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.

Thank you, C.C. This concludes our prepared remarks. Before we begin the Q&A session, I would like to remind everybody to please limit your questions to two at a time. to allow all the participants an opportunity to ask their questions. Should you wish to raise your question in Chinese, I will translate into English before our management answers your question. For those of you on the call, if you would like to ask a question, please press the 0 then 1 on your telephone keypad now. Questions will be taken in the order in which they are received. If at any time you would like to remove yourself from the question in queue, please press zero, then two. Now let's begin the Q&A session. Operator, can we please proceed with the first caller on the line?

Yes. The first one to ask questions, Bruce Liu from Goldman Sachs. Go ahead, please.

Hi, thank you for taking my question. Congratulations for the great result. I think the first one is still focused on the micro and inflation concern. How does the GSMC evaluate the impact on the inflation and the geopolitical tension? We understand that GSMC works with customers closely, but most of your customers probably don't have the full picture of ending inflation. At the same time, GSMC has to bear the risk to build the capacity a couple years ahead to make the decision earlier. So, you know, can TSMC provide more colors to strengthen the investor confidence? Do we have any changes on our multi-year capacity expansion plan?

Okay, Bruce, please allow me to summarize your first question. I think Bruce's question is related to the macro environment and inflationary concerns. He wants to know how do we evaluate the impact from inflation and macro environment and also how in terms of there are capacity. Our customers may not have the full clear picture of end demand, but TSMC has to bear the risk of building the capacity multiple years ahead of time. And will the CapEx amplify our volatility? So he wants to know if there's any color, what keeps basically management confident for the CapEx plan and color to strengthen investors' confidence in our CapEx.

Hi Bruce, this is CC Wei. Let me answer your question. You know, as you said, TSMC works closely with our customers to plan capacity, and our CAPEX and capacity expansion plan are actually based on customers' long-term demand profile. Underpinned by the industry megatrend, we do not build capacity based on speculation. In advanced technology node, we have a leading position, and on mature node, Our capacity build to support customer demand for our differentiated specialty technologies. And we focus on building effective capacity, which is capacity that products and produce specialized technology with high yield rather than just plain capacity. Thus, we are confident our capacity built to support our customers, of course, and our utilization and profitability will be sustained.

And then also, how do we, I think, the impact of inflation?

Well, the inflation definitely impact, you know, consumers' buying pattern, but Let me stress down on overall demand under the inflation environment. While the momentum in certain end market segments may slow down or adjust in terms of device units, other end market segments remain strong. In fact, we expect our HPC platform to be TSMC's strongest growing platform in 2022 and the largest contributor to our growth, fueled by the structural megatrend driving increasing need for greater computation power and energy efficient computing. But then more importantly, the increasing silicon content in end devices such as 5G smartphones, PCs, servers, networking and automotive applications are a much more important factor in supporting our strong semiconductor demand. And with our industry-leading technology, we are well-positioned to capture all the opportunities.

Okay, Bruce, does that answer your first question?

Yes, I want to go for the second question. I think in the prepared email, I noticed that there was no mentioning about the end-to-end schedule. Both of your competitors evaluate their schedule for the next generation transistor. Can you comment on TSMC's status for the get-over-run, especially in performance and the RANBAR schedule?

Okay, so I think Bruce's second question, Bruce, please allow me to make sure we got it, is on the N2 schedule. He said that our competitors have commented on their N2 schedule, and Bruce wants to know what is our N2 plan.

Our N2 development is on track, including new transistor structure and progressing to our expectation. We expect our N2 delivery to be the best technology, maturity, performance, and cost for our customers. And we are confident that N2 will continue our technology leadership to support our customer growth. And we still plan the production in 2025.

So the two-year cadence will remain unchanged for N2?

It won't.

I will say thank you.

Okay. Thank you, Bruce. Operator, can we move on to the next participant, please?

The next one to ask questions, Gokul Hadihalan from Chettin Morgan.

