A. As usual, I would like to remind everybody that today's Discussions may contain forward looking statements that are subject to significant risks and uncertainties, which could cause Actual results to differ materially from those contained in the forward looking statements. Please refer to the Safe Harbor notice that appears in our press release. And now, I would like to turn the call over to TSMC's CFO, Mr.

Operator

Wendell Huang, for the summary of operations and the current quarter guidance.

Speaker 1

Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with Financial highlights for the Q3 2023. After that, I will provide the guidance for the Q4 2023.

Speaker 1

3rd quarter revenue increased 13.7% sequentially in NT dollars or 10.2% in U. S. Dollars As our 3rd quarter business was supported by the strong ramp of our industry leading 3 nanometer technology and higher demand for 5 nanometer technologies, partially offset by customers' ongoing inventory adjustment. Gross margin increased 0.2 percentage points sequentially to 54.3%, mainly reflecting higher capacity utilization, partially offset by the margin dilution from N3 ramp. Total operating expenses accounted for 12.6% of Net revenue as compared to 12.1% in the 2nd quarter, mainly due to higher R and D expenses To support our 3 nanometer and 2 nanometer development, operating margin was 41.7%, down 0.3 percentage point from the previous quarter.

Speaker 1

Overall, our 3rd quarter EPS was NT8.14 And ROE was 25.8%. Now let's move on to the revenue by technology. 3 nanometer process technology contributed 6% of wafer revenue in the 3rd quarter, While 5 nanometer and 7 nanometer accounted for 37% 16%, respectively, Advanced Technologies, defined as 7 nanometer and below, accounted for 59% of wafer revenue. Moving on to revenue contribution by platform. HPC increased 6% Quarter over quarter to account for 42% of our 3rd quarter revenue.

Speaker 1

Smartphone increased 33% to account for 39%. IoT increased 24% to account for 9%. Automotive decreased 24% to account for 5% And DCE decreased 1% to account for 2%. Moving on to the balance sheet. We ended the Q3 with cash and marketable securities of NT1.55 trillion or USD48 1,000,000,000.

Speaker 1

On the liability side, current liabilities increased by JPY159,000,000,000, mainly due to the increase of JPY 95 1,000,000,000 in accounts payable and the increase of 59,000,000,000 in accrued liabilities and others. Long term interest bearing debt increased by NT30 1,000,000,000, of which NT10 1,000,000,000 from new issuance and RMB 20,000,000,000 from foreign exchange rate movement. On financial ratio, accounts receivable turnover days increased 3 days to 35 days, while days of inventory decreased 3 days to 96 days. Regarding cash flow and CapEx, during the Q3, we generated about TWD 295 1,000,000,000 in cash from operations, spent RMB227 1,000,000,000 in CapEx and distributed RMB71 1,000,000,000 for Q4 2022 cash dividend. Overall, our cash balance increased TRY 35,000,000,000 to TWD1.31 trillion at the end of the quarter.

Speaker 1

In U. S. Dollar terms, our 3rd quarter capital expenditures Total RMB7.1 billion. I have finished my financial summary. Now let's turn to our current quarter guidance.

Speaker 1

Based on current business outlook, we expect our 4th quarter revenue to be between US18.8 billion and US19.6 billion dollars which represents a 11.1% sequential increase at the midpoint. Based on the exchange rate assumption of $1 to NT0.32, gross margin is And 41.5 percent. This concludes my financial presentation. Now let me turn to our key messages. I will start by making some comments on our 3rd quarter 2023 and 4th quarter 2023 profitability.

Speaker 1

Compared to 2nd quarter, our 3rd quarter gross margin increased by 20 basis points sequentially to 54.3%, primarily due to a higher capacity utilization rate and a more Favorable foreign exchange rate, partially offset by the margin dilution from the initial ramp up of our 3 nanometer technology. Compared to our Q3 guidance, our actual gross margin exceeded the high end of the range provided 3 months ago by 80 basis points, mainly due to a more favorable foreign exchange rate. We have just guided our 4th quarter Gross margin declined by 1.8 percentage points to 52.5 percent at the midpoint, primarily due to the continued margin dilution from this steep ramp of our 3 nanometer technology. As a reminder, 6 factors determine TSMC's profitability: leadership technology development and ramp up, Pricing, cost reduction, capacity utilization, technology mix and foreign exchange rate To manage our profitability in the next several years, we will work diligently on our internal cost improvement, while continuing to strategically sell our value. Excluding the impact of foreign exchange rate, of which we have no control over, We continue to forecast that long term gross margin of 53% higher is achievable.

Speaker 1

Next, let me talk about our 2023 CapEx and depreciation. Every year, our CapEx 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 have tightened up our capital spending throughout the year where appropriate. We now expect our 2023 CapEx to be approximately US32 $1,000,000,000 Out of the approximately RMB32 1,000,000,000 CapEx for 2023, about 70% of the capital budget will be allocated for Advanced Process Technologies, about 20% will be spent for specialty technologies and about 10% will be spent for advanced packaging, testing, mask making and others. Our depreciation expense is now expected of approximately 30% year over year increase.

Speaker 1

Despite the near term inventory cycle, Our commitment to support customers' growth remains unchanged and our disciplined CapEx and capacity planning remains Based on the long term structure 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 turn the microphone over to C. C.

Speaker 2

C. Wei:] Thank you, Windho. Good afternoon, everyone. First, let me start with our near term demand in inventory. We Our Q3 with revenue of $17,300,000,000 in line with our guidance in U.

