Taiwan Semiconductor Manufacturing (TSM) Earnings Report ...current. During the year of 2011 and 2013, TSMC issued corporate bonds totaling TWD211 billion to support the capital expenditure.

EventDescription:Q12016EarningsCallMarketCapasofEventDate:132.61BPriceasofEventDate:25.21

CompanyName:T aiwanSemiconductorManufacturingCoLtdCompanyTicker:T SMSector:T echnology

©2014TheStreet,Inc.Al l R ightsReserved Page1of25

TaiwanSemiconductorManufacturing(TSM)EarningsReport:Q12016ConferenceCallTranscriptThefollowingTaiwanSemiconductorManufacturingconferencecalltookplaceonApril14,2016,04:00AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

ElizabethSun;TaiwanSemiconductorManufacturingCompany,Limited;DirectorofCorporateCommunicationDivisionLoraHo;TaiwanSemiconductorManufacturingCompany,Limited;CFOMarkLiu;TaiwanSemiconductorManufacturingCompany,Limited;Co-CEOandPresidentC.C.Wei;TaiwanSemiconductorManufacturingCompany,Limited;Co-CEOandPresident

OtherPart icipants

RandyAbrams;CreditSuisseAG;AnalystMichaelChou;DeutscheBankAG;AnalystGokulHariharan;JPMorganChase;AnalystRolandShu;CitigroupInc;AnalystRickHsu;DaiwaSecurities;AnalystDonaldLu;GoldmanSachsGroup;AnalystBrettSimpson;AreteResearchServices;AnalystMehdiHosseini;SusquehannaFinancialGroup;AnalystBillLiu;UBSInvestmentBank;AnalystCharlieChan;MorganStanley;AnalystStevenPelayo;HSBC;AnalystSebastianHou;CreditAgricoleSecuritiesTaiwan;Analyst

MANAGEMENTDISCUSSIONSECTION

ElizabethSun (DirectorofCorporateCommunicationDivision):

(interpreted)WelcometoTSMC'sFirstQuarter2016EarningsConferenceandConferenceCall.ThisisElizabethSun,TSMC'sDirectorofCorporateCommunicationsandyourhostfortoday.Today'seventiswebcastlivethroughTSMC'swebsiteatwww.tsmc.com.Ifyouarejoiningusviatheconferencecall,yourdialinlinesareinlisten-onlymode.

Asthisconferenceisbeingviewedbyinvestorsaroundtheworld,wewillconductthiseventinEnglishonly.

Theformatfortoday'seventwillbeasfollows,first,TSMC'sSeniorVicePresidentandCFO,Ms.LoraHo,willsummarizeouroperationsinthefirstquarterof2016,followedbyourguidanceforthesecondquarter;afterwards,Ms.HoandTSMC'stwoCo-CEOs,Dr.MarkLiuandDr.C.C.Wei,willjointlyprovideourkeymessages;thenwewillopenboththefloorandthelineforQ&A.

Forthoseparticipantsonthecall,ifyoudonotyethaveacopyofthepressrelease,youmaydownloaditfromTSMC'swebsiteatwww.tsmc.com.Pleasealsodownloadthesummaryslidesinrelationtotoday's




earningsconferencepresentation.

Asusual,Iwouldliketoremindeverybodythattoday'sdiscussionsmaycontainforward-lookingstatementsthataresubjecttosignificantrisksanduncertaintieswhichcouldcauseactualresultstodiffermateriallyfromthosecontainedintheforward-lookingstatements.Pleaserefertothesafeharbornoticethatappearsonourpressrelease.

AndnowIwouldliketoturnthepodiumtoTSMC'sCFO,Ms.LoraHo,forthesummaryofouroperationsandcurrentquarterguidance.

LoraHo (CFO):

Thankyou,Elizabeth.Goodafternoon,everyone.Thankyouforjoiningustoday.Mypresentationwillstartfromfinancialhighlightsforthefirstquarter,followedbytheguidanceforthesecondquarter.

Firstquarterrevenuecameoutslightlybetterthanwehadexpected.AlthoughtheFebruary6earthquakecausedsomedelayinwafershipmentsinthefirstquarter,wesawbusinessupsideresultingfromdemandincreasesinmidandlower-endsmartphonesegmentandcustomers'inventoryrestocking.Therefore,ourfirstquarterrevenuewasessentiallyflatfromthefourthquarterlastyearcomparedtoabout2%declineweguidedthreemonthsago.

Ourfirstquartergrossmarginwas44.9%,andoperatingmarginwas34.8%.Bothare3.7percentagepointslowerthanfourthquarterlastyearduetolowerutilizationandthenegativeimpactfromtheearthquake,whichIwillprovidemoredetaillater.Overall,ourfourthquarterEPSwas$2.50.

Nowlet'stakealookattherevenuecontributedbyapplication.Duringthefirstquarter,CommunicationandConsumerincreased4%and15%,respectively,whileComputerandIndustrial/Standarddecreased7%and9%,respectively.

Nowlet'stakealookatrevenuebytechnology.16-and20-nanometercontributed23%ofourtotalwaferrevenueinthefirstquarter.Inaddition,28-nanometersawanicereboundindemandandcontributed30%ofourtotalwaferrevenue.Together,thesethreeadvancedtechnologiesaccountedfor53%oftotalwaferrevenue.

Nowmovingintothebalancesheet.WeendedthefirstquarterwithcashandmarketablesecuritiesofTWD648billion,anincreaseofTWD62billion.Ontheliabilityside,currentliabilitiesincreasedTWD24billion.TheincreaseincludedthereclassificationofTWD10billionbondspayablefromlong-termtocurrent.Duringtheyearof2011and2013,TSMCissuedcorporatebondstotalingTWD211billiontosupportthecapitalexpenditure.Thisbondswillgraduallybecomeduestartingfromthiscurrentquarter.

Onfinancialratios,accountsreceivableturnoverdaysremainat41days.Daysofinventorydecreasedby8daysto54days,reflectingmoreshipmentsfromfinishedwafersandearthquakeimpact.

NowletmemakeafewcommentsoncashflowandCapEx.Duringthefirstquarter,weend--wegeneratedaboutTWD122billioncashfromoperationsandspentTWD38billionincapitalexpenditure.Asaresult,wegeneratedfreecashflowofTWD83billionthisquarter,andoverallcashbalanceincreasedTWD55billiontoreachTWD618billionattheendofthefirstquarter.

Ihavefinishedmyfinancialsummary.Nowletmeturntothesecondquarteroutlook.Weexpectourbusinessinthesecondquarterwillbenefitfromcontinuedinventoryrestockingandtherecoveryofthedelayedshipmentfromtheearthquake.Basedonourcurrentbusinessoutlookandexchangerateassumptionsof$1toTWD32.30,weexpectsecondquarterrevenuetobebetweenTWD215billionandTWD218billion,whichrepresents6%to7%sequentialincrease;grossprofitmargintobebetween49%and51%;andoperatingmargintobebetween38.5%and40.5%.




Inthesecondquarter,wewillbegin--wewillagainneedtoaccruethe10%taxonundistributedretainedearnings.Asaresult,ourquarterlytaxratewillbeabout24%inthesecondquarter.Thetaxratewillthenfallbackto11%levelinthethirdandfourthquarter,andthefullyeartaxratewillbeabout14%.

Nowletmegiveyousomecommentsabouttheearthquakeimpactandthisyear'sprofitabilityandCapEx.OntheFebruary6thisyear,anearthquakeof6.4magnitudestrucksouthernTaiwanandcauseddamagestocertainpartsofourtoolinourmanufacturingsitesinTainan,andthatdisruptedproduction.Asaresultofwafershipmentdelays,wehavepushedoutdeliveryofabout90K12-inchwaferfromfirstquartertosecondquarter.

ThefinancialimpactofthisearthquaketoTSMCisasfollows.First,itreducedourfirstquarterrevenuebyaboutTWD7billionandloweredfirstquartergrossmarginby2.2percentagepoint.About1.1percentagepointreductionisduetothelossesassociatedwiththepropertydamageandthewaferscrapped,netofinsuranceclaims.Another1.1percentagepointiscontributedbythelossofproductivity.Theimpacttoourfirstquarteroperatingmarginisabout2.4percentagepoints.Andthenegativeimpacttofirstquarteroperatingincome,indollars,isaboutTWD7billion.