Thanks for taking my question. My first question is on N3. Given we are less than one year from N3 mass production start, could we talk a little bit about how should we expect N3 revenues to be ramping up next year? Would it be similar to what we have seen with N5 and N7 with roughly about 10% of next year's revenues being N3? And also, could you talk, I think you highlighted that there would be a little bit more challenge to get N3 to profitability closer to corporate average, given some of the moving parts. Could we elaborate a little bit more on that as well? That's my first question. Thank you.

Okay, Gokul, please allow me to summarize your question. So Gokul's question is really related to N3. He wants to know with the ramp up of N3, what kind of revenue contribution can we expect? Will it be similar to the past patterns of N5 and N7 for about 10% of wafer revenue in the first year? And also, he would like to ask, given CC's comments about process complexity challenges, what is the profitability outlook for N3? Is that correct, Gokul? Okay, maybe Wendell can address.

Yeah, hi, Goku. This is Wendell. It's too early to talk about the revenue contribution as M3 will not begin volume production until second half of 2022 with revenue contribution starting 2023. In addition, as the structural demand underpinned by the industry megatrends is driving growth across all our nodes, the specific percentage of a new node as compared to the historical pattern may be less meaningful in the future. But overall, we are confident that our three nanometer will be the most advanced foundry technology when it is introduced and with the strong customer engagement and tape-out activity, our N3 family will be another large and long-lasting node for TSMC, just like N5 and N7 families. Now, about the gross margin. As C.C. said, the initial outlook for a new node is always challenging, and the increasing process complexity of leading nodes, such as N3, brings even greater challenges, to achieving the corporate average gross margin in seven to eight quarters. And partially also because our corporate profitability has increased. And our new long-term gross margin target of 53% and higher. Now, it is a bit early to say when N3 can reach the corporate average gross margin at this stage. because the volume production hasn't started yet. However, we will continue to work diligently on selling our value and cost improvement to ensure that we earn the right profitability in return. Now, even considering the increasing process complexity of advanced nodes such as M3, we believe our technology leadership, manufacturing and capacity support, and ability to earn our customers' trust will enable us to earn a long-term gross margin of 53% and higher.

Got it. Thank you very much. My second question is on the more mature process technology. Could TSMC give us some view on the industry growth for specialty and mature technologies I think based on the data we look at historically, that has only grown at maybe low to mid-single digit. But right now, we see a lot of capacity being announced from many foundries in these older specialty and mature process technologies, let's say defined as 28 nanometer and above. So, TSMC, talk a little bit about growth rate for these mature process technologies going forward. Is it going to be materially higher than the 3% to 5% that we have seen in the past? In most cases, we have seen older nodes grow for four to five years and then kind of stagnate. Do we see that pattern changing because of some of the content per box or content per device dynamics that you talked about?

Okay, Goku, let me summarize your second question. I think your second question is, Goku's second question is on the mature node and the outlook, growth outlook for mature nodes. His question is, how do we see the growth outlook at mature nodes? In the past, it has grown, in his words, about 3% to 5%. Do we think it can be materially higher than that on the mature nodes, which he defines as 28 nanometer and above?

OK, Goku, we forecast the growth rate of the overall semiconductor X memory industry to accelerate to high single digit percentage level in the next five years as compared to around 4% CAGR in the past 10 years. The higher demand at mature nodes will be driven by structural factors, such as an increase in long-term demand for certain specialty technologies due to the multi-year industry megatrends of 5G and HPC, and increasing silicon content in many end devices, as well as the acceleration of digitalization. TSMC's strategy at Mature Notes is to work closely with our customers to develop specialty technology solutions to meet their requirements and create differentiated and long-lasting value to customers. We believe our differentiated specialty technologies will enable us to capture the structural demand generated from the industry megatrend and continue to support our customers' growth.

Gokul, does that answer your second question?

Yes, thank you.

Okay. Thank you, Gokul. Operator, can we move on to the next caller, please?

Next on to our question, Chandi Chan from Morgan Stanley.