Speaker 2

S. Data terms. Our business in the 3rd quarter was supported by the strong ramp of our industry leading 3 nanometer technology and higher demand for 5 nanometer technologies, partially offset by customers' ongoing inventory adjustment. Moving into Q4 2023, while AI related demand continues to be strong, It is not enough to offset the overall cyclicality of our business. We expect our business in the 4th quarter to be supported by the continued strong ramp of our 3 nanometer technology, partially offset by customers' continued inventory adjustment.

Speaker 2

On the inventory side, we expect the fiber semiconductor inventory to have continuously reduced in the 3rd quarter. However, due to the persistent weaker overall macroeconomic conditions and slow demand recovery in China, Customers have remained cautious in their inventory control. Thus, we expect the inventory digestion to continue in the 4th quarter. Having said that, we are observing some early signs of demand stabilization in the PC and smartphone end market. Together with such level of inventory control, we forecast the fabless semiconductor inventory to further reduce and exit 4Q 'twenty three at a healthier level.

Speaker 2

Next, Let me talk about our global manufacturing footprint update. TSMC's mission is to be the trusted technology and capacity provider of the global logic IC industry for years to come. As we have said before, Our strategy is to expand our global manufacturing footprint to increase customer trust, expand our future growth potential and reach for more global talent. Our overseas decision are Based on our customers' need and the necessary level of government support, this is to maximize value for our shareholders. In Europe, after conducting extensive due diligence, we announced our plan to build a specialty technology fab in Dresden, Germany, focusing on automotive and industrial applications.

Speaker 2

We have received a strong commitment to support this project from our JV partners, the European Commission Government and German Federal, State and City Governments. This fab will utilize 22 and 28 nanometer and 12 60 nanometer technologies For semiconductor wafer fabrication, web construction is scheduled to begin in second half twenty twenty four and production is targeted to beginning date 2027. In Arizona, We are receiving strong support from the City of Phoenix, State of Arizona and U. S. Federal Government and continue to develop positive relationship and work closely with our local trade and union partners.

Speaker 2

We are making good progress on the fab infrastructure, utilities and equipment installation issues in our first fab, And the situation is improving. We have also begun early preparation for our Arizona fab operations and hired close to 1100 local TSMC employees so far. Many of them has been brought to Taiwan for extensive Operation Environment and Culture. We continue to target volume production of N4 Process Technology in first half twenty twenty five and are confident that once we begin operations, We will be able to deliver the same level of manufacturing, quality and reliability in Arizona As for our fabs in Taiwan, in Japan, we build a specialty technology fab, which will utilize 12 and 16 nanometer and 22-twenty 8 nanometer process technologies. We have hired approximately 8 100 local TSMC employees so far with the majority having similar beam brought to Taiwan for hands on experience.

Speaker 2

Equipment moving has begun this month, and volume production is on track for date 2024. In China, we have recently received an extension from the U. S. Bureau of Industry and Security To continue our operation in Nanjing, we are currently in the process of applying for validated end user of authorization and expect to receive a permanent authorization in the near future. From a cost perspective, the initial cost of overseas fabs are higher than TSMC fab in Taiwan due to: 1st, Small over upscale second, higher costs throughout the supply chain and third, the early stage of TSMC's responsibility to manage and minimize the cost gap to maximize the return for our shareholders.

Speaker 2

Our pricing will also remain strategic to reflect our value, which include the value of geographic flexibility. We'll also work closely with government to secure their support. At the same time, We are leveraging our fundamental competitive advantage of manufacturing technology leadership, Large volume economies of scale to continuously drive our cost down. By taking such actions, TSMCY have the ability to absorb the higher cost of overseas fabs and still deliver the long term gross margin of 53% and higher and sustainable ROE of greater than 25%. We remain firm in our commitment to maximize the value for our shareholders.

Speaker 2

Now let me talk about N3 and N3E ramp up and progress. Our 3 nanometer technology, the most advanced semiconductor technology in both PPA and transistor technology. N3 is already in volume production with good yield, And we are seeing a strong ramp in the second half of this year, supported by both HPC and smartphone applications. We reaffirm N3WA contributed mid single digit percentage of our total wafer revenue In 2023, and we expect a much higher percentage in 2024 supported by robust demand for multiple customers, N3 EWA leverages the strong foundation of N3 to further extend our N3 family We see enhanced performance, power and yield and provide complete platform support for both SPC and the smartphone applications. N3e has passed qualification and achieved performance in yield targets and will start volume production in Q4 of this year.

Speaker 2

We also continue to provide further enhancement of N3 technology, including N3P and N3X. With our strategy of continuous enhancement of our 3 nanometer process technologies, We expect strong multiyear demand from our customers, and we are confident that our 3 Derobedo family will be another large and long lasting node for TSMC. Finally, I will talk about the N2 status. The recent surge in AI related demand supports our already strong conviction that Demand for energy efficient computing will accelerate in an intelligent and connected world. Thus, the value of our technology platform is expanding beyond the scope of geometry shrink alone and increasing toward greater power efficiency.

Speaker 2

In addition, as process technology complexity increases, The lead time and engagement with customer also started much earlier. As a result, we are observing a strong level of Customer interest and engagement at our N2, similar to or higher than N3 at a similar stage on both HPC and smartphone applications. Our 2 nanometer technology will be the most advanced semiconductor technology In the industry, in both density and energy efficiency when it is introduced in 2025, Our N2 technology development is progressing well and on track for volume production in 2025. Our N2O adopt Nanoxi Transmitter structure, which has demonstrated excellent power efficiency. N2 will deliver full node performance and power benefit to address the increasing need for energy efficient computing.

Speaker 2

As part of N2 technology platform, we also developed N2 with backside power rail solution, which is the best suited for HPC applications. We are targeting backside power rail to be available in the second half of twenty twenty five to customers with production in 2026. With our strategy of continuous enhancement, end to end its derivative will further extend our technology leadership well into the future. This concludes our key message, and thank you for your attention.