WafershipmentsthataredelayedtosecondquarterwillbenefitoursecondquarterrevenuebyaboutTWD7billion.Andtheycontributedpositivelytosecondquartergrossmarginbyabout0.7percentagepoints;tooperatingmarginbyabout0.9percentagepoint;andthepositiveimpacttosecondquarteroperatingincome,indollars,isaboutTWD5billion.Onafullyearbasis,overallimpactfromtheearthquakereducesourgrossprofitandoperatingprofitmarginbyabout0.2percentagepointeachandreducesour2016operatingincomebyTWD2billion.

Nowletmesayafewwordsabout2016'sprofitabilityandcapitalexpenditure.Regardingourstructuralprofitability,asyoumayknow,inthepastsixtosevenyears,weincreasedourstructuralprofitabilityby4to5percentagepointstotheupper40%range.Weareoptimisticthatwecanmaintainthatlevelin2016.

Mylastcommentisabout2016CapEx.Inthelastinvestorconferencethreemonthsago,wehavestatedour2016capitalbudgettobebetween$9billionto$10billion.Wemaintainthesameguidancerangetoday.Thisendsmyremarks.

NowIwouldliketoturnthepodiumtoourCo-CEO,MarkLiu.

MarkLiu (Co-CEOandPresident):

Goodafternoon,everyone.Letmestarttogiveyouareportonournear-termdemandandinventoryoutlook.

Our1Q'16revenueisessentiallyflatfrom4Q'15;however,exceedingourFebruary17'srevisedguidance.ThisresultwashelpedbyanincreaseinsmartphonedemandwithChinaandemergingmarkets,[pulling]fromsecondquarterandfasterrecoveryfromearthquake,whichoffsetstheweaknessandseasonalityinahigh-endsmartphonesector.

Weestimateourfablessincome'sdaysofinventorytoincreasefromtwodaysbelowseasonalexiting4Q'15toaboutseasonallevelending1Q'16.Lookingaheadfor2Q'16,weforecastagrowthof6%to7%quarter-to-quarterinNTdollarsor8%to9%inU.S.dollars.Mostofourfablesscustomersmayseeanabove-seasonalgrowthin2Q'16,drivenbyOEMs'newproductlaunchesandinventoryrestockinginthesupplychain.Weestimatedaysofinventorywillstillbeclosetoseasonallevelexiting2Q'16.

Duetotheworldmacroeconomicuncertainties,wereducedourestimateof2016smartphonegrowthfrom




8%to7%;PC,fromminus3%tominus6%;tablet,fromminus7%tominus9%;whilemaintainingdigitalconsumerelectronicsgrowthrateatminus5%.Inspiteofthereductionsofthesegrowthrates,therearestillgrowthareasinsmartphones,broadbandnetwork,wirelessinfrastructuresandgaming.

Forsmartphonegrowth,momentumcomesfromChina's4G+deploymentthroughincreasesofoperatorsubsidyandthecontinued3Gto4Gupgradeinemergingmarkets.Thesefactorswillalsodrivetheassociateinfrastructuregrowth.Recently,wealsoseegooddemandfromgaming'sGPUandgameconsoleprocessorforVRapplications.

Forthewholeyearof2016,weestimatethegrowthofworldsemiconductortobeabout1%.Wemaintainourestimateforthefoundrymarketgrowthofabout5%andTSMCrevenuegrowthof5%to10%thisyear.

NowImoveontoleading-edgetechnology.LetmegiveyouafirstonN10update.WehavereceivedN10customerproducttape-outin1Q'16.Weareactivelypreparingformorecustomerproducttape-outsinthefollowingquarters.MostofourN10usersareformobileproducts.WewillputthistechnologyinproductionintwoofTSMC's12-inchgigafabs.Thosetape-outswilldriveasizabledemandstartingfrom2Q'17through2018.

Our7-nanometertechnology,N7,thetechnologydevelopmentiswellontrack.N7isafurtherextensionofN10technology,withmorethan60%inlogicdensitygainand30%to40%reductioninpowerconsumption.N7fullyleveragesN10yieldlearningandsharesmorethan95%ofcommontools.WehaveexpandedourN7designecosystemdevelopmenttoincludebothmobileandhigh-performancecomputingtoenableourcustomerstodelivertheirfirst-to-marketproducts.OurN7adoptionisverystrong,withcustomersrangingfrommobileGPU,gameconsole,FPGA,networkprocessorsandotherconsumerapplications.Wehavemorethan20customersinintensivedesignengagementwithusandexpecttohave15customertape-outsin2017.ThevolumeproductionofN7willstartfromfirsthalf'18.

NowonEUV.WehavemadegoodprogressintheEUVdevelopmentwithASML.Recently,EUVdevelopmentgainedquitegoodmomentumacrosstheindustry.Toolssourcepowerof60to80wattsiscapableofbecomingoperationalinfabsnow.Weareworkingonthetoolreliabilityandtheirfaboperatingcondition.EUVphotoresist,massfabrication,particlecontrolandbasicmoduleshaveallmadegoodprogress.WerecentlydemonstratedareasonableyieldonourN7yieldvehicle,128-megabitSRAM,usingoneEUVlayer.Currently,developmentofareliableEUVmaskpellicleisanotherfocustoenableamassproductionoperation.

Next,Iwanttogiveyouaupdateongrowthdriverforourleading-edgetechnology,wherethedemandcomesfromforourleading-edgetechnologies.

First,mobile.Weseecontinuingtechnologyadvancementinbaseband,applicationprocessor,RFtransceiverandwirelessconnectivitytomeetthedemandofLTEadvancedspecifications.Thegrowthof4Gdataratethroughcarrieraggregationandhigh-frequencyWiFidrivestheneedformorecomplexandlargerchips.AlltheabovedrivethedemandforourN10andN7technologies,whichwillenterproductionin2017to2019.

Thenextemerging5Gstandardalsopromptsourcustomerstodevelopstate-of-the-artbasestationandbasebandapplicationprocessorstocaptureearlybusinessopportunityusingourN10andN7technologies.

Secondareaishigh-performancecomputing.Wealsoworkcloselywithourcustomerstoaddresstheopportunityinthehigh-performancecomputingmarket.WeworkwithARMtoco-optimizeitsCPUcoreswithTSMC'ssolutionstoenableourcustomertodelivertheirproductsinthecloudcomputingmarket.Today,ourcustomershaveonlyaverysmallmarketshareincloudcomputing,mostlyinnetworkingandstorageapplications.WithTSMC'shigh-performancecomputingtechnologies,wewillsupportour




customerstoparticipateinthisfast-growingcloudcomputingmarket.

NowlastareaistheVR/AR,ADASandsoforth.VR/AR,deeplearningandartificialintelligence,artificialAI,aretheemergingapplicationsthatwillrequireleading-edgetechnologies.Consumer-orientedVR/ARproductsforimmersedgamingandimmersivevideoviewingexperiencehavebegunshipmentin1Qthisyear.ThedatatransferrateofVR/ARproductsininteractivedesign,remotetrainingandmulti-siteconferencingmustbe--stillbe--muststillbeenhancedby10xfromtoday'slevelinordertoenablequalityviewingexperience,thatallthisapplicationrequirelow-powerandhigh-speedGPUandCPUand,therefore,requiresourleading-edgetechnologies.

Weseeincreasingdemandalsobothinenhancedsafetyandtheimprovedinfotainmentsysteminautomotiveapplications.TheADAS,AdvancedDriverAssistSystems,includeadaptivecruisingcontrol,emergingbrake,collisionavoidance,lanetrackingandautoparkingassistant.Theadvancedinfotainmentsystemincludesbothhigh-performancemultimediaapplications.BothautomakersandtheTier1modulesuppliersaredefiningthespecsandincreasingtheiradoptionforADASandadvancedinfotainmentsystems.ThistrendwillcertainlyalsospeeduptheadoptionofTSMC'sleading-edgetechnology.

That'smyreport.Thankyou.I'llturnthepodiumtoC.C.Wei.

C.C.Wei(Co-CEOandPresident):

Thankyou,Mark.Goodafternoon,ladiesandgentlemen.Today,Iwillupdateyouthestatusof16-nanometer,28-nanometer,InFOandspecialtytechnologies.Iwillalsotalkabouttheirroleasagrowthdriver.