Thanks for taking my question, and congratulations for great results, management. My first question is about the semi-inventory debate. So may I clarify with the CEC that the company still believes that supply chain needs to keep high inventory for several reasons. But, in fact, we are seeing that PC, smartphone OEMs, they are working down channel inventory even today. As you know, that the great big parts, they are working down the channel inventory. So do you think that the high inventory is actually a signal of a weak demand or anything we miss here? Because, in fact, we are seeing consumer tech, you know, inventory, we are seeing a correction. Thank you.

Okay, Charlie, let me summarize your first question. So Charlie's question is on inventory and demand. He wants to know or he notes that the parts of the consumer and demand seem to be weaker or softer than expected. And so how does this also affect our view on the higher level of inventory? Sort of our view, I guess, Charlie, your question is really what is our view on the end demand given potential weakness in consumer and market segments? And then what is our view on inventory? Is that correct?

Yeah, yeah. And if a demand is indeed deteriorating, do you think actually inventory level should come down? Thank you.

Hi, Charlie. This is CQA. You are right. Some of the end market segment actually we start to see a little bit soft in these days for those smartphone PC or tablets, those. But as I indicate, other end market segment remain very strong. All right. And so if you look at some of the unbalance in the supply chain market, particularly in the MCU or the power management side, we still see very strong demand. And also because of those kinds of supply chain disruption by the emergence of COVID-19 uncertainty. So we continue to observe that our customer will maintain a higher level of inventory for a longer period of time. We continue to observe that, and as a result, actually, for TSMC, our capacity remains very tight throughout the whole year of 2022.

I see. Okay, so it's a more... specific to those industrial automotive industry instead for consumer tech. Am I right about your comments about inventory level?

Yes, you are right. In fact, the very important thing is structural megatrend. So for the great, you know that my customer require a greater computation power and energy efficient computing. and which is actually the strong point of TSMC's technology.

I see. Thank you. And my second question is about your N3 progress. So we continue to hear lots of good news and anecdotes about your N3E. It's actually progressing very, very well. So do you think there's a possibility that – you could actually pull in your N3E for maybe one or two quarters to address customers' demand. So I think it could be a win-win for both DSMC and your customers. Do you see that kind of possibility and maybe convert some N3B projects to N3E earlier? Thank you.

Okay, so Charlie's second question is on N3E. He notes the progress is going very well. So his question is, is there a possibility to bring in the timing of N3E to earlier, and will we convert N3 capacity to N3E?

Exactly. Thank you.

Okay, Charlie. You are right again. I mean, our N3E, the result is quite good. And the progress actually is ahead of our schedule. And pull-in, yes, we are considering that. So far, I still did not have very solid data to share with you that how many months we can pull-in. But, yes, it's in our plan. And also the capacity. Since we have a very strong demand on the N3, N3E, we are still planning to have enough capacity to support our customer.

That's a great note. Thank you. I will be back to the queue.

All right. Thank you, Charlie. Operator, can we move on to the next participant, please?

Next one to ask questions, Randy Abrams from Credit Suisse.

Okay, yes. No, thank you. My first question, I wanted to follow up on your change to Outlook, where you took up from mid to high 20s to now high 20s or above. Could you discuss, because it is in light of the macro and the softening you've seen on consumer, could you discuss the factors for the change, how much might be attributed to market share technology changes, or how much to a certain platform. If you could give an update on your view of the different platforms, if certain platforms drove it. And did you see any downward change on any of the four platforms?

Okay, thank you, Randy. So let me summarize. Randy's first question is about our full-year outlook, which as Cece mentioned in his key messages, that we expect to be likely to be at or exceed the high end of our guidance of mid to high 20s. So Randy's question is, what is driving the higher or better full-year outlook, given the macro environment looks a bit more shaky? Is it technology? Is it market share, et cetera? And what is the outlook by platform?

Randy, you know, we expect our HPC platform to be TSMC's strongest growing platform this year and the following years. And it will be the largest contributor to our growth. And this is all because of a structural megatrend driving increasing need for greater computation power and energy efficient computing. As I said, these kind of technologies happen to be TSMC's strong point. So that all I can share with you is that we have a competence that will exceed or add on a high end of our guidance.

