Taiwan Semiconductor Manufacturing Q4 2023 Earnings Call Transcript

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Provided by Quartr
January 18, 2024

Key Takeaways

  • In Q4 2023, TSMC delivered NT$9.21 EPS on revenues up 14.4% sequentially (13.6% in USD), supported by the ramp of its industry‐leading 3 nanometer technology, with a gross margin of 53.0% and operating margin of 41.6%.
  • For Q1 2024, TSMC expects revenue of US$18.1 billion to US$18.8 billion (–6.2% sequential at the midpoint), with gross margin guided to 52%–54% and operating margin to 40%–42%, reflecting smartphone seasonality.
  • TSMC forecasts full‐year 2024 revenue growth of low to mid‐20% in USD terms, aiming to outperform the foundry industry’s ~20% expansion, driven by continued strong 3 nm ramp and robust AI/HPC demand.
  • The 2024 CapEx budget is set at US$28 billion to US$32 billion, with 70%–80% devoted to advanced process technologies, and depreciation rising ~30% year over year, supporting N3 and N2 ramps.
  • TSMC is expanding its global manufacturing footprint with specialty fabs in Japan (12/16 nm), Arizona (N4), Germany (automotive/industrial nodes) and enhanced N2 capacity in Taiwan to meet diversified customer needs.
AI Generated. May Contain Errors.
Earnings Conference Call
Taiwan Semiconductor Manufacturing Q4 2023
00:00 / 00:00

There are 12 speakers on the call.

Operator

Good afternoon, everyone, and welcome to TSMC's 4th Quarter 2023 Earnings Conference and Conference Call. It's great to see everyone in person once again. This is Jeff Su, TSMC's Director of Investor Relations and your host for today. Today's event is being webcast live through TSMC'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.

Operator

The format for today's event will be as follows. First, TSMC's Vice President and CFO, Mr. Wendell Huang, We'll summarize our operations in the Q4 2023 and full year of 2023, followed by our guidance for the Q1 2024. Afterwards, Mr. Huang, TSMC's CEO Doctor.

Operator

C. C. Wei and TSMC's Chairman, Doctor. Mark Lu, We'll jointly provide the company's key messages. Then TSMC's Chairman, Doctor.

Operator

Mark Liu, will host the Q and A session where all 3 of our executives will take your questions. As usual, I'd like to remind everybody that today's discussions may 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 statements. Please refer to the Safe Harbor notice that appears on our press release. And now, I would like to turn the microphone over to TSMC's CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.

Speaker 1

Thank you, Jeff. Happy New Year, everyone. Thank you for joining us today. My presentation will start with financial highlights for the Q4 and a recap of full year 2023. After that, I will provide the guidance for the Q1 2024.

Speaker 1

4th quarter revenue increased 14.4 percent sequentially in NT dollar or 13.6% in U. S. Dollars As our 4th quarter business was supported by the continued strong ramp of our industry leading 3 nanometer technology, Gross margin decreased 1.3 percentage points sequentially to 53%, primarily due to margin dilution from 3 nanometer ramp. Operating margin decreased 0.1 percentage points sequentially to 41.6%, slightly ahead of our guidance, mainly due to operating leverage on higher revenue. Overall, our 4th quarter EPS was 9.21 NT and ROE was 28.1%.

Speaker 1

Now let me move on to revenue by technology. 3 nanometer process technology contributed 15% of wafer revenue in the 4th quarter, while 5 nanometer and 7 nanometer accounted for 35% 17%, respectively. Advanced Technologies, defined as 7 nanometer and below, accounted for 67% of wafer revenue. On a full year basis, 3 nanometer revenue contribution came in at 6% of 2023 wafer revenue. 5 nanometer was 33% and 7 nanometer was 19%.

Speaker 1

Advanced Technologies accounted for 58% of total wafer revenue, up from 53% in 2022. Moving on to revenue contribution by platform. HPC increased 17% quarter over quarter to account for 43% of our 4th quarter revenue. Smartphone increased 27% to account for 43%. IoT decreased 29% to account for 5%.

Speaker 1

Automotive increased 13% to account for 5% And DCE decreased 35% to account for 2%. On a full year basis, Smartphone, IoT, DCE decreased 8%, 17% and 16%, respectively. HPC remained flat, while automotive increased 15% in 2023. Overall, HPC accounted for 43% of our 2023 revenue smartphone, 38% IoT, 8% and Automotive, 6%. Moving on to the balance sheet.

Speaker 1

We ended the 4th quarter with cash and marketable securities of NT1.7 trillion or USD 55,000,000,000 On the liability side, current liabilities decreased by USD 56,000,000,000 mainly due to the decrease in accounts payable. On financial ratios, accounts receivable days decreased 4 days to 31 days, while days of inventory also declined 11 days to 85 days, primarily due to higher 3 nanometer wafer shipments. Regarding cash flow and CapEx, During the Q4, we generated about TRY395 1,000,000,000 in cash from operations, Spent $170,000,000,000 in CapEx and distributed $78,000,000,000 for the Q1 'twenty three cash dividend. Overall, our cash balance increased $154,000,000,000 to $1,470,000,000,000 at the end of the quarter. In U.

Speaker 1

S. Dollar terms, our 4th quarter capital expenditures totaled DKK 5,240,000,000. Now let's look at the recap of our performance in 2023. 2023 was a challenging year for the global semiconductor industry, but our technology leadership Our revenue decreased 8.7% in U. S.

Speaker 1

Dollar terms to USD 69,000,000,000 or decreased 4.5 percent in NT terms to NT2.16 trillion. Gross margin decreased 5.2 percentage points to 54.4%, mainly reflecting lower overall capacity utilization and 3 nanometer ramp, partially offset by a more favorable foreign exchange To extend our technology leadership, we continue to expand our R and D investment in Operating margin decreased 6.9 percentage points to 42.6%. Overall, full year EPS declined 17.5 percent to NTN 32.34 And ROE was 26.2 percent. On cash flow, we spent USD 30,450,000,000 or TWD950 1,000,000,000 in CapEx, while generating TWD 1,700,000,000,000 in operating cash flow and DKK292,000,000,000 in free cash flow. We also paid DKK 292,000,000,000 in cash dividends in 2023.