First,on16-nanometer.Wecontinuedtoramp16-nanometerwithyieldandcycletimebetterthanourtargets.Applicationsinmobileprocessor,cellularbaseband,videogameplayer,PCgraphicswillcontributesignificanttoour16-nanometershipmentthisyear.Meanwhile,wealsobeginshipmentforotherapplicationsuchasaEthernetswitch,CPU,networkingprocessor,programmablelogicdeviceandothers.Weexpect16-nanometerwillcontributeabove20%waferrevenuethisyear.

AsIreportedherelastquarter,wehavecompletedthedevelopmentofalow-powerandlow-costversion16FFC.Icaninformyoutodaythat16FFCisnowthemostadoptedsolutionbyour16-nanometercustomers.Andwehaveenteredmassproductionsincefirstquarterthisyear.

Inadditionto16FFC,wealsodevelopedanultra-low-powersolutionwithmuchloweroperatingvoltage,downtoalevelbelow0.5voltwithouttoomuchsacrificeofthecircuitspeed.Webelievethisisasuperiorsolutioncomparedtoothertechnologyapproachesavailableinthelow-powerareatodayandisideallysuitedforthemobileandIoTmarket.BothmobileandIoTwillbethemaingrowthdriverinthefuture.

Nowletmemoveonto28-nanometer.Sinceourlastconference,wehaveseenstrongerdemandforour28-nanometer,comingmainlyfromthemidandlow-endsmartphone-relatedapplications.Asaresult,theutilizationrateof28-nanometerhasremainedwellabove90%.Wethinkitwillstayatahighlevelthroughoutthisyear.

KeytothisstrongdemandhasbeenTSMC's28HPCand28HPC+.Inadditiontothemid,low-endsmartphones,applicationsrelatedtonetworkingprocessorandconsumerproductalsoadoptour28HPC,HPC+.

Our28-nanometerfocustodayisinthelow-powerarea,andwedevelopastrongplatform.Our28ULP,ULP+and28HPC+areveryeffectiveinaddressingtheneedforlowpowerconsumption,whichiscriticalfortheIoTmarket.Again,weexpectIoT-relatedapplicationswillbecomethenextdemanddriverfor




TSMC's28-nanometertechnologies.Weareconfidentonthecompetitivenessofour28-nanometersolutionsandbelievewewillholdourstrongmarketsegmentshareoverthenextfewyears.

NowletmeupdateonInFO.TheequipmentinstallationatourLongtansiteforvolumeproductionisalmostcomplete.Weexpecttocompletecustomersproductqualificationshortlyandwillbereadyforvolumeproductioninthisquarter.

OurexpectationofInFOcontributingmorethan$100millionperquarterin4Qthisyearremainunchanged.Inadditiontohigh-volumepreparationandproductqualification,weareworkingonyieldimprovementandcostreduction.

NowletmemakesomecommentsonInFOtechnology.Comparedtotheconventionalpackage,TSMC'sInFOhasadvantageinformfactor,suchasasmallerareaand(inaudible)[service]andalsoinpowerefficiency,anditcanreducethepowerconsumptionbyasmuchas20%.Meanwhile,InFOsupportshighermemorybandwidthand,therefore,improvescircuit'sperformance.

WithTSMC'sInFOtechnology,ourcustomerscanintegratethemultiplechipinthesamepackagewhilereducingtheoverallcost.ThisadvantagewillenableInFOtechnologytoplayanimportantroleinthechippartitioning,whichcanbeoneoftheeffectivewaystoreducecostforproductswhichutilizeleading-edgetechnologiessuchasthe7-nanometertechnologyandbeyond.Asaresult,webelieveInFOwillbeapowerfultechnologytocapturethegrowthopportunityinboththemobileandIoTmarket.

NowIwilltalkaboutthespecialtytechnologies.Currently,specialtytechnologiesatTSMCincludeEmbeddedFlashforMCUandautomotiveproducts.

CMOSimagesensors,imagesignalprocessors,dataconverter,displaydriver,touchcontroller,fingerprintandimagingforsmartphoneandalsohigh-voltageforpowermanagement,thesespecialtytechnologieshadcontributedincreasinglytoourrevenueinrecentyearsandarenowaccountedformorethanaquarterofourtotalwaferrevenue.

TherearemanyexploratoryeffortsongoingatTSMC,andIwillfirsttalkaboutthelargestthreesectors--theEmbeddedFlash,theCMOSimagesensorandMEMS.

Wehavecompleted40-nanometerEmbeddedFlashdevelopmentandhavebegunvolumeproduction.Wearenowdeveloping28-nanometerEmbeddedFlashforautomotive-relatedapplicationswhileworkingonothernonvolatilememoriesfortechnologiesbeyond28-nanometer.

ForCMOSimagesensors,wehavecompletedahybridbondtechnologywhichwillenhancetheconnectionbetweenchips.Thistechnologywillpushtheimagesensorperformancetoanewlevelandwillbeusedbyfuturesmartphone.Inadditiontothemobilephoneapplication,wearedevelopingotherCMOSimagesensortechnologytoimprovethesafetyfeatureinautomobileandforuseinthemedicalarea.

Nowlet'smemovetoMEMS.MEMShasbeenwidelyusedasamotionsensorinmobilephones.WearealsodevelopingMEMStechnologyforenvironmentalandbiosensorsforsmarthealthcareandmedicalIoTapplications.

Insummary,webelievealsoautomotive,medicalmarketsandIoTpresentgoodgrowthopportunitiesforspecialtytechnologyinthenext10years.

Thankyouforyourattention.





Allright,thisconcludesourpreparedstatements.BeforewebegintheQ&Asession,Iliketoremindeverybodytolimityourquestionstotwoatatimetoallowallparticipantsanopportunitytoasktheirquestions.Questionswillbetakenbothfromthefloorandfromthecall.ShouldyouwishtoraiseyourquestioninChinese,IwilltranslateittoEnglishbeforeourmanagementanswersyourquestions.

(OperatorInstructions)Nowlet'sbegintheQ&Asession.


First,wewillaskCreditSuisse,RandyAbrams.

QUESTIONS&ANSWERS

RandyAbrams (Analyst-CreditSuisseAG):

Thankyou.Firstquestion,justwanttoaskaboutthebusinessoutlook.Forsecondquarter,lookslikesomewhatmildgrowth,forlikemid-tohighsingle-digitgrowth.Justfactoringintheearthquake,someshipmentspushingout,smartphonelaunchesandrelativelyleaninventory,couldyoutalkaboutsomeheadwindsyoumaybefacingjusttooffsetsomeofthosepositivedrivers?Andthenifwelookatthesecondhalf,whatdoesthatimply,factoringinthe16-nanometerandInFOstartinginsecondhalf,howyoufeelaboutsecondhalfatthisstage?


Well,thesecondhalf,theheadwinds'notmuchdifferentthanthefirsthalf--secondquarter'sheadwindnotmuchdifferentthanfirstquarter.Butwedohave--wedoseethecustomers--andeventheendmarketdemandisincreasing,theinventoryrestockingisstillcautious.Andgoingforward,we'restillwatchingthismonth-by-monthifweseethedemandwerechangingornot.Butthisiscurrentlyourperspective,yes.


Okay.AndthenifIcouldask,fortheforwardtechnology,you'redoingmuchfastermoveto7-nanometer,whereit'sanewbumpeveryoneyear,wheresomeoftheotherfoundries,likeIntel,isgoingtoanoptimized,takinglonger.AndI'mcuriousontwofronts--one,ifthere'sanytrade-offorrisktoyourstrategymovingfaster;andthe7,yourdensityshrinkisabouta60%,sonotafullshrink.Aswegothroughthenoteofcompetitorscouldleapfrogwiththefull7-nanometeroryoucanoperatetheprocessasyoumovethrough,somaybetalkaboutthatstrategyforwhatyou'redoingon10and7.


Well,Icannottellyouallourstrategy,butwethinkwearedevelopingthetechnologyfitforourcustomer'sproductannouncement.Soallthisstrategyandroadmapiscollaboratingwithourcustomerattheshortesttimetobeabletoreachthemaximumtechnologydevelopmentbenefitfortheirproducts.Sothathasbeeninthepasttwoorthreegenerations,butIdon'tseenodifferenceingoingforward.


Aquickfollow-up,canyouputEUV--andyougavetheupdate,butcouldyoubringthatinpartwaythrough7toenhancetheprocesssaypartwaythrough,orisitmoretargetednowfor5-nanometer?


