Taiwan Semiconductor Manufacturing Company Ltd.

So we will use English throughout. Please excuse us. Good afternoon, everyone, and welcome to TSMC's third quarter 2021 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 2021, followed by our guidance for the fourth quarter 2021. Afterwards, Mr. Huang and TSMC's CEO, Dr. C.C. Wei, 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 on 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. Third quarter revenue increased 11.4% sequentially in NT terms, or 12% in dollar terms. Our third quarter business was driven by strong demand across all four growth platforms, which are smartphone, HPC, IoT, and and automotive-related applications. Gross margin increased 1.3 percentage points sequentially to 51.3%, mainly due to the improvement in back-end profitability and a more favorable technology mix. Operating margin increased 2.1 percentage points sequentially to 41.2%, mainly due to better operating leverage. Overall, our third quarter EPS was 6.03 NT, and ROE was 30.7%. Now let's move on to the revenue by technology. 5 nanometer process technology contributed 18% of wafer revenue in the third quarter, while 7 nanometer accounted for 34%. Advanced technologies, which are defined as 7 nanometer and below, accounted for 52% of wafer revenue. Now moving on to revenue contribution by platform. Smartphone increased 15% quarter over quarter to account for 44% of our third quarter revenue. HPC increased 9% to account for 37%. IoT increased 23% to account for 9%. Automotive increased 5% to account for 4%, and DCE decreased 2% to account for 3%. Moving on to the balance sheet, we ended the third quarter with cash and marketable securities of 976 billion NT or equivalent 35 billion U.S. dollars. On the liability side, current liabilities increased 8 billion NT mainly due to the increase of $24 billion in accounts payables and the increase of $6 billion in dividend payable, partially offset by the decrease of $21 billion in short-term loans. Long-term interest-bearing debt increased by $50 billion NT, mainly as we raised $49 billion corporate bonds during the quarter. On financial ratios, Accounts receivable turnover days decreased two days to 40 days, while days of inventory remained at 85 days. Now let me make a few comments on cash flow and CAPEX. During the third quarter, we generated about 319 billion NT in cash from operations, including some customer prepayments. Spent $189 billion in CAPEX and distributed $65 billion for fourth quarter 20 cash dividend. Short-term loans decreased 18 billion, while bonds payable increased by 49 billion. Overall, our cash balance increased 106 billion to 854 billion at the end of the quarter. In U.S. dollar terms, our third quarter capital expenditures totaled 6.77 billion U.S. dollars. I have finished my financial summary. Now let's turn on to our fourth quarter guidance. Based on the current business outlook, we expect our fourth quarter revenue to be between $15.4 billion and $15.7 billion, which represents a 4.5% sequential increase at the midpoint. Based on the exchange rate assumption of $1 to 28NT, Gross margin is expected to be between 51% and 53%, operating margin between 39% and 41%. On July 12, we announced we have completed the purchase of 5 million doses of vaccine as part of our efforts to help fight against COVID-19 pandemic in Taiwan. We recognized a small portion of the vaccine donation expense in the third quarter, and the majority of it will be recognized in the fourth quarter, which will have around one percentage point impact on our operating margin. This concludes my financial presentation. Now, let me turn to our key messages. I will start by making some comments on our 2021 capital budget. Every year, our CAPEX is spent in anticipation of the growth that will follow in future years. We are witnessing a structural increase in underlying semiconductor demand underpinned by the industry megatrends of 5G-related and HPC applications. In order to support our customers' growth and meet the increasing demand for our advanced and specialty technologies in the next several years, we have budgeted our full-year 2021 CAPEX to be around $30 billion. Next, let me talk about our profitability. Our third-quarter gross margin increased 1.3 percentage points sequentially to 51.3%, mainly due to better back-end profitability and technology mix. Based on the exchange rate assumption of $1 to 28 NTN, we have just guided fourth quarter 2021 gross margin to be 52% at the midpoint. The midpoint of our fourth quarter gross margin guidance also implies that our full year 2021 gross margin is expected to be higher than 50%, despite the rapidly rising depreciation cost, the dilution from M5 ramp, and the unfavorable foreign exchange rate in 2021 as compared to 2020. As we have discussed before, six factors determine TSMC's profitability. Leadership technology development and ramp-up, pricing, cost, capacity utilization, technology mix, and foreign exchange rate, which is not controllable. Taking all these factors into consideration, we believe a long-term growth margin of 50% and higher is achievable. Now let me turn the microphone over to C.C.