Speaker 1

I have finished my financial summary. Now let's turn to our current quarter guidance. We expect our business in the Q1 to be impacted by smartphone seasonality, partially offset by continued HPC Based on the current business outlook, we expect our first quarter revenue to be between US18 1,000,000,000 And USD 18,800,000,000 which represents a 6.2% sequential decline at the midpoint. Based on the exchange rate assumption of USD 1 to USD 31.1, gross margin is Expected to be between 52% 54%. Operating margin between 40% 42%.

Speaker 1

Now let me turn to our key messages. I will start by making some comments on our Q4 'twenty three and 30 basis points sequentially to 53%, primarily due to the margin dilution From the continued ramp up of our 3 nanometer technology. We have just guided our first quarter gross margin to be flat Sequentially at 53% at the midpoint, primarily as a less favorable foreign exchange rate assumption is offset by product mix changes due to smartphone seasonality. Looking at full year 2024, Given the six factors that determine our profitability, there are a few puts and takes I would like to share. On the plus side, we expect our utilization rate to rise in 2024 as our business recovers.

Speaker 1

However, as we move as we have said before, N3 is expected to dilute our gross margin by about 3 to 4 percentage points for the full year of 2024 as the revenue contribution will be much higher than in 2023. In addition, we have a strategy so that some of Such a plan will enable higher capital efficiency in the mid- to long term, but requires cost and effort in the near term. Most of this conversion will occur in second half of twenty twenty four, and we expect it to dilute our gross margin by about 1 to 2 percentage points in second half of twenty twenty four. Finally, we have no control over the foreign exchange rate, but that may be another factor in 2024. Long term, excluding the impact of foreign exchange rate and considering our global manufacturing footprint expansion plans, We continue to forecast a long term gross margin of 53% and higher is achievable.

Speaker 1

Next, let me talk about our 2024 capital budget and depreciation. Every year, Our CapEx is spent in anticipation of the growth that will follow in future years. In 2023, We spent US30.4 billion dollars lower than our prior guidance of approximately US32 billion dollars As we continue to tighten up our capital spending where appropriate given the near term uncertainties. In 2024, our capital budget is expected to be between USD 28,000,000,000 and USD 32,000,000,000 as we continue to invest to support customers' growth. Out of the CAD 28,000,000,000 to CAD 32,000,000,000 for 2024, Between 70% 80% of the capital budget will be allocated for the advanced process technologies.

Speaker 1

About 10% to 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 expected to increase Close to 30% year over year in 2024, mainly as we ramp up our 3 nanometer technologies. Finally, let me make some comments on our long term CapEx and cash dividend distribution policy. At TSMC, a higher level of capital expenditures is always correlated with higher growth opportunities in the following In the past few years, we have sharply increased our CapEx spending in preparation to capture I'll harvest the growth opportunities from HPC, AI and 5 gs megatrends. Despite a challenging 2023, Our revenue remains well on track to grow between 15% 20% CAGR over the next several years in U.

Speaker 1

S. Dollar terms, which is the target we communicated back in January 2022 investor conference. With our 2024 CapEx guidance Of DKK28 1,000,000,000 to DKK32 1,000,000,000, the rate of increase of our capital spending has begun to level off as we capture and harvest the growth. The objectives of TSMC's capital management Are to fund 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 November, TSMC's Board of Directors approved the distribution of a NT3.5 per share cash dividend For the Q3 of 2023, up from 3NT previously, this will become the new minimum In 2023, TSMC's shareholders received a total of TWD11.5 cash dividend per share, And they will receive at least NT13.5 per share cash dividend for 2024.

Speaker 1

In the next few years, we expect the focus of our cash dividend policy to continue to shift from a sustainable

Speaker 2

Good afternoon, everyone. First, let me start with our 2024 outlook. 2023 was a challenging year For the global semiconductor industry, we also witnessed the rising emergency of generative AI related applications with TSMC as a key enabler. In 2023, weakening global Macroeconomic conditions and high inflation and interest rate, example rate and prolonged the global semiconductor inventory adjustment cycle. Concluding 2023, The semiconductor industry, excluding memory industry, declined about 2%, while foundry industry declined about 13% year over year.

Speaker 2

TSMC's revenue declined 8.7% year over year in U. S. Dollar term. Despite the near term challenges, our technology leadership enabled TSMC to outperform the high performance computing related growth opportunities. Entering 2024, We forecast fabless semiconductor inventory to have returned to a higher level exceeding 2023.

Speaker 2

However, Consumer sentiment and the end market demand. Having said that, our business has buttoned out On a year over year basis, we expect 2024 to be a healthy growth year for TSMC, Supported by continued strong ramp of our industry leading 3 nanometer technologies, strong demand for the 5 nanometer technologies and robust AI related demand. Coming off the steep inventory correction and low base of 2023, For the full year of 2024, we forecast the overall semiconductor market, excluding memory, to increase by more than 10% year over year, while foundry industry growth is forecast to be approximately 20%. For TSMC, supported by our technology leadership and broader customer base, We are confident to outperform the foundry industry growth. We expect our business to grow quarter Over quarters throughout 2024 and our full year revenue expect to increase by low to mid 20% in U.

Speaker 2

S. Data terms. Next, let me talk about our N3 and N3e ramp up and progress. Our 3 nanometer technology are the most advanced semiconductor technology in both PPA and transistor technology. As a result, almost All the world's smartphone and HPC innovators are working with TSMC on 3 nanometer technologies.

