Taiwan Semiconductor Manufacturing Q2 2023 Earnings Report

Taiwan Semiconductor Manufacturing EPS Results

• Actual EPS: $1.14
• Consensus EPS: $1.07
• Beat/Miss: Beat by +$0.07
• One Year Ago EPS: N/A

Taiwan Semiconductor Manufacturing Revenue Results

• Actual Revenue: $15.68 billion
• Expected Revenue: $15.52 billion
• Beat/Miss: Beat by +$157.83 million
• YoY Revenue Growth: N/A

Taiwan Semiconductor Manufacturing Announcement Details

• Quarter: Q2 2023
• Date: 7/20/2023
• Time: N/A
• Conference Call Date: Thursday, July 20, 2023
• Conference Call Time: 2:00AM ET

Taiwan Semiconductor Manufacturing (NYSE:TSM) Company Limited (NYSE:TSM), commonly known as TSMC, is a Taiwan-based semiconductor manufacturer and the world’s leading dedicated semiconductor foundry. Founded in 1987 and headquartered in Hsinchu, Taiwan, the company pioneered the pure-play foundry business model, producing chips designed by other companies rather than developing and selling branded semiconductor products of its own.

TSMC manufactures semiconductor wafers using advanced and specialty process technologies. Its services support a broad range of applications, including high-performance computing, smartphones, the Internet of Things, automotive systems, consumer electronics and industrial equipment. The company also provides advanced packaging and other semiconductor manufacturing services that help customers integrate increasingly complex chips into electronic devices.

TSMC serves customers worldwide and operates manufacturing facilities and related operations in Taiwan, China, the United States and Japan, with additional international expansion underway. Its global customer base includes semiconductor designers and technology companies that rely on TSMC for the production of leading-edge and specialized integrated circuits. C.C. Wei serves as the company’s chairman and chief executive officer.

Taiwan Semiconductor Manufacturing Q2 2023 Earnings Call Transcript

Key Takeaways

• In Q2 2023, TSMC reported revenue of US$15.7 billion, down 6.2% sequentially, while gross margin fell 2.2 pts to 54.1% amid weak end-market demand and customer inventory adjustments.
• For Q3, TSMC expects revenue of US$16.7–17.5 billion (a 9.1% sequential increase), with gross margin forecast at 51.5–53.5% and operating margin at 38–40%.
• TSMC now sees full-year 2023 wafer revenue declining around 10% in US dollars as fabless customers continue to rebalance inventories and macro headwinds persist into Q4.
• TSMC forecasts server AI processor demand to grow at roughly 50% CAGR over the next five years, rising from ~6% of its revenue today to the teens as HPC and generative AI workloads expand.
• Advanced-node ramp plans remain on track: N3 volume in H2 2023, N3e qualification and volume in Q4, and N2 on track for volume production in 2025 to extend TSMC’s technology leadership.

Presentation

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

[Foreign Language] Good afternoon, everyone, and welcome to TSMC's second 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.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

If you are joining us through the conference call, your dial-in lines are in listen-only mode. The format for today's event will be as follows: First, TSMC's Vice President and CFO, Mr. Wendell Huang, will summarize our operations in 2Q 2023, followed by our guidance for 3Q 2023. Afterwards, Mr. Huang, TSMC's CEO, Dr. C.C. Wei, and TSMC's Chairman, Dr. Mark Liu, will jointly provide the company's key messages. Then we will open the line for a question and answer session. 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.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Now, I would like to turn the call over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

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. After that, I will provide the guidance for the third quarter. Second quarter revenue decreased 5.5% sequentially in TWD, or 6.2% in USD, as our second quarter business was impacted by the overall global economic conditions, which dampened the end market demand and led to customers' ongoing inventory adjustment. Gross margin decreased 2.2 percentage points sequentially to 54.1%, mainly reflecting lower capacity, utilization, and higher electricity cost, partially offset by more 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. Thus, operating margin was 42%, down 3.5 percentage points sequentially.

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

Overall, our first quarter EPS was NT 7.01, and ROE was 23.2%. Let's move on to revenue by technology. 5nm process technology contributed 30% of our wafer revenue, excuse me, in the second quarter, while 7nm accounted for 23%. Advanced technologies, defined as 7nm and below, accounted for 53% of wafer revenue. Moving on to revenue contribution by platform. HPC decreased 5% quarter-over-quarter to account for 44% of our second quarter revenue. 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%. Moving on to the balance sheet. We ended the second quarter with cash and marketable securities of NT 1.5 trillion, or $48 billion.

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

On the liability side, current liabilities decreased by NT$62 billion, mainly due to the net decrease of NT$87 billion in income tax payable as we pay NT$120 billion for 2022 income tax, offset by NT$33 billion accrued tax payables for the second quarter. Long-term interest-bearing debt increased by NT$53 billion, mainly as we raised NT$41 billion in corporate bonds. On financial ratios, accounts receivable turnover days decreased 2 days - 32 days, while days of inventory increased 3 days - 99 days, primarily due to N3 ramp during the quarter. Regarding cash flow and CapEx, during the second quarter, we generated about NT$167 billion in cash from operations, spent NT$251 billion in CapEx, distributed NT$71 billion for 3Q 2022 cash dividend, and raised NT$41 billion from corporate bond issuances.

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

Overall, our cash balance decreased by NT 109 billion to NT 1.33 trillion at the end of the quarter. Free cash flow was negative NT 83 billion during the quarter, as operating cash flow was more than offset by capital expenditures, partly due to the income tax payment of NT 120 billion. In US dollar terms, our second quarter capital expenditures total $8.17 billion. I have finished my financial summary. Let's turn to our current quarter guidance. 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.

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

Based on the exchange rate assumption of one US dollar to NT 30.8, 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 2023 and third quarter 2023 profitability. Compared to first quarter, our second quarter gross margin decreased by 220 basis points sequentially to 54.1%, primarily due to a lower capacity utilization. Compared to our second quarter guidance, our actual gross margin slightly exceeded the high end of the range provided three months ago, mainly due to more stringent cost control efforts and a slightly more favorable foreign exchange rate.