Yes.OnEUV,eventhoughtherecentprogressisgood,however,asyousee,our7-nanometerdevelopmentisalreadyonfullsteamandisgettingtoyieldenhancementmodenow.Andproductions




imminentisthebeginningof2018.Sothis--lookingatthisschedule,EUVishardtoreachfor--beabletocontribute.Soforthe--soN7ispurelyadevelopedvehicleforEUV,wedoplantouseEUVonourN5,andthatisourplan.Andwewill--welookattheschedule,appearsthatwillfit,probablyEUV--givensomemargin,itstillwillfit.ItthisdependsonthefollowingprogressatEUV.


Allright.NextquestionwillbecomingfromDeutscheBank,MichaelChou.

MichaelChou (Analyst-DeutscheBankAG):

Thankyou.Regardingyourcommentson10-nanometers,soyoumentionedyouhavemorethan20customersfor10-nanometer.AmIright?


7.


Yes.Sodoesthatmeanyou'reactuallyseeingthestronger-than-expected10-nanometercomparedtosixmonthsagobasedonyourprogress?Becauseinthepast,itseemsthat--Iremembermanagementmentioned10-nanometerwillbesmallerthan16-nanometer,right?Sobasedonlatestprogress,areyouseeingabetterdemandoutlookfor10-nanometer?


WhenItalkabout20customerison7-nanometer,okay,so7-nanometer,indeed,weseestrongeradoptioninthepastquarters.Sothat'swhatweare--Iwasaddressing.


Okay.SecondquestionisforIoT.IsthereanywaymanagementcanquantifytheIoTsalesforceand--orbecauseitseemslikealotofpeoplearesayingIoTwillbeanimportantgrowthdriverinthelongterm,butwestillcannotseealotoftheIoTproductcomingout,mainlyforinfrastructurebuild-out.Soisthereanywayyoucantrytoquantify?


Idon'tthinkthatwecanreallyquantifywhatisIoTmarkettoday.Butalotofproductsthat,forexample,connectsthesensorsthatessentiallythatIoT'smostimportantproduct--oneoftheIoTmostimportantisoursensors,includingCMOSimagesensorandtheMEMSthatyoucanseetoday.ButyouwanttoquantifythewholeIoTmarket.No,wecannot.


Onefollow-upquestionisthat--willsomeoftheIoTuseadvancednode,ortheywilljustusea28or16inthelongterm?


ItshouldbebecausetheIoTrelatedtoalotofdatatransmission,datacommunication.Sothecomputation--thehigh-speedcomputationisoneoftheessentialpartsoftheIoTarea.





Thankyou.


NextquestionwillbecomingfromJPMorgan'sGokulHariharan.

GokulHariharan (Analyst-JPMorganChase):

Thanks.Myfirstquestionisonalittlebitofgranularityonthe2Qoutlook.Couldyoutalkalittlebitaboutadvancednodeversusoldernodegiventhatthere'salotofrestockingin28andbelow?Isitfairtosay16-nanometerisprobablyweakerthanothernodesinsecondquarter?


Allright.Ithinkyouareaskingusabouttherestockinginthesecondquarter,whetheritisoncertainnodesor--


Itisprimarilyonoldernodes,28andbelowor--28andaboveor--


Whethertherestockingisontheadvancednodesoracrosstheboard.


Therestockingismostlyon28,40,65.


Second,Ithink,Dr.Liu,youmentionedaboutcloudcomputing,high-performancecomputeasapotentialmarket.Andyou'reworkingwith7-nanometerhigh-performancecomputeproductaswell.Ithinkhere,acoupleofyearsback,you'vementionedthatsoftwareecosystemreadinesshasstillbeenanissueforthismarket.Anythoughtsonwhatyou'reseeingfromyourcustomers'sideonthisfront,howfaryou'vegoneandhowwillthismarketlikelydomoregiventhat,asyousaid,rightnow,it'snotreallyaddressingtheneedofthemarket,whichisserversisprimarilyontheperiphery?


Well,thatmomentumhascollectedquiteabitrecently.AsyouhearfromRedHat,therewasasoftwaredeveloper,andfromthe--someofthecustomers'softwarealliances,asyouknow,hascollectednowquiteabit.Andtheyareservices--cloudservicesforapplicationsoftwaredevelopmentonseveralsides.Sotheapplicationinsoftwaredevelopmentalsoonprogressing.Sothosepartofthemomentum,aswesee,increases.

AndforTSMC,ofcourse,wewillsupportourcustomersinthathigh-performancecomputingplatform.Forusmostlyisthetechnologydevelopment;technologydevelopment,alsoincludingtheinterfacecircuitdevelopmentwithourcustomers,alsoincludingthepackagingsolutionsforthat--fortheapplication.

SoIthinkthatcomparedwithacoupleofyearsago,indeed,youmustbeseeingourreportsthat,thatmomentumiscollectingquiteabitrecently.Soallthepartshave--weseethedriversforthatintothehigh-performancecomputingmarket,yes.





Andjustonefollow-up.Ifyouhavetotakeaguessrightnow,isthatgoingtobemostlymerchantfablessorsystemfabless,likeyoumentionedasapotentialgrowthdriverinthelastcoupleofquarters?


Weseeboth.Weseeboth,includingtheserviceprovider;theyparticipate,too.


Allright,nextquestionwillbecomingfromCitigroup'sRolandShu.

RolandShu (Analyst-CitigroupInc):

Firstquestionisif--forthesecondquarterguidance,nowit'satTWD215billiontoTWD218billion.Soifweexcludethepressure--pressureshouldbe,theshipmentpressurefromfirstquarter,thatshouldbeaboutTWD7billion,right?SothatactuallyisaboutaTWD208billiontoTWD211billion.Sothatactuallyismuchsmallerthanifwe(inaudible)Marchmonthlysalesby3,asTWD219billion.Sotherefore,this--thegrowthinsecondquarter,forthisgrowth,isthiswhatyouexpectedearlierthisyear,orareyougoingtosee--becauseofsomeweakeningonthedemand?

LoraHo (CFO):

There'safactorthataffectoursecondquarter,onefactorisexchangerate.We'reusingTWD32.30,whichisveryclosetotoday'smarket.Theninfirstquarter,ourexchangeratewasTWD33.1,sothere'sa2.2%depreciate--appreciate,actually.Sothatwillaffect2%ofrevenue.

AnotherreasoniswhatMarkwasmentioning,thatweseetheinventoryrestockingcontinuesthroughoutthesecondquarter.Sothat'sanotherfactorthatwehaveakindofweaker-than-expectedsecondquarter.


Okay.Andalso,fortheshipmentdelay,Ithinkthataccordingtoyournewsreleasepreviously,probablyabout100,000of12-inchwafershipmenthadbeendelayed.Andhowever,Ithinkearlier,yousaidyouprobablyshippedabout90,000.Sowhyisthedifferencebetweenis10,000becausetheyarecanceledbycustomerorwearegoingtofurtherdelayto3Q?

LoraHo (CFO):

No,fabpeopleworkreallyhardtorecovercustomershipments,soactually,wedidbetter.Ithinkwehadannounced120,000inourpressrelease,anditcomeataround90K,soit'sabout30%lower,okay?


Okay.AndIthinkthatmysecondquestionisIthinkGartnerjustreportedaboutTSMClastyearthatouroverallfoundrymarketsharewasabout4--54.5%.Butthenforthisyear,wearerecovering16-nanometermarketshareaggressively.Andalso,wearealsogoingtoproduction10-nanometerwithaveryhighmarketsharenextyear.AndIbelieveforthe7-nanometerproductionin2018,thatwillbemuchaheadofthepeers.Soaquestionisafterthisthree-yeartechnologyleadership,whatdoyouthinkareyourmarketsharewillbe?


Well,thebattleisahead--stillaheadofus,soIcannotclaimanyterritoryyet.Sowetrytoimprovethat--ourmarketsharejustaccordingtowhatyoumentioned,thefactors.





Well,the[50%]ofmarketshareachievable?

LoraHo (CFO):

Anythingisachievable.


Ofcourse.


Soatleast50%?


That'snotwhatIsaid.