Speaker 2

Our N3 successfully entered volume production and enjoyed a strong ramp in second half 'twenty three, accounting for 6% of our total wafer revenue in 2023. N3e further leveraged The strong foundation of N3 to extend our N3 family with enhanced performance, power and yield. N3e has already entered volume production in the Q4 of 2023, supported by robust demand From customers in both smartphone and HPC applications, we expect revenue from our 3 nanometer technology to more than triple in 2024 and account for mid teens percentage of our total wafer revenue. We also continue to provide further enhancement of our N3 technology, including N3P and N3X. With our strategy of continuous enhancements of our 3 nanometer process technologies, we expect strong multiyear demand from our customers and are confident that our 3 nanometer family will be another large and long lasting node for TSMC.

Speaker 2

Now I will talk about the AI related demand and our N2 Status. The surge in AI related demand in 2023 Suppose our already strong conviction that the structurally demand for energy efficient computing will accelerate In an intelligent and connected world, TSMC is a key enabler of AI applications. No matter which approach is taken, AI technology is evolving to use more complex AI models As the amount of computation required for training and inference is increasing. As a result, AI model need to be supported by more powerful semiconductor hardware, which requires use of the most advanced semiconductor process technologies. Thus, The value of TSMC Technology position is increasing, and we are well positioned to capture the major portion of the market in terms of semiconductor component in AI To address insensible AI related demand for energy efficient computing power, Customers rely on TSMC to provide the most leading edge processing technology at scale with a dependable and predictable cadence of technology offering.

Speaker 2

At the same time, As process technology complexity increase, the engagement lead time with customer also start much earlier. Almost all the AI innovators are working with TSMC and we are observing a much higher level of Customer interest and engagement at N2 as compared with N3 at a similar stage From both HPC and smartphone applications, our 2 nanometer technology will adopt narrow sheet transistor structure And be the most advanced semiconductor technology in the industry in both density and energy efficient When it is introduced in 2025, our N2 technology development is progressing well, With device performance and yield on track or ahead of plan, N2 is on track for volume production in 2025 With a ramp profile similar to N3, as part of our N2 technology platform, We also developed the N2 with backside power rail solution, which is better suited for specific HPT applications Based on performance, cost and maturity considerations, N2 with backside power rail We'll be available in the second half of twenty twenty five to customers with production in 2026. With our technology of continuous enhancement, end to end its derivative will further extend our technology leadership position and enable TSMC to capture the AI related growth opportunities well into the future.

Speaker 2

Finally, let me talk about our specialty technology strategies at mature node. For TSMC, today around 70% of our total revenue is 16 nanometer and more advanced node With rising contribution from 3 nanometer and 2 nanometer technologies in the next several years, This number will only increase, thus our mature node exposure is around 20% of our total revenue. TSMC's strategy at mature knowledge is to work closely with strategic partner To develop specialty technology solutions to meet customers' requirement and create differentiated And long lasting value to customers, our focus is to build high yield capacity for specialty technologies rather than just a nominal capacity. Through the deployment of Depreciated Specialty Technologies, the profitability of our mature node can be around our corporate average gross margin. Looking ahead, we forecast 28 nanometer will be the sweet spot for our embedded memory applications, And we expect our long term structural demand at 28 nanometer to be supported by multiple types of specialty technologies.

Speaker 2

Thus, we are expanding our 28 nanometer specialty manufacturing capacity overseas To support the long term structural market demand, we believe demand for the differentiated specialty technology will remain steady Despite the potential industry capacity increase and our utilization rate and structural profitability, Edward, you all know, can be well protected in the future. This concludes my prepared remarks. And now let me turn the microphone over to Mark.

Speaker 3

Thank you, C. C. Good afternoon, everyone. First, let me talk about our global manufacturing footprint update. TSMC's mission is to be the trusted technology and the capacity provider for the global logic IC Industry for years to come.

Speaker 3

In today's fractured globalization environment, Our strategy is to expand our global manufacturing footprint, to increase our customer trust, Expand our future growth potential and reach for more global talents. Our overseas decisions are based on our customers' needs and a necessary level of government subsidy or support. This is to maximize the value for our shareholders. Firstly, in Japan, we are building a specialty technology fab in Kumamoto, which will utilize 12 and 16 nanometer and 22 and 28 nanometer process technologies. We will hold an opening ceremony for this fab on February 24, next month.

Speaker 3

And volume production is on track for the Q4 of 2024. In Arizona, we are in close and constant communication with the U. S. Government On incentive and tax credit support and making strong progress In Facilities Supply Chain Infrastructure, Utility Supply and Equipment Installation for our first fab, We continue to work closely and develop strong relationships with our local union and trade partners in Arizona, Including recently signed an agreement with Arizona Building and Construction Trades Council on a new framework for cooperation. This agreement extends our collaboration across enhanced workforce Training and development, shared commitment to site safety, hiring local workers and establishing regular communication.

Speaker 3

It is a win win for all parties. We are well on track for volume production of N4 or 4 nanometer process technology in first half of twenty twenty five And are confident that once we begin operations, we will be able to deliver the same level of manufacturing quality In Europe, we plan to build a specialty technology fab in Dresden, Germany, focusing on automotive and industrial applications with our joint venture partners. We continue to be in close communication with the German Federal, State and city governments and their commitment to this project remain strong and unchanged. Fab construction is scheduled to begin in Q4 2024, this year. In Taiwan, of course, we continue to invest Given the robust multiyear demand for our 3 nanometer technologies, we are expanding our 3 nanometer capacity In Tainan Science Park, we are also preparing our N2 volume production starting in 2025.

Speaker 3

We plan to build multiple fabs or multiple phases of 2 nanometer technologies In both Jintu and Kaohsiung Science Parks to support a strong structural demand from our customer C. C. Just mentioned. In Taichung Science Park, the government approval process It's ongoing and is also on track. While the initial cost of overseas fab, I previously mentioned are higher than TSMC's fab in Taiwan.

Speaker 3

We are confident to manage and minimize the cost gap And remain committed to deliver profitable growth and maximize the value for our shareholders. Now let me talk about my retirement. On December 19 last year, I announced that I have decided not to seek nomination of Board members for the next term, and we will retire from the company after the 2024 Annual Shareholders Meeting in June. Allow me to say this. Over the past 30 years, I have been incredibly fortunate To be able to work at and contribute to TSMC.