Thank you, Wendell. We hope everybody is staying safe and healthy during this time. First, let me start with our near-term demand and inventory. We concluded our third quarter with revenue of NT$414.7 billion, or U.S. dollar 14.9 billion, driven by strong demand across all four growth platforms, which are smartphone, HPC, IoT, and automotive-related applications. Moving into fourth quarter 2021, we expect our sequential growth to be supported by strong demand for our industry-leading 5-nanometer technology. Based on the midpoint, of our fourth quarter revenue guidance, our full year 2021 revenue is expected to grow about 24% year-over-year in U.S. starter term. On the inventory front, we continue to expect our customers and the supply chain to gradually prepare higher level of inventory in the second half of this year as compared to the historical seasonal level. Given the industry's continued need to ensure supply security, we expect the supply chain to maintain a higher level of inventory for a longer period of time. In the near term, we continue to observe short-term imbalances due to interruptions in the supply chain brought about by COVID-19. We also continue to observe the structural increase in long-term demand underpinned by the industry megatrends of 5G and HPC-related applications, and the higher silicon content in many end devices, including automotive, PCs, servers, networking, and smartphones. While the short-term imbalances may or may not persist, we believe our technology leadership will enable TSMC to capture the strong demand for our advanced and specialty technologies, and we expect our capacity to remain tight in 2021 and throughout 2022. Next, let me talk about TSMC's long-term growth driver and return. We are entering a period of higher structural growth. The multi-year megatrend of 5G and HPC-related applications are expected to fill massive requirements for computation power and prepare greater need for energy-efficient computing, which demands the use of leading-edge technologies. These megatrends will not only spur unit growth, but also drive increasing semiconductor content in HPC smartphone, automotive, and IoT applications. COVID-19 has also fundamentally accelerated the digital transformation, making semiconductors more pervasive and essential in people's lives. With our technology leadership, manufacturing excellence, and customer trust, TSMC is better positioned to capture the growth from the favorable industry megatrend with our differentiated technologies. To address the structural increase in the long-term market demand profile, TSMC is working closely with our customers to plan our capacity and investing in leading-edge and specialty technologies to support their demand. Our capital investment decisions are based on four disciplines, technology leadership, flexible and responsive manufacturing, retaining customers' trust, and earning the proper return. At the same time, we face manufacturing cost challenges due to increasing process complexity at leading node, new investment in mature nodes, expansion of our global manufacturing footprint, and rising material and basic commodity costs. As we continue to work closely with our customers to support their growth, our pricing strategy will remain strategic, not opportunistic, to reflect our value creation. We will also continue to work diligently with our suppliers to deliver and cause improvement. Even as we shoulder a greater burden of investment for the industry, By taking such actions, we believe we can achieve a proper return that enables us to invest to support our customers' growth and deliver long-term profitable growth with 50% and higher gross margin for our shareholders. Now let me talk about our Japan Fair Plan. We are expanding our manufacturing footprint to sustain and enhance our competitive advantage in providing industry-leading technologies, the world's largest logic capacity, efficient and cost-effective manufacturing, and to better serve our customers. Our global manufacturing expansion strategy is based on customers' needs, business opportunities, operating efficiency, and cost economic considerations. After conducting due diligence, we announced our intention to build a specialty technology fab in Japan, subject to our board of directors approval. We have received a strong commitment to support this project from both our customers and the Japanese government. This fab will utilize 2228 nanometer technology for semiconductor wafer fabrication. Flap construction is scheduled to begin in 2022 and production is targeted to begin in late 2024. Further details will be provided subject to the board approval. We believe the expansion of our global manufacturing footprint will enable us to better serve our customers' needs and the rich global talent while earning the proper return from our investments and deliver long-term profitable growth for our shareholders. Finally, I will talk about N3 and N3E status. Our N3 technology will use FinFET transistor structure to deliver the best technology maturity, performance, and cost for our customers. Our N3 technology development is on track. We have developed complete platform support for both HPC and smartphone applications. N3 risk production is scheduled in 2021, and production will start in the second half of 2022. We continue to see a high level of customer engagement at N3 and expect more new tap-outs for N3 for the first year as compared with N5. We also introduced N3E as an extension of our N3 family. N3E will feature improved manufacturing process window with better performance, power, and yield. Volume production of N3E is scheduled for one year after N3. Our 3-nanometer technology will be the most advanced foundry technology in both PPA and transistor technology when it is introduced. With our technology leadership and strong customer demand, we are confident that N3 family will be a large and long-lasting node for TSMC. This concludes our key message. Thank you for your attention.