Taiwan Semiconductor Manufacturing Company Ltd.

Ladies and gentlemen, good afternoon. I am Su Zhikai, the legal officer of TSMC. I welcome you to participate in the TSMC's second legal session in 2020. In order to prevent the spread of the COVID-19 epidemic, this legal session will still be held by telephone. Since this law will be broadcast to global investors at the same time, we will use English all the time. Please forgive us. Ladies and gentlemen, welcome to TSMC's second quarter 2020 earnings conference call. This is Jeff Hsu, TSMC's Director of Investor Relations and your host for today. To prevent the spread of COVID-19, TSMC is hosting our earnings conference call via live audio webcast through the company's website at www.tsmc.com, where you can also download the earnings release materials. If you are joining us through the conference call, your dial-in lines are in listen-only mode. The format for today's event will be as follows. First, TSMC's Vice President and CFO, Mr. Wendell Huang, will summarize our operations in the second quarter 2020, followed by our guidance for the third quarter 2020. Afterwards, Mr. Huang and TSMC's CEO, Dr. Cici Wei, will jointly provide the company's key messages. Then, TSMC's chairman, Dr. Mark Liu, will host a Q&A session where all three executives will entertain your questions. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. please refer to the safe harbor notice that appears in our press release. And now I would like to turn the call over to TSMC CFO, Mr. Wendell Huang, for the summary of operations and current quarter guidance.

Thank you, Jeff. Good afternoon, everyone. Second quarter revenue was flat sequentially as the continued 5G infrastructure deployment and HPC-related product launches offset weaknesses in other platforms. Gross margin increased 1.2 percentage points sequentially to 53%, mainly due to continuing high level of utilization in the absence of unfavorable inventory valuation adjustment, partially offset by NT dollar appreciation in the second quarter. Total operating expenses increased by 1.19 billion NT, mainly as TSMC supported a range of COVID-19 relief efforts. Operating margin increased by 0.8 percentage points sequentially to 42.2%. Overall, our second quarter EPS was 4.66 NT and ROE was 28.5%. Now let's move on to the revenue by technology. 7-nano process technology contributed 36% of wafer revenue in the second quarter, while 16-nanometer contributed 18%. Advanced technologies, which are defined as 16-nanometer and below, accounted for 54% of wafer revenue. Moving on to revenue contribution by platform, smartphones contributed decreased 4% quarter over quarter to account for 47% of our second quarter revenue. HPC increased 12% to account for 33%. IoT decreased 5% to account for 8%. Automotive decreased 13% to account for 4%. Digital consumer electronics decreased 9% to account for 5%. Moving on to the balance sheet. We ended the second quarter with cash and marketable securities of $605 billion NT. On the liability side, current liabilities increased by $25 billion NT, mainly due to the increase of $30 billion NT in short-term loans. On financial ratios, accounts receivables turnover days increased two days to 44 days. Days of inventory also increased two days to 55 days, mainly due to N5 ramp and stronger N7 demand. Now let me make a few comments on cash flow in CAPEX. During the second quarter, we generated about $170 billion NT in cash from operations, spent $127 billion in CAPEX, and distributed $65 billion for third quarter cash dividends. We also increased $30 billion in short-term loans and issued $36 billion of corporate bonds. Overall, our cash balance increased $37 billion to $468 billion at the end of the quarter. In U.S. dollar terms, our second quarter capital expenditures amounted to $4.2 billion. I have finished my financial summary. Now let's turn to our third quarter guidance. Based on the current business outlook, we expect our third quarter revenue to be between $11.2 billion and $11.5 billion, which represents a 9.3% sequential increase at the midpoint. Based on the exchange rate assumption of $1 to $29.5 NT, gross margin is expected to be between 50% and 52%. operating margin between 39% and 41%. Now I will hand over the call to C.C. for his key messages.