Speaker 3

I started at TSMC 30 years ago As a leader of a small four person fab construction team, it has been my privilege to serve as Chairman of TSMC. And after our legendary founder, Doctor. Morris Chang, over the last 6 years, during this time, we have reaffirmed our commitment To our mission, to be the trusted technology and capacity provider to the global logic IC industry for years to come, While adhering to our core values of integrity, commitment, innovation and customer trust, TSMC's success is predicated on providing the industry's most leading edge processing technology at scale In the most efficient and cost effective manner, to enable all the innovators to successfully offer They're best products to the world. We together have worked diligently to enhance our focus On our technology leadership, competitiveness, global manufacturer footprint, digital excellence, Sustainability and Corporate Governance to maximize the value for our customers and our shareholders. The past 30 years with TSMC has been an extraordinary journey for me, and I want to Dan, my sincerest thanks to our incredible talented team and all our TSMC's colleagues whose diligence, dedication and can do spirit have made the company into what it is today.

Speaker 3

Now TSMC's nomination, Corporate Governance and Sustainability Committee of the Board has recommended Doctor. C. C. Wei to If Doctor. Wei is elected to be Chairman, he should also continue in his current role as CEO.

Speaker 3

Supported by a deep and experienced team of senior executives, many of whom have been with TSMC for many, many years. As I look ahead to spend more time with my family and starting the next chapter of my life after my AGM, in June, I remain fully confident in TSMC's strategy, leadership and execution And firmly believe TSMC will continue to perform outstandingly in the years ahead. Thank you for your trust in TSMC, and the best is yet to come for the company and its shareholders.

Operator

Thank you, Chairman. This concludes our prepared statements. So before we begin the Q and A session, I would like to remind everybody Questions will be taken both from the floor and also from the call online. Should you wish So now let's begin the Q and A session. Again, our Chairman, Doctor.

Operator

Mark Liu, will be the host. Let's take the first two questions from the floor, please. Okay. Our first question comes from Charlie Chan from Morgan Stanley.

Speaker 4

Thanks, Jeff and Mark, C. C. And Wendell. It's great to see you again in person. Happy New Year.

Speaker 4

Hello, me to remain seated. I have some long question to you. So first question is to C. C. I am very curious about your comments about the technology leadership, right, because your competitor knows our customer Intel States that their PPA is ahead of your 2 nanometer, even the cost is lower.

Speaker 4

So I want to consult your opinion, Why there's a different story and how do we judge? And given these debates, how TSMC is going to plan The future capacity for this customer and also competitor, we want to seize this opportunity but also avoid Any overexpansion? Thanks.

Operator

Okay. Thank you, Charlie. Just please allow me for the benefit of the audience here in person and online to summarize your question. So Charlie, first question is around sort of the technology leadership and also our relationship, I guess, capacity planning with a specific IDM. So the first part of his question is on the technology part.

Operator

He notes this IDM, it says their PPA is ahead of TSMC's 2 nanometer and the cost can be lower, yet we said our technology is industry leading. So how do we reconcile the difference? And also, how do we plan the future capacity planning for such type of customer?

Speaker 2

Charlie, you named my customer's name. That's my customer and my competitor. Let me repeat the last time when I comment on their technology. The comment stays the same. So that's their newest technology What would be very similar or equivalent to TSMC's N3P, we further check again with All the specs or the possible published in technology, With a big advantage in the technology maturity because of in 2025, when they say that The newest technology will be go on production.

Speaker 2

For TSMC, that will be the 3rd year We saw very high volume production in the fabs. So again, I don't want to Make too much of a comment on my customers' claim, but let me assure you, We continue to have a technology leadership, and we continue to have a Broad base of customer and almost everybody, almost, they are working with TSMC. Okay. Thank you.

Speaker 5

In that

Speaker 4

case, would you aggressively spend the capacity because outsourcing is more likely?

Speaker 2

Certainly, we are expanding our capacity with RMB28,000,000,000 to RMB32,000,000,000. That's a big money. That will be used for 3 nanometer and 2 nanometers at capacity.

Speaker 3

Let me add some color to this, C. C. I think C. C. Has been very modest.

Speaker 3

I think he's claimed that our N3P is comparable to their I18A. We still affirm our statement, but I would like you to look at a different perspective. And what's CEC? What the other side claim might be right, but it's only to their own product. An IDM typically optimize their technology for their own product, We're foundry, us, we optimize our technology for our customers' product.

Speaker 3

So that's a big difference. What you use for the high power server could be very different than what you use, Was the sketches on your hand, smartphone or even the large data edge AI processors? So you should look at this. I think the time compared with PPA, we still affirm our statement. But I think just look at our customers' action that just tell all the stories.

Speaker 4

Thanks, Mark. So, Jeff, can I go to the second one? Yes. So, Mark, so first of all, I really appreciate your leadership. I believe our global investors appreciate your past 6 year, create lots of shareholders value.

Speaker 4

Thank you. So my question is about the content of your speech in November. The speech was about the TSMC in the era for AI. And you mentioned some very interesting data points. You used AI technology to improve the defense clarification.

Speaker 4

Also, the EUV throughput by, for example, 10%, right? So now it's the generative AI can be very Big breakthrough in terms of technology. Do you think Samsung or Intel by leveraging the generative AI can really Breakthrough and catch up your technology. And also before your retirement, any kind of a big unfinished goal or targets for TSMC. Thank you.

Operator

Okay. Thank you, Charlie. So Charlie's second question is directed to Chairman. He noted in November, Chairman gave a speech where he shared how TSMC has always been utilizing big data machine learning and AI to improve our operational efficiencies. His question is whether now with generative AI, will this enable or allow our competitors to do the same thing and catch up and narrow the gap.