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

We have just guided our third quarter gross margin to decline by 1.6 percentage point to 52.5% at the midpoint, primarily as a higher level of capacity utilization rate is offset by 2-3 percentage points margin dilution from the initial ramp-up of our 3-nm technology. Looking ahead to the fourth quarter, we expect a continued steep ramp-up of our 3-nm to dilute our fourth quarter gross margin by about 3-4 percentage points. In 2023, our gross margin faces challenges from lower capacity utilization due to semiconductor cyclicality, the ramp-up of N3, overseas fab expansion, and inflationary costs, including higher utility costs in Taiwan. To manage our profitability in 2023, we will work diligently on internal cost improvement efforts while continuing to sell our value.

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

While we face near-term challenges, we continue to forecast a long-term gross margin of 53% and higher is achievable. Let me talk about our 2023 capital budget 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 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 billion and $36 billion. Our depreciation expense is now expected to increase by mid-20s% year-over-year in 2023, mainly as we ramp our 3 nm technologies. Despite near-term inventory cycle, our commitment to support customers' structural growth remains unchanged, and our disciplined CapEx and capacity planning remains based on the long-term market demand profile.

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

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. Let me make a few comments on our cash dividend distribution policy. The objectives of TSMC's capital management are to fund the capital, the company's growth organically, generate 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 quarter of 2023, up from 2.75 NT previously. This will become the new minimum quarterly dividend level going forward. First quarter 2023 cash dividend will be distributed in October 2023.

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

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. 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. Let me turn the microphone over to C.C Wei.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Thank you, Wendell. 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. Our business in the second quarter was impacted by the overall global economic conditions, which dampened the end market demand and customers' 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 cyclicality of our business. We expect our business in the third quarter to be supported by the strong ramp of our 3-nm technologies, partially offset by customers' 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.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

However, due to persistent weak, weaker overall macroeconomic conditions, slower than expected demand recovery in China, and overall softer end market demand conditions, customers are more cautious and intend to further control their inventory into Q4 2023. Thus, while we maintain our forecast for the 2023 semiconductor market, excluding memory, to decline mid-single-digit year-over-year, we now expect the foundry 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 fabless semiconductor inventory to exit Q423 at a healthier and lower level as compared to our expectation three months ago. Next, let me talk about HPC and TSMC's long-term growth outlook.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

As we have said before, the massive structural increase in demand for computation, underpinned by the industry mega trend of 5G and HPC, continues to drive greater need for performance and energy-efficient computing, which require use of leading-edge technologies. These mega trends are expected to fuel TSMC's long-term growth. Even with a more challenging 2023, our revenue remains well on track to grow between 15% and 20% CAGR over the next several years in US dollar terms, which is a target we communicated back in January 2022 investor conference. The recent increase in AI-related demand is directionally positive for TSMC. Generative AI requires higher computing power and interconnected bandwidth, which drive 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 foundry design ecosystem.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

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, accounts for approximately 6% of TSMC's total revenue. We forecast this to grow at a close to 50% CAGR in the next five years, and increase to low teens % of our revenue. The insatiable need for energy-efficient computation is starting from data centers, and we expect it will proliferate to edge and end devices over time, which will drive further long-term opportunities. We have already embedded a certain assumption for AI demand into our long-term CapEx and growth forecast. Our HPC platform is expected to be the main engine and the largest incremental contributor to TSMC's long-term growth in the next several years.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

While the quantification of the total addressable opportunity is still ongoing, generative AI and large language model only reinforce the already strong conviction we have in the structural megatrend to drive TSMC's long-term growth, and we will closely monitor the development for further potential upside. Now, let me talk about our N3 and N3E status. Our 3-nm technology is the most advanced semiconductor technology in both PPA and 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 smarter smartphone applications. N3 is expected to continue to contribute mid-single digit percentage of our total wafer revenue in 2023....

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

N3E further extend our N3 family with enhanced performance, power, and yield, and provide complete platform support for both HPC and smartphone applications. N3E has passed the qualification and achieved performance and yield target, and will start volume production in the fourth quarter of this year. With our continuous enhancement of 3 nm process technologies, we expect strong multi-year demand from our customers, and are confident that our 3 nm 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 on track for volume production in 2025. Our N2 will adopt Nanosheet transistor structure to provide our customer with the best performance, cost, and technology maturity.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Our Nanosheet technology has demonstrated excellent power efficiency, and our N2 will deliver full node performance and power benefits to address the increasing need for energy-efficient computing. As part of N2 technology platform, we also develop N2 with backside power rail solution, which is best suited for HPC applications. Backside power rail will provide 10%-12% additional speed gain and 10%-13% logic 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 HPC and smartphone applications.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Our 2 nm technology will be the most advanced semiconductor technology in the industry in both density and energy efficiency when it is introduced, and to further extend our technology leadership well into the future. This concludes my prepared remarks, and now let me turn the microphone over to Mark.

[Mark Liu, Chairman at Taiwan Semiconductor Manufacturing Company]

Thank you, C.C., and good afternoon, everyone. Today I want to talk about TSMC's global manufacturing 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 talents. 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 fab to provide US' most advanced semiconductor technology in mass production to support the needs for US semiconductor infrastructure. Our fab in Arizona started construction in April 2021, with an aggressive schedule.

[Mark Liu, Chairman at Taiwan Semiconductor Manufacturing Company]

We are now entering a critical phase of handling and installing the most advanced and dedicated equipment. We are encountering certain challenges, as there is an insufficient amount of skilled workers 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. Volume 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.

[Mark Liu, Chairman at Taiwan Semiconductor Manufacturing Company]

In China, we are expanding 28 nm in Nanjing as we planned, to support our customer in China. 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 fab are higher than 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.