Okay.Okay.Ithinkwiththisthreeyearstechnologyleadershipwith[13],areyougoingtohavethe--anyupsideforyourPBTtarget?Ithinknowyousaidthat,forfiveyears,PBTtargetistogrowby10%inCAGR.Sowiththistechnologyleadership,anyupsideonthisPBTtarget?


Well,thecompetitionisstillaheadofus.Rightnow,it'sjustnotthetimetotalkaboutwhat'sthetrophyis.


NextquestioncomesfromDaiwa'sRickHsu.

RickHsu (Analyst-DaiwaSecurities):

Yes.Hi.Goodafternoon.Justonequestionfromme.Aboutyoursecondquarterguidance,Ithinkitlookstomethat'sabitbelowseasonal,right,intermsofsequentialgrowthmomentum.Andyoualsomentionedthatthedemandismainlyfromthe28-nanometer,40-and65-nanometer,notmuchforthe16-nanometer.Andyoualsomentionedthatyour16-nanometerforthisyear,thefullyearrevenuecontributionwillgoingtobeabove20%.CanItakethatasa--yourQ3momentumisgoingtobereallystrongandlikeaboveseasonal?


Yes.


Canyouelaboratealittlebitmore?


Yes.Actually,thehigh-volumerampweexpectinthesecondhalfofthisyearforthe16-FinFET,that'sbecauseofaleading-edgeorthehigh-endsmartphone,okay.Andotherapplications,actually,inthe16-FinFETcontinueson.Andwesawalotoftape-outsincelastyear.SothemomentumaccumulatedinPBTinthesecondhalfofthisyearwewillseeahighergrowth.





Thankyousomuch.That'sallIhave.


We--Ithinkweneedtogotothelineforsomequestions.So,operator,couldyoupleasehavethefirstcallerontheline?We'lltakethenextquestionfromthecall.

Operator :

OurnextquestioncomesfromthelineofMr.DonaldLuofGoldmanSachs.

DonaldLu (Analyst-GoldmanSachsGroup):

Goodafternoon.Ihavetwoquestions,oneisonInFO.IthinkC.C.justcommentedthatyoupackagemorechipsandthecostswillcomedown.Andinwhatyear--whichyeardoyouthinktheInFOcostwillbesimilarorevenlowerthantheconventionalpackaging?Andalso,assumingitwillhappeninthis10-nanometer,7-nanometer[then]willTSMCexpectyourmobilemarketsharetoincreasesignificantlyat7-nanometerversus10-nanometeror16-nanometerglobalmarketshare?Sothat'squestionnumberone.

Questionnumbertwoisinsecondquarter,doesTSMC's16-nanometerutilizationisgoingtodeclinefromQ1?


SoDonald'sfirstquestionisifwecanpackagemultiplechipsinInFO,whichisthechippartitioningandreducethecost,heaskedwhichyearwewillbegintoseethatthecostonInFOislowerthanthecostfromconventionalpackaging.Andifwecanapplythisveryusefultechnologyon10-nanometerand7-nanometer,doesthatmeanthatourmobilemarketsharewillbehigherat7-and10-nanometercomparedtoourmobilemarketshareat16-nanometer?That'sfirstquestion.

Secondquestionisdowehaveautilizationdeclineat16-nanometerinthesecondquarter.


Okay,letmeanswerthefirstquestionontheInFO.Yes,okay.ImentionedthattheInFOofthechippartitioningandtheideaofreducingthecost.Actually,thiskindofassumesorincurthedesignarchitecturedifferencechanges.Soweareworkingwiththecustomer.Icannotgiveaverycertaindateofwhichyearthatitwillbeinthemarketandthencomparewiththeconventionalpackagingmethod.

Butouranalysisshowthat,inanyyearwhenweintroducethiskindoftechnologyandthiskindofnewapproaches,youcertainlywanttobebetterinperformanceandincostascomparedwiththeconventionalpackages.Whetheritwillhelpustoincreasemarketsegmentshareinthemobile,certainly,wehopeso.Icannotgiveyouanumber,okay?Whataboutthesecondquarter?


Secondquarteris16-nanometer.


Sorry,justparticularlyat7-nanometer,wouldyouseenewcustomerswilladoptTSMC's7-nanometertogetherwithInFOatthisstage?





Weareworkingwiththecustomer.That'sallIcanansweryourquestions.

Okay,sothesecondquarter,ourutilizationrateforthe16-nanometer?


16-nanometer.


Decreasing?


Declined.


No.That'sit.

LoraHo (CFO):

SoifIcanaddsomecommenton16-nanometer.Andwearerampingatveryfastspeedon16-nanometeracrossthewholeyear.Sosecondquarterutilizationfor16-nanometerwillbemuchhigherthanfirstquarter.


Allright.Sowewillgotothenextcallerontheline.Operator,pleasehelp.

Operator :

OurnextquestioncomesfromthelineofMr.BrettSimpsonofArete.

Brett Simpson (Analyst-AreteResearchServices):

Yes.Thanksverymuch.Ijusthadaquickquestionon28-nanometer.WesawanicerecoverythereinQ1.Butyouhavealotof28-nanometercustomersmigratingto16-nanometergoingintosecondhalf'16.Sohowdoyousee28-nanometeroutlookasyoustarttoseethisbigshiftinmobilelow-endsmartphonesgaining?Whatimpactdoyouthinkthathasonyour28-nanometeroutlookandwhatareasmightbackfillthat28-nanometernode?


SoBrett,yourquestionis,evenifweareseeingverygoodrecoveryof28-nanometerinthefirstquarter,butsincealotofthecustomers'productswillbemigratingto16-nanometerinthesecondhalf,youareaskinguswhatkindofapplicationsorbusinesswecanhavetofill28-nanometerinthesecondhalfoftheyear?Isthatyourquestion?


Yes,that'sright.Andwhetheryouthink28-nanometercanmaintaintheserevenuelevels.


Okay,letme--okay,letmeanswerthequestion.Actually,heaskedthequestionthatthis28-nanometer'sstrongdemandcancontinueornotbecauseofsmartphone[one]adopting16-nanometers




technologyquickly.Actually,thatinthesmartphone,wehavehigh-endsmartphone,midandlow-endsmartphone.Forthehigh-endsmartphone,movingtothe16-nanometerisanaturalchoice,andthenthey'removingveryfast,yes.Butthenthemidandlow-endsmartphonethatdemandincrease.SoalotofthemadoptingTSMC's28-nanometertechnology.That'swheretheverystrongdemandcomefrom.Andweseethatstrongdemandthroughoutthisyear.

Inadditiontothat,Ijustmentionedthatwealsohaveanetworkingprocessor,consumerproduct.TheyarealladoptingTSMC's28HPC,HPC+.Furthermore,thatinthefuture,wesawthatIoTmobileapplicationforthelow-powerconsumptionisveryimportantinTSMCoveraverycompetitiveplatforminthisarea.Sowebelievethat28-nanometer'sdemandwillcontinuetobestrong.Thankyou.


AndIjusthadasortofindustryquestionasmysecondquestion.There'salotoftalkabouttherisingcostsofdevelopingchipsatleading-edge.Howmuchdoyouthinkitcostsyourcustomerstodevelopchipsat10-nanometerand7-nanometercomparedwith28?AndIthinkyoumentioned20customersare--you'reengagedwith20customerson7-nanometer.Canyoutalkabitabouthowbigthecustomerengineeringteamsarethatyou'reengagingwithatthesenodes?Thankyou.


Well,Icannotcommentontheexactnumberofthe[NEE],newengineeringexpense,forthenewN.Ofcourse,eachnodedevelopmentcostishigherand--butontheotherhand,thechipintegrationisalsoincreases.Whereitusedtobeseveralchips,rightnow,it'sbeingdevelopedby--inonechip.

Sosecondly,actually,althoughwehave,asmentioned,15tape-outs,typically,thefirsttape-outincursthehighestcost,andthefollowingtape-outs,doesn't--itcanbesynergistic.Soindeed,customersseethe7-nanometerisalong-standinglongnode.Therefore,Ithinkthecustomeriswillingtoputintothe--theirinvestmentresourcesinitforthe--formanyyearstocome.


CouldIaskathirdquestion?


Allright.Yes,Brett.


SomaybejustIwantedtoaskongraphicsbecauseyoutalkedanumberoftimesinyourpreparedremarksaboutVRandgraphicsingameconsoles,andthere'squiteabigperformancejumpcomingassomeofthesecustomersgoto16-nanometerlaterthisyear.Whatsortofgrowthareyouseeingingamingandgraphics,specifically,atthemomentthisyear?Thankyou.