Speaker 3

Okay. Thank you, Charlie. The talk I gave in last November was the audience is the Taiwan's Industry Companies. The purpose I want to give that is I see artificial intelligence can be a great opportunity for the industry in Taiwan. Just like Taiwan is a big country for semiconductor, it can be a big country for artificial intelligence in the future.

Speaker 3

That's how I encourage them. And as far as the whether our competitor are using AI, of course, Of course, they use AI. And just look at the other company, AI company in Silicon Valley or in U. S, That's not a secret. But on the other hand, AI is only in its nascent stage.

Speaker 3

Only last November, the first large language data is announced, CHA GPD announced. We only see the tip of the iceberg. So I want to give a industry a optimistic note that even though 1 nanometer or sub-one nanometer could be challenging, but we have a new technology capability Using AI to accelerate the innovation in science, and that is the That is our part. And we have been working on that for many years already. So we open of course, it's a fair competition.

Speaker 3

Yes, it's no secret. Oh, you have another question about 1? Sure. Well, I still have a Yes, indeed. I will retire in June.

Speaker 3

And from now to June is a long time. In the company, a lot of things can happen. And I think I hope we definitely execute To CC's forecast of this year, I think by the middle of this year, I think we're pretty sure We can accomplish that. And of course, C. C.

Speaker 3

Just mentioned, our technology development is on the slew of success. And By June next this year, we will know what we are going to fare in 2025. And I give our executive A milestone, I don't want to share with you, but it's going to be very exciting for TSMC. And of course, from now on, I simply want to encourage our people in TSMC The world has changed. Just like you mentioned, we have to use artificial intelligence for future technology.

Speaker 3

So we will go into global we try our global footprint And we are trying on digital excellence. By digital excellence, you mean we can't count on the Hard working of Taiwan engineer, only we have to recreate our job To tap their talents and lift up the semiconductor technology engineering to a different level Based on what we already have. And of course, the corporate governance is one thing I always see in my heart. During this transition, I want every executive and our board to adhere to the sound corporate governance Thank you.

Operator

Okay. Thank you, Chairman. Let's take the move on to the second person from the floor. I think in front, Bruce Liu of Goldman Sachs, please.

Speaker 6

Thank you. Again, the question is definitely coming from the AI Sure. I think as Sisi mentioned, almost every AI chip is working with TSMC. However, the investor's So it's concern is always like the dollar content as a percentage of customers' cost for AI is a lot lower than smartphone or other chips. So as also C.

Speaker 6

C. Mentioned that you sell a wafer for your customer, but when you buy it back, it's a lot more expensive. So can we expect that the dollar generated by TSMC in from Can be increased in the coming years, whether it's through like no migration or advanced packaging or anything we can What kind of rate we can expect for that?

Operator

Okay. Let me summarize Bruce's first question. I think, again, he is around AI related. He notes that Almost all the innovators are working with TSMC at AI, but the value per chip that we seem to be capturing is lower than for a smartphone or PC. So his question is that, I think can we expect the dollar value captured by TSMC to increase in the next few years?

Operator

And will this be this additional value more come from the front end Process node wafer production? Or will it be through the advanced packaging solutions?

Speaker 2

Well, let me answer the easiest one first. The revenue come from the front end and back end together, okay. To Capture the value, yes, we are working on it, definitely. But first, let me say that I'm very happy that my customer has been very successful in the AI area. And we are a key enabler for the AI applications.

Speaker 2

So far today, everything you saw on the AI It's Ken from TSMC. Okay. Now here come the questions is that how we're going to capture the value. We are working on it and actually we see today, they say that the component of total value In the AI, the whole AI data center is a very small percentage amount. If we narrow down the AI So component or the semiconductor's value in the whole system, yes, is a small percentage.

Speaker 2

But for TSMC, we look at our share. The AI's CAGR, that's The gross rate every year is about 50%. And we are confident that we can capture More opportunities in the future. So that's what we said that in up to 2027, we are going to have a High teens of the revenue from very narrow, we define the AI application process, not to mention about the networking, Not to mention about all others. Okay.

Speaker 2

And to further extend our value, actually, All the edge device, including smartphone, including the PC, they start to put the AI application inside. They have some kind of a neural processor, for example. So the silicon content will be greatly increased. Although the unit is actually low single digit in CAGR, But the silicon content is more important. So put all together, if we run some of the AI related application, Actually, it's quite a big amount for TSMC to grow.

Operator

Okay. Bruce, do you have a second question, please?

Speaker 6

Yes. The second question is more for the technology leadership. I mean, as we're moving into the nanometer shift or advanced node, We see another technology divide nowadays. For example, like a high NA EUV tools, TSMC seems to have a different view with other peers. I mean, in the past, like, 20, 30 years, there are several Technology divide that TSMC always choose the right decisions, right?

Speaker 6

So can you tell us that why you choose your current route Comparing to your peers, what is the pros and cons? And what's the advantage? And how confident that TSMC Can leverage that to be the key success factor for the leading agent.

Operator

Okay. Bruce's second question is in regards, I think, to technology development and decision making. Basically, he notices that Today, there's divergence or his words, divide between different companies' technology decision whether to adopt manosheet, Transistor structure, whether to adopt high NA tools. He noted in the past that this has always occurred in our industry, but TSMC has somehow managed to make the right decision. So He is asking especially how what do we look at or evaluate in our decision making process?

Operator

What are the pros and cons and advantages? And probably most importantly, How confident we are we about our technology decisions going forward, whether nanostheat or high NA given our competitors' actions?

Speaker 2

Bruce? You asked a very technical question. I am not very sure everybody know the high NDA or is a narrow sheet or get all around. Let me answer the question. We always make the right decision and our track record show that.

Speaker 2

Is that enough? Okay. Let me elaborate a little bit more. Because of Technology itself is no value, only when you can serve your customer. So we always work with our customer to give them the best transistor technology and the best power efficient technology and at the reasonable cost, Okay.