[Mark Liu, Chairman at Taiwan Semiconductor Manufacturing Company]

We also emphasize one of our major responsibility is to manage and minimize the cost gap to maximize return for our shareholders. Those discussion 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.

[Mark Liu, Chairman at Taiwan Semiconductor Manufacturing Company]

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. 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 conclude our key messages. Thank you for your attention.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Thank you, Chairman. This concludes our prepared statements. 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 one on your telephone keypad now. If at any time you would like to remove yourself from the questioning queue, please press star two. Let's begin the Q&A session. Operator, can we please proceed with the first caller on the line?

[Operator]

The first one to ask question is Gokul Hariharan from JPMorgan. Go ahead, please.

[Gokul Hariharan, Managing Director at J P Morgan]

Yeah, thank you. Good afternoon, thanks for a lot of clarity on the AI-related exposure. My first question is on the AI front. A lot of TSMC's 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? 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 you think it could happen quicker based on what you see on demand from your customers and the capacity plans?

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay, Gokul, thank you. Let me try to summarize your first question. First question from Gokul is that he notes that we are, as you know, customers are seeing strong demand from AI-related, but they're facing capacity tightness or shortage. His question is: What are we doing in terms of the capacity side? Maybe both in terms of the advanced packaging, as well as the logic. When do we see the demand-supply imbalance returning to a better, healthier balance level? Is it sometime next year? Is that correct, roughly, Gokul?

[Gokul Hariharan, Managing Director at J P Morgan]

Yeah. Thanks. Thank you.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Okay, Gokul, this is C.C. 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. For the back end, the advanced packaging side, especially for the CoWoS, we do have some very tight capacity to very hard to fulfill 100% of what customer needed. We are working with customer for the short term to help them to fulfill the demand, but, you know, we are increasing our capacity as quickly as possible. We expect that these tightness will be released in next year, probably towards the end of next year. In between, we're still working closely with our customer to support their growth.

[Gokul Hariharan, Managing Director at J P Morgan]

Okay, C.C., maybe one follow-up. Could you let us know what kind of capacity expansion, is it like how much capacity you're expanding on the CoWoS side? like, any kind of quantitation of what kind of capacity you are adding?

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay, Gokul, just an additional to the first question, how much capacity are we going to increase in terms of CoWoS?

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Well, let me give you know, I will not give you the exact number, but let me give you a roughly approximately 2x of the capacity will be added. Okay, Gokul? Okay. Goku, are you there? If not, operator, maybe we move on to the next participant. Gokul, are you there? Okay, I think there was a disconnected. All right, let's move on to the next caller, participant, please.

[Operator]

Next one to ask question, Bruce Lu from Goldman Sachs. Go ahead, please.

[Bruce Lu, Vice President and Equity Analyst at Goldman Sachs]

Okay, thank you for taking my question. I still want to know about, like, the, you know, the TSMC maintain the 15%-20% revenue CAGR when we cut the, this year's revenue to -10%, right? If we use that 15% revenue CAGR to 2026, that implies about, like, 25%+ revenue CAGR from the coming two years, which means that the overall semi growth is gonna increase, like, a lot for the next two, three years. You just mentioned that the AI only accounts for 6% with low teens, potentially. That is not big enough to get back to the trend. What is the underlying growth you have with the, global semi, in the coming years, and what are the key assumptions for the growth for each segment?

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay, Bruce, let me try to summarize your first question. Bruce's first question is on our long-term growth CAGR, which we have said is to be between 15%-20% from 2021-2026 CAGR period. Bruce's question this year, you know, CC just said we will decline around 10%. Under his calculation, I think, he's saying, "Well, this implies you should grow 25% the next several years," which of course, this is a CAGR, but nonetheless... Bruce's question is that, therefore, if that's the type of growth, then shouldn't that imply a much higher growth level for the overall semiconductor, excluding memory industry? I think that is your question, Bruce. Am I correct?

[Bruce Lu, Vice President and Equity Analyst at Goldman Sachs]

Yes. What are the key assumptions for this growth?

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

Okay. Let me handle this question. Your count, your rationale is correct. However, some of the factor may not be totally included. For one thing, in your model that the customer's gross margin is 60% or plus, I don't think that would represent the average customer's gross margin, and maybe some specific ones. 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 growth right now, we are forecasting 4%-5%. It may increase, but definitely, as you said, it won't increase to 10%. Those are longer-term semiconductor, excluding memory growth, is still yet to be evaluated. Yeah. Did I answer your question?

[Bruce Lu, Vice President and Equity Analyst at Goldman Sachs]

Yes. The reason I do that is that I'm assuming that you have, like, dominant market share in the advanced node, and also that the growth is mostly coming from the advanced node, which your customers growth rates are supposed to be higher. I still think that the gap is wide enough. That's why I'm wondering, right, would 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 color?

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

I don't. This is a 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. Yeah. What I mean.

[Bruce Lu, Vice President and Equity Analyst at Goldman Sachs]

Okay.

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

is not just the advanced leading-edge technologies, but also the share of the outsourcing.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

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. Our CAGR is a combination of those two factors.

[Bruce Lu, Vice President and Equity Analyst at Goldman Sachs]

I see. Okay, thank you.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Do you have any-?

[Bruce Lu, Vice President and Equity Analyst at Goldman Sachs]

My next-

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Yeah, sorry, go ahead.

[Bruce Lu, Vice President and Equity Analyst at Goldman Sachs]

My next question. Yes. My next question is regarding to the guidance changes. You know, the previous guidance was the full year was, you know, low to mid-single digit, now it's about, like, 10% decline. The gap is, like, 5% of the total revenue, which is like, you know, quite sizable in terms of the revenue. Well, like $3 billion-$4 billion, highly concentrated in the second half or fourth quarter. Can you give us, like, what are the changes in terms of this shortfall? You know, where are the weaknesses come from?