Operator

Thank you, C. C. This concludes our prepared statements. Before we begin the Q and A session, I would like to remind everybody Should you wish to raise your questions in Chinese, I will translate it to English before our management answers your question. Now let's begin the Q and A session.

Operator

Operator, can we please proceed with the first caller on the line? Thank you.

Speaker 3

Yes. The first one to ask question Gokul Harihara from JPMorgan.

Speaker 4

Yes. Hi. Congratulations on

Speaker 5

the great result and thanks for the details on N3 and N2. My first question is on the technology leadership. Given we are hearing a lot of competitive messaging from your U. S. IDM competitorcustomer in the last few months, Intel seems to think that they will be getting into technology or process technology leadership in 2025.

Speaker 5

Just wanted to hear what does TSMC think of Intel's claim? And when TSMC thinks about customer engagement, Do you feel you will lose a little bit of market share to Intel when it comes to the N2 or the 1st generation of nanosheet transistors? Or you think Your very high market share in N3 will continue into N2.

Speaker 6

That's my first question.

Operator

Okay. Thank you, Gokul. Please Allow me to summarize your first question. So Gokul's first question is about technology leadership and competition with, I think particularly IDM, he notes this IDM is very messaging about taking over process technology leadership from TSMC. And so Gokul's question is how do we see this?

Operator

Are we concerned that we will lose market share at Nanosheet or N2 to this IDM given their claims of regaining process technology leadership? Is that correct, Gokul?

Speaker 5

Yes. That's right. Thanks.

Speaker 3

Okay.

Speaker 2

Well, Gokul, this is C. C. Wei. Let me answer your question with a very simple answer, say no. But while I stayed a little bit wrong, actually, we do not underestimate any of our competitors or text them lightly.

Speaker 2

Having said that, our internal assessment show that our N3P Now I repeat again. S3P Technology demonstrated comparable PPA to 18A, my competitors' technology. But with a earlier time to market, better technology maturity and much better cost. In fact, let me repeat it again. Our 2 nanometer technology without backside power is more advanced than both N3P and ATA, N YB Semiconductor Industry is the most advanced technology one it is introduced in 2025.

Speaker 2

Does that answer your question, Gokul?

Speaker 5

Okay. That's quite clear. Thank you very much. Could you also talk about my second question is, could we talk a little bit about the AI related demand? You've seen a pretty strong demand on the data center side and you talked about AI being about 6% of revenues this year, Mostly on the data center side.

Speaker 5

Are we starting to see more engagement on AI demand on edge devices? Based on TSMC's expectations, is this going to be a big growth driver in the next 1 to 2 years for TSMC's leading edge AI devices sorry, AI on edge devices, do you think that, that is a bigger driver for you?

Operator

Okay. Thank you, Gokul. So Gokul's second question is on AI related demand. He notes, of course, that we have talked last time also about Our AI related demand outlook and particularly focused on what we call server AI processes or Gokul referring to data centers. So this question is really more about on the edge devices.

Operator

Are we starting to see AI related demand for edge devices? Do we expect this to be a big growth driver in the next 1 to 2 years for our leading edge technologies as well?

Speaker 2

Well, the answer is also very simple. Yes. We do see some activities from Customers who add AI capability in end devices such as smartphone and PCs through Neural Engine And the AI and PCL fiber, and we certainly hope that this one will add to the growth,

Speaker 5

So, Zisi, do you see that happen in the next 1 year or is it something that will happen in a more longer term horizon? Just wanted to understand when to think about the cadence of this growth.

Speaker 2

Okay. Let me answer Briefly, it started right now, and we were expected that the more and more customer will put that AI's capability into the end devices into the end product.

Speaker 5

Got it. Yes. Thank you very much.

Operator

Okay. Thank you, Gokul. Operator, can we move on to the next participant, please?

Speaker 3

Next one to ask question, Charlie Zhang from Morgan Stanley.

Speaker 7

Hi, good afternoon, C. C, Mark and Jen. So my first question is about the cycle recovery. So much appreciated about your comment about end demand. So my question is about when do you expect there will be an uptick of the Fab utilization, assuming demand is stabilizing and also inventory get back to the healthy level, because it's just very hard to believe Your fab utilization outside of DDNASH will stay at only 70%, 80%.

Speaker 7

So First question is about do you see that overall fab utilization to pick up at anytime soon? Thank you.

Operator

Okay. So Charlie, I think your first question is sort of, if I'm correct, around the cycle and in terms of How do we see the cycle and the recovery? When do we see the fab utilization picking up, which really is a function of, I guess, do we see the cycle bottoming out and when do we expect the recovery. Is that correct?

Speaker 8

Yes. Thank you.

Speaker 2

Well, Charlie, this is C. C. Wei again. Let me answer your question. As I said, we do observe some early signs of demand stabilization in PCs and smartphone end market.

Speaker 2

Those two segments are the biggest segment for TSMC's business. We want to say that 2024 will be a very healthy growth. But right now, did we see the bottom? Very close, very close. We want to I cannot give you a number because it's too early to call it a sharp rebound.

Speaker 2

Even with macro environment remain uncertain, we're weighing customers' inventory control in First half of twenty twenty four, having said that, we already say that we have strong technology leadership and the broad customer base. And those 2 are unique and specific to TSMC. Enable our customer to win business in their end market, and TSM C2 continues to deliver healthy growth. And that's why we can do better than overall industry. And that's why we have confidence that we will have a healthier growth next year.