Thank you, Wendell. Good afternoon, ladies and gentlemen. Let me start with our near-term demand outlook. We concluded our second quarter with revenue of NT$310.7 billion, or US dollar 10.4 billion, in line with our guidance given three months ago. Our second quarter business increased slightly in U.S. dollar terms as a continual 5G infrastructure deployment and HPC-related product launches upset weakness in other platforms. Moving into third quarter 2020, we expect our business to be supported by strong demand for our industry-leading 5-nanometer and 7-nanometer technologies, driven by 5G smartphone, HPC, and IoT-related applications. Looking at the second half of this year, COVID-19 continues to bring some level of disruption to the global economies, and uncertainty remains. We have observed weak consumer demand in the first half of this year and now expect global smartphone units to decline low teens percentage year over year in 2020. However, amid the COVID-19 pandemic, we also observed the supply chain making effort to ensure supply chain security and actively preparing for new 5G smartphone launches. We raised our forecast for 5G smartphone penetration rate to high teens percentage of the total smartphone market in 2020. For the full year of 2020, 5G and HPC-related applications will continue to drive semiconductor content enrichment. We now forecast the overall semiconductor market excluding memory growth to be flat to slightly increasing, while foundry industry growth is expected to increase to be mid to high teens percentage. For TSMC, Although COVID-19-related uncertainties remain, our technology leadership position enables us to outperform the fund-raising revenue growth. We believe we can grow above 20% in 2020 in U.S. dollar terms, including the impact from the new U.S. regulations, which I will discuss in the next session. Our 2020 business will be supported by strong demand for our industry-leading 5-nanometer and 7-nanometer technologies and our specialty technology solutions, driven by customers of 5G smartphone-related product launches and expanding HPC-related opportunities. Now let me talk about the impact of new U.S. regulations. On May 15th, the U.S. Department of Commerce announced a set of new export control regulations. As a global and law-abiding company, TSMC will follow all the rules and regulations fully, no doubt about it. While there may be some impact from the new U.S. regulations, TSMC's purpose to unleash innovation remains unchanged. Our leading position in the semiconductor industry We hold upon our technology leadership, manufacturing excellence, and customers' trust also remain unchanged. We will continue to build upon our trinity of strengths and conduct our business with integrity to ensure our value and contribute to the semiconductor industry. In the near term, we will work dynamically with our customers to minimize the impact to our business from new U.S. regulations. In the mid- to long-term, we believe the underlying megatrend of 5G-related and HPG applications remain intact, and supply chains can adjust and rebalance themselves. With our technology leadership, we are well positioned to capture the mid- to long-term growth opportunities. We reaffirm our goal to grow at the high end of our long-term growth projection of 5% to 10% in U.S. dollar terms. Next, let me talk about our N5 ramp-up and N4 introduction. N5 is the front-end industry's most advanced solution with the best PPA. N5 is already in volume production with good yield while we continue to improve the productivity and performance of the EUV tools. We are seeing robust demand for EN5 and expect a strong ramp of EN5 in the second half of this year, driven by both 5G smartphones and HPC applications. As we observed some delays earlier this year in EN5 tool deliveries due to COVID-19, we now expect 5 nanometer to contribute about 8% of our wafer revenue in 2020. We also introduced N4 as an extension of our 5nm family. N4Y have compatible design rules and a highly competitive performance to cost advantages as compared to N5 and will target next wafer of N5 products. Volume production is targeted for 2022. Thus, we are confident that our 5 nanometer family will be another large and long-lasting node for TSMC. Now I will talk about our N3 status. N3 will be another full node straight from our N5, with about a 70% large density gain, 10 to 15% speed gain, and 25 to 30 power improvement as compared with 5 nanometers. Our N3 technology will use FinFET transistor structure to deliver the best technology maturity, performance, and cost. Our N3 technology development is on track with good progress. N3 risk production is scheduled in 2021, and volume production is targeted in second half of 2022. We have already demonstrated 256-megabit SRAM functionality. N3 logic test chip is fully functional with yield ahead of plan. The device performance is also on track. R3 nanometer technology will be the most advanced factory technology in both PPA and transistor technology when it is introduced, which will further extend our leadership position right into the future. Finally, let me talk about our U.S. FAB plan. On May 15th, we announced our intention to build an advanced semiconductor FAB in the U.S. We have received the commitment to support this project from both the U.S. federal government and the state of Arizona. We are working closely with them, as well as our supply chain partners, to build an effective supply chain and make up the cost gap. These five will start with 5 nanometer technology with 20,000 wafer per month capacity. Production is targeted to begin in 2024. The U.S. five will enable TSMC to expand our technology ecosystem and better service our customers and partners. At the same time, as TSMC's global presence increases, It will allow us to better reach global talent to sustain our technology leadership. Now let me turn the microphone over to our CFO.