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

Okay, Bruce's second question is looking at our 2023 full year guidance. He knows this last time, we had said low to mid-single digit decline. This time, we have guided to, around 10%. His question is, the delta of this, seems to be all, a lot of it also in the fourth quarter. Is there any particular segment or market, that is driving this? What are the factors behind this? Is that correct, Bruce?

[Bruce Lu, Vice President and Equity Analyst at Goldman Sachs]

Yes, thank you.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Okay, Bruce, let me answer the question. 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 that is, you know, for example, China economy's recovery is actually also weaker than what we thought. The yen market demand actually did not grow as we expected. Put all together, even we have a very good AI's processes, the demand is still not enough to offset all those kind of a macro impact. Now we expect that the whole year will become a -10%. That's what we thought.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

In terms of by particular segment or is there a particular market?

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Well, thank you. You are asking me the question.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Oh, no.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

It's almost an impact.

[Bruce Lu, Vice President and Equity Analyst at Goldman Sachs]

I don't know.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Yeah.

[Bruce Lu, Vice President and Equity Analyst at Goldman Sachs]

You understand my question. Thank you.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Yeah. It's overall, you know, market segment is being impacted because of it's a combination of the macroeconomics.

[Bruce Lu, Vice President and Equity Analyst at Goldman Sachs]

Can we conclude that other than AI, almost every application sees some weakness in the second half?

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

You got it.

[Bruce Lu, Vice President and Equity Analyst at Goldman Sachs]

Thank you.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

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

[Operator]

Next one to ask question is, Gokul Hariharan from JPMorgan.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Gokul, you're back. Okay.

[Gokul Hariharan, Managing Director at J P Morgan]

Yes, Yeah, sorry about that. Next question. 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 2019 and 2015. When do you think we kind of bottom out? Do you feel that the recovery in next year is going to be a strong recovery, or you think it's going to be a more gradual recovery? What are the kind of plans that you're putting in place as you think about next year's recovery once the inventory situation normalizes? Thank you.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Gokul'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 or, and 2015. His second question is, "When do we think this cycle can bottom out? What will, you know, 2024 next year look like? Do we expect a strong recovery, and what factors are we looking at?" Is that correct, Gokul?

[Gokul Hariharan, Managing Director at J P Morgan]

Yes. Thanks. Thank you.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Okay, Gokul, this is a good question. Let me answer it in a short one sentence. It's all about the macro. I mean, that, I just said, the macroeconomy is not so, it's become weaker than we thought. High inflation and interest rate impact end demand in all market segment, in every region in the world. As we said, under such situation, our customer are more cautious in their inventory control in the second half of this year. While we expect the fabulous semiconductor industry, their inventory to be cleaner and healthier, existing this year, and much closer to the seasonal level. Our expectation for them, they will continue to manage their inventory. 2024, it is still dependent on the macro situation. Gokul?

[Gokul Hariharan, Managing Director at J P Morgan]

Okay.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Yeah.

[Gokul Hariharan, Managing Director at J P Morgan]

C.C., 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 fair to say?

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

We will give you our comment.

[Gokul Hariharan, Managing Director at J P Morgan]

For first half next year.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Gokul, we will give you our comment next time. For 2024.

[Gokul Hariharan, Managing Director at J P Morgan]

Thank you.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay.

[Gokul Hariharan, Managing Director at J P Morgan]

Thank you.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

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

[Operator]

Next one, we have Charlie Chan from Morgan Stanley.

[Charlie Chan, Managing Director at Morgan Stanley]

Hey, gentlemen. Good afternoon. Thanks for taking my question. My first question is about the overseas fab cost, seems to get higher. Would TSMC consider to further adjust your pricing to absorb those increased costs? Management mention that you're doubling or more than doubling your advanced packaging, given an AI rush order. Would that give you a chance to reprice the backend foundry service? I remember there was a kind of below company's gross margin average. Would that be a chance to bring that back to the corporate average? Thank you.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

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? Also along similar lines related to advanced packaging, given we are, you know, C.C. said, doubling roughly the capacity, would we consider to.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

... also, charge more or higher, given that the returns of the back end, are lower?

[Mark Liu, Chairman at Taiwan Semiconductor Manufacturing Company]

Great. Let me answer the first question first. Yes, the overseas fab will cost higher, at least for the near future, where their supply ecosystem is not mature yet. The labor cost is from our experience, actually is a little bit higher than we expected. To answer your question, yes, as we try to get the maximum government subsidy, we also really look at the, how the co- price value for the overseas geographical flexibilities is 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, the price is strategically, yes.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

All right.

[Mark Liu, Chairman at Taiwan Semiconductor Manufacturing Company]

CC, can you ask the second question?

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Okay.

[Mark Liu, Chairman at Taiwan Semiconductor Manufacturing Company]

Yeah.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

I think the second question is about the pricing or the, and the CoWoS. As I answered the question, we are increasing the capacity in a, you know, as soon as possible, so manner, of course, that including actual cost. In fact, we are working with our customer, and the most important thing for them right now is the supply assurance, is the supply to meet their demand. We are working with them. We do everything possible to increase the capacity. Of course, at the same time, we share our value.

[Mark Liu, Chairman at Taiwan Semiconductor Manufacturing Company]

And then-

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Charlie,

[Charlie Chan, Managing Director at Morgan Stanley]

thanks.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Okay.

[Charlie Chan, Managing Director at Morgan Stanley]

May I ask a second question? It's a different topic. Is that okay?

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Sure. You get two questions, so sure.

[Charlie Chan, Managing Director at Morgan Stanley]

Thank you. Thanks, Jeff. Another question is about the AI semi demand, right? Thanks for providing, you know, your annual contribution growth assumption. That is super helpful. I'm wondering how TSMC can judge the AI demand, because right now, it's an arms race right now. Our customers are very aggressive at booking capacity. I'm wondering how company can judge.

[Mark Liu, Chairman at Taiwan Semiconductor Manufacturing Company]

Mm-hmm.