Speaker 7

Okay. Thank you. Yes, so just want to kind of Very bad because we do see some green shoots and some rush orders to wafer foundry sector. Thank you. But second question is also about AI, my question is that over the past 3 months, do you see any aberration of the forecast I know many from the GPU or those are cost and chip.

Speaker 7

And I know it's very, very recent, right? Just 2 days ago, The U. S. Has put us some additional export control on the AI shipment to China. Do you think that is going to have any Kind of near term or long term impact to your AI semi revenue growth assumption?

Speaker 7

Thanks.

Operator

Okay. Thank you, Charlie. So Charlie's second question is related to AI, 2 parter. First, do we see over the last 3 months, I think his words were an upward revision in the demand from AI in the last 3 months. And then he wants to know, given the recent Additional regulations announced.

Operator

What would the impact to the AI demand be to TSMC both for the short term and the

Speaker 2

Charlie, the AI demand continues to grow stronger and stronger. So from TSMC point of view, now we have about we have a capacity limitation to support them to support the Demand. We are working hard to increase the capacity to meet their demand. That's for one thing. Now U.

Speaker 2

S. Government put a new regulation and to for some of the product cannot be shipped to Mainland China. However, it is just for a couple of days, we are still evaluating the We are still doing our assessment. But so far, we can tell you that the impact to TSMC is limited and manageable At least for the short term, for the long term, we are still evaluating what is the pension

Speaker 7

Got it. So actually there was one embedded question about the custom chip. So may I know your Perspective about this custom chip long term may kind of gain share or outgrow GPU Products, so what's your assumption for this cost and chip in terms of the real contribution within AI or to TSMC? May I ask you to follow-up?

Speaker 2

Okay. Let me answer. Whether customer develop the CPU, GPU, AI accelerates or AC for all the type of AI applications. The commonalities that they all require usage of leading edge technology with stable yield delivery to support larger die size and a strong foundry design ecosystem. All of those are TSMC's strength.

Speaker 2

So we are able to We'll address and capture a major portion of the market in terms of semiconductor component in AI.

Speaker 8

Okay. Okay. Thank you.

Operator

Okay. Thank you, Charlie. Operator, can we move on to the next participant, please?

Speaker 3

Next one to ask question, Bruce Liu from Goldman Sachs. Okay. Thank you for taking my question. I think the question is I'd like to ask about the outlook for next 2 years. I think I do recall that manager mentioned about 15% to 20% revenue take us from 21% to 26%.

Speaker 3

The smartphone business supposed to be in line or slightly below the corporate average In terms of the growth rate, but the smartphone business was down meaningfully in 2023. Do we expect to see a sharp rebound For the smartphone business to get back to the corporate average in terms of growth rate, also the management also mentioned that the back end business will Grow in line with the corporate average. Well, we see a much stronger growth from the bacon business in the coming 2 years.

Operator

Okay. So Bruce's question really is Looking at we have indeed you're right, Bruce, we had said we will grow between 15% to 20% revenue CAGR in U. S. Dollar terms from 20 21 to 20 20 6, so Bruce's question wants to break down the components here to look at smartphone in particular, given that it has been slower going market these last few years, how do we see the growth of the smartphone market the next 1 to 2 years in the context of this CAGR? And then also, I think Bruce is also asking about the back end growth.

Operator

We have said previously, it will grow slightly faster than the corporate average. What is the current expectation now also for the next 1 to 2 years? Is that correct, Bruce?

Speaker 3

Yes. Thank you.

Speaker 1

Right. Bruce, this is Wendell. Yes, in the next 2 to 3 years, Backing up to 2021 to 26, we still expect that the smartphone as a whole will grow slightly slower than the corporate average. We still think that HPC will be the strongest one and will be the major growth contributor to our multiyear growth. This is your first question.

Speaker 1

As to the growth of back end business, We still expect that the back end business as a whole will grow slightly faster than the corporate average in the 5 year time period.

Speaker 3

Ivy, thank you. So the next question is for the technology Hey, this. I mean for TSMC, for revenue contribution for 5 nanometer, we start to see the Meaningful revenue contribution for 5 nanometer starting at Q3 2020 and 3 nanometer is Q3 2023. So The cadence, it looks like, is longer for 3 nanometers versus 5 nanometer and 7 nanometers. What is the technology cadence moving forward?

Speaker 3

Are we able to see meaningful revenue contribution of 2 nanometer in 2 year timeframe or 3 year timeframe? I think the technology migration cadence is an important indicator.

Operator

Okay. Thank you, Bruce. So Bruce's second question again, as he said, is around the Technology cadence, he notes that 5 nanometer started contributing revenue in 3Q 2020, but I think you're saying 3 nanometer's revenue is contribution 3Q 2023. So the cadence is growing longer to kind of 3 years between 5 3. So what will be the technology cadence in the future?

Operator

And thus for 2 nanometer, when should we expect meaningful revenue as well? Is that correct, Bruce?

Speaker 3

That's correct.

Operator

Okay. Thank you.

Speaker 2

Okay, Bruce. Let me answer the question. I think that We developed the technology to meet the customers' demand. That's a first priority to us. But then different customer may have a And as time goes by, the technology complexity actually become More and more complicated and our customer design their product and react to the market situation.

Speaker 2

So let me answer the question that's in a very simple way. TSMC's technology cadence remain constant and to support our customers' growth. But whether we got the same amount or same percentage of the revenue, It will depend on customers' product schedule.

Speaker 3

But the follow-up question is that if the customer doesn't really need advanced technology is as fast as before. Maybe we slow it down a bit, which will make better returns, right?

Operator

So Bruce's follow-up is, so if the customers do not need the leani node as fast or as soon as before, then slow down the cadence, does that mean we will see better returns?

