Taiwan Semiconductor Manufacturing Company Ltd.

Good afternoon, everyone. Welcome to TSMC's third quarter 2020 earnings conference call. This is Jeff Su, 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 third quarter 2020, followed by our guidance for the fourth quarter 2020. Afterwards, TSMC's CEO, Dr. C.C. Wei, and Mr. Huang will jointly provide the company's key messages. Then we will open the line for Q&A. As usual, I would like to remind everybody that today's discussions may contain forward-looking statements that are subject to significant risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements. Please refer to the Safe Harbor Notice that appears in our press release. And now, I would like to turn the call over to TSMC CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.

Thank you, Jeff. Good afternoon, everyone. Third quarter revenue increased 14.7% sequentially in NT dollars, or 16.9% in U.S. dollars. As we saw strong demand for our advanced technologies and special technology solutions, driven by 5G smartphones, HPC, and IoT-related applications. Gross margin increased 0.4 percentage point sequentially to 53.4%, mainly thanks to a much higher level of utilization, partially offset by the margin dilution from 5 nanometer ramp and an unfavorable exchange rate. The operating expenses increased by 7.4 billion NT, mainly attributable to a higher level of development activities for N4 and N3 technologies and one-time expenses to facilitate our expansion in Hsinchu. Therefore, operating margins slightly declined by 0.1 percentage points sequentially to 42.1%. Overall, our third quarter EPS was 5.3 NT and ROE was 31.3%. Now let's move on to the revenue by technology. Five nanometer process technology contributed 8% of wafer revenue in the third quarter, while seven nanometer and 16 nanometer contributed 35 and 18% respectively. Advanced technologies, defined as 16 nanometer and below, accounted for 61% of wafer revenue. In terms of revenue contribution by platform, smartphone increased 12% quarter over quarter to account for 46% of our third quarter revenue. HPC increased 25% to account for 37%. IoT increased 24% to account for 9%. Automotive decreased 23% to account for 2%. Digital consumer electronics decreased 24% to account for 3%. Moving on to the balance sheet, we ended the third quarter with cash and marketable securities of 742 billion NT. On the liability side, current liabilities decreased by 27 billion NT, mainly due to the decrease of short-term loans and the decrease of current portion of bonds payable. Long-term interest-bearing debts increased by 146 billion NT, mainly as we raised 145 billion of corporate bonds during the quarter. On financial ratios, accounts receivable turnover days decreased four days to 40 days, while days of inventory decreased increased three days to 58 days primarily due to N5 ramp. Regarding cash flow and CAPEX, during the third quarter, we generated about $190 billion NT in cash from operations, spent $99 billion in CAPEX, and distributed $65 billion for fourth quarter 19 cash dividends. Short-term loan decreased by 17 billion NT, while bonds payable increased by 136 billion NT, mainly due to the bond issuances. Overall, our cash balance increased 137 billion to 604 billion at the end of the quarter. In U.S. dollar terms, our third-quarter capital expenditures totaled 3.4 billion. I have finished my financial summary. Now let's turn to our fourth quarter guidance. Based on the current business outlook, we expect our fourth quarter revenue to be between 12.4 billion and 12.7 billion U.S. dollars, representing a 3.4% sequential increase at the midpoint. Based on the exchange rate assumption of 1 U.S. dollar to 28.75 NT dollars, Growth margin is expected to be between 51.5% and 53.5%. Operating margin between 40.5% and 42.5%. Now I will hand over to the call to CC for his key messages.

Thank you, Wendell. Good afternoon, everyone. We hope everybody is staying safe and healthy during this time. Now let me start with our near-term demand and inventory. We concluded our third quarter with revenue of NP 356.4 billion, or US dollar 12.1 billion, which was above our guidance, mainly due to better demand across all our platforms than our forecast three months ago. Moving into fourth quarter 2020, We expect our sequential growth to be supported by strong demand for our industry-leading 5-nanometer technology, driven by 5G smartphone launches and HPC-related applications. On the inventory front, we forecast our fabulous customers' overall inventory to exceed the year above the seasonal level, as the supply chain continues to make efforts to ensure supply chain security and actively prepare for the new 5G smartphone launches. Looking ahead, we expect our customers' overall inventory to remain above the historical seasonal level for a longer period of time, given the industry's continued need to ensure supply chain security amid its the lingering uncertainties. For the full year of 2020, although COVID-19 continues to bring some level of impact to the global economies, we also observe that COVID-19 is accelerating digital transformation, while 5G and HPC-related applications continue to drive semiconductor content enrichment. We now forecast the overall semiconductor market, excluding memory, to increase mid-single-digit percentage, while factory industry growth is expected to be close to 20% year-over-year. For TSMC, our technology leadership position enables us to capture the industry megatrend of 5G and HPC We expect to outperform the fund tree revenue growth and grow by about 30% in 2020 in U.S. dollar terms. Next, let me talk about our N5 ramp-up and N4 progress. TSMC's N5 is the fund tree 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 to further enhance our leadership in EUV technology. Due to the robust demand from 5G smartphones and HPC applications, we reaffirm N5 will contribute about 8% of our wafer revenue in 2020. and we expect even higher percentage in 2021. N4 will leverage the strong foundation of N5 to further extend our 5-nanometer family. N4 is a straightforward migration from N5 with compatible design rules while providing further performance, power, and density enhancement for the next wave 5-nanometer products. N4 risk production is targeted for 4Q 2021 and volume production in 2022. With our continuous technology enhancement, we expect our 5nm family to be a large and long-lasting node for TSMC. Now I will talk about our N3 status. N3 will be another 4-node straight from our N5. with up to 70% logic density gain, up to 15% performance gain, and up to 30% power reduction as compared with N5. We have chosen thin-thread transistor structure for our N3 technology to deliver the best technology maturity, performance, and cost for our customers. Our N3 technology development is on track, with good progress, and we will offer complete platform support for both mobile and HPC applications. Reproduction is scheduled in 2021, and volume production is targeted in second half of 2022. Our 3 nanometer technology will be the most advanced foundry technology in both PPA and transistor technology when it is introduced. Thus, we are confident our 3 nanometer will be another large and long-lasting node for TSMC. Finally, I'll talk about the TSMC 3D fabric. TSMC has developed an industry-leading and comprehensive wafer-level 3D IC technology roadmap to enhance system-level performance. Our differentiated chiplets and heterogeneous integration technologies drive better power-efficient and smaller form factor benefits for our customers while shortening their time to market. These technologies, including chip-staking solutions such as SOIC, as well as advanced packaging solutions such as Info and Coworks, we are consolidating these offerings under one umbrella and naming it TSMC 3D Fabric. As the industry continues to seek innovations to enhance system-level performance, 3D Fabric will complement our advanced technology to unleash our customers' innovation. We expect revenue from our back-end services, which include both Advanced packaging and testing to grow at a rate slightly above the corporate average in the next few years. Now let me turn the microphone over to Wendell.