Okay. And a follow-up that's on the screen. Did you change your view on – oh, yeah. Yeah, I also wanted to know the other platforms. Did you change your view on smartphone or 5G kind of things?

Now, for this year, Randy, we can share with you that we expect HPC and automotive to grow faster than the corporate average. IoT, similar, and smartphone approaching the corporate average.

For the full year.

For the full year, yeah.

Okay, so it sounds like not much change. Hey, my second question, it more ties to there's a lot of fear about do we head into the downturns. or a slowdown, if you could give the other way in terms of flexibility on expansion plans, if hopefully we don't, but if we go into a more of a recession, how much flexibility with your FAB plans across U.S., Taiwan, Japan, and Nanjing? And on the other side, with the prepayments and deposits, is there flexibility on timing of shipments like full flexibility for customers if they need to respond to slowing demand.

Okay. So, Randy, second question is about, you know, if there's a downturn or a slowdown, will this change or how flexible is the timeline for our new FAB and capacity expansion plans? whether in Taiwan, Japan, and overseas, if the outlook changes for the worse, and what is the flexibility of our prepayments with customers if there was a downturn or slowdown?

Randy, this is CC Wei. Our KPAX and capacity expansion plan are always based on our customers' long-term demand profile. This is underpinned by industry megatrends As long as the megatrend continues, which we believe it will, we will continue to invest to capture the growth that will follow. So even a short term with the possibility of downturn, which we don't think it will impact too much to TSMC, if even it happens, we will continue our plan and we have confidence to invest to capture the growth that will follow.

Okay, and on the customer side for their deposits and capacity they're locking in?

Randy, actually, we believe signing contracts to guarantee the loading in the future is not a common practice. We focus really on technology leadership, manufacturing excellence, and earning customer trust as a more effective way to secure customer commitments. Now, we work closely with our customers to plan the capacity, including receiving their prepayments for capacity support. And we will continue to work with them to determine the best way to support them.

Yeah, Randy. So I think the answer for customer side and capacity side is pretty aligned or similar. Does that answer your second question?

Yeah, I mean, I guess just, like, in the past, it was the flexibility. Like, we saw the slowdown in utilization. So, I mean, I would think it still worked with customers on their plans if they need to reschedule. Because we've seen in the past, like, if they have to adjust their utilization. Like, I don't know if anything's changed in the model on that element.

No, no, nothing changed in the model, yeah.

Okay, great. Okay, thanks a lot.

Okay. Okay. Thank you, Randy. Operator, can we move on to the next caller, please?

Next one, Sunny Lin, UBS. It's your turn now.

Thank you. Good afternoon. Thank you for taking my questions and congratulations on the strong performance. So my first question is on the pricing strategy for you going forward. I mean, if we look at this up cycle, the tight supply and the strong restocking demand have supported a pretty meaningful price increase for farm to industry and TSMC throughout 2021. So from here, would you look to further raise price for some of the technologies to justify rising cost of expansion? And on the other hand, if the supply demand start to normalize, do you think there could be any risk to pricing?

Okay. So, Sunny, let me – please allow me to summarize your first question. Her question is on pricing on both sides, sort of in an up cycle. But as we face cost challenges, will TSMC consider to further raise the price? And then on the flip side, on the other hand, if demand were to soften, I think, Sunny, the other hand would be risk to pricing to lower price. Is that correct?

That's right. Thank you, Jeff.

Okay, Sunny, this is Xixi Wei. We do not comment on our pricing detail, but let me assure you that our pricing strategy is strategic, not optimistic or short-term. And customers understand our effort to support their growth. As you said that if there is a downturn coming and on the flip side, is the TSMC going to drop our price? The answer is no. Did I answer your question?

Thank you for the assurance. That's very helpful. So my second question is to follow up on the N3 wrap up. So just trying to get a bit of a color on 2023, understand the demand is pretty robust, but when we think about the potential revenue contribution for 2023, With the length of equipment supply and delivery time, would that be a capping factor for 3 nanometer to exceed the typical 10% revenue contribution for next year? Or do you think there's still some time for you to try to accelerate the equipment expansion?