ThisVRandARisstillisemergingapplication.Sothegrowthratecomefromverysmallnumbers.Soprobably--Icannotputintoaccuratenumber.Currently,thisapplication,thisproductisundertheapplicationsoftwaredevelopment.Ithinkyou'vebeentriedseveralVRsandARsproducts.Manyoftheapplicationsoftwareisademosoftwares.Andboth--alloftheproducerofthechipsrightnowcreatetheirsoftwaredevelopmentplatform.Sothisisthisstage.Sointerms--wejustseeastartingshipment,butthe--it'syettobeavolumequantityatthisyearofthisapplication.





Okay.Thankyou.


Allright.Wewillcontinuetohavethenextcallerfromtheline.Operator,couldyoupleasehavethenextcallerontheline?

Operator :

OurnextquestioncomesfromthelineofMehdiHosseiniofSFG.

MehdiHosseini(Analyst-SusquehannaFinancialGroup):

Yes.Thanksfortakingmyquestion.Goingbacktoyourpreparedcommentarywhereyoudescribedasmartphoneunitgrowththatisgoingtobelessthanyourproductexpectation,whichisalso,inmyopinion,ishavingadverseimpactonyourassumptionforsemiconductorrevenuegrowth.Howisitgoingtoimpactyourrevenueexpectationgrowththisyear?Your--therangeof5%to10%hasremainedunchanged,butthelargestendmarketsmartphone,youhavedowntickedonthat.Andthenthesemiconductorindustryrevenueisalsogoingtobeuponly1%.Andsointhecontext,ifyoucouldhelpusunderstandhowthisdowntickisimpactingtherange.Doyouseeyourrevenuecomingtothelowend,tothehighend?Orareyoustillontracktohitmidpointoftheguidance,givenalltheprogramsthathavecometofruition?


Allright.IthinkMehdi'swas--questionwasthatsincewehavereviseddownsomeofthegrowthrateslikesmartphonesandsemiconductorrevenue,etcetera,howwouldTSMCstillkeepourrevenueguidance?Sohewassayingwhetherweareonthehigh-endoftheguidancerangeorthelow-endoftheguidancerange,etcetera.


Well,onsemiconductorgrowth,weforecast1%.Andpartofitismemorymarketappearstobeshrinkingthisyear.Excludingmemory,itwillbeabout2%.Butoursystemisverycomplicated,it'sverydifficultformetodescribeeverythingforyouhere.Butthesmartphonegrowththisyearismostlyfromthemid-endandlow-endintermsofunitgrowth.Soisthatonetoreconcileforyournumbers.

Ournumberforthisyearisstillmaintainedat5%to10%.Thatisa--noraggressive,norconservative.Itisstillthesamenumber.


Letmerephrasethequestionbecausecurrently,youhavehadmorecontentinhigh-endsmartphone.Butthegrowthrateforlow-tomid-rangeismuchhigherthanhigh-endsmartphonegrowthrate.Woulditbefairtoassumethatifthegrowthrateforthelowtomidrangeisoffsettinglowergrowthrateforhigh-end,eventhoughthehigh-endgivesyouahighercontent?


It'spossible.Weseetheover-$500phoneisreducing,but$400phoneisincreasingquickly.Andbothhigh-endandmid-endsiliconcontentareincreasingwiththishighsingle-digit.Buttheunitofthemid-endphoneincreaseandhigh-endunitnumberdecreasesthisyear.





Okay.Ithinkwewillcomebacktothe--


Ihaveafollow-up.


Allright.Sorry.


Ihaveafollow-uponthesecondquestion.


Yes,Mehdi,please.


There'sbeenalotofemphasison7-nanometerandyourprogress,itisgreattoseeyouhavemaintainedyourlead.Butinthatcontext,shouldweassumethatthe10-nanometerwillbeashorternode?Andifso,whathappenstobackfilling?Youmentionedthat90%oftheequipmentfor10--90%ofthe10-nanometerequipmentcouldbeusedfor7-nanometer.Isthatgoingtohaveanimpactonyourspending,whichtiesintobackfilling?Anycommentoranycolortherewouldbegreat.


Okay.Mehdi'squestionisthathe'shappytoseethatwehavealeadershipat7-nanometer.However,doesthatmeanthatwewillhaveashortnodefor10?Andifitisashortnode,whatwouldhappentothecommontools,thisequipmentbeing90%-pluscoming,what'stheimpacttoourcapitalspending?


Ithinkthis10-nanometerwillrampveryfast,butitappearstobeashorternodethanthatofa7-nanometer.Sothepicturecouldbesimilartoour20and16.Andalso,weanticipatedthisbeforeenoughthatwetriedtomaximizethecommontoolfrom10-nanometerto7-nanometer.Therefore,thisis95%isin--bydesignsothatwhenthe10-nanometerafterthreeyearsitreduces,thetoolcanbereadilyexpandintothecapacityfor7-nanometerramp.


Impacttospending?


Thequestionisimpactspending?


Impacttoourcapitalspending.


Thathasbeenlongbeingplannedintoourcapitalexpense.It'sanintegratednumberwhatweoffertoyou.





Okay.Sonowwecomebacktothefloor.AndthenextonewillbefromUBS,BillLiu.

BillLiu (Analyst-UBSInvestmentBank):

Thankyouverymuch.GoingbacktoInFO,I'mtryingtofigureoutwhenthismightbroadenout.AndI'vespokentoacoupleofyourcustomersandmaybesomeoftheback-endplayers,andwhatI'mhearingprettyconsistentlyiscostandthefactthatthisisTSMCproprietary.Otherthanthat,peopleseemtoloveit.Iknowyou'reworkingveryhardoncosts.IntermsofthisbeingaTSMCproprietary,I'mwonderingwhatyouaretellingyourcustomerstotrytoconvincethem?AndIthinkitlookstomelikeit'sgoingtobeTSMCwithInFO,everybodyelsewithsomesortofothertechnology.Isthatthewaythatyouseedeveloping?

AndIguess,numbertwoiswouldyouconsiderpossiblylicensingInFObecausewe'vecertainlyseensuccessstoriesintermsoflicensinginsemiconductors.Ithinkthatwouldhelpoutyourcustomers.Iwanttogetyourthoughtsonthat.


Okay.WedevelopInFOtechnologythatwithmuchlowercostthanthecohortsthatweintroducedearlier.AndInFOgiveadvantage,asIsaidinthepresentation.

Wehavementionedthatinthelastquarter,thatweonlyfocus--rightnow,weonlyfocusonthefewhigh-volumecustomersbecauseofwestarttorampitup.AndIalsosaidinthepresentationthatweareworkingonthenewimprovementandthecostreduction.That'smeaningthat,today,westillhavesomeimprovementongoing.Andoncewecompletedinourhigh-volumeproductionthisyear,webelievewewillbeverycompetitive.

However,ineverytechnologynode,weoffsetpeopletobetterserveourcustomer.Fornow,wealsoseethatthecooperationbetweenTSMCandback-endpeople.Butforthisyear,beforewecompletethevolumeproductionandreadyforotherconsideration,thisyear,we'llonlyfocusonourownbringingupofthisInFOvolumeproduction.


That'sveryclear.Iguess,I'mjustwonderingwhathappensbeyondthisyearasyouneedtostartthinkingaboutmorecustomers.


Wewilltellyouthatnexttime.


Okay.MysecondquestionwastheonethatMedhijustasked,butmaybeI'lljustfollow-up.Ifitturnsoutthat10-nanometerturnsouttobealittlebitsmallerthanwhatyouexpectedpreviously,if7turnsouttobemuchbigger,andyouonlyspentTWD1billioninthefirstquarterofthisyearversusyourguidancefortheyear,TWD9billiontoTWD10billion,isitapossibilitythatmaybetheCapExbecomesveryback-endloadedorsomegetspushedoutinto2017?

LoraHo (CFO):

Itistrue,andwespentmuchlessinthefirsthalf.Andthisyear,theCapExwillbeverymuchback-endloaded.Reasonbeingbecausewearepreparingthecapacityfor10-and7-nanometer.Thosespending




getsmostlyspentinthesecondhalfoftheyear.