[Charlie Chan, Managing Director at Morgan Stanley]

whether those AI semi demand is for real. Also in terms of breakdown, I'm wondering whether, I mean, C.C. said that ASIC, the custom chip, is outgrowing GPU. I think that the more important one should be the first part of question, especially investors are concerned whether AI is cannibalizing the CPU server demand. Those are kind of the questions in our mind. Thank you.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay, let me summarize your second question, Charlie. Charlie's 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? How do we see the demand specifically for ASICs, as it relates to AI?

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Okay. You want to answer?

[Mark Liu, Chairman at Taiwan Semiconductor Manufacturing Company]

Let me try first.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Okay.

[Mark Liu, Chairman at Taiwan Semiconductor Manufacturing Company]

You probably.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Sure.

[Mark Liu, Chairman at Taiwan Semiconductor Manufacturing Company]

Follow up with that. This is a very deep question. Of course, we have a model, basically. The short term, the short-term frenzy about the AI demand definitely cannot extrapolate for the long term, and neither can we predict the near future, meaning next year, how the sudden demand will continue or will flatten out. However, our model is based on the data center structure. We assume a certain percentage of the data center processor are AI processors, and based on that, we calculate the AI's processor demand. This model is yet to be fitted to the practical data later on. But in general, I think the our trend of a big portion of data center processor will be AI processor is a sure thing.

[Mark Liu, Chairman at Taiwan Semiconductor Manufacturing Company]

Will it cannibalize the data center processors? In the short term, when the CapEx of the cloud service provider are fixed, yes, it will. It is. As for the long term, when their data service, when the cloud service having the generative AI service revenue, I think they will increase the CapEx. That should be consistent with the long-term AI processor demand. I mean, the CapEx will increase because of generative AI services. Anything more for you?

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Yeah.

[Charlie Chan, Managing Director at Morgan Stanley]

Is it?

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Charlie, I think part of Charlie's question is also, how do we see ASIC related in AI development?

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Well, actually, the customer also have a high demand on the ASIC parts for the AI application. As Mark pointed out, a short-term sudden increase, you cannot extrapolate it to be a long term. But again, let me emphasize that, those kind of application in the AI, be it CPUs, GPUs, or AI accelerator or ASIC, they all need leading-edge technologies, and they all have a one symptom. They are using the very large die size, which is a TSMC's strength.

[Charlie Chan, Managing Director at Morgan Stanley]

All right. Thank you.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay. Thank you, Charlie.

[Charlie Chan, Managing Director at Morgan Stanley]

Thank you very much.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

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

[Operator]

Next one to ask questions, Randy Abrams. Please, please.

[Randy Abrams, Equity Research Analyst at UBS]

Hey, yes, thank you. I wanted to shift to the profitability, maybe more for Wendell. You know, looking at the fourth quarter, you mentioned the 3-4 points dilution from N3. I think that is 2-3 points in the 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? A follow-up on the margin, where you discussed it's a tough year for margins on these factors like the energy ramp of N3. Could you discuss 2024? Do you think we're going into a period of a bit more challenging profitability, where you see factors that we could comfortably get back to the 53% and above next year?

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay. Thank you, Randy. Randy's first question is on gross margin. fourth quarter, with the N3 dilution of 3%-4%, does that mean directionally, fourth quarter, margin is sequentially down? Are there any positive offsets? Then for looking to 2024 for the full year, if Wendell can give some comments about 2024 gross margin, will it also be challenging, or do we still feel confident in a 53% and higher gross margin?

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

Okay, Randy. Starting from the second half of this year, as we said, we face certain cost challenges, including the ramp of N3, which will dilute about 2-3 percentage point in Q3 and 3-4 in the Q4, plus the higher electricity cost. We're not giving our guidance on the fourth quarter at this moment. We're just spelling out some of the challenges that we're seeing. Of course, we are going to continue to drive down our cost 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 seeing...

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

we're not talking about the whole gross margin, but we still see that N3 will dilute about 3-4 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. Net network, we also see some dilution from the N3 next year. The margin, the guidance will be given out next year.

[Randy Abrams, Equity Research Analyst at UBS]

Okay. I, quick follow-up to the first question. I think the last few nodes was 2 - 3 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 3nm versus 5nm and 7nm, or it looks like a little bit more dilution?

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

The increasing process complexity does add on the to the challenges of a newer node. However, the other important factor is that our corporate averages has become higher than before. We used to have 50% gross margin. We're now talking about 53% and higher gross margin. Okay?

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Yeah.

[Randy Abrams, Equity Research Analyst at UBS]

Okay, the second question, I wanted to ask how you're thinking about CapEx. Just netting up a few things, the geographic expansion, the 3nm, and then the start of 2nm, 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. If, 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 year, to give some lift for next year?

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

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, you know, invest in N2, but at the same time, as the macro remains uncertain, how does this impact 2024 CapEx?

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

Yeah, Randy, the push out of fabs does push out some part of the CapEx, but that doesn't affect a big part. For 2024, it's too early to talk about the overall CapEx. However, our CapEx, as we said before, every year, we spent the CapEx to capture the future growth opportunities. In the past few years, our CapEx has risen very fast, to capture the megatrend. Going forward, the next few years, when we start to harvest those, CapEx investment, we believe the CapEx will begin to level off in terms of dollar amount. That will lead to start to lower the capital intensity in the next several years.

[Randy Abrams, Equity Research Analyst at UBS]

And then-

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Sorry, Randy. Sorry.

[Randy Abrams, Equity Research Analyst at UBS]

Again, my quick follow-up, I think you mentioned in the past, you could use your 5 nm 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? That's my final one. Thank you.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Yeah. Randy's just also asking then, how does tool commonality play a role in our future CapEx?

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

We always build the tool commonality between nodes to provide a greater flexibility. We mentioned last time the strong multi-year demand from N3. We are able to support that using some of the tools from N5. We're not going to comment on the CapEx beyond this year. However, as I just mentioned, every year, the CapEx spent to capture the future growth opportunities.