Okay, so Sunny's second question is on N3 and the ramp-up. Her question, once again, is sort of around the revenue contribution of N3, and specifically she is asking whether the equipment supply or some of the tool delivery issues would affect the ramp-up of N3 in next 2023 and thus the revenue contribution.

Well... You know, we did see some of the issues on the tool delivery, and we're still working on it. As I said in the statement, we are working on 2023 right now, and we hope that we won't have any big issues. But right now, we are not ready yet to share with you how much we can resolve the issue. But we have strong demand. We try to build enough capacity for our customer, and we are working with our equipment supplier to get enough tools to expand our capacity.

Got it. Thank you very much, C.C.

Okay. Thank you, Sunny. Operator, can we move on to the next participant, please?

Next one to ask questions, Rick C. from Daiwa.

Yeah, hi, good afternoon, and thank you so much for taking my question. My first question is regarding your revenue guidance for this year. I think you're saying that it should be at or even exceed mid to high 20s growth guidance in US dollar terms. So in that case, are you revising your forecast for the global semi-income dollar as memory for this year and also the global foundry market forecast for this year?

Okay, Rick's first question is about our 2022 outlook. Sorry, Rick, let me try to summarize. So Rick notes that CC said our 2022 growth will likely be at or exceed the high end of our revenue guidance of mid to high 20s. So he wants to know what does this mean for our forecast or expectation for the semiconductor X memory and foundry markets.

So let me answer your question. So far, we are confident on TSMC's performance, but on the whole industry, semiconductors, foundry industry, we remain that it will be around 20% year-over-year growth. All others, we are still trying to understand the status and, you know, not be very ready to share with you yet.

Okay, thank you so much. So basically the strength is more TSMC company specific, right?

That's because our leadership in the technology and you are right.

Okay, great. Thank you so much, CC. And second question. I think your customers have been waiting in a long queue since last year. And I know this year there's some macro issue, there's some change, and you mentioned some demand slowdown, but some others still very strong. So I assume for any customers releasing capacity will be completely filled up by others. But are you saying the queue is shortening? Or if that's the case, when do you think the queue, there's no more queue, when do you think that will happen?

Okay, so Rick's second question is about... CC mentioned that our capacity will remain tight throughout 2022, but Rick's question is more about the queue or the line to wait, because as we said, certain end market segments may slow down or adjust, but others remain strong. Rick's question is really if that wait or list line shortening, or when do we expect that to shorten?

Rick, so far, as I said, TSMC's capacity will be very tight, not enough to support our customer. So if you ask whether the list in the queue will be longer or smaller, it doesn't matter. It's still just not enough to support our customer, and we are working very hard to support them. That I can share with you.

Okay, great. That's very clear. Thank you so much again.

Thank you. Okay, thank you, Rick. Operator, can we move on to the next participant, please?

Next one on the line, Brett Simpson from Aerotech Research. Go ahead, please.

Yeah, thanks very much. I had a question on your overseas FAB expansion plans. I guess today if we look at your wafer capacity, it's almost 100%. Are you seeing any pressure from your strategic customers to accelerate your overseas plants for fab expansion? And can you also share with us if you have a target for what portion of your wafer capacity long-term might come from your overseas fabs, and in what time period might that happen? Thank you.

Okay, so Brett's first question is about our overseas expansion and global manufacturing footprint. His question is that, are we seeing any pressure from strategic customers to expand overseas? And he wants to know what proportion or percentage of our capacity will be overseas by what timeframe?

Okay, let me answer the question. In fact, Talking about the overseas supply board capacity we are building, our responsibility as TSMC's management is to make the best decision for our customers and in the best interest of TSMC. And we are in close and constant communication with all of our customers. And so far, actually, their priorities are securing capacity, enough capacity to support their business, and also working with TSMC on technology development. That's what they all ask TSMC to focus on. And for the, how much of the capacity to build outside, let me share with you, right now we have a fab in Arizona with a five nanometer, a fab in Japan with a 28 and 16 fanfare technology, And expanding our capacity in China with 16-frame variant 28. Also, we're building in Taiwan for 28 nanometers more capacity. We definitely have some future plans, but it will increase in the next several years, but not enough to show how many percentage in total will compare with TSMC's technology.

