Taiwan Semiconductor Manufacturing Company Ltd.

Good afternoon, everyone, and welcome to TSMC's fourth 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 fourth quarter 2020, followed by our guidance for the first quarter 2021. 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 the 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 the current quarter guidance.

Thank you, Jeff. Happy New Year, everyone. Thank you for joining us today. My presentation will start with the financial highlights for the fourth quarter and a recap of full year 2020. After that, I will provide the guidance for the first quarter of 2021. Fourth quarter revenue increased 1.4% sequentially in NT terms, or 4.4% in U.S. dollar terms, as we saw strong demand for our 5 nanometer technology, driven by 5G smartphone launches and HPC-related applications. Gross margin increased 0.6 percentage points sequentially to 54%, mainly thanks to cost improvement, partially offset by the margin dilution from 5 nanometer ramp and an unfavorable exchange rate. Our utilization rate in the fourth quarter was at an extremely high level, partially due to more production output, of which some of the wafers will be shipped in the first quarter. Total operating expenses slightly decreased by 2.6 billion NT. Therefore, operating margins increased by 1.4 percentage points, sequentially to 43.5%. Overall, our fourth quarter EPS was 5.51 NT, and ROE was 31.4%. Now let's move on to the revenue by technology. 5 nanometer process technology contributed 20% of wafer revenue in the fourth quarter, while 7 nanometer and 16 nanometer contributed 29% and 13% respectively. Advanced technologies, which are defined as 16 nanometer envelope, accounted for 60% of wafer revenue. On a full year basis, 5 nanometer revenue contribution came in at 8% of 2020 wafer revenue. 7 nanometer was 33%, and 16 nanometer was 17%. Advanced technologies accounted for 58% of total wafer revenue, up from 50% in 2019. Now, moving on to the revenue contribution by platform. Smartphone increased 13% quarter over quarter to account for 51% of our fourth quarter revenue. HPC decreased 14% to account for 31%. IoT decreased 13% to account for 7%. Automotive increased 27% to account for 3%. Digital consumer electronics increased 29% to account for 4%. On a full year basis, smartphone, HPC, and IoT saw strong growth of 23%, 39%, and 28% respectively. DCE also increased 2%, while Alto decreased 7% in 2020. Overall, Smartphone accounted for 48% of our 2020 revenue. HPC accounted for 33%, and IoT accounted for 8%. Moving on to the balance sheet, we ended the fourth quarter with cash and marketable securities of $791 billion NT. On the liability side, current liabilities increased by $29 billion NT. mainly due to the increase of $57 billion in accounts payable and the increase of $38 billion in accrual liabilities and others, offset by the decrease of $69 billion in short-term loan. Long-term interest-bearing debt increased by $28 billion NT, mainly as we raised $30.5 billion of corporate bonds during the quarter. On financial ratios, Accounts receivable turnover days decreased one day to 39 days. Days of inventory increased 15 days to 73 days, primarily due to the ramp of leading nodes. Now, let me make a few comments on cash flow in CAPEX. During the fourth quarter, we generated about $259 billion NT in cash from operations, spent $89 billion in CAPEX and distributed $65 billion for first quarter 20 cash dividend. Short-term loans decreased by $67 billion, while bonds payable increased by $30.5 billion due to the bond issuances. Overall, our cash balance increased $56 billion to $660 billion at the end of the quarter. In U.S. dollar terms, Our fourth quarter capital expenditures total $3.2 billion. Now let's look at the recap of our performance in 2020. We saw a strong growth in 2020 as our technology leadership position enabled us to capture the industry megatrends of 5G and HPC. Our revenue increased 31.4% in U.S. dollar terms, and 25.2% in NT dollar terms to