Taiwan Semiconductor Manufacturing Company Ltd.

Good afternoon, everyone. I am Su Zhikai from Taichi Deng Law Firm. Welcome to the first legal explanation meeting of Taichi Deng Law Firm in 2022. In order to prevent the spread of the COVID-19 epidemic, this legal explanation meeting is still held by telephone meetings. Due to the fact that this law will be broadcast to global investors at the same time, Good afternoon, everyone, and welcome to TSMC's first quarter 2022 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 dialing 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 first quarter 2022, followed by our guidance for the second quarter 2022. Afterwards, Mr. Huang and TSMC 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 TSNC CFO, Mr. Wendell Huang, for the summary of operations and the current quarter guidance.

Thank you, Jeff. Good afternoon, everyone. Thank you for joining us today. My presentation will start with financial highlights for the first quarter 2022. After that, I will provide the guidance for the second quarter. First quarter revenue increased 12.1% sequentially in NT terms, or 11.6% in US dollar terms, as our first quarter business was supported by strong HPC and automotive-related demand. First quarter gross margin increased 2.9 percentage points sequentially to 55.6%, mainly as we continue to sell our value and improve costs. operating margin increased 3.9 percentage point sequentially to 45.6%, primarily due to lower vaccine donation expense as compared to the fourth quarter. Overall, our first quarter EPS was 7.82 NT and ROE was 36.2%. Now, let's move on to revenue by technology. Five nanometer process technology contributed 20% of wafer revenue in the first quarter, while 7nm accounted for 33%. Advanced technologies, which are defined as 7nm and below, accounted for 50% of wafer revenue. Now, moving on to revenue contribution by platform. All six platforms increased in the first quarter. Smartphone increased 1% quarter over quarter to account for 40% of our first quarter revenue. HPC increased 26% to account for 41%. IoT increased 5% to account for 8%. Automotive increased 26% to account for 5%. And DCE increased 8% to account for 3%. Moving on to balance sheet. We ended the first quarter with cash and marketable securities of 1.3 trillion NT. On the liability side, current liabilities increased by 83 billion NT, mainly due to the increase of 63 billion in accrued liabilities and others, and the increase of 30 billion in short-term loans, partially offset by the decrease of 21 billion in accounts payable. Long-term interest-bearing debt increased by 19 billion NT as we raised 20 billion of corporate bonds during the quarter. On financial ratios, accounts receivable turnover days decreased 2 days to 38 days, while days of inventory remained at 88 days. Now let me make a few comments on cash flow and CAPEX. During the first quarter, we generated about 372 billion NT in cash from operation, spent 262 billion in CAPEX, and distributed 71 billion for second quarter 21 cash dividend. Bonds payable increased by 20 billion due to the bond issuances. Overall, our cash balance increased 87 billion to 1.2 trillion at the end of the quarter. In U.S. dollar terms, our first quarter capital expenditures totaled 9.38 billion. I have finished my financial summary. Now let's turn to our current quarter guidance. Based on the current business outlook, we expect our second quarter revenue to be between 17.6 billion and $18.2 billion, which represents a 1.9% sequential increase at the midpoint. Based on the exchange rate assumption of $1 to 28.8 NT, gross margin is expected to be between 56% and 58%, operating margin between 45% and 47%. In addition, we maintain our 2022 capital budget to be between $40 and $44 billion. This concludes my financial presentation. Now let me turn to our key messages. I will start by making some comments on our first quarter and second quarter profitability. As a reminder, six factors determine TSMC's profitability. Leadership, technology, development, and ramp-up. pricing, cost reduction, capacity utilization, technology mix, and foreign exchange rate. As we discussed earlier, our first quarter gross margin increased by 290 basis points sequentially to 55.6%, mainly due to cost improvement and value selling efforts and a more favorable foreign exchange rate. Our gross margin guidance provided three months ago, was based on exchange rate assumption of $1 to 27.6 NT, whereas the actual first quarter exchange rate was $1 to 27.95 NT. This created about 50 basis point difference in our actual first quarter gross margin versus our original guidance. We have just guided our second quarter gross margin to further increase by 140 basis points sequentially to 57% at the midpoint, primarily due to a more favorable exchange rate assumption of $1 to 28.8 NT, which brings more than 100 basis points gross margin tailwind and continue cost improvement and value selling efforts. Looking ahead on our profitability, we continue to face challenges from rising inflationary costs, increasing process complexity of leading nodes, new investments in mature nodes and overseas FAB extensions. Despite the manufacturing cost challenges and excluding the impact of foreign exchange rate of which we have no control over, Taking the other five factors into consideration, we continue to believe a long-term growth margin of 53% and higher is achievable. Now let me turn the microphone over to CC.