Okay. Thanks for that. Yeah, that's great. And maybe just a second question. You mentioned N3E is coming one year after N3, but can you give us an update around timing of 2 nanometer, which I believe is going to have a new transistor architecture gate all around? I guess the move from N5 to N3 was more than two years, which is what you've typically been, that cadence you've typically been running at. Are we going to get back to two years with N2, between N3 and N2, so that we'll see an end of 2024 introduction for N2, or will it take longer? Thank you.

Okay, so Brett's second question is really on N2 and the cadence. He wants to know that N5 to N3 is about more than two years cadence between those two nodes. For N3 to N2, will it be back on a two-year cadence? And what's the time frame for N2?

Brett? Our progress so far today for the N2 is on track, and all I want to say is that, yes, at the end of 2024, you will enter the risk production. 2025, you will be in production. Probably close to the second half or the end of 2025. That's our schedule.

Great. Thank you very much.

All right. Thank you, Brett. Operator, can we move on to the next participant, please?

Next one we have Laura Chen, KGI. Hi.

Good afternoon. Thank you for taking my question. My first question is about advanced packaging development. Can you share with us your view on TSNC's current progress in advanced packaging in terms of the revenue contribution and the growth trend? And since we know that a lot of high-computing PC clients relied on TSMC advanced packaging or 3D packaging service, so can we expect your advanced packaging revenue will be kind of a part of your high-computing PC growth outlook? That's my first question. Thanks. Thanks.

Okay, so Laura's first question is on our 3D IC or advanced packaging progress. She wants to know the progress in terms of the revenue contribution, the growth outlook for the packaging business, and how correlated is it to the HPC platforms?

Right, Laura, let me answer the first part. In 2021, the advanced packaging generated $4.1 billion of revenue. We expect that this year, the growth will be similar to the corporate growth. And during the next five years, we expect its growth in Keger will be slightly higher than the corporate growth.

Okay, thank you. Very helpful.

And the correlation with HPC?

Well, let me answer that correlation. Actually, very advanced SOIC technology actually serve for the HPC high-end applications. So that requires high bandwidth and very low power and very high performance. And so far, we just entered a small volume of the production in 2022, and we expect this one will continue to grow. That's what we have today.

Okay, thank you. That's very clear. And my second question is more like a follow-up. I think Citi already mentioned a lot about the strategy of the CAPAC expansion in the longer term. but we know that the equipment return has been quite longer. So I'm just wondering any specific area or process you are seeing the biggest impact, and what's your action accordingly, or do you have any priorities for various technology nodes? Thank you.

Okay, so Laura's second question is about capacity expansion and equipment lead time. Given the tool delivery that Cece talked about, she wants to know what areas or nodes are we seeing the biggest impact and are we prioritizing, how are we prioritizing this?

Yes, thank you.

Laura, I mean that's a – we – We see this kind of tool delivery problem unexpectedly from beginning of this year. And we are working very hard with our tool suppliers to resolve all the issues. And so as for which technology node or which technology or what are being impacted, all the leading edge technology and mature node technologies capacity expansion are being impacted. And certainly, in order to support our customers' strong demand, we're working very hard for the two suppliers to resolve all the issues. And so far, 2022, no problem. We're working on 2023 and beyond. I hope a few months later that we can report that the issue will be resolved soon. But we are still working very hard with our suppliers to resolve all the issues. That's all I can say right now.

Thank you very much. That's very helpful.

Okay. Thank you, Laura. Operator, can we move on to the next participant, please?

Next I want to ask question, Mati Hussaini from SIG. Thank you.

Yes, thank you for taking my question. My first one has to do with better understanding demand dynamics. You highlighted better than average growth from HPC. And in that context, I'm just wondering how I should think about the mix of 5 and 7 nanometer node by year end 22 or second half of 22.