reach 1.34 trillion NT. Gross margin increased 7.1 percentage points to 53.1%, primarily due to a higher level of capacity utilization and cost improvement. Operating margin increased 7.5 percentage points to 42.3%. Overall, Full-year EPS increased 50% to 19.97 NT. On cash flow, we spent 507 billion NT in CAPEX while we generated 823 billion in operating cash flow and 315 billion in free cash flow. We also paid 259 billion NT in cash dividends in 2020. I have finished my financial summary. Now let's turn to our first quarter guidance. Based on the current business outlook, we expect our first quarter revenue to be between 12.7 billion and 13 billion U.S. dollars, which represents a 1.3 percent sequential increase at the midpoint. Based on the exchange rate assumption of 1 U.S. dollar to 27.95 NT, Gross margin is expected to be between 50.5 and 52.5%, operating margin between 39.5 and 41.5%. The sequential decline in first quarter gross margin is mainly due to a slightly lower utilization rate in the first quarter, albeit it is still staying at the high level, as well as an unfavorable foreign exchange rate. Now I would like to talk about the tax rate. We expect our 2020 tax rate to be in the range of 10% to 11%. And this will be equally applied to all four quarters of the year. This concludes my financial presentation. Now I would like to start with the key messages for the quarter. I will start by making some comments on our capital budget in 2020 and 2021. Every year, our CAPEX is invested in anticipation of the growth that will follow in the next few years. Our capital investment decisions are based on four disciplines, technology leadership, flexible and responsive manufacturing, retaining customers' trust, and earning the proper return. In 2020, We spent 17.2 billion US dollars to capture the strong demand for our advanced technologies and support our customers' capacity needs. In order to meet the increasing demand for our advanced and specialty technologies and further support of customers' capacity needs, our 2021 capital budget is expected to be between 25 and 28 billion US dollars. Out of the 25 to 28 billion KPACs for 2021, about 80% of the capital budget will be allocated for advanced process technologies, including 3 nanometer, 5 nanometer, and 7 nanometer. About 10% will be spent for advanced packaging and mask making, and about 10% will be spent for specialty technologies. Next, let me talk about our capital intensity outlook. As we have said previously, our long-term capital intensity is in the mid-30s percentage range. However, when we enter a period of higher growth, our CAPEX needs to be spent ahead of the revenue growth that will follow, so our capital intensity will be higher. For example, during 2010 to 2014, our CAPEX spending increased threefold as compared to the previous few years, and our capital intensity ranged between 38% to 50%. Because of the increased investment, we were able to capture the growth opportunities and deliver about 15% growth category from 2010 to 2015. Today, as we enter another period of higher growth, We believe a higher level of capital intensity is appropriate to capture the future growth opportunities. We now expect a higher growth category in the next few years, driven by the industry megatrends of 5G and HPC-related applications, which CC will discuss in more detail. We also expect this higher level of capital investment to continue to drive our technology leadership enable flexible and responsive manufacturing, and earn customers' trust. While our leading nodes' capital costs continue to increase due to increasing process complexities, it is expected to be compensated by continuing to sell our value, which includes the value of our technology, service, quality, and capacity support, and diligently working on cost improvements. With this level of CAPEX spending in 2021, we reiterate that TSNC remains committed to a sustainable cash dividends on both an annual and quarterly basis. Now let me turn the microphone over to CC.