[Randy Abrams, Equity Research Analyst at UBS]

Okay. Thank you, Wendell.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

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

[Operator]

Next one to ask questions, Laura Chen from Citi.

[Laura Chen, Research Analyst at Citi]

Thank you very much for taking my question, good afternoon, gentlemen. Very appreciate CC and Mark sharing on TSMC's view on the longer-term outlook in AI. So I'm just wondering, how does TSMC evaluate your backend capacity expansion to think of with the front-end wafer side? Since there is no problem in the front-end foundry space, were you kind of concerned about potential overcapacity in the backend side beyond next year? Or actually, we may see more upside at the foundry wafer side, so our say, like, advanced node utilization rate may go higher into next year? Thank you. That's my first question.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay. Laura's first question is, looking at our expansion of advanced packaging or backend versus the front-end wafer. As we are expanding the backend, but not the front end, does that imply that first, that our front-end wafer, particularly leading node, we expect the utilization to increase next year? Then conversely, or is there a risk that we are expanding or overcapacity risk for the packaging side?

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Laura, let me answer the question. AI today is a very hot topic. A lot of my customer 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 that, in the front-end wafer. According to that front-ends are loading, or we really work closely with our customer and to decide what is the backend that they need. On that perspective, we are planning our CoWoS as a capacity, although probably still not enough, but we're working very hard to increase it. Overcapacity, not today's a concern. If today's a concern, it's not enough capacity to support all the very strong demand.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay. Thank you, C.C.

[Laura Chen, Research Analyst at Citi]

Yes. Thank you. That's very clear. Thank you very much, C.C. My second question is also about the growth margin outlook. If you, I'm wrong, please correct me. I recall that the previous cycle, like 7 or 5 nm, the capacity usually will be 3x in the third year of the new technology ramping. I'm still wondering, is still the case for N3, particularly, we are seeing that a significant capacity intensity increase may lead to some margin pressure, particularly in the first few years. I'm just wondering, how does TSMC balance your technology leadership and also the margin saturation? Thank you.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Laura, you said 3x. Sorry, are you referring to the revenue contribution? Sorry, you said N7.

[Laura Chen, Research Analyst at Citi]

No, the capacity.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Oh, okay.

[Laura Chen, Research Analyst at Citi]

The capacity. Yeah.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay. All right, let me try to summarize your question. I think Laura is asking, N7, N5, we substantially expand the capacity. What is the case for N3? 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?

[Laura Chen, Research Analyst at Citi]

Yes. Thank you, Jeff.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay.

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

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. At the same time, we will continue to sell our value and drive down the cost at the same time. We still believe that N3 will be a long-lasting or a large node for TSMC. With all the efforts, we still believe that the whole company's gross margin will be 53% and higher.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay. Laura, does that answer your question?

[Laura Chen, Research Analyst at Citi]

Thank you. Very appreciate.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Yes. Okay. Thank you, Laura.

[Laura Chen, Research Analyst at Citi]

Thank you.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Operator, let's move on to the next participant, please.

[Operator]

Yes, right now we have Rolf Bulk from New Street Research. Go ahead, please.

[Rolf Bulk, Senior Analyst at New Street Research]

Thank you for taking my question. This quarter, your SUs in the legacy nodes, 16 and 20 nm in particular, were down around 15%-20% Q-on-Q. My question is, were there any particular end markets that caused this decline? How do you think about the recovery of those legacy nodes? Should we still expect recovery in the fourth quarter of this year, or is that more 2024 interest? Thank you.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay, Rolf's first question is looking on the mature nodes, such as 16 and 28. He notes, sorry, that those all saw sequential declines in the second quarter. His question is, what is driving this, you know, what end markets are driving this decline, and what is the expectation for this in the second half?

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

Well, let me answer that question. The mature nodes are wafer actually, or the product actually, try to be companion chip for the smartphone or for the PC market or for the HPC. While the total unit of smartphone become weaker and PC become weaker, the leading-edge technology node, being, also demand dropping, the mature node, that's together. Did I answer your question?

[Rolf Bulk, Senior Analyst at New Street Research]

Yes, thank you. That's very clear. For my second question, giving your focus on CoWoS and advanced packaging in general, also the weakness that you see in the remainder of your business, would you maybe comment on the percentage of your CapEx spending that will go towards leading nodes, specialty nodes, and packaging this year compared to last year?

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay, Rolf's second question is for 2023 CapEx, which our CFO has said, towards the lower end of the $32-$36 range, can we give a breakdown between leading-edge specialty technologies and then the packaging, testing, mask making, and others?

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

Leading-edge technology accounts for between 70%-80% of our total CapEx in a year. Mature specialty technology between 10%-20%. The remaining are split between advanced packaging and EBO and some others.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay. Thank you, Rolf.

[Rolf Bulk, Senior Analyst at New Street Research]

Perfect. Thank you.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

All right. Operator, let's move on to the next participant, please.

[Operator]

Next one, we have Sunny Lin from UBS.

[Sunny Lin, Semiconductor Analyst at UBS]

Thank you very much. Good afternoon. Thank you for taking my questions. My number one question is on 3 nm ramp-up. As we are going through several quarters of mass production, I think you must have pretty good visibility for customer engagement for the coming few years. I wonder now, how should we think about the overall ramp of 3 nm, if we compare with 5 and 7 nm? If we look at five, you reach toward 18% of revenue in the second year of mass production, and then about 24% of revenue in the third year. Whereas for 3 nm, I think the concerns by smartphone customers have been on cost.

[Sunny Lin, Semiconductor Analyst at UBS]

The question will be if HPC is significant enough to still drive a meaningful pickup of 3 nm. It would be greatly appreciate if you could provide us any kind of thoughts. Thank you very much.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay. Sunny's first question is on the ramp of 3-nm. Her question really, I believe, is coming from a percentage of revenue contribution. She wants to know how is the ramp of 3-nm, and then can it contribute to the revenue like N5 and 7nm in the past?