Okay, so the first question is... Looking at the demand and also by note, he wants to know how should he expect the contribution or the mix from N5 and N7 in the second half of this year.

It will be greater than we just reported of 50%, right? I mean, for the second half of this year, The contribution to JSMC's revenue we work with is 50%, combining in seven and five together.

Okay. I would just like to understand how that increase would look like compared to prior years when, you know, in the second half, usually the advance note contribution increases, and with three in a small mix, I was just trying to better understand how the second half of 2022 would look like in the past five years.

Yeah, I think that the second half revenue is normally higher partially because of seasonality of some of the products.

Okay, great. Thank you. And one more follow-up, and thank you so much for the color on the next technology migration, the two nanometers. You highlighted the transistor change. But I also want to understand what is an underlying assumption, especially as it relates to lithography. We also have another change coming up going from EUV to high NA. And I'm just curious to know if you are assuming if you will be using EUV or you would need high NA as you go into HVM for 2 nanometer in the second half of 2025.

Okay, so Madi's second question is on N2, a very specific question. He wants to know with N2, there's a change in transistor structure. He also wants to know on the lithography side, will we be using EUV or high NA? Correct, Madi?

Yes, thank you. Well, let me answer the question. We are the largest user of EUV tool today in the industry. And so we have extensively evaluated and are very familiar with those high-end UV tools for a while. And we will continue to evaluate and adopt the high-end tool whenever we think it's necessary and is ready and cost-effective. Whether it is an end-to-end or not, I have not yet to be able to share with you.

Okay, thank you so much.

Okay, thank you, Midee. Operator, can we move on to the next participant?

Next one to ask questions, Charles from Nieman Company.

Hey, good afternoon. Thank you for taking my question. I want to ask my first question a little bit longer term. One of your IDM customers, well, I don't want to call the name, but their CEO, I believe, revisited you twice over the last six months. They think they can both buy Weverse Foundry and at the same time compete with you in technology, and they are hoping in 2025 and beyond they will compete with you in the Foundry business. So there have been concerns that you may not really get a fair deal out of this, a little bit of complex relationship. One concern, very specifically, I heard is that you may end up basically teaching this competitor, enabling their accelerated roadmap, but in the end, they will break away from you and compete against you, especially down to business. So Can you address this concern and provide us some high-level thinking to the investor community and the public? Thank you.

Okay, Charles. Let me summarize your first question. His first question is on an IDM customer that says, wants to buy wafers or outsource to TSMC, but also said that they would like to compete in the foundry industry. So Charles, your question is really, I guess, two parts in the sense that how will TSMC end up teaching this IDM and enabling their roadmap, and how will we compete on the foundry side?

Well, Charles, let me answer the question first on the competition, you know. As a leading pure play funder, TSMC has never been short on competition in our 35 years of history. And we know how to compete, all right? And you asked about how to protect TSMC's IP or technology detail. In fact, we have a well-established process. and design enablement system to ensure a productive engagement with all our customers. And while we can protect our own IP as well as customers' IP, we do not anticipate any issues at all. And for the future, actually, these IDM might take back their business back into their own house We have already taken this into our capacity planning consideration already. Did I answer your question, Charles?

Yes, thanks, Suisi. So maybe really just to follow the second question, and actually it's a follow-up to my first question. There have been some press reports, I believe over the last two, three months, saying TSMC is potentially building a dedicated FAB For this particular customer, I'm not sure if dedicated fab or production line for specific customer is really TSMC standard practice. However, can you kind of provide your thinking? Would the answer be no, even if like this customer is going to bring you a significant volume? Thank you.

Okay, so Charles, second question is, There's been certain media reports saying that we will build a dedicated fab or production for certain IDM. Is this our practice? And would the answer still be no, even if there is large volume behind such a dedicated capacity?

Well, Charles, to be frank with you, our capacity planning, as we said many times, is based on the long-term market demand profile. Underpinned by the industries of megatrend of 5G and SPC and the semiconductor content enrichment in many end devices. We are not dependent on any single customer or product. Did I answer your question?