Speaker 2

And more importantly, the technology maturity that in the high volume production, That's all important, everything. Everything comes together. So we every time we know that there are some new structure, Yes, new tools such as high NA EUV, we look at it carefully, look at the maturity of the tools, Look at the cost of the tours and look at the schedule of that, how to achieve it, we always make the right decision at the right moment to Okay. Did I answer your question? Almost everybody work with TSMC on 2 nanometer

Operator

Okay. Thank you, C. C. All right. Let's go to the Online, take the next two questions from the participants who are dialing in via the conference call, please.

Operator

Operator, Okay. Gokul, I need you to slow down a bit because the line is not that clear. I do think I got his question, which is he wants to confirm. C. C, you mentioned that we have a very narrow definition, we call server AI processor contribution, and that you said it can be high teens in 5 years' time because the last time we said low teens?

Speaker 2

The demand is suddenly being increased since last I think last year, the Q1, up to March or April, when Chegg GPT become popular, So customer respond quickly and ask TSMC to prepare the Both in front end and the back end. And that's why we have a confidence that this AI's revenue will increase. We only narrow down to the AI application process, by the way. So we look at ourselves that we prepare the technology And the capacity in both our front end and also our back end. And so we It's in the early stage so far today.

Speaker 2

We already see the increase, the momentum, and we expect If you guys continue to track this one, the number will increase. I have confidence to say that, although I don't know how much. Okay.

Operator

So high teens, you confirm?

Speaker 2

Or higher.

Operator

Okay. So okay, Gokul,

Speaker 5

Talk a little bit

Speaker 7

about what happens when we get back to Close to full utilization, I think we are still running at well below full utilization in 2023. And could you also The gross margin dilution that you're expecting in second half twenty twenty three because of this Capacity conversion, what exactly leads to that gross margin dilution? And is that like a One time kind of valuation that lasts for a little bit of time and kind of levels off in 2025.

Operator

Okay. Thank you, Gokul. So if I heard correctly, Gokul's second question is around gross margin. So two parts to it. Maybe the second part first, which is he is asking, I believe, about this gross margin in the second half of this year, Particularly with what Wendell had described, our plan to convert some of the capacity, the gross margin impact here and is this a one time thing?

Operator

Is this better capital what does this mean in the mid- to long term profitability? That's the first part. And then I'll go to the second.

Speaker 1

Right. 2nd half, the as I said, there are 2 negative Factors affecting our gross margin this year. The first one is the N3 dilution. N3 volume will be much bigger in the second half Then the first half. So the second half impact from N3 dilution will be between 3 to 4 percentage points.

Speaker 1

And also the N5 capacity converted to N3, that will mostly take place in the second half as well. That will be 1 to 2 percentage point, okay. That's for this year. For the longer term, If you look at these two factors, our N3 dilution will gradually reduce because the profitability will continue to improve or increase in the next several years. And N5 converted to N3, It's a onetime short term impact on profitability, which will bring capital efficiency to us in the middle to long term.

Speaker 1

And the benefits together would be much bigger than the onetime hit in the short term. So if you're talking about the longer term profitability, including these two factors, Plus, we are selling our value, our technology value, as C. C. Mentioned. We continue to drive down the cost.

Speaker 1

We build our capacity based on the long term market profile and not the short term cyclicality and therefore enable us To have a pretty good utilization, the only thing we are not able to control is foreign exchange rate. So if you put all these together, We still believe that 53% and higher long term gross margin is achievable.

Operator

Okay. Gokul, does that answer both parts of your question?

Speaker 7

Yes. So just to clarify, So given we are much at a much lower utilization than normal, what you suggest, Wendell, Is that gross margin should get back to the mid to high 50s once the upcycle starts to gain more momentum, just like what we saw in 2022. Is that a reasonable expectation?

Operator

Yes. Okay. Thank you, Gokul. So Gokul, really, he's asking 53% and higher. Can it be higher?

Operator

Because of course, he looks at last year, the utilization was lower and we still managed to deliver. So he's wondering once Utilization goes back to full, can it get to mid to high 50s?

Speaker 2

We are working on it. Okay. Certainly, we prepare our capacity according to customers' demand. Last year is very challenging because Everybody missed their forecast and so did TSMC. And so the utilization rate is pretty bad.

Speaker 2

And I believe everybody got more experience in the next few years. And so TSMC's utilization rate will continue to increase. I guarantee that.

Operator

Okay. Thank you.

Speaker 3

So the question is, We're working on that. It can be.

Operator

Okay. Thank you, Gokul. Thank you. Operator, let's move on to the take the question from the second participant on the call.

Speaker 7

The The second one to ask question is Randy Abrams from UBS.

Speaker 8

Okay. Yes, thank you and good luck to both Mark and As you go through the upcoming transition, I wanted to ask going back to the question on the IBM. I think earlier you conceded that Your competitors' process is actually pretty good for Optimize to their own products. Could you talk about your view on The ability of the ramp of that IBM outsourcing with your own products in HPC, if you look out over the next 2 to 3 years, If you see that continuing to grow or reverse where there could be a bit of a cooling off from some of the opportunity you have right in front of you now.

Operator

Okay. Thank you, Randy. So Randy's first question goes back to the IDM. His question is, with IDM, say their technology is pretty good, What is the risk or how do we see the sustainability of this IDM's outsourcing business to TSMC in the next 2 to 3 years? Can this continue to grow?

Operator

Or will this reverse and go back in house to the IDM? And how do we manage or plan for this?

Speaker 2

Okay. Randy, that's a good question. Actually, we have taken into account all the considerations, including the IDMs, can do it by MCO. We have put that one into consideration actually in our capacity planning. Actually, we took a very conservative way to prepare our capacity in this kind of a situation.

Speaker 2

Okay. I cannot speak more because of that's our strategy.

Speaker 8

Okay. If I could ask a follow-up actually just through the CapEx, where I think earlier you said that rate of increase would Slow down, but I think still implying it should increase over time as you grow. If you could discuss the CapEx that you guided was flat. Should we think of it as a pause, whereas you start to move into 2 nanometer, there should be another wave of increase? And 2nd part somewhat related, but curious about the geographic expansion.