Allright.NextquestionwillbecomingfromMorganStanley'sCharlieChan.

Charlie Chan (Analyst-MorganStanley):

Thanksfortakingmyquestion.Soaveryquickfollow-uponBill'squestiononInFO.SowhatwouldbethemarginimpacttoyourcorporatemarginfromtheInFObusinesswhenitgettomassproduction?

LoraHo (CFO):

SincetheInFOvolumeisstillsmallforthisyearandC.C.wasmentioningabove$100millionbyfourthquartercomparedtothetotalrevenueisstillsmall.Soitwillhaveverysmalldilutiontothisyear'scorporateaveragemargin.


Okay.Sodoesthisjustsuggestthatthemarginisslightlybelowcorporateaverageevenitissmall?

LoraHo (CFO):

Itisbelow.


Okay.Thanks.AndmysecondquestionisregardingtheEUVadoption.SoitseemslikeitisalreadyadonedealthatyouwilladoptEUVata5-nanometer?Sotheproductiontimingissometimelike2020.Sofromnowto2020,doyouthinkthecapitalintensitywillincrease?Iknowthecompanygaveguidancebeforethatthenewnormwillbe30%--35%.Butintermsoftheratio,howdoyouthinkthatyourgrowth,especiallywhenyoumass-produce7-nanometer?Thankyou.


Well,I'lltrytoanswerwhatIheardfromyou.Yes,weplantouseEUVonour5-nanometer,andwehavealreadythreeEUVtoolsonthefloorandthefourthiscoming.Soalltheseareusingactivelyforthedevelopment.Sountil2020whenN5iscurrentlyplanningtoproduction,yes,itwillbeadopted.

ButjusttoremindyouthatifyouthinkaboutCapEx,don'tthinkabouteverythingwe'regoingtochangetheEUV,okay?Thereare80layersandonly10--thereareabout50,60ifyoudiscountmultiplepatterning.Onlythe10ofthem,roughly,willuseEUV.Soalotoftoolsstillbeableto--beableto--commontools.Sodidthatansweryourquestion?


Yes.SojustwantedtoclarifybecauseIthoughtquadruplepatterningormulti-patterningwillcauselotsofCapEx.Butalso,youmentionedthatyouwilluseacommontoolstrategytoreducetheCapEx.Sojustnet-net,intermsofCapEx,intermsofabsolutedollarsversusTWD10billionlabelorintermsofCapExratioversus35%,inthecomingfouryears,doyouthinkthatyouwillincreaseordecrease?Sothatwasessentiallymyquestion.

LoraHo (CFO):

Cannotbesospecific,asyousaid.Butingeneralspeaking,conversionoftoolischeaperthanbuyinganewtool.SomoreconversionisbeneficialtotheCapEx.





Allright.Nextquestionwillbeafollow-upfromCreditSuisse,RandyAbrams.


Yes.Thanksforfittingmebackin.Forthesecondhalf,youmentionedalotoftherampwillbe16-nanometer,whichisstillrelativelynewnode.Atsecondquarter,you'realready49%to51%grossmargin.I'mcuriouswithfurthergrowthtocomefromthatproject,if16isapproachingcorporateaverage,thenwecouldgetfurtherleveragetothemodelinthesecondhalffromthatgrowth?

LoraHo (CFO):

Forthisyear,16-nanometerprofitmarginisimprovingaswehaveamuchmorehighervolume.Butit'sstillbelowcorporateaveragethisyear.Weexpectthe16-nanometerwillgetclosetocorporateaveragebythesecondhalfof'17.


Okay.Iguess,forsecondhalf,ifyounetouttherampof16stillbelowcorporate,canwegetsomeincrementalleveragefromthatfillinguputilizationthatwenormallysee?Likefromfirsthalftosecondhalf,ifthere'spotentialforfurthermarginexpansion,wouldwenormallygetpickupfromutilizationimproving?

LoraHo (CFO):

Ourutilizationswillbebetterinsecondhalf,that'snumberone.Andwehaveothertechnologywhohashighutilizationwithverygoodprofitmargin,sothatkindofmixedissue.


Okay.Okay.Thanks.ThesecondquestionIwanttoask,you'vementioned,Mark,inyourpreparedremarksabouttheserveropportunityanddevelopmentmovingalongonsoftwareapplications.Ifyoucouldthinkabout,foryourtechnology,whenyouthinkwe'dstarttogetthefirstvolumewhereitcan,say,getto1%,2%ofrevenue.Ifthat'stime,say,around7-nanometeroryouthinkitwilltakemoretimeitmightbefurtherout?


Wethinkit'son7-nanometerthatwe'llseeasignificantinroad.


Allright.Weneedtogobacktotheline.Operator,couldyoupleasehavethenextcallerontheline?

Operator :

OurnextquestioncomesfromthelineofMr.StevenPelayoofHSBC.

StevenPelayo (Analyst-HSBC):

Yes.Justfirstafollowup.Oncapitalspending,youmentionedbeingback-endloadedthisyear.I'mcuriousdoesthat,fromarunratebasis,reallystarttosuggestwhatmayhappenin2017?Ordoyouthink35%ofsale,that'skindofanormalizedCapExleveleventhoughyou'regettingkindofhighreuserate,15%today,butmaybenotsohigh,10-nanometer,before7kicksin?SoCapExisin,fornextyear,kindofbackinthe35%range?Whatdoyouthink?




LoraHo (CFO):

Allright.Questionisthisyear'sCapExisback-endloaded,like35%to65%,withthesamepattern,similarpatternin2017.Whatwillbeourcapitalto--CapExtosalesrationextyear?

LoraHo (CFO):

Iprobablycannottellabout2017,whetherit'sgoingtobefront-endloadedorback-endloaded.Butintermsofcapitalintensity,wehavewentthroughthishigh-intensityperiodin--sincelastfiveyears,andithascomedowntoamid-30range.Webelievethis30%to35%rangewillbeforthenextfewyears.


Okay.Excellent.Thankyou.Inyour20-Ffilingthisweek,weseethatyourlargestcustomerfellfrom21%ofrevenuesto16%ofrevenues.Youobviouslymadeitupwithsomeothercustomerswithgoodgrowthlastyear.ButIguess,myquestionisexpectationasyougothrough2016,doyou---dowehavetoworryaboutthatkindofsignificantdeclineinyourlargestcustomerscontinuing?


Allright.Thequestionisweusedtohaveaverybigcustomerthataccountedfor21%ofourrevenuelastyear,andthisyearisprobablyinthemid-teens.Whatwouldbe,inthefuture--whatifthepercentagedrop,what'stheimpacttoTSMC?


Yes.Justtoclarify,wasthat,in2014,itwas21%ofrevenue.2015,itwas16%ofrevenue.I'mcuriousifyou--anyconcernoverthattrendcontinuing,couldtheyfalltosingle-digitpercentageofrevenues?


Well,wewillsupportourcustomerfullyandletthemgrow.


Allright.Ithink,Steven,Ithinkwehaveansweredyourquestions.Thankyou.

Operator,couldyoupleasehavethenextcallerontheline?

Operator :

OurnextcallercomesfromthelineofMr.DonaldLuofGoldmanSachs.


Hi.Ihavesomequestionon28.Ithinktheconventionalwisdomisthat28willbealongandverystrongnode.ButIcheckedthat,inQ4lastyear,28isonlya--maybelessthan5%higherthan65-nanometer,atthesamestageofthenode.Somyquestionishaveyoudoneanystudytoseehowmuchbigger28willbeforthenextfewyearsrelativeto65?AndthereasonIaskedthisisalotofyourcompetitorshaveactuallyincreasedCapExthisyearfor28,soI'mafraidthatwemighthaveapricewar.


Okay.Donald'squestionisthat28-nanometerlastquarter,4Q2015,whichIthinkwesaiditwas25%ofourrevenue,andhesaidthatthisisonly5percentagepointshigherthan65-nanometeratthesamestage.Sosincemanyofourcompetitorsarebuildingupcapacityfor28-nanometer,Donaldisaskingus




howbigcan28-nanometerreallybeandwhetherwewillhaveapricewar.


Well,Icannottalkspecificallyforthequantity,butI'llsaythatwesawthestrongdemandthat'sduetoTSMC'stechnologyverycompetitive.Andforthisyear,mid,low-endsmartphoneincreasedalot.Andthenwealsodevelopedverycompetitivelow-powertechnologies,whichwethinkismuchbetterthanourcompetitors.Andsowecontinuetohaveconfidencethatwewillcontinuetohavestrongdemandandholdourmarketshare.