Speaker 2

Well, we don't slow down our technology development per Say, we might slow down our capacity expansion according to customer set demand. Did I answer your question, Bruce? That's what we are doing right now.

Speaker 3

I understand. Thank you.

Operator

Okay. Thank you. Operator, can we move on to the next participant, please?

Speaker 3

Yes. Next one, we have Laura Chang from Citi.

Speaker 9

Hello. Hi. Good afternoon. Thank you for taking my question. I think my question is also similar to what Bruce mentioned about the capacity expansion plan.

Speaker 9

As we see that healthier inventory situation right now and at the same time, the most advanced process now depends on customers' demand. So just want to get your feeling about the overall CapEx outlook or capacity outlook into the next 2 years, do you feel that will be better to resume the year on year CapEx next year or later, Considering there's still quite a strong demand on N3, N2 ramp up, at the same time, The most advanced now seems you will see maybe 2x more expensive on N2 versus N3. So My question is just about the future capacity expansion plan. Yes. Thank you.

Operator

Okay. So Laura's first question again is on the capacity expansion plan. She notes that, of course, the inventory, as we said, is becoming healthier, but also with N3 and N2. So she really wants to know what is the CapEx and Capacity outlook planned for the next 1 to 2 years.

Speaker 1

Laura, this is Wendell. C. C. Just mentioned our capacity plan will really depend on the customer's Product plan. Now in terms of CapEx, what we can see now is that we, in the past few years, have invested Very heavily to capture the growth in the next few years.

Speaker 1

And as we begin to harvest those investments, We expect our the increase of our CapEx to be leveling off in the next few years. That doesn't mean the dollar amount is going to reduce, but the capital intensity is expected to decline in the next few years. That's what we can see at this moment.

Speaker 9

Thank you, Wendell. I recall that previously we mentioned about like we target longer term to back to like mid-30s for our CapEx intensity. So Is there any possibility we see we achieve that target next year?

Speaker 1

First of all, it's not a target. It's a forecast based on the customers' demand. And secondly, it's like 3 or 5 years out. It's not the immediate next year.

Speaker 9

Okay. Thank you. Very clear. And also my second question is about Thank you, progress. Appreciate C.

Speaker 9

C. Previous sharing on the progress and also the Big Sat Power timeline. I'm just wondering that what would be the most challenging part if we migrate to like a base at power? And also since the transistor density will become a total different on NaXI, so I'm just wondering that the clients' Migration or intention to adapt the most advanced node into next 2, 3 years? And what will be the most challenging in technology perspective?

Speaker 9

Thank you.

Operator

Okay. So Laura, let me make sure I got this right. So your second question is And you want to know with the adoption of backside power rail, what is the most challenging part from a technology perspective? And then how do we see the customer adoption?

Speaker 9

Yes, correct. Thank you.

Speaker 2

Rob? I'll answer that as a technology moving into more and more The challenge is always there. Technology complexity increased dramatically, but we can do it. No doubt about it. And we are still remain the technology leadership in this industry.

Speaker 2

If you ask me what is the most challenging part, I would say it's cost. I mean, that's how you look at it today, Inflation, everything and the tool have become more and more expensive. Although we can do it On time to meet customers' requirement, our challenge right now, actually, I would say, Number 1, cost. I want to reduce the cost so more customer can afford it. But Even with that actually, we have a lot of our customer interested and engaged with TSMC today.

Speaker 2

Actually, it's probably higher than the N3 at a similar stage, okay? Did I answer your question? Yes.

Speaker 9

Yes. Very clear. Thank you very much, C. C.

Operator

Okay. Thank you, Laura. Operator, can we move on to the next participant, please?

Speaker 3

Right now, we have Brett Simpson from LFT Research.

Speaker 10

Thanks very much. I had

Speaker 7

a question for C. C.

Speaker 10

Regarding the hyper scalars, major U. S. Hyper are hiring a lot of chip designers at the moment and looking to make their own AI silicon Going direct to TSMC, much like Apple has done over the years, are you is TSMC generally supportive of this trend Or not? And can you give us your perspective as to whether hyperscalers have the in house IP and skills To cut out the ASIC suppliers or not and go direct to TSMC? Thank you.

Operator

Okay. Brett, thank you. So Brett's first question is looking at his observation U. S. Hyper Scale companies are hiring a lot of people to do AI custom chips silicon and working directly or coming directly to work with TSMC.

Operator

His question is, is TSMC support such efforts? And how do we see such type of customers, I guess? Is that your question, Brett?

Speaker 10

Yes. And generally, just share your perspective on how you see This part of the business developing at TSMC. Thank you.

Operator

Brett,

Speaker 2

Okay. Those are hyperscalers. I don't comment on the specific customer. But All we know or our fundamental rule is whether customer develop the CPU, TPU, AI Accelerate or ASIC for their own application or for any purpose in the AI area, We will support them actually. And because of our technology leadership and our good manufacturing, So we are able to address and capture a major portion of the market.

Speaker 2

And so you are asking whether we support it or not. We wholly every customer all over the world.

Speaker 10

Okay. Thanks. That's very clear. And maybe just as a follow-up, I wanted to ask about some of the areas in the quarter that were weaker Than expected, namely 7 nanometer, I think it's half year on year. And also automotive, this saw a decline sequentially, a meaningful decline sequentially.

Speaker 10

Can you just help us understand how you build back up 7 nanometer? What led to the weakness? And what's happening in automotive? And how do you assess Prospects for automotive over the next 6, 9 months or so? Thank you.