Thank you, Wendell. Hi, everyone. This is CC Wei. Good afternoon. 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 fourth quarter with revenue of NT $361.5 billion, or U.S. dollar $12.7 billion, which was in line with our guidance, mainly due to strong demand for our 5 nanometer technology, driven by 5G smartphone launches and HPC-related applications. Concluding 2020, the semiconductor industry, excluding memory cores, was about 10%, while foundry industry increased about 20% year-over-year. TSMC's revenue grew 31.4% year-over-year in U.S. dollar term. Moving into fourth quarter 2021, our business continues to be strong, supported by HPC-related demand, recovery in the automotive segment, and a milder smartphone seasonality than in recent years. On the inventory front, our fabulous customers' overall inventory was digested throughout the fourth quarter. We now expect it to approach the historical season exceeding 2020, better than our forecast three months ago. We observe that the supply chain are changing their approaches to inventory management amidst lingering macro uncertainties. Looking ahead, we expect the supply chain and our customers to prepare a higher level of inventory compared to the historical season level for a longer period of time given the industries that continue the need to ensure supply security. Next, let me talk about the automotive supply tightness. The automotive market has been soft since 2018. Entering 2020, COVID-19 further impacted the automotive market. The automotive supply chain was affected throughout the year, and our customers continue to decrease their demand in the third quarter. We only begin to see sudden recovery in the fourth quarter. However, the automotive supply chain is long and complex, while many of our technology nodes has been tied throughout 2020 due to strong demand from our other customers. Therefore, in the near term, as demand from the automotive supply chain is rebounding, The shortage in automotive supply has become more obvious. In TSMC, this is our top priority, and we are working closely with our automotive customers to resolve the capacity support issues. Now I will talk about our 2021 outlook. For the full year of 2021, We forecast the overall semiconductor market excluding memory to grow about 8%, while foundry industry growth is forecast to be about 10%. For TSMC, we are confident we can outperform the foundry revenue growth and grow by mid-teens percentage in 2021 in US dollar term. Our 2021 business will be supported by strong demand for our industry-leading advanced and specialty technologies, where we see strong interest from all four growth platforms, which are smartphone, HPC, automotive, and IoT. Next, let me talk about TSMC's long-term growth outlook. We are entering a period of higher growth The multi-year megatrend of 5G and HPC-related applications are expected to fuel strong demand for our advanced technologies in the next several years. We expect global smartphone units to grow 10% year-over-year in 2021. We forecast the penetration rate for 5G smartphones of the total smartphone market to rise from 18% in 2020 to more than 35% in 2021. We expect the silicon content of a 5G smartphone to continue to increase as compared to a 4G smartphone. We continue to expect faster penetration of 5G smartphone as compared to 4G over the next several years as 5G smartphones benefit from the significant performance, bandwidth, and latency improvement of 5G networks to drive more AI applications and more cloud services. We believe 5G is a multi-year megatrend that will enable a world where digital computation is increasingly ubiquitous, which will fuel the growth of all four of our growth platforms in the next several years. As we enter the 5G era, a smarter and more intelligent world will require massive increases in computation power and greater need for energy-efficient computing and therefore require leading-edge technologies. Thus, HPC is an increasingly important driver of TSMC's long-term growth and the largest contributor in terms of our incremental revenue growth. With our technology leadership, we are well positioned to capture the growth from the favorable industry megatrend. We now expect our long-term revenue growth to be 10% to 15% caker from 2020 to 2025 in U.S. dollar terms. Now I will talk about the N3 status. N3 will be another four-node stride form of N5 with up to 70% logic density gain, up to 15% performance gain, and up to 30% power reduction as compared with 5 nanometer. N3 technology will use FinFET transistor structure to deliver the best technology maturity, performance, and cost for our customers. N3 technology development is on track with good progress. We are seeing a much higher level of customer engagement for both HPC and smartphone application at N3 as compared with N5 and N7 at the similar stage. Reproduction is scheduled in 2021. and volume production is targeting second half of 2022. Our three nanometer technology will be the most advanced foundry technology in both PPA and transistor technology when it is introduced. Thus, we are confident our three nanometer will be another large and long lasting node for TSMC. Finally, I will talk about TSMC 3D fabric. TSMC has developed an industry-leading and comprehensive wave-level 3D IC technology roadmap to enhance system-level performance. Our differentiated chiplet and heterogeneous integration technology drive better power efficiency and smaller form factor benefit for our customers who are shortening their time to market. These technologies include chip-staking solutions such as SOIC, as well as advanced packaging solutions such as Info and Coworks. We observe chiplets are becoming an industry trend. We are working with several customers on 3D Fabric to enable chiplet architecture. SOIC small volume production is targeted in 2022. SOIC is expected to be first adopted by HPC applications where bandwidth performance, power efficiency, and form factor are aggressively pursued. We expect revenue from our back-end services, which include both R1 packaging and testing, to grow at a rate higher than corporate average in the next few years. This concludes our key message. Thank you for your attention.