Speaker 8

There's been a lot of press about new fabs in Japan, 2nd fab and And it feels like the first fab went smoothly. So are you starting to redirect or think more expansion to Japan rather than U. S. Or potentially both, so you have both options as you move to 3 nanometer.

Operator

Okay, Randy, that's a lot of questions. I'm going to take that as your second question, okay, basically. So the first part of it is about the CapEx. He notes that Wendell said The rate of increase is beginning to level off. Randy's question is for this year and take the midpoint $30,000,000,000 is basically flat.

Operator

So is this just a temporary pause in the CapEx? And with 2 nanometer in the upcoming years, should we expect the dollar amount to go back up? That's the first part.

Speaker 1

Okay, Randy. The CapEx dollar amount every year may vary. It depends on the different situation. The rate of increase definitely is slower than the past 3 years. And if you look at, I think the other way of looking at that is the capital intensity.

Speaker 1

In the past 3 years, The highest point is 2021. So it's going to be it was over 50% And then followed by $47,000,000 $43,000,000 And this year, if you do the math, it's going to be mid-30s. We expect in the next several years, it will remain around mid-thirty percentage capital intensity.

Operator

Okay. And then the other part of Randy's question is on the geographic expansion. He notes a lot of reports saying, we may build a 2nd fab in Japan and that we even may build a 3rd. So his question is really, are we redirecting Are overseas expansion focused more to Japan or has it changed anything in the U. S?

Operator

Randy, I think that's what you're trying to ask, right?

Speaker 8

Yes, that's what I'm trying to ask.

Speaker 7

Thank you.

Speaker 3

Can you repeat the question again? Sure.

Operator

So Reni is saying, look, he knows There's a lot of talk, we're going to build a 2nd fab in Japan, maybe 3. So he just wants to know, are we shifting our overseas expansion focus to Japan or from the U. S? Or is there any big significant change?

Speaker 3

No, no. I think Japan, the 2nd fab in Japan is in serious evaluation stage. We haven't announced to the public yet, and we are still discussing with the Japan government, although many they are very cooperative, so you might be waiting for that. And But that technology will still be either 7 or 16, 12 technologies. And remember, our Kaohsiung fab, the first fab used to be 28 nanometer or 7 nanometer.

Speaker 3

Now it's becoming 2 nanometer. So that is the shift to for the if there is a second fab in Japan. That's our current plan. And as far as Great,

Speaker 8

that's helpful.

Speaker 3

Yes. Thank you.

Speaker 8

And to quickly on 3 nanometer, because 5 nanometer was slightly delayed, would 3 nanometer still come 2 years after the new plan for 5 in Arizona. Thank you.

Operator

So in Arizona, Randy wants to know that we have 5 nanometer in first half twenty twenty five. What's the plan for the 2nd fab with 3 nanometer?

Speaker 3

Yes, we are the 2nd fab shell is under construction. But what technology in that shell is still in under discussion I think that also has to do with how much incentives that Fab, the U. S. Government can provide. And yes, there will be a gap, at least Current planning is 27% or 28%, yes.

Speaker 3

That will be that time frame. To be honest, mostly most all the fab In overseas, what actually be loaded, what technology is being set up, really is the decision of customers' demand in that area at that timing. So nothing is definitive, but we are trying to Optimize the value for the overseas fab for TSMC.

Operator

Okay. Thank you, Chairman. Thank you, Randy. All right. In the interest of time, we'll take the next 2 from the floor.

Operator

I think there's one here. First, Laura Chen from Citibank.

Speaker 9

Thank you very much for taking my question. Thank you, gentlemen, Mark, C. C, Wendell and Jeff. Happy New Year. I think we got a lot of discussion about the leading position in the most advanced node.

Speaker 9

So I just have a question about What's your view on the mature node dynamic? And particularly, we are seeing that globally considered geopolitical tension. So we are seeing that the fab All over the place in the world, so do you see that in the longer term, any concern on industry wise overcapacity? So what's TSMC's strategy? And also what's your view on your mature nose profitability as well?

Speaker 9

That's my first part.

Operator

Okay. Thank you, Laura. So Laura's first question is on mature node strategy and profitability. She notes With the geopolitical dynamics that there's a lot of capacity being built on the mature nodes, so her question is do we See or expect an industry wide oversupply? And probably more importantly, what is the impact to TSMC's mature node strategy and profitability?

Operator

Dora,

Speaker 2

I think your observation is right. There might be Too much of a capacity being built right now for mature nodes. So the concern on overcapacity is valid. Now let's talk about TSMC. As I said, TSMC increased the mature node Capacity for specialty technology differentiated with others.

Speaker 2

We work with customer And that kind of capacity, actually effective capacity as we name it, is with commitment from customers And because we offer the value for our customer to design their product, So we believe that they can retain their products value even the capacity is flattered in the industry. And so long as our customer is doing well, TSMC is doing well. And so the profitability, as I said in my statement, It will be around the corporate average, so we don't have concern.

Speaker 3

We speak for TSMC, okay. It could be industry issues.

Speaker 9

That's very helpful. Thank you. And also my second question is back to AI related. As we know that a lot of investor care a lot about your advanced packaging progress. We also know that TSMC got a very good progress on DDIC SOIC.

Speaker 9

So can you share with us Your progress development beyond COVA, what's your plan on the 3 d IC and what's the schedule and Capacity you are aiming for in the next 2, 3 years.

Operator

Okay. Thank you, Laura. So Laura, second question is on advanced packaging. She notes again the strong Demand for AI related applications, so advanced packaging, the progress, of course, cobas demand is very strong. Her question is really, I think, beyond cobas into true 3dic or integration solutions such as SOIC.

Operator

What is the progress that we see, the engagement from customers, The capacity and basically the outlook for these segments of the business.

Speaker 2

The demand actually is very strong. Today's situation that we cannot offer enough capacity to support our customer. And that condition will continue probably all the way to next year. Although we are very working very hard to increase the capacity, For example, this year, we are doubling our output and still not enough. And so we continue to increase for the next year.