Operator

Okay. So two parts To Brett's question, maybe I'll start with the second. But anyway, looking at automotive demand and the weakness in the past quarter, how do we the automotive demand? And then also his question is about 7 nanometer, also year on year sharp revenue decrease. So how do we see the outlook for 7 nanometer as well?

Speaker 2

Well, let me answer the question on automotive demand. In fact, in the past 3 years, automotive demand has very strong, and we deliver whatever they ask. And today, I think if automotive demand already entered the inventory adjustment mode the second half of twenty twenty three. However, we still expect the automotive demand wide increase Again in 2024 because of more and more EV, more and more functionality being added to automotive, And that's what we saw. Now talking about the N7, the 7 nanometer Technology, why we have such a low utilization or the revenue decrease?

Speaker 2

It's go beyond our initial our original plan because of We expect the N7 to be very fully utilized even now, but it is not. Let me answer the question because of we suddenly have in 10 years, The smartphone demand dropped dramatically from about 1,400,000,000 units to about RMB1.1 billion now. So that exactly in this time frame, the N7's Utilization has been impacted and followed by 1 major customer who delayed their product introduction. And so that's why we have low utilization. But seeing that we are confident to backfill our 7, 6 nanometer capacity with additional wave of specialty demand from consumer, RF, connectivity and other applications and what return to a healthy level of utilization over the next several years.

Speaker 2

This is very similar to situation that we have 28 nanometer back in 2018 2019 timeframe, okay? In the beginning, it was underutilized for a period of And we work hard to with our customer and then for develop some specialty technologies. And now we have to expand 28 nanometer specialty capacity. That's the same kind of a story. Brett, did I answer your question?

Speaker 8

Thank you.

Operator

Okay. Thanks a lot.

Speaker 10

Yes. Thanks very much.

Operator

All right, Brett. Thank you. Operator, can we move on to the next Participant, please.

Speaker 3

Next one to ask questions, Brad Lin from Bank of America.

Speaker 6

Thank you for taking my questions. So first of all, congrats on the strong result and then also the impressive gross margin. So I have two questions. One is on the and device AI, HAI and the other is on the CPO. So appreciate the management's Constructive comments on the growth outlook on the HAI.

Speaker 6

So besides the well Interesting engagement with the clients. What are the implications for the wafer consumptions for the firm? And also, eyeing on the computing power and energy consumption angle on the end device with AI in the additional AI functions, Should we expect it to accelerate reaccelerate the node migration for the end devices? That's my first question. Thank you.

Operator

Okay. So Brad's first question is about edge and end device AI. He wants to know what is the implications for wafer consumption and then with the increasing need for energy efficiency and power, he is wondering does this reaccelerate or increase the node for, I guess, his words is node migration or adoption of leading edge technologies.

Speaker 2

Well, the edge device start to that's including smartphone and PCs, Start to incorporate AI functionality inside. We observe some of the new raw engines has been added increasingly. So the die size Well, increase, even the unit did not increase dramatically, but the die size It's in mid teens. No, not I mean, mid single digit is a size size increase so far. And I expect this kind of trend will continue.

Speaker 2

And so more and more application of the On the AI side, what we incorporate into those kind of edge device And that one need have very power efficient chips to put into the edge device, especially when it is mobile. So I do expect from my own perspective, I do expect that my customer will Moving to the leading edge node, more and more quickly to compete in the market.

Speaker 6

Thank you very much, C. C. So a bit of a follow-up is that Well, now it accounts for some, well, mid single digit of the Dice size incremental for Chip. So does that Or are we seeing that to enlarge something like meetings or well, even bigger in the well, mid to long term?

Operator

So Brad's quick follow-up is if the AI portion is kind of mid single digit now, how should we Can we expect mid teens or what type of percentage in a few years' time?

Speaker 2

Well, I will answer the question. Actually, we see the increase on the DAI size. We cannot nail We say the mid single digit, but I expect it start to increase. And whether that will increase our forecast on our growth or something is still too early to say to at this moment.

Operator

Yes. Sorry.

Speaker 1

Yes. But we are still quantifying the impact from this development. So we're maintaining the previous Statement that we expect it to grow to about in 5 years, about mid single digit I'm sorry, mid teens of our revenue.

Operator

Yes. I think, Brad, probably just very simply, as we said, edge AI, we do see some activity. It will drive silicon content, but this will occur over time, okay? And we don't have any quantitative number to share,

Speaker 6

All right. Got it. Thank you. Okay.

Operator

What is your second question?

Speaker 6

Okay. So the second question is on CPO. So basically, we have learned that TSMC is doing quite well and also leading the industry in CPO or so called silicon photonics and has introduced a So may we learn that the opportunities and implications of the new technology Also, should we expect the platform to offer additional competitive advantage for

Operator

So Brad, your second question is on silicon photonics. Is that correct?

Speaker 2

Okay. Let me answer that question. Silicon Photonics actually is growing its importance because of just a large amount of data need to be collected, processed and transfer in an energy efficient manner. Silicon Photonics tends to be the best fit that role. And TSMC has been working on silicon photonics for years.

Speaker 2

And most importantly, we're collaborating with some multiple leading customer and to support their innovations in this field. It takes a lot of time to develop the technology and to build the capacity. And when we increase the volume production, we believe that TSMC's Silicon Photonics will be the best technology and when customer roll out all their innovations. But as I said, it's gradually increasing in their activity and gradually increasing their demand ourselves to date.

Speaker 6

Got it. Thank you very much.

Operator

All right. Thank you. Operator, can we move on to the next caller, please?

Speaker 3

Next one, we have Sunny Lin from UBS.