Yeah, thank you.

Okay, thank you, Charles. Operator, in the interest of time, I think we'll take the last two participants' questions, please.

Okay, the next one to ask question is Chris Senka from Covenant Company.

Hi, thanks for taking my question. I have two of them. The first one is for Vendor. In the March quarter, you know, there's quite a big difference between the revenue growth and the shipment growth. So I'm kind of curious on your full year guidance of high 20s or even beyond that for revenue growth, how much is coming from pricing? Any color there would be helpful. And then I had a follow-up for CC.

Okay, so Chris's first question is in looking at our full year outlook. He wants to know how much of our growth this year, how much of it is coming from price versus volume, I guess.

Yeah, Chris. Fallen price and product mix are all important contributing factors in driving our growth. But we do not have a specific breakdown to share with you.

All right. No worries. And then I had a follow-up for CC. You know, clearly... investors seem to be worried about a recession or a slowdown. So, C.C., from your experience, when you look at prior cyclical slowdowns or even macro corrections, what are the leading indicators TSMC looks for specifically? Is it a pricing slowdown? Is it push out of capacity? Is it customers breaking LTAs? What do you think is the first shoe to drop? Any color there would be helpful. Thank you.

Okay. Krish, your second question is in terms of looking at, again, the demand environments. He wants to ask CC, based on past recessions or slowdowns, what are some of the leading indicators that we watch for as a signal? Do we look at pricing slowdown? Do we look at slowdown in capacity and CapEx? What are the indicators that we look at?

Chris, this is a tough question to be asked because we always encourage working with our customers. So we know that each customer's demand and their forecast, and we plan our capacity, we plan our technology by working with them. So it's just a long-term. Sure, we got the first-hand information from our customers, and we collect them together, and we look at it, and we decide our long-term strategy. CAPEX and the capacity, but which one is the leading indicator that I don't have a specific answer for your questions.

Thank you.

Okay, thank you. Operator, we'll take the questions from the last participant, please, and thank you.

Yes, the last one to ask questions is Rolf Boop from U3 Research.

Yes, thank you for squeezing me in. At the beginning of the year, you guided for advanced processes to account for 70% to 80% of capex and specialty nodes for 10% to 20%. Now, with the year now underway and you having better visibility on the demand in your different end markets, can you share with us if... your thinking on capacity additions of advanced versus specialty have changed or whether those ratios that you gave originally still hold?

Thank you. Okay. Rolf's first question is about our CapEx and CapEx spending. His question is, you know, with the – in the past three months, has the –

allocation or breakdown between advanced and specialty technologies in terms of our capex has that changed no no it has not thank you that's helpful now as a follow-up you mentioned that you're working with suppliers to secure and further diversify your material supply can you discuss whether you expect your material input costs to increase in the second half of the year and how we should think about gross margin in the second half of 2022 in that context?

Okay, so Rolf's second question is a little bit on materials cost. We have said that we're diversifying our materials supplier. So are we seeing the input cost increase? And then what does this mean for the margin outlook in the second half?

Yes, let me answer that. We do face manufacturing costing challenges, partially due to the rising materials and inflationary costs. But we always work closely with our customers to provide our value, and we will continue to ensure that the pricing strategy reflects the value creation. We will also work diligently in our FAP operations, and with our suppliers to deliver on cost improvements. So by taking such actions, we believe we can achieve the long-term gross margin of 53% and higher and earn greater than 25% ROE through the cycle that will enable us to invest to support our customers' growth and to deliver a profitable growth for our shareholders.

Okay, Rolf. Thank you. Is this very helpful? Yeah. Thank you, both. Okay, so thank you, everyone. This concludes our Q&A session. Before we conclude today's conference, please be advised that the replay of the conference will be accessible within one hour from now. The transcript will become available 24 hours from now, both of which will be available through TSMC's website at www.tsmc.com. Thank you for joining us today. We hope everyone continues to stay healthy and safe, and we hope you will join us again next quarter. Goodbye and have a good day.