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

Yeah, as I just said, we believe N3 will be a long-lasting and large node 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. I think you should also take that into consideration. Dollar amount-wise, it's a much bigger node.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Yeah. C.C. also said-

[Sunny Lin, Semiconductor Analyst at UBS]

Got it.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

It's multiyear strong structural demand. Yeah. Sorry. Okay?

[Sunny Lin, Semiconductor Analyst at UBS]

Got it. I have a quick follow-up on 3nm profitability. Wendell has provided pretty good insight about the dilution for 2024, but historically, a new node would take about 7-8 quarters to get to corporate average after mass production. I understand now, corporate average gross margin is also higher, but any expectations that N3 will become in line with corporate average gross margin?

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

Yeah.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Sunny's question is looking at the 3nm. Her question is really, you know, that with 3nm and process complexity, Sunny, you're asking really, can it reach the corporate average over time?

[Sunny Lin, Semiconductor Analyst at UBS]

Is there a time, timeline, that you are expecting?

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

A timeline to reach?

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

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. It will be challenging for N3. We actually mentioned that at the beginning of last year already. It will be challenging that for N3 to reach the corporate average in the 7-8 quarters timeframe like before. However, part of it is really all because of the a higher corporate margin that we currently have.

[Sunny Lin, Semiconductor Analyst at UBS]

Got it. Thank you. My second question is on 2nm.

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Sure.

[Sunny Lin, Semiconductor Analyst at UBS]

If we look at your target for 2nm improvement over 3nm in terms of speed and power, the upgrade seems to be actually less than 3nm over 5nm. I wonder what's actually the implication of GAA transition to cost versus performance? Is the target somewhat conservative, or there's other technological challenges that we need to consider?

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay. Sunny, second, well, it's really her third, but the question is on N2. She notes that the performance and the improvement seem to be less than three nm versus five nms. Could we talk more about that?

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Yeah, let me answer the question. Sunny, you have a very good observation. Yes, you are right. As I compare node to node, from five to three, the improvement, it become less from 3 to 2. 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 node as a performance, because of as time goes by, more and more customer, 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. Did I answer your question, Sunny?

[Sunny Lin, Semiconductor Analyst at UBS]

Got it. 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.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Thank you, Sunny. Operator, let's move on to the next participant, please.

[Operator]

Next one to ask questions, Brett Simpson from Arete Research.

[Brett Simpson, Partner, and Co-Founder at Arete Research]

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 variant 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, rather than the N3E? This is a follow-on. For AI, when do we actually start to see N3 adoption for N3? Thank you.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay. Brett's first question is looking at Our 3nm 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? When do we expect AI related to adopt 3nm family solutions?

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Let me answer the last one first. AI application already adopting that our N3 technology node. We continue to improve our technology, as we always do. We have a N3E, N3P, N3X. X is the actual performance that's for the very high speed, very high, let me say, performance computing, for some of the CPU's application. N3Es are widely accepted by all my customer, and they design starting from N3E, and we help them, okay, for some of them, go to the N3P. All together, the every version, every variation, there's a lot of customer engagement right now.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay. Thank you, C.C.

[Brett Simpson, Partner, and Co-Founder at Arete Research]

Okay. And maybe just, 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. 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% premium to operate in the US. Can you just clarify if it's likely to be that high? When would you expect the cash support from U.S. Chip Act to be made available to TSMC? Thank you.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay. Brett's second question is for chairman. He wants to know, in basically, the cost gap, how big is the cost gap of fab in the US versus in Taiwan? Founder has said, you know, 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?

[Mark Liu, Chairman at Taiwan Semiconductor Manufacturing Company]

Yes, Simpson. I mean, at this point, if we using the current supply chain and labor cost, indeed, yes, that's the difference is. However, we try to work with the US administration. First of all, on the subsidy, cash subsidy and tax, investment tax credit, 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 the material cost, chemical cost, and the labor cost. We are working with our supplier to set up some of the more efficient supplier, supply sites and to be lower. The...

[Mark Liu, Chairman at Taiwan Semiconductor Manufacturing Company]

The US administration is decided to also to subsidize the supply, our suppliers. That is still in the work. How much it can further decrease? I don't know. I think either way, we will strengthen our pricing values, and be able to keep the corporate profitability as we forecast it now.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Thank you, Chairman. Okay. Thank you, Brett.

[Brett Simpson, Partner, and Co-Founder at Arete Research]

Thank you.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

In the interest of time, operator, we'll take questions from the last two participants in the queue, please.

[Operator]

Yes. Next one to ask question, Mehdi Hosseini from SIG.

[Mehdi Hosseini, Senior Tech Hardware Analyst at Susquehanna Financial Group, LLLP]

Yes, sir. Thanks for taking my question. I'm going to go back to the gross margin, and I think you highlighted the fact that for 23 years, you're still tracking to 53% gross margin on a USD basis. Does it imply that Q4 could be flat to up? I just want to better understand how it's tracking. I'm not asking for a guide on Q4, but if 2023 gross margin is going to be 53% plus, that would imply Q4 flat to up. Is that correct?

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

All right, Mehdi. I think we'll let Wendell answer this question, but Mehdi is asking basically, you know, are we saying that 2023 will be 53% and higher?

[Wendell Huang, VP and CFO at TSMC]

Mehdi, we're not giving our guidance beyond this third quarter. 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 targets for TSMC.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Yeah, we did not provide a guidance for 2023, specifically, Mehdi. As Wendell just said, 53% and higher is our long-term target, which we believe is achievable. Do you have a second question?

[Mehdi Hosseini, Senior Tech Hardware Analyst at Susquehanna Financial Group, LLLP]

Okay. Thank you. Yes. Your updated guide suggests the revenues in the second half would be up 10%-12% versus the first half. Obviously, then, a step up is lower than prior expectations. 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?