Speaker 11

Good afternoon. Thank you very much for taking my questions. So my first question is on Advanced Packaging. Incrementally, we are hearing more customer interest in The adoption to achieve better heterogeneous integrations, but want to get your thoughts on what could be the potential impact Of customers relying a bit more on packaging to improve the system performance and perhaps less on the process migrations Given cost considerations, meanwhile, SOIC has been introduced for quite a while, Whereas the customer adoption still seems to be limited at this point. And so when should we expect a more meaningful pickup of SOIC?

Speaker 11

And Huacobi the major catalyst. Thank you.

Operator

Okay. So Sunny, sorry, I may have missed a little bit of the first But I think her question is on overall advanced packaging. Looking at this trend and The move to more, of course, heterogeneous integration, what are the cost implications and how does the dispense packaging work and go together with the Process Technology standpoint? And then also a question about the update or progress of SOIC. Is that correct, Sunny?

Speaker 11

Well, so maybe if I may clarify that, so for the first part, I wonder If customers may consider relying a bit more on packaging, we're slowing down a bit on the process migration because of increasing cost.

Operator

Okay. So she's asking will customers because of the increasing cost of the process technologies, Will customers rely more on advanced packaging as a result?

Speaker 2

Let me answer that. It's not because of Increasing of the cost in the more advanced node. And actually, they try to Our customers try to maximize the system performance. That's the major portion. That including the kind of speed improvement or the power consumption decrease, all those kind of things, put all together.

Speaker 2

And maybe cost is also part of the consideration, which we noticed about. And so more and more customer moving into the very advanced technology node And they start to adopt the chip based approaches. And No matter what, TSMG provide the industry leading solution in both Very leading technology and also very advanced packaging technology. And to work with our customer for their product I have a best system performance. And the other one is you are asking about the SOIC.

Speaker 2

When it will become A high volume and more substantial revenue for TSMC It's coming. It's coming. Actually, the customer already ready to announce their new product, which are widely adopt. And I expect starting from now and next year, the SOIC will generate revenue and become one of the faster growing advanced packaging solution in the next few years.

Speaker 11

Got it. Thank you very much. If I may, a quick follow-up. 3 months ago, You had a target to double your COOS capacities. And just now you mentioned AI demand continued to surprise on the upside.

Speaker 11

So wonder if there's any update on your COOS capacity expansion?

Operator

Okay. So I will take this as your second question, Sunny. But as she's asking about COOS We had said that we will double the capacity 3 months ago. Can we provide an update on the overall COAS Capacity and I guess CapEx and capacity go hand in hand. What is our plan?

Speaker 2

Well, Sunny, The last time we say that we will double our cohort's capacity, we are working very hard to increase the capacity more than double. But today is limited by my suppliers' capability or their capacity. So we still maintain that we will double our COVA's capacity by the end of 2024, but the total output actually is more than double from 2023 to 2024 because of a very high demand in from our customer. So extend this kind of a trend, we will continue to increase our COOS capacity to support our customer even into 2025. Okay, Sunny?

Speaker 11

Got it. Thank you very much.

Operator

Okay. Thank you. Operator, can we move on to the next caller, please?

Speaker 3

Next one, please welcome, Madhih Hosseini from SIG.

Speaker 4

Yes. Thanks for taking my question. I understand there are a number of new products that are ramped that You're ramping into year end and into first half of twenty twenty four in various for various end markets. And I want to understand how the ramp of these new products are to impact The seasonality, could we see a scenario where in the first half, the ramp of these new products, especially at the leading edge To somewhat offset the seasonal factors, any thoughts there? And I have a follow-up.

Operator

All right, Mehdi. Well, Mehdi's first question is in terms of new products, which of course, customer products we don't comment on, but he said we are ramping products into the second half. And so how will this ramp of new products go into as we go into first half twenty twenty four and can this offset or mitigate some of the seasonality?

Speaker 4

Let me rephrase the contribution of customers' new product and how would that impact How could that offset seasonal factors?

Speaker 1

Yes. Mehdi, I don't think we can comment on specific customer products, But I can tell you that we're not seeing any dramatic change in the seasonality as of now.

Speaker 4

Okay. Because I was looking at your year calendar 23 And given your Q4 guide, you're actually doing better than What you guided 3 months ago, you principally said revenues could be down 10% U. S. Dollar, and now it could actually be down by single digit. Is that a combination of a stronger new product ramp and better pricing?

Speaker 4

Is that a fair

Operator

assessment? Okay. So, Mehdi is really looking at he rightly notes that 3 months ago, we This year will decline around 10% in U. S. Dollar term.

Operator

Now with the Q4 implied guidance is slightly better. So he wants to know what Is the implication or behind this?

Speaker 2

Well, let me give you one simple reason because our ramp up of N3 because of the demand of N3 is shrunk. So ramp up quickly to meet customers' demand. So the final result is better than we expected 3 months ago.

Operator

And we have also said that strong ramp of N3 will continue in next year, okay? That's about all the seasonality color we can give.

Speaker 4

Got you. Okay. And then perhaps if I were to ask a second question, I just want to better understand your view on your customers' inventory correction. We're reaching the bottom where we don't have any visibility on how quickly they are going to refresh inventory. The slope of the recovery is Still not clear.

Speaker 4

Did I understand you correctly?

Operator

So Mehdi, second question, you would like to clarify. So are we saying that customers' inventory is reaching or approaching a bottom, but the slope of the inventory is not clear. Is that what we are saying?

Speaker 2

Okay. I'll answer the question. Actually, in These couple of months, we start to see the demand stabilize in the PC and smartphone end market. And in fact, we see some kind of an urgent PO ask for more device to be shifted to their place To meet the demand, that give us a hint of the inventory control already become more healthier than we thought. So in terms of uncertain macro, It probably will continue, but our expectation is very close to a healthy condition.