Speaker 2

The progress so far so good because we invested on the advanced packaging technology for more than 10 years already. So we expect the growth rate for COVAX for 3DIC or for SOIC per se, It will be more than 50% CAGR in the next few years, at least. And so We are confident that the demand is there. It's TSMC's capability to offer enough capacity to support our customer.

Speaker 9

For COOS, you will be doubling. And what's Idea about the next year, do you have any preliminary thought?

Speaker 2

I will talk to you next year.

Operator

Thank you. Okay. Thank you. We have A question here from Brad Lin from Bank of America Merrill Lynch. I think in the interest of time, we'll take one question sorry, from yourself and then we'll take one more from the line and then one more in person if there's any.

Speaker 10

Hello. Okay. Thank you for taking my question. So my question will be still around N3 and also IDM. So as we understand, the demand is uncertain, but we can definitely increase our business uncertainty by gaining market share.

Speaker 10

So do we expect some more contribution or market share gain, especially from IDN side or any more contribution from PCE side, Maybe by the end of the year or any time soon?

Operator

Okay. So Brad's first Question is about IDM outsourcing. I think, again, given the technology leadership that we have, he wants to know, do we expect more business or outsourcing from the IDM by the end of this year? Or and how do we see it? Is it uncertain going forward?

Speaker 2

That is too specific. You said the IDM Outsourcing, I know whom you talk about. So I better not to make any comment. I state what I said, we take everything into consideration. We welcome the business, but we prepared our capacity expansion.

Speaker 10

You very

Operator

much. Your second question?

Speaker 10

Yes. So it's on the advanced packaging. So we know that the COWAS S right now as a mainstream, So have the management seen the clients converting to either COASR, COASL? And then what's the implication to revenue and margin profile?

Operator

Okay. So it's also a very specific, too specific question. But again, Brad wants to know, COOS S seems to be the mainstream Today, do we see customers switching to COBOS L or COBOS R? And what's the margin implication?

Speaker 2

Well, let's make a joke. I even didn't know what is COVID-nineteen are, COVID-nineteen error. Anyway, we are working with customer to support them with adequate capacity, although it's not 100 We're saying enough, but we do our best. And we're developing that next generation COOS, aero or something like that for our customer. And it's overwhelming that it welcomed by all my customers, so we are preparing the capacity for it.

Speaker 10

Okay. Got it. Thank you very much. Last but not the least, not the question.

Operator

That's 2 questions.

Speaker 10

No, no, no, not the question. So basically, well, I want to say, well, Thank you, Mark, for your leadership contribution and endeavor for the past 30 years, not just for Taiwan not just for TSMC, but also for Taiwan. And we wish you a happy retirement and also the new chapter of life. Thank you.

Speaker 3

Okay.

Operator

We will take the final questions from the last two participants. Let's go online first, then we have one in final in person. Okay? Operator?

Speaker 7

Next from the call is Krishan Khan from TD Cowen. Go ahead please. Hi.

Speaker 5

Thanks for taking my question. I have 2 of them. First one, I think Wendell, you spoke about revenue growth for the year And again from gross margin guidance. I'm just trying to wonder how to think about gross margin for the full year in the context of the fact that TSMC's earnings are going to grow in the low to mid-twenty percent. How do you think about gross margin for full year 2024?

Speaker 5

And then I had a follow-up.

Operator

Okay, Krish, again, sorry, we could not hear you that clearly online, but I think his question is, correct me if I'm wrong, With revenue outlook that we gave, low to mid-20s growth in U. S. Dollar term, what is the outlook for the full year gross margin? Is that what you're asking?

Speaker 7

That's right, Jeff. Yes.

Speaker 1

Right. So I just mentioned a couple of puts and takes On the gross margin of this year, and I'd also said that the second half, we will have a higher dilution from 2 factors. But we're not ready to give out a full year guidance on gross margin yet. So we'll talk about that As time goes by. But let me say this, longer term, with all the factors Together, still 53% or higher is definitely we're very confident in it achieved that.

Operator

Okay. Does that end? Sorry, Krish,

Speaker 5

why don't you go ahead? I have a follow-up and Yes. Just a quick follow-up and I just want to say thanks a lot to Mark for all the support. Just a follow-up, in terms of the revenue growth for this year, December quarter, you exhibited HPC and smartphone, roughly 43% of revenue. What's going to drive the growth this year?

Speaker 5

It's HPC or Small phone, which is going to be better this year to get to the low to mid-twenty percent.

Operator

Okay, Krish. Sorry. Again, we could not hear you that clearly, but I think I got the Just of your question, maybe the way Krish's question is what the components that's driving the revenue growth this year, maybe we can share with him by the 4 growth platforms.

Speaker 1

Chris, the HPC will be will have the highest growth, Actually, much higher than the corporate. The other three platforms will all grow, although slower than the corporate.

Speaker 5

Thank you very much. Thank you, Preeti. Thank you, Benel. Thanks, Mark. Thanks, Jess.

Operator

Yes, no problem, Krish. Okay. Then we'll take the final question from the floor. The first row here, Nicholas Barrett of Macquarie. The microphone is on.

Operator

You can It's on.

Speaker 10

Thanks, Steve.

Speaker 11

Very quick question. Thank you very much, Jeff. Is it possible or would you expect that Some of your Arizona customers could be only customers in Arizona, that's some U.

Speaker 2

Let me answer that question. Arizona fab is for everybody, but majority is a U. S. Customer. You are right.

Speaker 11

Sure. Thanks. That's all, Jeff. Thanks.

Operator

Do you have another question? No? Okay. Well, if not, then this does conclude our Q and A session. Before we conclude today's conference, please be advised that the replay of the conference will be website@www.tsmc.com.

Operator

So thank you again, everyone, for joining us today. We hope everyone continues to stay well, and we hope you will Join us again next quarter. Goodbye, and have a great day. Thanks.

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