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Mehdi is asking, with our full year guidance, it implies, you know, a more mild second half seasonality. He wants to know how much strength of the new customer product launches is offset by continued inventory correction, sort of if we can provide more color on that.

[Mark Liu, Chairman at Taiwan Semiconductor Manufacturing Company]

Oh, that's a tough question to answer. Mehdi, your observation is right. Our second half, the seasonality is more milder than previous years. Of course, we have N3 ramped up and for the new product launch. What is the impact? How to separate them? No, I cannot share the too much of the detail of that.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay, Mehdi? Okay.

[Mehdi Hosseini, Senior Tech Hardware Analyst at Susquehanna Financial Group, LLLP]

Thank you.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Thank you. Operator, let's move on to the last participant, please.

[Operator]

Yes, the last one on queue is Charles Shi from Needham.

[Charles Shi, Senior Analyst at Needham & Company]

Thanks. Hi, thanks for squeezing me in. I have two questions. The first question is, I want to ask about AI, especially around TSMC's monetization of the AI trend. We did hear some commentary that for certain AI applications, TSMC is selling chips for a few hundred bucks, but the TSMC customers can actually sell for tens of thousands of dollars to their end customers. I mean, some investors I spoke with really feel it pains them to see TSMC create an advanced technology, probably deserve a greater value than this. The question really is, how does TSMC think about maybe better monetization going forward for the capability to produce all these AI chips?

[Charles Shi, Senior Analyst at Needham & Company]

Really, I want to tie back to one thing management mentioned in the prepared remarks, the AI growth 50% CAGR. How much of that is volume, and how much of that could be the pricing actually, in terms of what TSMC expected to grow over the next few years in AI? Thank you.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay, Charles's 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. 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?

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

Well, Charles, I used to make a joke on my customer, say that I'm selling him a few hundred dollars of a chip, and then he sold it back to me with a $200,000. Let me say that we are happy to see customer doing very well. If customer do well, TSMC does well. Of course, we work with them, and we sell our value to them. Fundamentally, we want to say that we are able to address and capture a major portion of the market in terms of a semiconductor component in AI. Did I answer your question?

[Charles Shi, Senior Analyst at Needham & Company]

yes. What about the part about 50% CAGR? How much of that is volume, and, should we expect some pricing element in that long-term growth?

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

I'm sorry.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Yeah. The second part is about close to 50% CAGR for sorry, server with AI processor. How much of that is volume? How much of that is price?

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

We cannot separate it out, but, let me share with you again. We talk to the customers because of we have a major share of that, all the leading-edge technology node. We know that we can make our judgment, and so we forecast a 50% CAGR. How much of that is, you know, on the front end, back end, or others, you know, I am not able to share with you about it. Let me assure you that TSMC-

[Charles Shi, Senior Analyst at Needham & Company]

Yeah

[Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company]

going to capture a major portion of the market in terms of semiconductor component.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay, Charles?

[Charles Shi, Senior Analyst at Needham & Company]

Thank you. Can I ask you a second question?

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Last question.

[Charles Shi, Senior Analyst at Needham & Company]

Yeah, no problem. Last one. May I ask about the CapEx? I think I heard a comment, maybe from Wendell, about on dollar amount, CapEx is probably going to level off from here. I think the management, you should point us, analysts, to look at the 2010-2013 period, where the high capital intensity, CapEx actually went up $3 billion-$4 billion per year to $10 billion. Actually, after that, TSMC CapEx did level off around the $10 billion level for roughly five years until 2019. By telling us that the CapEx is probably going to level off, are you telling us or are you alluding to maybe there will be some steady-state CapEx numbers going forward, maybe starting from 2024 or 2025, around $30 billion-ish level?

[Charles Shi, Senior Analyst at Needham & Company]

That's just a clarification on that comment on leveling off. Thank you.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

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, you know, specific, but what does that mean? Is it going to stay around, you know, the thirty-some level, or what does that mean by spending leveling off?

[Wendell Huang, Vice President and CFO at Taiwan Semiconductor Manufacturing Company]

Yeah, Charles, as I've mentioned, in the past few years, our CapEx increased dramatically, from $10 billion to $36 billion last year. As we start to harvest those investment, the increase in CapEx will be slower than before. That's what I mean by leveling off.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay. All right, Charles?

[Charles Shi, Senior Analyst at Needham & Company]

Got it. Got it.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay.

[Charles Shi, Senior Analyst at Needham & Company]

Yeah.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Thank you.

[Charles Shi, Senior Analyst at Needham & Company]

Yes, thank you.

[Jeff Su, Director of Investor Relations at Taiwan Semiconductor Manufacturing Company]

Okay, operator, this concludes our Q&A session. Before we conclude today's conference, please be advised that the replay of the call will be accessible within 30 minutes from now. The transcript will become available 24 hours from now, both of which you can be find and available through TSMC's website at www.tsmc.com. Thank you for joining us today. We hope everyone continues to stay well. Have a good rest of the summer, and we hope you will join us again next quarter. Goodbye, and have a good day.

Participants

Executives

• Jeff Su, Director of Investor Relations
• Wendell Huang, Vice President and CFO
• Mark Liu, Chairman

Analysts

• Che-Chia Wei, CEO at Taiwan Semiconductor Manufacturing Company
• Gokul Hariharan, Managing Director at J P Morgan
• Bruce Lu, Vice President and Equity Analyst at Goldman Sachs
• Charlie Chan, Managing Director at Morgan Stanley
• Randy Abrams, Equity Research Analyst at UBS
• Laura Chen, Research Analyst at Citi
• Rolf Bulk, Senior Analyst at New Street Research
• Sunny Lin, Semiconductor Analyst at UBS
• Brett Simpson, Partner, and Co-Founder at Arete Research
• Mehdi Hosseini, Senior Tech Hardware Analyst at Susquehanna Financial Group, LLLP
• Wendell Huang, VP and CFO at TSMC
• Charles Shi, Senior Analyst at Needham & Company