Speaker 2

So that's why we say we can expect 2024 to be a healthy growth year for

Operator

Okay.

Speaker 2

Or Mehdi, did I answer your question?

Speaker 4

Great. Thank you.

Operator

Okay. In the interest of time

Speaker 3

Next one to ask question is Krish Sankar from TD Cowen.

Speaker 12

Yes. Hi. Thanks for taking my question. I have 2 of them. First one is on gross margin.

Speaker 12

When do you expect N3 to reach corporate average gross margin? And as you look into next year as more mature node capacity comes online across the industry, how to think about Make sure to note gross margins also and I have a follow-up after that.

Operator

Okay. So Chris's first question is on gross margin. When do we expect 3 nanometer or N3, I should say, to reach the corporate average gross margin? And how do we see the gross margin trend for the more mature nodes?

Speaker 1

Yes. Chris, in the past, our leading nodes normally reached gross margins corporate margin in about 8 quarters. But as we progress with more and more leading nodes, it will become more and more challenging because of several reasons. Well, first of all, our corporate margin is Higher than before. And secondly, the leading node, as I just said, is becoming more and more complex.

Speaker 1

And also, in the past few years, the inflation pressure that was not expected also contribute The higher cost in the N3. So it's going to be pretty challenging for future leading nodes to reach Corporate margin as in before like before in the same time frame. The mature nodes, I can tell you that our mature notes are the

Speaker 12

Okay. That's very helpful. Thank you for that. And then And then as a follow-up on Arizona, you mentioned that you've hired about 1100 local employees. I'm kind of curious, Is that critical mass enough for you to start 4 nanometer production?

Speaker 12

Or do you have another target level of employees before you can actually start Getting this production since we are still maintaining the output to be in first half of twenty twenty five.

Operator

Okay. So thank you, Krish. So Chris's second question is about our 1st fab in Arizona. He notes that we have said we hired 1100 local employees. So his question is, is this enough critical mass or enough people basically to support the ramp of the first fab as we plan, as we said today in first half twenty twenty five.

Speaker 2

Of course, we continue to hire the local talent to join the TSMC 5 being Arizona. So when we start to have a volume production, we are confident That we will have enough resources to support our ramp up in Arizona.

Operator

Okay? All right.

Speaker 10

Thank you.

Operator

Thank you, Krish. Operator, can we move on to the last participant, please?

Speaker 3

Yes. The last one to ask question Charles Shi from Niam.

Speaker 8

Hi, thank you for squeezing me in. First off, I really want to congratulate GSMC for delivering Good results for Q3 and very good guidance for Q4. But I want to really call out The reported revenue for 5 nanometer in the 3rd quarter looks like you are showing some really good countercyclical strength and probably A record high. I want to understand the rebound in the 5 nanometer business in Q3. Is that going to be more in the following quarters?

Speaker 8

And what's behind that? And relative, let's say, your expectation like 3 to 6 months ago when you were reducing your 2023 outlook, Is 5 nanometer doing better than expected? And how has the demand trending in the last 2 to 3 months for 5 nanometer? Thank you.

Operator

Okay. So Charles' first question is about 5 nanometer. He's asking in the very near term, he notes that He saw a very strong sequential revenue increase in the Q3. So he's wondering what is driving this? And then he's asking about what is the outlook for the next 3 to 6 months, 4, 5 nanometers specifically?

Speaker 1

Yes. Charles, I can share with you the increase In revenue, N5 in the 3rd quarter mainly comes from 2 platforms, HPC and smartphone. HPC also includes the AI related demand. Smartphone basically customers some customers' product seasonalities. Now forward looking wise, I'm not going to share with you, but we will tell you in January what actual the next quarter N5 revenue will be.

Operator

The overall revenue. Yes. Yes. We don't provide revenue by process node, okay? What's your second question, Charles?

Speaker 8

Yes. Thanks, Jeff. The other question is about CapEx. It sounds like that you are expecting CapEx on absolute dollar may still grow Going forward, I know that's a long term comment. But I look at the near term, TSMC CapEx Seems to be running at $7,000,000,000 per quarter in the second half twenty twenty three, which comes at a 28 Daily annualized run rate, but if we are expecting total CapEx for 2024 to grow On your dollar term over 23, it seems like you're expecting CapEx ramp in 2024.

Speaker 8

Maybe that's You're planning for some of the CapEx ramp in 'twenty four. Is that the right way to think about the CapEx? Is RMB7 1,000,000,000 pretty like really Bottom level run rate for TSMC CapEx at this point. Thank you.

Operator

All right. So Charles' second question is also is on CapEx. Basically, he's saying Given the guidance, he is looking at our CapEx, it's running at about a US7 $1,000,000,000 run rate. So He's assuming or although we do not comment on 24, he's assuming if next year's CapEx dollar amount is going to increase, but if we're running at 7 The run rate does that imply JPY 28,000,000,000? How should he reconcile this?

Speaker 1

Charles, the Every year, the CapEx is invested based on the future opportunity to growth and we invested to capture those future opportunities. Too early to talk about 2024, Really, we will share the guidance with you in January quarterly release.

Operator

Okay. All right. Thank you, Charles. Thank you, everyone. This concludes our Q and A session.

Operator

Before we conclude today's conference, Please be advised that the replay of the conference will be accessible within 30 minutes from now. The transcript will become available 24 hours from Now both of these you will are available and you can find through TSMC's website at www.tsmc.com. So thank you everyone for taking the time to join us today. We hope everyone continues to be well, And we hope to see you join us again in January. Goodbye and have a good day.

Operator

Thank

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