Butinthenexttwoyears,ifyoulookoutandincomparedto65,doyouthink25--28-nanometerwillhave10%morerevenuethan65atthesamestageafterlaunch?Orit's5%,10%or15%?Isthereanumberthatwecanuseinourmodel,approximatenumber?


Donald,thisisElizabeth.Letmeansweryourquestion.Thispercentagebasicallyisnotdirectlycomparablebecausethebaseisdifferent.65-nanometer,30%backin,say,2012,isamuchsmallernumberthan28--28-nanometerat30%intoday'snumber.Infact,ifyoulookatsamestage,say,65-nanometerafterfiveyearsand28-nanometerafterfiveyears,28-nanometerintermsofdollarisalmosttwiceasbigas65,intermsofdollars,sopleasedonotuse--


No,actually,sorry,Elizabeth.WhenI'mcomparingisIcompared65-nanometerrevenueabsolutenumberofallthefoundriesIcanfindversusthesamefoundry,total28-nanometerMEMS.Sothetotal28-nanometerrevenueinQ4lastyearwasonly5%higherthan65-nanometer--total65-nanometerrevenueatthesamestageafterlaunch.


Soyouaretalkingaboutmarketsharepercentage,notrevenuepercentage,isthat--


[Exactly]--


Okay.


--notthemarketshare,thetotalabsoluteamount.BecauseIthinkTSMChasamuchmoreinformationthanusintermsoflookingforward,intermsoftape-outs,etcetera.Sodoyouthink28-nanometerisalongnodeorstrongernodethan65,andbyhowmuch?


Yes,itisastrongnode.


Andforthewholemarket(multiplespeakers)--





Well,letmeanswerthequestionagain.Itseemstomethatyouarenotsoconfidentonthe28-nanometer'sdemand,butitisstrong.Andthisisavery[sweet]node,offerthelow-powerbutverycompetitiveperformance.Andthecoststructureisalsogood.SoIwanttosayagainthatTSMC'stechnologyisverycompetitive.Andwewillholdourmarketshareandwehave[confidenceon].

LoraHo (CFO):

Letmeaddsomecommenttothisone.Donald,Ithinkyouaretryingtofigureouthowbigis28versusthe65-nanometer.Isthatwhatyou'reaskingfor?


Exactly,thatforthewholemarket,yes,that'smyquestion.

LoraHo (CFO):

Okay.Ithink--Idon'tknowaboutthe10.Butforus,ifIlookatthenumber,65-nanometerrevenueversus28-nanometerrevenue,ifyoulookatthehigh--thepeakrevenueversus65peakrevenue,Iwouldsaythat28-nanometerrevenueismuchbiggerthanthe65-nanometeratthesamestage.


Okay.Asafollow-upwithElizabethonthequestion.Yes,Ithinkthe28rampedupveryfastanddroppedveryquickly,too,forthewholeindustry.Sothequestionis,goingforward,whetheritwillbebigger,howmuchbiggeritwillbeversus65.ButIwillfollowup.Thankyou.


Thankyou.Let'scomebacktothefloor.NextquestioncomesfromCitigroup'sRolandShu.


Thanks.Justafollow-upontheInFOquestion.Ithink[Ifeel]justasapartofcollaborationwithInFOwith,Iwouldsay,ourlikelycandidate.ButIwouldliketohearfrom--learnfromyouaboutthecompetitionfortheInFOorInFO-like.Doyousee--isthereanyclosecompetitorwhocandoInFOproductionaswhatTSMCisdoinginthenearterm?


Well,there'salotof[FinFET]technologyavailabletoday.TSMCdevelopedtheInFObecauseof--wedevelopedatechnologywithsomecertainadvantage.JustlikeImentioned,wehaveasignalseriesthat'ssuitableforyoursmartphonebecausetoday'ssmartphoneneededtobe(inaudible).Thenalso,thatwefindoutthatourapproachescangivebenefitoradvantageforthehigherbandwidththatwhichisimportantforthesmartphoneforalltheapplicationalso.

Sowebelieve,amongall[FinFET]technologies,TSMC'sInFOisthebest.Andwhenwerampitup,thatwillbethehighestvolumeof[FinFET]technologyintheindustry.Butourmainprogressintohelpourcustomertoagaintohavetheirproductintothemarketwithverycompetitiveperformanceandcost.


SoconclusionisIthinkyouthinkprobablyit'svery[bigpurchase]foranycompetitortodothesimilarjobasTSMCtocompetewithyouatsamecustomerorsameapplication.AmIreadingyouright?





Idon'twanttosaythat,butyoumightberight.


Thankyou.


Okay.Follow-upquestionfromDeutscheBank,MichaelChou.


C.C.,isthereanywayyoucanmentionwill--arethemodulebeusingInFOaswell,[RF],thetransceiver,thiskindofproduct?


Yes.Toansweryourquestion,today,wefocusonverylimitedcustomerwithahighvolume.Butinthefuture,ofcourse,itwillbeadoptedbyalotofcustomer,alotofdifferentapplicationsthatweexpected.


Thankyou.


Okay.Ithink,intheinterestoftime--sorry,there'sa--SebastianHou,intheback,fromCLSA.

SebastianHou (Analyst-CreditAgricoleSecuritiesTaiwan):

Hi.Thanksfortakingmyquestions.Somyfirstoneisifyoulook--basedontheinventorycycle.Sowestartedtoseesomerushordertowardstheendoflastyear.Andfirstquarter,wealsohavesomebusinessupsidebecauseoftheinventoryrestock.Andnow,inthesecondquarter,wecontinueto--youjustcommentedthatyoucontinuetoseesomeinventoryrestockinginthesecondquarter.Sothat'saboutlike--thisislikethefifthmonthorfourthmonthofinventoryrestocking.Sowheredoyouthinkthatmostofyourcustomersarenowintheinventorycycle,apartfromyourlargestcustomer,whicharestartingto[build]soon?Butapartfromthat,whatabouttherestofyourcustomers?


Well,whatwesee,thefourthquarterlastyear,ifyouremember,ispeopledrasticallyreducedtheirinventory.WeonlyseetherestockingalmostaftertheChineseNewYear.Sothat'swhere,ifyoucountthecycles.AndbutIdon'tseevery,very--Idon'tseesignsofover-buildatthispoint.Peoplearestillcautious.Sothat'swhatweseeinthecycle.

Howlongwillitlast?Idon'tknow,itdependson--Ijustmentioned--Iaddressedonmypreparedmessage,eventotheendofQ2appearstheinventorywillstillabouttheseasonallevel.It'sarestocking,butatthe--abouttheseasonallevelofattheendofQ2.Sothatwillbefourmonthsintothebuilding.Butitwillstillbeacautiouscondition.


Thankyou.Mysecondquestionisonthe--yourrevenue,applicationside.Becauseyoubreakdownrevenueintofourparts,andoneofthatistheindustrial/standards.Andwe'veseenverystronggrowthfor




thepastfouryears,about27%CAGR,verysimilargrowthtothecommunicationcategory.SoIwonder,canyouprovidesomeofyourexpectationfortheCAGRforthenextcoupleofyears?Andifyoucantalkaboutwhat'sthespecificdriverinsidethatindustrial/standardandwhatkindofprofitabilityisabovecorporateaverageorabovetheotherapplication?Thankyou.


Actually,theindustrialandthestandard,forexample,includingtheMCUorincludingthatcategory.But--andpowermanagementinthatcategory.Bothofthosecomponentsstillalsousedinasmartphone.Sowhenwetalkaboutsmartphone'sgrowthinthepastfewyears,thisincludessomeofthe--oneofthecategoriesintoindustrialandstandard.That'sthereasonyouseethegrowth.Partofitiscontributedfromthesmartphone.So--


Sowhat'sthegrowthoutlookforthenextcoupleofyears?


Icannotforecastintothenumberforyou,butitwillbeagrowthsituation,yes.Itwillbestillagrowthpattern,Ithink.


Willitbecontinue--continuethissimilartothecommunicationapplicationgrowthorwoulditbehigherorlower?


That'shardtopredict.Ihopethecommunicationgrowfaster,butthat'shardtopredict.


Okay,thankyou.


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