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 first quarter with revenue of NT$491.1 billion, or US$17.6 billion, which is above the high end of our guidance, mainly due to better demand from smartphone and automotive-related applications than our forecast three months ago. And customers continue to need to ensure supply security with the emergency of COVID-related uncertainties. Moving into second quarter 2022, we expect our business to be supported by HPC and automotive-related demand, partially offset by smartphone seasonality. On the inventory front, we expect the supply chain to continue to maintain a higher level of inventory as compared to the historical seasonal level for a longer period of time, prolonged by recent COVID-related supply chain disruptions and uncertainties brought about by geopolitical tensions. On the demand side, despite the recent macro-related uncertainties, we continue to observe the structural increase in long-term semiconductor demand underpinned by the industry megatrend of 5G and HPC-related applications. This multi-year megatrend will support modest device unit volume growth and, much more importantly, drive substantial semiconductor content enrichment in many end devices across HPC, smartphone, automotive, and IoT applications. With our technology leadership, TSMC is well positioned to capture the strong structural demand with our advanced and specialty technologies, and we expect our capacity to remain tight throughout 2022. 2022 will be another strong growth year for TSMC, and we expect our full-year growth to likely be at or exceed the high end of our guidance range of mid to high 20% in U.S. dollar terms. Next, given the recent constraint in the tool supply chain, let me talk about the tool delivery update. As a major player in the global semiconductor supply chain, TSMC works closely with all our tool suppliers to plan our KPEX and capacity in advance. However, like many other industries, our suppliers are facing great challenges in their supply chain from the continued impact of COVID-19, which are creating labor, component, and chip constraints in their supply chains, and extending toward delivery time for both advanced and mature nodes. TSMC is working closely with our suppliers and taking several actions to do our part to help address the supply chain challenges. We have increased regular high-level communications to trace the progress. We have sent several teams outside to support our suppliers and are working closely with them to identify critical chips that are gauging toward delivery. We are working with our customers to prioritize our wafer capacity to support those critical chips to help mitigate the chip constraint issue. By taking such actions, we do not expect any impact to our 2022 capacity plan, and we continue to work closely with our suppliers on 2023 and beyond. so that we can ramp up our capacity to meet customers' demand. Now I will talk about the material supply update. TSMC operates a well-established enterprise risk management system to identify and assess all relevant risks and proactively implement risk mitigation strategies. In terms of material supply, TSMC's DSMC's strategy is to continuously develop multi-source supply solutions to build a well-diversified global supplier base and to improve the local supply chain. For specialty chemicals and gases, Including NIO and Jiong, we source from multiple suppliers in different regions and we have prepared a certain level of inventory stock on hand. We are also working closely with our suppliers to further strengthen the resilience and the sustainability of our supply chain. We do not expect any impact on our operations for materials supply. Finally, let me talk about N3 and N3E schedules. Our N3 technology will use windfair transistor structure to deliver the best technology maturity, performance, and cost for our customers. Our N3 schedule is unchanged. and well on track for volume production in second half of 2022 with good yield. We expect the ramp of N3 to be driven by both HPC and smartphone applications. We continue to see a high level of customer engagement at N3 and expect more new tape-outs for N3 for the first year as compared with N5 and N7. N3E will further extend our N3 family with enhanced performance, power, and yield. We also observe a high level of customer engagement at N3E, and volume production is scheduled for one year after N3. Our 3 nanometer technology will be the most advanced of 1.3 technology in both PPA and transistor technology when it is introduced. In terms of profitability, the initial outlook for new node is always challenging and the increasing process complexity of leading nodes such as N3 bring even greater challenges to achieving the corporate average gross margin in seven to eight quarters. Particularly as our corporate profitability has improved with long-term gross margin target of 53% and higher. As we have done at prior nodes, we will continue to work diligently with our cost improvement and value-setting effort to ensure that we earn the right profitability and return on N3. With our technology leadership and strong customer demand, we are confident that our N3 family will be another large and long-lasting node for TSMC. This concludes our key message, and thank you for your attention.